UNITED STATES
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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from __________ to
Commission file number 001-15789
STRATUS SERVICES GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3499261
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
500 Craig Road, Suite 201, Manalapan, New Jersey 07726
(Address of principal executive offices)
(732) 866-0300
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
As of May 15, 2001, 5,811,619 shares of the Registrant's common stock
were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
STRATUS SERVICES GROUP, INC.
Condensed Balance Sheets
Assets
March 31, September 30,
2001 2000
-------------------- -------------------
Current assets (Unaudited)
Cash and cash equivalents $ 510,238 $ 1,030,722
Due from factor - less allowance for recourse
obligation of $ -0- and $30,000 -- 1,154,012
Accounts receivable - less allowance for doubtful
accounts of $585,000 and $255,000 7,954,034 852,876
Unbilled receivables 1,206,088 1,236,002
Loans to related parties 64,500 64,500
Loans receivable 34,000 56,000
Prepaid insurance 196,583 432,674
Prepaid expenses and other current assets 346,971 278,169
Deferred taxes -- 340,000
-------------------- -------------------
10,312,414 5,444,955
Property and equipment, net of accumulated depreciation 1,383,274 1,118,625
Goodwill, net of accumulated amortization 4,637,259 3,716,538
Deferred financing costs, net of accumulated amortization 481,374 --
Deferred taxes 428,000 --
Other assets 68,273 38,163
-------------------- -------------------
$ 17,310,594 $ 10,318,281
==================== ===================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 146,395 $ 27,012
Notes payable - acquisitions (current portion) 158,261 275,000
Line of credit 6,045,521 --
Insurance obligation payable 95,107 367,100
Accounts payable and accrued expenses 1,800,855 1,172,148
Accrued payroll and taxes 1,103,239 1,105,363
Payroll taxes payable 583,859 412,513
-------------------- -------------------
9,933,237 3,359,136
Loans payable (net of current portion) 339,889 134,700
Notes payable - acquisition (net of current portion) -- 25,000
Convertible debt 1,964,875 --
-------------------- -------------------
12,238,001 3,518,836
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value, 25,000,000 shares
authorized 5,708,704 and 5,712,037 shares
issued and 5,600,038 and 5,712,037 shares outstanding 57,087 57,120
Additional paid-in capital 11,289,577 10,554,782
Deferred compensation (38,365) (67,900)
Accumulated deficit (5,583,706) (3,744,557)
Less treasury stock, at cost (652,000) --
-------------------- -------------------
Total stockholders' equity 5,072,593 6,799,445
-------------------- -------------------
$ 17,310,594 $ 10,318,281
==================== ===================
See notes to condensed financial statements.
1
STRATUS SERVICES GROUP, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------------ ------------------ ------------------ ------------------
Revenues (including $-0-, $220,000,
$-0- and $399,000 from related parties) $ 14,545,935 $ 9,201,351 $ 33,206,352 $ 16,925,238
Cost of revenue (including $-0-, $203,000
$-0- and $358,000 from related parties) 11,607,728 6,927,366 25,969,570 12,537,383
------------------ ------------------ ------------------ ------------------
Gross Profit 2,938,207 2,273,985 7,236,782 4,387,855
Selling, general and administrative expenses 4,249,320 1,916,478 8,030,655 3,599,022
------------------ ------------------ ------------------ ------------------
Earnings (loss) from operations (1,311,113) 357,507 (793,873) 788,833
------------------ ------------------ ------------------ ------------------
Other income (expenses)
Finance charges (106,676) (100,934) (279,791)
Interest and financing costs (837,015) (92,515) (1,035,513) (196,687)
Other income (expense) (4,520) 3287 3,171 5,184
------------------ ------------------ ------------------ ------------------
(841,535) (195,904) (1,133,276) (471,294)
------------------ ------------------ ------------------ ------------------
Earnings (loss) before income taxes (2,152,648) 357,507 (1,927,149) 317,539
Income tax benefit -- -- (88,000) --
------------------ ------------------ ------------------ ------------------
Net earnings (loss) $ (2,152,648) $ 161,603 $ (1,839,149) $ 317,539
================== ================== ================== ==================
Net earnings (loss) per common share -
Basic $ (.38) $ .04 $ (.33) $ .07
Diluted (.38) .04 (.33) .07
Weighted average shares, outstanding
per common share
Basic 5,613,319 4,349,137 5,662,158 4,328,522
Diluted 5,613,319 4,543,804 5,737,320 4,517,802
See notes to condensed financial statements.
