PROSPECTUS REGISTRATION NO. 333-55312
RULE 424(b)(3)
5,096,180 SHARES
STRATUS SERVICES GROUP, INC.
COMMON STOCK
----------------------------------
This prospectus relates to the public offering of shares of our common
stock by the selling stockholders. These shares may be issued to the selling
stockholders upon conversion of our debentures, in lieu of the payment of cash
interest on the debentures and upon the exercise of warrants owned by the
selling stockholders. We will not receive any of the proceeds from the sale of
the shares. We will pay all expenses of registration incurred in connection with
this offering, but the selling stockholders will pay all of their selling
commissions, brokerage fees and related expenses.
The selling stockholders have advised us that they will sell the shares
from time to time in the open market, on the Nasdaq SmallCap Stock Market, in
privately negotiated transactions or a combination of these methods, at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or otherwise as described under "Plan of
Distribution."
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"SERV". On March 30, 2001, the closing price of the common stock was $1.31 per
share.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
APRIL 3, 2001
TABLE OF CONTENTS
PAGE
TABLE OF CONTENTS............................................................2
PROSPECTUS SUMMARY...........................................................3
RISK FACTORS.................................................................5
USE OF PROCEEDS..............................................................9
PRICE RANGE OF OUR COMMON STOCK; DIVIDEND POLICY............................10
CAPITALIZATION..............................................................11
SELECTED FINANCIAL DATA.....................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................13
DESCRIPTION OF BUSINESS.....................................................20
MANAGEMENT..................................................................27
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........................32
EXECUTIVE COMPENSATION......................................................34
PRINCIPAL STOCKHOLDERS......................................................39
SELLING STOCKHOLDERS........................................................41
PLAN OF DISTRIBUTION........................................................43
DESCRIPTION OF SECURITIES...................................................45
LEGAL PROCEEDINGS...........................................................50
LEGAL MATTERS...............................................................50
EXPERTS.....................................................................50
ADDITIONAL INFORMATION......................................................50
INDEX TO FINANCIAL STATEMENTS..............................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS. NO PERSON IS
AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED OR INCORPORATED
BY REFERENCE HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR
BY ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE AT ANY TIME IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF. IN THIS PROSPECTUS, REFERENCE TO "STRATUS,"
"THE COMPANY," "WE," "US" AND "OUR" REFER TO STRATUS SERVICES GROUP, INC.
2
PROSPECTUS SUMMARY
THE COMPANY
Stratus Services Group, Inc. is a New Jersey based provider of temporary
staffing and engineering services. We currently operate through a network of
thirty-four offices in 12 states. We provide a wide range of commercial staffing
services including light industrial, clerical, distribution, technical,
specialty and other professional services. We also have a dedicated engineering
services staff providing a broad range of staffing, project consulting and
outsourcing services. Our SMARTSolutions(TM) service provides a structured
program to monitor and enhance the productivity of a customer's labor resources.
As of December 31, 2000, we were providing approximately 3,685 staffing
employees to more than 635 businesses.
Our strategy is to continue to expand operations through internal growth
and strategic acquisitions. Our executive offices are located at 500 Craig Road,
Manalapan, New Jersey. Our phone number is (732) 866-0300.
THE OFFERING
Estimated Number of Shares of Common Stock Offered.......... 5,096,180 shares.
Estimated Number of Shares to be Outstanding following
conversion of the 6% Debentures and Warrants................ 7,681,048 shares.
Nasdaq SmallCap Market Symbol............................... SERV
Boston Stock Exchange Symbol................................ SSG
The above information is based on shares outstanding as of March 15, 2001
and excludes 2,771,538 shares issuable upon the exercise of options and warrants
to acquire our common stock that were outstanding as of March 15, 2001 and not
related to the sale of the 6% debentures.
SUMMARY FINANCIAL INFORMATION
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 2000 1999 2000 1999
---- ---- ---- ----
Revenues ..................... $ 41,676,587 $ 30,042,751 $ 18,660,417 $ 7,723,887
Gross profit ................. 10,493,909 6,736,497 4,298,575 2,113,870
Operating income (loss) ...... 1,578,992 (517,952) 517,240 431,326
Other income (loss) .......... (873,082) (1,009,091) (291,741) (275,390)
Net earnings (loss) .......... 1,045,910 (1,527,043) 313,499 155,936
Net earnings (loss) per common
share
- - Basic ...................... .21 (.40) .05 .04
Net earnings (loss) per common
share
- - Diluted .................... .20 (.40) .05 .03
Weighted average shares
outstanding
Basic ..................... 4,931,914 3,828,530 5,709,936 4,308,131
Diluted ................... 5,223,508 3,828,530 6,112,727 4,492,024
3
AS OF
DECEMBER 31, 2000
-----------------
SELECTED BALANCE SHEET DATA:
Cash.......................................... 993,914
Accounts receivable.......................... 11,586,515
Other assets................................. 8,543,462
Total assets................................. 21,123,891
Notes and loans payable...................... 315,617
Line of Credit............................... 8,607,083
Accrued payroll and taxes.................... 1,124,509
Accounts payable, accrued expenses and other. 3,217,276
Total liabilities............................ 13,264,485
Stockholders' equity......................... 7,859,406
RECENT OPERATING RESULTS
We will take a one time charge to earnings of $1.7 million for the quarter
ended March 31, 2001 in connection with acquisition and financing activities.
The charges relate to fees and expenses associated with capital raising and
costs incurred in connection with due diligence and other acquisition
activities. We anticipate that we will report a loss from operations for the
quarter ended March 31, 2001 of approximately $453,000, excluding non-recurring
charges.
4
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE FACTORS
SET FORTH BELOW, AS WELL AS OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
WE HAVE A HISTORY OF NET LOSSES.
We have incurred net losses in recent periods, including net losses of
$477,044 in our inception period from August 11, 1997 through September 30,
1997, $2,412,145 in the year ended September 30, 1998 and $1,527,043 in the year
ended September 30, 1999. Although we had net earnings in the year ended
September 30, 2000 and three months ended December 31, 2000 of $1,045,910 and
$313,499 respectively, we can provide no assurance that our operations will be
profitable in the future.
DELAYS IMPLEMENTING OUR INTERNAL GROWTH STRATEGY MAY REDUCE ANTICIPATED CASH
FLOW AND PLACE A STRAIN ON OUR MANAGEMENT RESOURCES, WHICH COULD ADVERSELY
AFFECT OUR OPERATING PERFORMANCE.
Any significant delay in the opening of new offices or the failure of new
offices to achieve anticipated performance levels could adversely impact our
operations and expansion plans and have a material adverse effect on our
business. We have grown in recent years by opening new offices and increasing
the volume of services provided through existing offices. We cannot assure you
that we will continue to be able to maintain or expand our market presence in
current locations or to successfully enter other markets.
FUTURE ACQUISITIONS COULD INCREASE THE RISK OF OUR BUSINESS.
As part of our business strategy, we expect to review acquisition
prospects that would complement our existing business. We anticipate that we
will acquire other businesses or assets meeting our strategic goals that can be
purchased on terms acceptable to us. We may not locate suitable acquisition
opportunities. Any future acquisitions would expose us to increased risks,
including:
o issuances of equity securities that may dilute existing
stockholders;
o increased debt obligations or contingent liabilities;
o risks associated with the assimilation of new operations;
o the diversion of resources from our existing operations;
o the inability to retain the customers of acquired businesses and
generate sufficient revenues from new operations to offset
associated acquisition costs;
o the maintenance of uniform standards, controls, procedures and
policies; and
5
o the impairment of relationships with employees and customers as a
result of any integration of new management personnel.
If these risks materialize, future acquisitions could require additional
capital investment or result in additional operating losses, amortization of
goodwill and other intangible assets or other charges against earnings.
IF WE ARE NOT ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED TEMPORARY
EMPLOYEES, OUR BUSINESS MAY SUFFER.
Since our "product" is the temporary employees we provide to our clients,
our future success will depend on our ability to attract, train, retain and
motivate suitably qualified personnel. Competition for such personnel in the
staffing services industry is particularly intense and frequently we are
required to hire a substantial number of employees within a short timeframe in
order to begin servicing a client. We compete with other temporary staffing
companies, as well as our customers and other employers for qualified personnel.
If we are unable to continue to recruit additional qualified personnel our
business and planned growth could suffer.
EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY
Demand for temporary services is sensitive to the general level of
economic activity in the country. When economic activity slows, many companies
reduce their usage of temporary employees before undertaking layoffs of their
full-time employees. Therefore, a significant economic downturn could have a
material adverse effect on our business.
COMPETITION
The temporary services industry is highly competitive with limited
barriers to entry. We compete in national, regional and local markets with full
service agencies and with specialized temporary services agencies. Several of
these competitors have greater marketing and financial resources than ours and
could attempt to increase market share through decreased prices. We also compete
with numerous local and single office firms in particular markets which are able
to compete effectively on price because of their lower overhead structures. In
addition, large national companies that presently operate in "niche" segments of
the outsourcing and professional services markets could expand their operations
to compete with our services. Strong competition from companies with
significantly greater financial resources than we have could have a material
adverse effect on our operations and profitability.
EMPLOYER RISKS
We are in the business of employing people and placing them in the
workplace of other businesses. An attendant risk of such activities includes
possible claims of discrimination and harassment, employment of illegal aliens
and other similar claims. Although we have policies and guidelines in place to
reduce our exposure to these risks, a failure to follow these policies and
guidelines may result in negative publicity and the payment by us of money
damages or fines.
CONTROL BY PRINCIPAL STOCKHOLDER AND MANAGEMENT
As of March 15, 2001, our Chairman of the Board, Joseph J. Raymond,
beneficially owned 627,321 shares of common stock, representing approximately
10.5% of the outstanding common stock. Our directors and executive officers, as
a group, beneficially own an aggregate 1,406,803 shares of common stock,
representing approximately 22.8% of the outstanding common stock. As a result,
Mr.
6
Raymond and, if they should determine to act together, our directors and
executive officers as a group, will be able to exercise significant influence
over the outcome of any matters or block certain matters which might normally be
submitted to our stockholders for approval, including the election of directors
and the authorization of other corporate actions requiring stockholder approval.
OUR 6% DEBENTURE FINANCING WILL REDUCE THE PERCENTAGE OWNERSHIP INTEREST OF
EXISTING STOCKHOLDERS AND MAY CAUSE A REDUCTION IN THE SHARE PRICE.
In December 2000, we raised $1,987,400 by issuing to the selling
stockholders 6% debentures, which are convertible into shares of our common
stock. If all of the selling stockholders convert their debentures into shares
of common stock, we will be required to issue no less than 427,398 shares of
common stock. If the trading price of the common stock is low when the
conversion price of the 6% debentures is determined, we would be required to
issue a higher number of shares of common stock, which could cause a further
reduction in each of our stockholder's percentage ownership interest. In
addition, if a 6% debenture holder converts our 6% debentures and sells the
common stock, this could result in an imbalance of supply and demand for our
common stock and a decrease in the market price of our common stock. The further
our stock price declines, the further the periodic adjustment of the conversion
price will fall and the greater the number of shares we will have to issue upon
conversion.
OUR 6% DEBENTURE FINANCING HAS CAUSED OTHER SIGNIFICANT CORPORATE ACTIONS BY US.
We could be required to issue greater than 19.999% of our outstanding
common stock (1,145,112 shares based on the number of shares outstanding when
the 6% debentures were issued) upon conversion of our outstanding 6% debentures.
We have agreed to seek stockholder approval to issue more than 19.999% of our
outstanding common stock because the Nasdaq Stock Market requires stockholder
approval if a Company is going to issue 20% or more of its outstanding equity at
a price that is less than the greater of the book or market value of the equity.
If we are unable to obtain stockholder approval for issuance of the additional
shares over the 20% amount, we will be required to pay cash to holders seeking
to convert 6% debentures in an amount equal to the principal amount of the
debentures which cannot be converted as a result of the limit imposed by the
Nasdaq Stock Market rule. We cannot give any assurance that we will have the
funds required to make payments to the holders of the 6% debentures under such
circumstances. A failure to make the required payments would result in a default
under the 6% debentures.
7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Some of the statements under the "Prospectus Summary", "Risk Factors",
"Use of Proceeds", "Management's Discussion and Analysis of Financial Condition
and Results of Operations", "Description of Business" and elsewhere in this
prospectus constitute forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels or activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "could", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential", or "continue" or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we, nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
8
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by the
selling stockholders. The shares of common stock being offered have been
acquired in connection with, or will be acquired upon the conversion of the 6%
debentures and the exercise of common stock warrants. Both the 6% debentures and
the common stock warrants were acquired by the selling stockholders in
connection with a December 2000 private placement of securities. We received
proceeds of approximately $1,987,400 from the private placement which was used
to pay outstanding indebtedness of the Company and for general working capital
purposes.