2
STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
March 31, 2001 March 31, 2000
---------------------- ----------------------
Cash flows from operating activities
Net earnings (loss) $ (1,839,149) $ 317,539
---------------------- ----------------------
Adjustments to reconcile net earnings
to net cash used by operating activities
Depreciation 179,632 63,504
Amortization 162,115 82,247
Provision for doubtful accounts 317,000 30,000
Deferred financing costs amortization 67,442 --
Deferred taxes - benefit (88,000) --
Imputed interest 650,362 37,549
Accrued interest 39,832 55,516
Compensation - stock options 29,535 23,400
Changes in operating assets and liabilities
Due from factor/Accounts receivable (1,075,807) (1,243,711)
Prepaid insurance 236,091 194,163
Prepaid expenses and other current assets (68,802) (59,446)
Other assets (30,110) (367)
Insurance obligation payable (271,993) (207,726)
Accrued payroll and taxes (2,124) (217,739)
Payroll taxes payable 171,346 64,807
Accounts payable and accrued expenses 588,875 91,936
---------------------- ----------------------
Total adjustments 905,394 (1,085,867)
---------------------- ----------------------
$ (933,755) $ (768,328)
====================== ======================
Cash flows (used in) investing activities
Purchase of property and equipment (401,631) (136,799)
Payments for business acquisitions (975,486) --
Loans receivable (105,000) --
---------------------- ----------------------
(1,482,117) (136,799)
---------------------- ----------------------
Cash flows from financing activities
Proceeds from loans payable 60,000 1,125,000
Payments of loans payable (27,428) (301,000)
Payments of notes payable - acquisitions (291,739) --
Net proceeds from line of credit 766,816 --
Net proceeds from convertible debt 1,652,864 --
Purchase of treasury stock (265,125) --
Payments of registration costs -- (165,041)
---------------------- ----------------------
1,895,388 658,959
---------------------- ----------------------
Net change in cash and cash equivalents (520,484) (246,168)
Cash and cash equivalents - beginning 1,030,722 423,072
---------------------- ----------------------
Cash and cash equivalents - ending $ 510,238 $ 176,904
====================== ======================
Supplemental disclosure of cash paid
Interest $ 285,586 $ 27,717
====================== ======================
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 1,125,486 $ --
Less: cash paid 800,486 --
---------------------- ----------------------
Liabilities assumed $ 325,000 $ --
====================== ======================
Issuance of common stock in exchange for notes payable $ - 300,000
====================== ======================
Purchase of treasury stock in exchange for loans $ 402,000 $ -
====================== ======================
See notes to condensed financial statements.
3
STRATUS SERVICES GROUP, INC.
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are
necessary to present fairly the financial position, the results of operations
and cash flows of the Company for the periods presented. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB/A.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
Certain items in the condensed statement of operations for the three and six
months ended March 31, 2000 have been reclassified to conform to the three
and six months ended March 31, 2001 presentation.
NOTE 2 - EARNINGS/LOSS PER SHARE
Basic "Earnings Per Share" ("EPS") excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted EPS assumes
conversion of dilutive options and warrants, and the issuance of common stock
for all other potentially dilutive equivalent shares outstanding. Dilutive
shares were - 0- and 75,162 for the three and six months ended March 31, 2001
and 194, 667 and 189,280 for the three and six months ended March 31, 2000.