9
PRICE RANGE OF OUR COMMON STOCK; DIVIDEND POLICY
On April 11, 2000 our registration statement on Form SB-2 (Commission File
No. 333-83255) for our initial public offering (the "IPO") of common stock, $.01
par value, became effective and our shares commenced trading on the Nasdaq
SmallCap Market under the symbol "SERV" on April 26, 2000. There were
approximately 216 holders of record of common stock as of March 15, 2001. The
table below sets forth, for the periods indicated, the high and low sales prices
of our common stock as reported by the Nasdaq Stock Market.
SALES PRICES
FISCAL YEAR 2000 HIGH LOW
---------------- ---- ---
Quarter Ended June 30, 2000 (from April 26, 2000) $9.00 $5.875
Quarter Ended September 30, 2000 7.00 4.25
Quarter Ended December 31, 2000 5.50 3.25
Quarter Ending March 31, 2001 4.875 1.31
On March 30, 2001, the closing price of our common stock as reported by
the Nasdaq Stock Market, was $1.31 per share. We have never paid dividends on
our common stock and we intend to retain earnings, if any, to finance future
operations and expansion. In addition, our credit agreement restricts the
payment of dividends. Therefore, we do not anticipate paying any cash dividends
in the foreseeable future. Any future payment of dividends will depend upon the
financial condition, capital requirements and our earnings as well as other
factors that our Board of Directors deems relevant.
10
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2000.
You should read this information together with our financial statements and the
notes to those statements appearing elsewhere in this prospectus.
Loans payable ............................................ $ 127,530
Convertible debentures ................................... 1,436,724
Stockholders' equity: .................................... 57,087
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 shares issued and outstanding
Additional paid-in capital ............................ 11,289,577
Deferred compensation ................................. (56,200)
Accumulated deficit ................................... (3,431,058)
------------
Total stockholders' equity ............................... 7,859,406
------------
Total capitalization ..................................... $ 9,423,660
============
11
SELECTED FINANCIAL DATA
The selected financial data that follows should be read in conjunction
with our financial statements and the related notes thereto and Management's
Discussion and Analysis and Results of Operations appearing elsewhere in this
prospectus.
INCOME STATEMENT DATA
FOR THE PERIOD
AUGUST 11, 1997
(INCEPTION) TO
SEPTEMBER 30,
FOR THE YEAR ENDED SEPTEMBER 30, 1997
2000 1999 1998 1997
---- ---- ---- ----
Revenues $ 41,676,587 $ 30,042,751 $ 24,919,63 $ 2,442,191
Gross Profit 10,493,909 6,736,497 4,589,921 436,344
------------ ------------ ------------ ------------
Earnings (loss) from operations 1,578,992 (517,952) (1,873,055) (422,722)
------------ ------------ ------------ ------------
Net earnings (loss) $ 1,045,910 $ (1,527,043) $ (2,412,145) $ (477,044)
============ ============ ============ ============
Net earnings (loss per common share)
Basic $ .21 $ (.40) $ (.67) $ (.23)
Diluted .20 (.40) (.67) $ (.23)
Weighted average shares, outstanding per
common share
Basic 4,931,914 3,828,530 3,602,086 2,027,124
Diluted 5,223,508 3,828,530 3,602,086 2,027,124
BALANCE SHEET DATA
AS OF SEPTEMBER 30,
------------------------------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
Cash and Cash Equivalents $ 1,030,72 $ 423,072 $ 249,987 $ 92,872
------------ ------------ ------------ ------------
Current Assets 5,444,955 1,769,618 847,874 1,263,985
Goodwill, net of accumulated amortization 3,716,538 2,345,555 -- --
Total Assets $ 10,318,281 $ 4,925,865 $ 1,094,649 1,310,270
============ ============ ============ ============
Loans and Notes Payable 461,712 2,158,427 406,350 158,500
Total Liabilities 3,518,836 5,799,470 2,832,899 1,467,605
------------ ------------ ------------ ------------
Temporary equity -- 2,138,060 1,618,060 343,600
------------ ------------ ------------ ------------
Total stockholders' equity (deficiency) 6,799,445 (3,011,665) (3,356,310) (500,935)
------------ ------------ ------------ ------------
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
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 the 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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR
ENDED SEPTEMBER 30, 1999
REVENUES. Revenues increased 38.7% to $41,676,587 for the year ended
September 30, 2000 from $30,042,751 for the year ended September 30, 1999. A
significant portion of the increase was attributable to the growth of our
SMARTSolutions(TM) division where revenues increased 108.1% to $14,443,057 for
the year ended September 30, 2000 from $6,938,887 for the year ended September
30, 1999.
GROSS PROFIT. Gross profit increased 55.8% to $10,493,909 for the year
ended September 30, 2000 from $6,736,497 for the year ended September 30, 1999.
Gross profit as a percentage of revenues increased to 25.2% for the year ended
September 30, 2000 from 22.4% for the year ended September 30, 1999. This
increase was due to continuing our plan to seek higher gross margin business and
the higher margins generated by our SMARTSolutions(TM) and Engineering
divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses not including depreciation and amortization increased
30.4% to $8,425,288 for the year ended September 30, 2000 from $6,462,631 for
the year ended September 30, 1999. Selling, general and administrative expenses
as a percentage of revenues decreased to 20.2% for the year ended September 30,
2000 from 21.5% for the year ended September 30, 1999. The increased dollar
amount is due to the increase in costs, primarily for personnel, to support the
increase in revenues. We believe that we can continue to increase revenues
without incurring a proportionate increase in selling, general and
administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 86.5% to $367,129 for the year ended September 30, 2000 from $196,818
for the year ended September 30, 1999. Depreciation and amortization expenses as
a percentage of revenues increased to 0.9% for the year ended September 30, 2000
from 0.7% for the year ended September 30, 1999. This increase was primarily due
to the amortization of goodwill associated with the acquisition of certain
assets of
13
Outsource International, Inc. in June 2000 and the impact of increased capital
expenditures.
PROVISION FOR RECOURSE OBLIGATION. Provision for recourse obligation is
the estimated amount of uncollectible accounts receivable sold to a factor,
which the factor may obligate us to repurchase. This amount decreased 79.4% to
$122,500 for the year ended September 30, 2000 from $595,000 for the year ended
September 30, 1999. Provision for recourse obligation as a percentage of
revenues decreased to 0.3% for the year ended September 30, 2000 from 2.0% for
the year ended September 30, 1999. Almost the entire amount for the year ended
September 30, 1999 was due to the uncertainty of recoverability of accounts with
which we ceased doing business during that same time period.
FINANCE CHARGES. Finance charges decreased 14.4% to $618,134 for the year
ended September 30, 2000 from $722,020 for the year ended September 30, 1999. As
a percentage of revenues, finance charges decreased to 1.5% for the year ended
September 30, 2000 from 2.4% for the year ended September 30, 1999. This
decrease was due to improved collections, which reduced the average days
outstanding of the accounts receivable sold.
INCOME TAX BENEFIT. Income tax benefit of $340,000 for the year ended
September 30, 2000 is the result of the utilization of a portion of the net
operating loss carryforwards. As a percentage of revenue, income tax benefit was
0.8%.
NET EARNINGS (LOSS). As a result of the foregoing, we had net earnings of
$1,045,910 for the year ended September 30, 2000 compared to a net loss of
($1,527,043) for the year ended September 30, 1999. The net earnings as a
percentage of revenues was 2.5% for the year ended September 30, 2000. The net
loss for the year ended September 30, 1999 as a percentage of revenues was
(5.1%).
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR
ENDED
SEPTEMBER 30, 1998
REVENUES. Revenues increased 20.6% to $30,042,751 for the year ended
September 30, 1999 from $24,919,639 for the year ended September 30, 1998.
Revenues increased primarily as a result of acquisitions in 1999 and the
implementation of our first SMARTSolutions(TM) programs in December 1998.
14
GROSS PROFIT. Gross profit increased 38.7% to $6,365,658 for the year
ended September 30, 1999 from $4,589,921 for the year ended September 30, 1998.
Gross profit as a percentage of revenues increased to 21.2% for the year ended
September 30, 1999 from 18.4% for the year ended September 30, 1998. This
increase was due to successfully implementing our plan to seek higher gross
margin business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, not including depreciation and amortization, increased
5.9% to $6,091,792 for the year ended September 30, 1999 from $5,751,875 for the
year ended September 30, 1998. Selling, general and administrative expenses as a
percentage of revenues decreased to 20.3% for the year ended September 30, 1999
from 23.1% for the year ended September 30, 1998. Selling, general and
administrative expenses in the year ended September 30, 1998 include $798,000
for the settlement of litigation and associated legal and other costs. Selling,
general and administrative expenses in the year ended September 30, 1999
includes $173,000 for legal fees in connection with our administrative actions
pertaining to the attempted unionization of a customer facility. Also, in
anticipation of making acquisitions and introducing our SMARTSolutions(TM)
program, we incurred significant costs without a corresponding increase in
revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 384.1% to $196,818 for the year ended September 30, 1999 from $40,656
for the year ended September 30, 1998. Depreciation and amortization expenses as
a percentage of revenues increased to 0.6% for the year ended September 30, 1999
from 0.1% for the year ended September 30, 1998. This increase was primarily due
to the amortization of goodwill associated with the acquisition of certain
assets of B&R Employment, Inc. in January 1999.
PROVISION FOR RECOURSE OBLIGATION. The provision for recourse obligation
decreased 11.3% to $595,000 for the year ended September 30, 1999 from $670,445
for the year ended September 30, 1998. Provision for recourse obligation as a
percentage of revenues decreased to 2.0% for the year ended September 30, 1999
from 2.7% for the year ended September 30, 1998. Almost all of this amount was
due to the uncertainty of recoverability of one account and a group of
affiliated psychiatric clinics.
FINANCE CHARGES. Finance charges increased 37.6% to $722,020, for the year
ended September 30, 1999 from $524,649 for the ended September 30, 1998. As a
percentage of revenues, finance charges increased to 2.4% for the year ended
September 30, 1999 from 2.1% for the year ended September 30, 1998. This
increase was due to a small increase in the average days' outstanding of the
accounts receivable sold.
INTEREST EXPENSE. Interest expense increased 542.0% to $309,257 for the
year ended September 30, 1999 from $48,170 for the year ended September 30,
1998. As a percentage of revenues, interest expense increased to 1.1% for the
year ended September 30, 1999 from 0.2% for the year ended September 30, 1998.
This increase was due to increased borrowings necessary to satisfy a litigation
settlement and a working capital shortfall.
NET LOSS. As a result of the foregoing, the net loss decreased 36.7% to
$1,527,043 for the year ended September 30, 1999 from $2,412,145 for the year
ended September 30, 1998. The net loss as a percentage of revenues decreased to
5.1% for the year ended September 30, 1999 from 9.7% for the year ended
September 30, 1998. We had a net loss carryforward for Federal income tax
purposes of $2,109,000 at September 30, 1999.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED
TO THREE MONTHS
15
ENDED DECEMBER 31, 1999
REVENUES. Revenues increased 141.6% to $18,660,417 for the three months
ended December 31, 2000 from $7,723,887 for the three months ended December 31,
1999. Revenues increased primarily as a result of acquisitions and the growth of
our SMARTSolutions(TM) division.
GROSS PROFIT. Gross profit increased 103.4% to $4,298,575 for the three
months ended December 31, 2000 from $2,113,870 for the three months ended
December 31, 1999. Gross profit as a percentage of revenues decreased to 23.0%
for the three months ended December 31, 2000 from 27.4% for the three months
ended December 31, 1999. This 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
124.8% to $3,624,422 for the three months ended December 31, 2000 from
$1,612,101 for the three months ended December 31, 1999. Selling, general and
administrative expenses, not including depreciation and amortization, as a
percentage of revenues decreased to 19.4% for the three months ended December
31, 2000 from 20.9% for the three months ended December 31, 1999. The increase
in the amount is attributable to implementation costs associated with new and
future SMARTSolutions(TM) accounts and increased payroll in anticipation of
future growth and acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 122.8% to $156,913 for the three months ended December 31, 2000 from
$70,443 for the three months ended December 31, 1999. Depreciation as a
percentage of revenues decreased to 0.8% for the three months ended December 31,
2000 from 0.9% for the three months ended December 31, 1999. The increased
dollar amount 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 41.7% to $100,934 for the three months ended December 31, 2000
from $173,115 for the three months ended December 31, 1999. As a percentage of
revenues, finance charges decreased to 0.5% for the three months ended December
31, 2000, from 2.2% for the three months ended December 31, 1999. This decrease
was due to the agreement being terminated December 12, 2000 and a decrease in
the percentage of accounts receivable sold to the factor during the three months
ended December 31, 2000 compared to the three months ended December 31, 1999.
16
INTEREST AND FINANCING COSTS. Interest and financing costs increased 90.5%
to $198,498 for the three months ended December 31, 2000 from $104,172 for the
three months ended December 31, 1999. Included in the amount for the three
months ended December 31, 2000 is $122,211, which is the portion of the discount
on the beneficial conversion feature of convertible debt issued on December 4,
2000.
INCOME TAX BENEFIT. Income tax benefit of $88,000 for the three months
ended December 31, 2000 is the result of a change in judgment about the
realizability of deferred tax assets. As a percentage of revenue, income tax
benefit was 0.5%.