NOTE 3 - ACQUISITIONS
On October 27, 2000, the Company purchased substantially all of the tangible
and intangible assets, excluding accounts receivable, of seven offices of
Tandem, a division of Outsource International, Inc. The initial purchase
price for the assets was $125,000; of which $50,000 was paid in cash at the
closing and the remaining $75,000 was represented by a promissory note
secured by the assets purchased by the Company. The note was payable in
twenty-four equal monthly installments of principal and interest at a
variable rate of prime plus two percent beginning December 1, 2000. In
January 2001, the Company exercised an option to repay the outstanding
balance of the note plus $175,000 in lieu of an earnout payment of thirty
percent of the Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") of the acquired business for a two year period.
The excess of cost paid over net assets acquired resulted in goodwill of
$855,718, computed as follows:
Net assets acquired
Furniture and equipment $ 31,650
Accrued holiday and vacation pay (21,758)
---------------------
9,892
---------------------
Amounts paid
Cash 50,000
Note payable 75,000
Earnout payable 175,000
Finder's fees and other costs 565,610
---------------------
865,610
---------------------
Excess of amounts paid over net assets acquired - goodwill $ 855,718
=====================
4
On January 2, 2001, the Company purchased substantially all of the tangible
and intangible assets of Cura Staffing, Inc. and The WorkGroup Professional
Services, Inc. The purchase price was $175,000 of which $100,000 was paid in
cash at the closing and the remaining $75,000 was represented by a 90-day
promissory note for $50,000 and $25,000 payable $5,000 a month beginning
after the payment of the 90-day promissory note. The promissory note bears
annual interest at 6%.
The excess of cost paid over net assets acquired resulted in goodwill of
$227,118, computed as follows:
Net assets acquired
Furniture and equipment $ 11,000
Accrued holiday and vacation pay (12,000)
---------------------
(1,000)
---------------------
Amounts paid
Cash 100,000
Note and other payables 75,000
Finder's fees and other costs 51,118
---------------------
226,118
---------------------
Excess of amounts paid over net assets acquired - goodwill $ 227,118
=====================
NOTE 4 - FACTORING AGREEMENT
The Company had a factoring agreement under which it was able to sell
qualified trade accounts receivable, with limited recourse provisions. The
Company was required to repurchase or replace any receivable remaining
uncollected for more than 90 days.
On December 12, 2000, the Company terminated its agreement with the factor.
As part of the termination agreement, the Company repurchased all accounts
receivable from the factor with proceeds from a new line of credit (see Note
5).
NOTE 5 - LINE OF CREDIT
On December 12, 2000, the Company entered into a loan and security agreement
with a lending institution whereby the Company can borrow up to 85% of
eligible accounts receivable, as defined, not to exceed $12 million.
Borrowings under the agreement bear interest at 1 1/2% above the prime rate
and are collateralized by substantially all of the Company's assets.
Approximately $5,100,000 of the initial borrowing under this agreement was
used to repurchase accounts receivable from the factor (see Note 4).
NOTE 6 - CONVERTIBLE DEBT
On December 4, 2000, the Company issued $1,987,400 of convertible debt,
comprised of 6% convertible debentures ("Debentures"). The Debentures have a
maturity date of five years from issuance. Each debenture is convertible
after 120 days from issuance into the number of shares of common stock
determined by dividing the principal amount of the debenture by the lesser of
(a) $4.65 or (b) 75% of the average closing bid price of the common stock for
the five trading days immediately preceding the date of conversion.
In accordance with generally accepted accounting principles, the discount
arising from the 75% beneficial conversion feature, amounting to $662,000, is
considered to be interest expense and is recognized in the statement of
operations during the period from the issuance of the debt to the earliest
time at which the debt becomes convertible.
5
NOTE 7 - INCOME TAXES
There was no provision for income taxes for the three months ended March 31,
2000, because the Company has net operating loss carryforwards with a
corresponding valuation allowance against them. The income tax benefit for
the six months ended March 31, 2001 is the result of a decrease in the
valuation allowance in the three months ended December 31, 2000.
NOTE 8 - SUBSEQUENT EVENT
In April 2001, the Company redeemed $1,187,400 of the outstanding convertible
debt (see Note 6). In connection therewith, a loss on extinguishment of debt
of approximately $43,000 was realized. The principal source of funds for the
redemption was the issuance of $1,401,654 of new convertible debt. The new
convertible debt has similar terms as the original issue.