NET EARNINGS. As a result of the foregoing, we had net earnings of
$313,499 for the three months ended December 31, 2000 compared to net earnings
of $155,936 for the three months ended December 31, 1999. Net earnings as a
percentage of revenues was 1.7% for the three months ended December 31, 2000 and
2.0% for the three months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
securities, borrowings and sales of accounts receivable to a factor. In
addition, on May 5, 2000, we completed our IPO of 1,300,000 shares of common
stock at a price of $6.00 per share, realizing net cash proceeds of
approximately $6,000,000 after deducting underwriting discounts and offering
expenses.
Net cash used in operating activities was $1,624,452 and $994,445 in the
year ended September 30, 2000 and 1999, respectively. Approximately $1,200,000
of the net proceeds from the IPO was used to reduce trade and other payables in
the year ended September 30, 2000. Net cash used in operating activities was
$3,903,024 and $979,842 in the three months ended December 31, 2000 and 1999,
respectively. A significant portion of the amount in the three months ended
December 31, 2000 was a result of our terminating our agreement with a factor.
Under that agreement, we had sold our accounts receivable to the factor. On
December 12, 2000, we obtained a line of credit from a lending institution,
which was initially used to repurchase the then outstanding accounts receivable
sold to the factor.
Net cash used in investing activities was $1,955,343 and $478,396 in the
year ended September 30, 2000 and 1999, respectively. Cash used for acquisitions
for the year ended September 30, 2000 and 1999 was $1,053,868 and $194,930,
respectively. Net cash used in investing activities was $971,894 and $73,326 in
the three months ended December 31, 2000 and 1999, respectively. Cash used for
acquisitions for the three months ended December 31, 2000 was $637,367. The
balance in all of the above periods was primarily for capital expenditures.
Net cash provided by financing activities was $4,187,445 and $1,645,926 in
the year ended September 30, 2000 and 1999, respectively. Net proceeds of the
IPO in the year ended September 30, 2000 were $6,034,169, of which $1,225,000
was used to repay notes and loans payable and $350,000 was used to purchase
53,766 shares of our common stock which has been retired. The sources of cash
provided by financing activities in the year ended September 30, 1999 were the
net proceeds of borrowings and private placements of our common stock and debt.
Net cash provided by financing activities was $4,838,110 and $641,288 in the
three months ended December 31, 2000 and 1999, respectively. We had net
borrowings of $3,350,342 under the line of credit obtained on December 12, 2000.
We also received net proceeds of $1,723,988 from the issuance of convertible
debt in the three months ended December 31, 2000. The source of cash provided by
financing activities in the three months ended December 31, 1999 was primarily
from loans payable.
17
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 and legal expenses. Temporary employees
are paid weekly.
In December 2000, we sold $1,987,400 of 6% convertible debentures in a
private offering. The 6% 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. In April 2001, we redeemed $200,000 principal amount
of Debentures.
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 6% 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' businesses.
Historically, staffing services has experienced lower revenues in the first
calendar quarter with revenues accelerating during the second and third calendar
quarters and then staring 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.
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IMPACT OF INFLATION
We believe that since our inception, inflation has not had a significant
impact on our results of operations.
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.
19
DESCRIPTION OF BUSINESS
OVERVIEW
We are a national business services company engaged in providing
outsourced labor and operational resources on a long-term, contractual basis. We
were incorporated in Delaware in March 1997 and began operations in August 1997
with the purchase of certain assets of Royalpar Industries, Inc. and its
subsidiaries. This purchase provided us with a foundation to become a national
provider of comprehensive staffing services. We believe that as businesses
increasingly outsource a wider range of human resource functions in order to
focus on their core operations, they will require more sophisticated and diverse
services from their staffing providers.
We are functionally divided into three "service lines":
SMARTSolutions(TM), Engineering Services and Staffing Services. Through our
SMARTSolutions(TM) Division, we provide a comprehensive, customized staffing
program designed to reduce labor and management costs and increase workforce
efficiency. Our Engineering Services Division provides a full range of technical
engineering services including on-site staff augmentation and in-house project
work. Finally, our Staffing Services Division provides temporary workers for
short-term needs, extended-term temporary employees, temporary-to-permanent
placements, recruiting, permanent placements, payroll processing, on-site
supervising and human resource consulting. All three service groups seek to act
as business partners to our clients rather than just a vendor, and in doing so,
seek to systematically enhance productivity and positively impact financial
results. We are headquartered at 500 Craig Road, Suite 201, Manalapan, New
Jersey 07726 and our telephone number is (732) 866-0300. As of March 30, 2001 we
were providing services from thirty-four locations in twelve states. We also
maintain a presence on the Internet with our website at WWW.STRATUSSERVICES.COM,
an informational site designed to give prospective customers and employees
additional information regarding our operations.
PRINCIPAL SERVICES & MARKETS
Our business operations are classified into SMARTSolutions(TM),
Engineering Services and Staffing Services, each reporting to a Division
President who reports directly to the Chief Executive Officer and each with its
own target market.
SMARTSOLUTIONS(TM) is a customized staffing program designed to reduce
labor and management costs and increase workforce efficiency. The programs
typically require an eight-week implementation process beginning with an
operational assessment of the client's tasks and processes conducted by the
SMARTSolutions(TM) implementation team. The team compiles and analyzes the data
and then presents its recommendations to the client's senior management.
Together they establish an implementation timeline with target dates and
responsibility checklists. Once the timeline is approved, a workforce-training
curriculum or SMART Training Program is developed and implemented by a team of
associates headed by the On-site Manager provided by Stratus. Monthly
performance is reported to the client through SMART Reports that track workforce
performance, analyze that performance against the pre-determined goals and
adjust programs to meet evolving customer needs.
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While SMARTSolutions(TM) is designed to be most effective in
manufacturing, distribution and telemarketing operations, it is marketed to all
companies that have at least 50 people dedicated to specific work functions that
involve repetitive tasks measurable through worker output and could benefit from
proactive workforce management. Since SMARTSolutions(TM) differs greatly from
traditional staffing services, we have developed a national marketing team
dedicated strictly to marketing these programs. However, the team utilizes our
Staffing Services branch staff to identify companies within their geographic
regions that could potentially benefit from a SMARTSolutions(TM) program. Once
identified, the team assumes full responsibility for the sales process. A
significant portion of our SMARTSolutions(TM) clients have been obtained through
this process or from "word of mouth" recommendations from current
SMARTSolutions(TM) customers.
ENGINEERING SERVICES require highly specialized and technically skilled
employees that demand significantly higher hourly rates than traditional
temporary staffing services. Engineering Services augments customers' in-house
engineering capability by supplying our engineers as contract labor. We will
also take the lead role as the project manager on specific engagements and
provide a full range of services that include design requirements, scheduling,
drawing and specification management, field supervision and quality assurance.
On large engagements, we may take responsibility for specific areas of the
engagement only, or supply staff to the project manager.
In addition to staff augmentation, we provide a broad range of project
support to Fortune 100 companies, government agencies and educational
institutions in electrical engineering, instrumentation and controls, mechanical
engineering, piping and pipe support analysis, civil, structural and
architectural engineering. We have developed an expertise providing services to
utilities and cogeneration facility operators, and are one of a small number of
engineering staffing firms in the United States with a "Class A Nuclear
Certification" qualifying us to provide staffing services to nuclear power
plants. Projects typically last six months to one year and may require the
services of several specialized professionals.
The marketing of engineering services is focused primarily on addressing
the requirements typical of specific customers. In marketing to potential
customers, the engineering sales team identifies the requirements of the
customer and promotes services offerings designed to meet those requirements. In
addition to personal sales calls, targeted mailings and telephone solicitations,
the entire management team promotes our services through cross-selling
complementary services to existing customers, submitting bids on "competitive
bid" projects and networking through industry trade associations. As is the case
with SMARTSolutions(TM), we anticipate that with the extensive experience of the
Engineering Services management team, word of mouth and personal contacts will
provide the majority of sales leads.
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STAFFING SERVICES includes both personnel placement and employer services
such as payrolling, outsourcing, on-site management and administrative services.
Payrolling, which is also referred to as employee leasing, typically involves
the transfer of a customer's employees to our payroll. Outsourcing represents a
growing trend among businesses to contract with third parties to provide a
particular function or business department for an agreed price over a designated
period. On-site services involve the placement of a Company employee at the
customer's place of business to manage all of the customer's temporary staffing
requirements. Administrative services include skills testing, drug testing and
risk management services. Skills testing available to the Company's customers
include cognitive, personality and psychological evaluation and drug testing
that is confirmed through an independent, certified laboratory.
Staffing Services can also be segmented by assignment types into
supplemental staffing, long-term staffing and project staffing. Supplemental
staffing provides workers to meet variability in employee cycles, and
assignments typically range from days to months. Long-term staffing provides
employees for assignments that typically last three to six months but can
sometimes last for years. Project staffing provides companies with workers for a
time specific project and may include providing management, training and
benefits.
Staffing services are marketed through our on-site sales professionals
throughout our nationwide network of offices. Generally, new customers are
obtained through customer referrals, telemarketing, advertising and
participating in numerous community and trade organizations.
COMPETITIVE BUSINESS CONDITIONS
Staffing companies provide one or more of four basic services to clients:
(i) flexible staffing; (ii) Professional Employer Organization ("PEO") services;
(iii) placement and search; and (iv) outplacement. Based on information provided
by the American Staffing Association (formerly the National Association of
Temporary and Staffing Services), the National Association of Professional
Employer Organizations and Staffing Industry Analysts, Inc., 1999 staffing
industry revenues were approximately $117 billion. Over the last five years, the
staffing industry has experienced significant growth, due largely to the
utilization of temporary help across a broader range of industries, as well as
the emergence of the PEO sector. Staffing industry revenues grew from
approximately $102 billion in 1998 to approximately $117 billion in 1999, or
14.7%.
The U.S. staffing industry is highly fragmented and has begun to
experience consolidation, particularly with respect to temporary staffing
companies. Recent industry statistics indicate that approximately 7,000
companies provide temporary staffing services in the United States. Many of
these companies are small, owner-operated businesses with limited access to
capital for development and expansion. We believe that the industry is
consolidating in response to:
o The increased demands of companies for a single supplier of a full
range of staffing and human resource services,
o Increased competition from larger, better capitalized competitors,
and
o Owner's desires for liquidity.
Although some consolidation activity has already occurred, we believe that
consolidation in the U.S. staffing industry will continue and that there will be
numerous available acquisition candidates.
Historically, the demand for temporary staffing employees has been driven
by a need to
22
temporarily replace regular employees. More recently, competitive pressures have
forced businesses to focus on reducing costs, including converting fixed labor
costs to variable and flexible costs. Increasingly, the use of temporary
staffing employees has become widely accepted as a valuable tool for managing
personnel costs and for meeting specialized or fluctuating employment
requirements. Organizations have also begun using temporary staffing to reduce
administrative overhead by outsourcing operations that are not part of their
core business operations, such as recruiting, training and benefits
administration. By utilizing staffing services companies, businesses are able to
avoid the management and administrative costs that would be incurred if full
time employees were employed. An ancillary benefit, particularly for smaller
businesses, is that the use of temporary personnel reduces certain employment
costs and risks, such as, workers' compensation and medical and unemployment
insurance, that a temporary personnel provider can spread over a much larger
pool of employees.
Since 1990, the staffing industry has seen an evolution of services move
away from "temp help" or supplemental staffing to more permanent staffing
relationships. The industry has developed specialization among various sectors
and can be classified into four categories: integrated staffing service
providers, professional services providers, information technology providers and
commodity providers. Integrated staffing services provide a vendor-on-premise,
acting as the general contractor managing the workforce and maintaining the
payroll. Through this arrangement, providers are able to establish long-term
relationships with their customers, reduce cyclicality of employees, and
maintain relationships with customers that are less price sensitive. The
professional services provider supplies employees in the fields of engineering,
finance, legal, accounting and other professions. In general, these services are
less cyclical than the light industrial and clerical segments and carry higher
margins. Information technology companies offer technical employees to maintain
and implement all forms of information systems. The commodity segment of the
staffing industry is the traditional temporary employer business in which an
employee of the service is placed at the customer for a short period. It is
characterized by intense competition and low margins. This sector is most
exposed to economic cycles and price competition to win market share. Growth in
this segment has been constrained over the past three years due to a competitive
labor market for low-end workers.
We compete with other companies in the recruitment of qualified personnel,
the development of client relationships and the acquisition of other staffing
and professional service companies. A large percentage of temporary staffing and
consulting companies are local operators with fewer than five offices and have
developed strong local customer relationships within local markets. These
operators actively compete with us for business and, in most of these markets,
no single company has a dominant share of the market. We also compete with
larger, full-service and specialized competitors in national, regional and local
markets. The principal national competitors include AccuStaff, Inc., Manpower,
Inc., Kelly Services, Inc., The Olsten Corporation, Interim Services, Inc., and
Norrell Corporation, all of which may have greater marketing, financial and
other resources than Stratus. We believe that the primary competitive factors in
obtaining and retaining clients are the number and location of offices, an
understanding of clients' specific job requirements, the ability to provide
temporary personnel in a timely manner, the monitoring of the quality of job
performance and the price of services. The primary competitive factors in
obtaining qualified candidates for temporary employment assignments are wages,
responsiveness to work schedules and number of hours of work available. We
believe our long-term client relationships and strong emphasis on providing
service and value to our clients and temporary staffing employees makes us
highly competitive.