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements relate to
future economic performance, plans and objectives of management for future
operations and projections of revenue and other financial items that are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. The words "expect",
"estimate", "anticipate", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements involve
assumptions, uncertainties and risks. If one or more of these risks or
uncertainties materialize or underlying assumptions prove incorrect, actual
outcomes may vary materially from those anticipated, estimated or expected.
Among the key factors that may have a direct bearing on our expected
operating results, performance or financial condition are economic conditions
facing the staffing industry generally; uncertainties related to the job
market and our ability to attract qualified candidates; uncertainties
associated with our brief operating history; our ability to raise additional
capital; our ability to achieve and manage growth; our ability to
successfully identify suitable acquisition candidates, complete acquisitions
or integrate the acquired business into our operations; our ability to
attract and retain qualified personnel; our ability to develop new services;
our ability to cross-sell our services to existing clients; our ability to
enhance and expand existing offices; our ability to open new offices; general
economic conditions; and other factors discussed from time to time in our
filings with the Securities and Exchange Commission. These factors are not
intended to represent a complete list of all risks and uncertainties inherent
in our business. The following discussion and analysis should be read in
conjunction with the Condensed Financial Statements and notes appearing
elsewhere in this report.
INTRODUCTION
We provide a wide range of staffing, engineering and productivity consulting
services nationally through a network of offices located throughout the
United States. We recognize revenues based on hours worked by assigned
personnel. Generally, we bill our customers a pre-negotiated, fixed rate per
hour for the hours worked by our temporary employees. We are responsible for
workers' compensation, unemployment compensation insurance, Medicare and
Social Security taxes and other general payroll related expenses for all of
the temporary employees we place. These expenses are included in the cost of
revenue. Because we pay our temporary employees only for the hours they
actually work, wages for our temporary personnel are a variable cost that
increases or decreases in proportion to revenues. Gross profit margin varies
depending on the type of services offered. Our Engineering Services division
typically generates higher margins while Staffing Services division typically
generates lower margins. In some instances, temporary employees placed by us
may decide to accept an offer of permanent employment from the customer and
thereby "convert" the temporary position to a permanent position. Fees
received from such conversions are included in our revenues. Selling, general
and administrative expenses include payroll for management and administrative
employees, office occupancy costs, sales and marketing expenses and other
general and administrative costs.
7
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
REVENUES. Revenues increased 58.1% to $14,545,935 for the three months ended
March 31, 2001 from $9,201,351 for the three months ended March 31, 2000.
Revenues increased primarily as a result of acquisitions.
GROSS PROFIT. Gross profit increased 29.2% to $2,938,207 for the three months
ended March 31, 2001 from $2,273,985 for the three months ended March 31,
2000. Gross profit as a percentage of revenues decreased to 20.2% for the
three months ended March 31, 2001 from 24.7% for the three months ended March
31, 2000. This decrease was due to lower gross profit percentages realized by
the acquired businesses as compared to our historical gross profit
percentages.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, not including depreciation and amortization,
increased 120.8% to $4,064,487 for the three months ended March 31, 2001 from
$1,841,169 for the three months ended March 31, 2000. Selling, general and
administrative expenses, not including depreciation and amortization, as a
percentage of revenues increased to 27.9% for the three months ended March
31, 2001 from 20.0% for the three months ended March 31, 2000. The increase
is primarily attributable to costs associated with the integration of the
acquisitions, increase in credit losses, prior years' state income taxes and
additional management and other costs in anticipation of future growth and
acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 145.4% to $184,833 for the three months ended March 31, 2001 from
$75,309 for the three months ended March 31, 2000. Depreciation and
amortization as a percentage of revenues increased to 1.3% for the three
months ended March 31, 2001 from 0.8% for the three months ended March 31,
2000. The increase was primarily due to the amortization of goodwill
associated with the acquisitions in June 2000 and October 2000, and the
impact of increased capital expenditures.