ACQUISITION HISTORY
Between September 1997 and March 2001, we completed six acquisitions of
primarily staffing companies or divisions of staffing companies. These
acquisitions included twenty offices located in six states and collectively
generated $42 million in revenue for the twelve months preceding such
23
acquisitions. Pursuant to our acquisition strategy we made the following asset
purchases:
o In August 1998, we acquired the assets of J.P. Industrial, LLC, a $1
million (in annual revenues) Canby, Oregon based Engineering
Services firm. We made this acquisition to expand our presence in
the engineering services intensive power generation and paper/wood
product industries in the Pacific Northwest.
o In January 1999, we completed the acquisition of the assets of B & R
Employment, Inc. ("B & R"), a $4 million (in annual revenues)
Wilmington, Delaware based provider of traditional temporary
staffing services. This acquisition gave us an immediate presence in
the industrial and banking center of Delaware.
o In April 1999, we acquired certain assets of Adapta Services Group,
Inc., a single location, $2 million (in annual revenues) New Castle,
Delaware based provider of traditional staffing services. This
acquisition was an excellent complement to our acquisition of B&R
Employment, Inc., and gave us full coverage of all of the major
Delaware metropolitan areas and provided us with additional quality
customers.
o In June 2000, we acquired the assets of the eight New Jersey and
Pennsylvania branches of Tandem, a $25 million (in annual revenues)
division of Outsource International, Inc. This acquisition greatly
expanded our presence in our home state of New Jersey and continued
our Mid-Atlantic regional expansion.
o In July 2000, we acquired certain assets of Apoxiforce, Inc., a $1
million (in annual revenues) Elizabeth, New Jersey based provider of
traditional staffing services. This acquisition provided us with a
strong presence in the commercial food service industry and an
excellent customer list. These operations were incorporated into our
existing Elizabeth, New Jersey office and the personnel assimilated
throughout our New Jersey operations.
o In October 2000 we acquired the assets of seven New Hampshire and
Massachusetts branches of Tandem, a $9 million (in annual revenues)
division of Outsource International, Inc. This acquisition further
continued our East Coast expansion plan and provided us with a
platform to further expand our New England presence.
Due to these acquisitions, as well as new offices we opened, the number of
our offices increased from five in five states after the initial Royalpar, Inc.
acquisition in August 1997 to thirty-four in twelve states at December 31, 2000.
CUSTOMERS
For the year ended September 30, 2000 we provided services to 1,025
customers in 30 states. Our five largest customers represented 35% of our
revenue but no one customer exceeded 12%. We do not believe that a loss or a
material reduction of any one customer would have a material adverse effect on
our business. At December 31, 2000 we were providing services to 635 customers
in 16 states with our five largest customers representing 33% of our revenues
with no one customer exceeding 8%.
GOVERNMENTAL REGULATION
Staffing services firms are generally subject to one or more of the
following types of government regulation: (1) regulation of the
employer/employee relationship between a firm and its
24
temporary employees; and (2) registration, licensing, record keeping and
reporting requirements. Staffing services firms are the legal employers of their
temporary workers. Therefore, laws regulating the employer/employee
relationship, such as tax withholding and reporting, social security or
retirement, anti-discrimination and workers' compensation, govern these firms.
State mandated workers' compensation and unemployment insurance premiums have
increased in recent years and have directly increased our cost of services. In
addition, the extent and type of health insurance benefits that employers are
required to provide employees have been the subject of intense scrutiny and
debate in recent years at both the national and state level. Proposals have been
made to mandate that employers provide health insurance benefits to staffing
employees, and some states could impose sales tax, or raise sales tax rates on
staffing services. Further increases in such premiums or rates, or the
introduction of new regulatory provisions, could substantially raise the costs
associated with hiring and employing staffing employees.
Certain states have enacted laws that govern the activities of
"Professional Employer Organizations," which generally provide payroll
administration, risk management and benefits administration to client companies.
These laws vary from state to state and generally impose licensing or
registration requirements for Professional Employer Organizations and provide
for monitoring of the fiscal responsibility of these organizations. We believe
that Stratus is not a Professional Employer Organization and not subject to the
laws that govern such organizations; however, the definition of "Professional
Employer Organization" varies from state to state and in some states the term is
broadly defined. If we are determined to be a Professional Employer
Organization, we can give no assurance that we will be able to satisfy licensing
requirements or other applicable regulations. In addition, we can give no
assurance that the states in which we operate will not adopt licensing or other
regulations affecting companies that provide commercial and professional
staffing services.
TRADEMARKS
We have filed for Federal Trademark registration of SMARTSolutions,
SMARTReport, SMARTTraining, our slogan, name and logo. No assurance can be given
that this registration will be obtained or if obtained, will be effective to
prevent others from using the mark concurrently or in certain locations.
Currently, we are asserting common law protection by holding the marks out to
the public as the property of Stratus. However, no assurance can be given that
this common law assertion will be effective to prevent others from using the
mark concurrently or in other locations. In the event someone asserts ownership
to a mark, we may incur legal costs to enforce any unauthorized use of the marks
or defend ourselves against any claims.
EMPLOYEES
As of December 31, 2000 we were employing 3,685 total employees. Of that
amount 165 were classified as Staff employees and 3,520 were classified as field
or "temp" employees, those employees placed at client facilities.
A key factor contributing to future growth and profitability will be the
ability to recruit and retain qualified personnel. To attract personnel, we
employ recruiters, called "Staffing Specialists" who regularly visit schools,
churches and professional associations and present career development programs
to various organizations. In addition, applicants are obtained from referrals by
existing staffing employees and from advertising on radio, television, in the
Yellow Pages, newspapers and through the Internet. Each applicant for a Staffing
Services position is interviewed with emphasis on past work experience, personal
characteristics and individual skills. We maintain software-testing and training
programs at our offices for applicants and employees who may be trained and
tested at no cost to the applicant or customer. Engineering Services and
Management Personnel are targeted and
25
recruited for specific engagements. We usually advertise for professionals who
possess specialized education, training or work experience. Engineering Services
recruiting efforts also rely upon industry contacts, personal networks and
referrals from existing and former Engineering Services personnel.