FINANCE CHARGES. Finance charges were the amounts charged under an agreement
with a factor, which was terminated on December 12, 2000. Accordingly, there
were no finance charges for the three months ended March 31, 2001. Finance
charges were $106,676 for the three months ended March 31, 2000 or 1.2% of
revenues.
INTEREST AND FINANCING COSTS. Interest and financing costs increased to
$837,015 for the three months ended March 31, 2001 from $92,515 for the three
months ended March 31, 2000. Included in the amount for the three months
ended March 31, 2001 is $528,151, which is the portion of the discount on the
beneficial conversion feature of convertible debt issued on December 4, 2000.
Interest and financing costs, not including the discount on the beneficial
conversion feature of convertible debt, as a percentage of revenue increased
to 2.1% for the three months ended March 31, 2001 from 1.0% for the three
months ended March 31, 2000. The increase was primarily attributable to the
line of credit agreement which replaced the agreement with the factor (see
"Finance Charges" above) on December 12, 2000.
NET EARNINGS (LOSS). As a result of the foregoing, we had a net loss of
($2,152,648) for the three months ended March 31, 2001 compared to net
earnings of $161,603 for the three months ended March 31, 2000.
SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO SIX MONTHS ENDED MARCH 31, 2000
REVENUES. Revenues increased 96.2% to $33,206,352 for the six months ended
March 31, 2001 from $16,925,238 for the six months ended March 31, 2000.
Revenues increased primarily as a result of acquisitions and the growth of
our SMARTSolutions(TM) division.
GROSS PROFIT. Gross profit increased 64.9% to $7,236,782 for the six months
ended March 31, 2001 from $4,387,855 for the six months ended March 31, 2000.
Gross profit as a percentage of revenues decreased to 21.8% for the six
months ended March 31, 2001 from 25.9% for the six months ended March 31,
2000. This
8
decrease was due to a decrease in the gross profit percentage being generated
by our Engineering Division and lower gross profit percentages realized by
the acquired businesses as compared to our historical gross profit
percentages.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, not including depreciation and amortization,
increased 122.7% to $7,688,908 for the six months ended March 31, 2001 from
$3,453,271 for the six months ended March 31, 2000. Selling, general and
administrative expenses, not including depreciation and amortization, as a
percentage of revenues increased to 23.2% for the six months ended March 31,
2001 from 20.4% for the six months ended March 31, 2000. The increase is
primarily attributable to costs associated with the integration of the
acquisitions, increase in credit losses and additional management and other
costs in anticipation of future growth and acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 134.5% to $341,747 for the six months ended March 31, 2001 from
$145,751 for the six months ended March 31, 2000. Depreciation and
amortization as a percentage of revenues increased to 1.0% for the six months
ended March 31, 2001 from 0.9% for the six months ended March 31, 2000. The
increase was primarily due to the amortization of goodwill associated with
the acquisitions in June 2000 and October 2000, and the impact of increased
capital expenditures.
FINANCE CHARGES. Finance charges were the amounts charged under an agreement
with a factor, which was terminated on December 12, 2000. Finance charges
decreased 63.9% to $100,934 for the six months ended March 31, 2001 from
$279,791 for the six months ended March 31, 2000. As a percentage of
revenues, finance charges decreased to 0.3% for the six months ended March
31, 2001, from 1.7% for the six months ended March 31, 2000. This decrease
was due to the agreement being terminated December 12, 2000.
INTEREST AND FINANCING COSTS. Interest and financing costs increased to
$1,035,513 for the six months ended March 31, 2001 from $196,687 for the six
months ended March 31, 2000. Included in the amount for the six months ended
March 31, 2001 is $650,362, which is the portion of the discount on the
beneficial conversion feature of convertible debt issued on December 4, 2000.
Interest and financing costs, not including the discount on the beneficial
conversion feature of convertible debt, as a percentage of revenue remained
at 1.2% for the six months ended March 31, 2001 and 2000.
INCOME TAX BENEFIT. Income tax benefit of $88,000 for the six months ended
March 31, 2001 is the result of a change in judgment about the realizability
of deferred tax assets.
NET EARNINGS (LOSS). As a result of the foregoing, we had a net loss of
($1,839,149) for the six months ended March 31, 2001 compared to net earnings
of $317,539 for the six months ended March 31, 2000.
9
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $933,755 and $768,328 in the six
months ended March 31, 2001 and 2000, respectively. The change in operating
cash flow was primarily a result of a net increase of $1,091,000 in net
(loss) adjusted by non-cash items, including depreciation, amortization and
imputed interest. This change was substantially offset by the change in the
working capital component "due from factor/accounts receivable" which
resulted from the replacement of our prior factoring agreement with a line of
credit and the increase in payroll taxes payable and accounts payable and
accrued expenses.
Net cash used in investing activities was $1,482,117 and $136,799 in the six
months ended March 31, 2001 and 2000, respectively. Cash used for
acquisitions in the six months ended March 31, 2001 was $975,486. The balance
in both periods was primarily for capital expenditures.
Net cash provided by financing activities was $1,895,388 and $658,959 in the
six months ended March 31, 2001 and 2000, respectively. We had net borrowings
of $766,816 under the line of credit obtained on December 12, 2000. We also
received net proceeds of $1,652,864 from the issuance of convertible debt in
the six months ended March 31, 2001. We used $265,125 to purchase treasury
stock in the six months ended March 31, 2001. The source of cash provided by
financing activities in the six months ended March 31, 2000 was primarily
from loans payable.
Our principal uses of cash are to fund temporary employee payroll expense and
employer related payroll taxes; investment in capital equipment; start-up
expenses of new offices; expansion of services offered; and costs relating to
other transactions such as acquisitions. Temporary employees are paid weekly.
In December 2000, we sold $1,987,400 of 6% convertible debentures in a
private offering. The debentures mature in December 2005 and are convertible
commencing in April 2001 into a number of shares, which is determined by
dividing the principal amount by the lesser of (a) $4.65 or (b) 75% of the
average closing bid price of the common stock for the five trading days
immediately preceding the conversion.
On December 12, 2000, we entered into a loan and security agreement with a
lending institution which replaced our prior factoring arrangement and
provides for a line of credit up to 85% of eligible accounts receivable, as
defined, not to exceed $12,000,000. Advances under the credit agreement bear
interest at a rate of prime plus one and one-half percent (1 1/2 %). The
credit agreement restricts our ability to incur other indebtedness, pay
dividends and repurchase stock. Borrowings under the agreement are
collateralized by substantially all of our assets.
We believe that the new credit facility, together with cash reserves,
proceeds from the debenture offering and cash flow from operations will be
sufficient to fund our operations and capital expenditure requirements for at
least the next twelve months. However, if we were to expand our operations
significantly, especially through acquisitions, additional capital may be
required. There can be no assurance that we will be able to obtain additional
capital at acceptable rates.
SEASONALITY
Our business follows the seasonal trends of our customers business.
Historically, Staffing Services has experienced lower revenues in the first
calendar quarter with revenues accelerating during the second and third
calendar quarters and then starting to slow again during the fourth calendar
quarter.
SMARTSolutions(TM) and Engineering Services do not experience the same level
of seasonality associated with Staffing Services.
IMPACT OF INFLATION
We believe that since our inception, inflation has not had a significant
impact on our results of operations.
10
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We are subject to the risk of fluctuating interest rates in the ordinary
course of business for borrowings under our Loan and Security Agreement with
Capital Tempfunds, Inc. This credit agreement provides for a line of credit
up to 85% of eligible accounts receivable, not to exceed $12,000,000.
Advances under this credit agreement bear interest at a rate of prime plus
one and one-half percent (1 1/2 %).
We believe that our business operations are not exposed to market risk
relating to foreign currency exchange risk, commodity price risk or equity
price risk.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATUS SERVICES GROUP, INC.
Date: May 15, 2001 By: /s/ Joseph J. Raymond
-----------------------------------
Joseph J. Raymond
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 15, 2001 By: /s/ Michael A. Maltzman
------------------------------------
Michael A. Maltzman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12