To promote loyalty and improve retention among our employees and to
differentiate ourselves from competing staffing firms, we offer a comprehensive
benefits package after only ninety days of employment instead of the industry
standard of one hundred eighty days. The benefits package includes paid time
off, holiday and vacation time, medical coverage, dental, vision, prescription,
mental health, life insurance, disability coverage and a 401(k) defined
contribution plan. The average length of assignment for employees ranges from
six months to five years depending on the client requirements.
PROPERTY
We own no real property. We lease approximately 6,300 square feet in a
professional office building in Manalapan, New Jersey as our corporate
headquarters. That facility houses all of our centralized corporate functions,
including the executive management team, payroll processing, accounting, human
resources and legal departments. Our lease expires on May 31, 2001 and we have
begun discussions with the landlord to increase our space at that location. As
of March 30, 2000 we leased 33 additional facilities, primarily flexible
staffing offices, in 12 states. With the exception of the corporate
headquarters, we believe that our facilities are generally adequate for our
needs and we do not anticipate any difficulty in replacing such facilities or
locating additional facilities, if needed.
26
MANAGEMENT
The name and age of each director and executive officer of the Company and
their respective positions with the Company are set forth below. Additional
biographical information concerning each of the directors and executive officers
follows the table.
NAME AGE POSITION
- ---- --- --------
Joseph J. Raymond 65 Chairman of the Board,
President and Chief
Executive Officer
Michael J. Rutkin 49 Director
Harry Robert Kingston 78 Director
Donald W. Feidt 69 Director
Sanford I. Feld 73 Director
Charles A. Sahyoun 49 President, Engineering Division
Michael A. Maltzman 53 Chief Financial Officer and
Treasurer
J. Todd Raymond 32 General Counsel and Corporate
Secretary
JOSEPH J. RAYMOND has served as Chairman of the Board and Chief Executive
Officer of Stratus since its inception in 1997. Prior thereto, he served as
Chairman of the Board, President and Chief Executive Officer of Transworld Home
Healthcare, Inc. (NASDAQ:TWHH), a provider of healthcare services and products,
from 1992 to 1996. From 1987 through 1997, he served as Chairman of the Board
and President of Transworld Nurses, Inc., a provider of nursing and
paraprofessional services, which was acquired by Transworld Home Healthcare,
Inc. in 1992.
MICHAEL J. RUTKIN has served as a Director of Stratus since November
1997 and was Chief Operating Officer and President from March 1997 to October
1998. Since November 1998, Mr. Rutkin has served as General Manager/Chief
Executive Officer of Battleground Country Club. From 1996 to 1998, Mr.
Rutkin served as Vice President of Transworld Management Services, Inc. From
February 1993 to October 1996, he served as Chief Operating Officer of
HealthCare Imaging Services, Inc. Prior thereto, Mr. Rutkin was the
Executive Vice President of Advanced Diagnostic Imaging from February 1987 to
February 1993. From March 1981 to September 1984, he served as Director of
New Business Development for the United States Pharmaceutical Division of
CIBA-Geigy. Mr. Rutkin is the brother-in-law of Joseph J. Raymond.
27
HARRY ROBERT KINGSTON has served as a Director of Stratus since November
1997. From 1977 until his retirement in 1989, he served as the President and
Chief Executive Officer of MainStream Engineering Company, Inc., an engineering
staffing firm located in California. From 1965 to 1968, he served as President
and Partner of VIP Engineering Company, a subsidiary of CDI Corporation, a
staffing and engineering services business. From 1968 to 1977, Mr. Kingston
served as Vice President for CDI Corporation.
DONALD W. FEIDT has served as a Director of Stratus since November 1997.
From 1987 to December 1998, Mr. Feidt was a Managing Partner of Resource
Management Associates, an information technology consulting company. Since
December 1998, Mr. Feidt has served as a Vice President to the Chief Executive
Officer of Skila Inc., a global web-based business intelligence platform company
providing services to the medical industry.
SANFORD I. FELD has served as a Director of the Company since November
1997. Mr. Feld is currently president of Leafland Associates, Inc., an advisor
to Feld Investment and Realty Management, a real estate development and
management company. He also serves as Chairman of Flavor and Food Ingredients, a
private savory and flavor company. From 1973 to 1979, he served as Director of
the Chelsea National Bank of New York City.
CHARLES A. SAHYOUN has served as President of Stratus' Engineering
Services Division since December 1997. From September 1988 to December 1997,
he was employed in various capacities with Day & Zimmerman Utilities Services
Group, Inc., an engineering and design services company, including Vice
President of Business Development. Mr. Sahyoun is a cousin of Joseph J.
Raymond.
MICHAEL A. MALTZMAN has served as Treasurer and Chief Financial Officer
of Stratus since September 1997 when it acquired the assets of Royalpar
Industries, Inc. Mr. Maltzman served as a Chief Financial Officer of
Royalpar, which filed for protection under United States Bankruptcy Code in
1997, from April 1994 to August 1997. From June 1988 to July 1993, he served
as Vice President and Chief Financial Officer of Pomerantz Staffing Services,
Inc., a national staffing company. Prior thereto, he was a Partner with
Eisner & Lubin, a New York accounting firm. Mr. Maltzman is a Certified
Public Accountant.
J. TODD RAYMOND has served as General Counsel and Secretary of Stratus
since September 1997. From December 1994 to January 1996, Mr. Raymond was an
associate and managing attorney for Pascarella & Oxley, a New Jersey general
practice law firm. Prior thereto, Mr. Raymond acted as in-house counsel for
Raymond & Perri, an accounting firm. From September 1993 to September 1994,
Mr. Raymond was an American Trade Policy Consultant for Sekhar-Tunku Imran
Holdings Sdn Berhad, a Malaysian multi-national firm. Mr. Raymond is the
nephew of Joseph J. Raymond.
MEETINGS OF THE BOARD OF DIRECTORS; COMMITTEES
During the fiscal year ended September 30, 2000, the Board of Directors
held six (6) meetings. During fiscal 2000, each member of the Company's current
Board of Directors attended at least 75% of the meetings of the Board of
Directors and all of the meetings of the committees on which he served.
During fiscal 2000, the Board of Directors had two standing committees:
the Audit Committee and the Compensation Committee.
The Audit Committee currently consists of Mr. Kingston, Mr. Feidt and
Mr. Feld. The Audit Committee's principal functions include making
recommendations to the Board of Directors regarding the auditors to be
engaged as the Company's independent public accountants, reviewing the
proposed
28
plan and scope for the annual audit and the results of and recommendations from
such audit when completed, reviewing the services rendered by the auditors and
the fees charged for such services, determining the effect, if any, of the
performance of any non-audit services by the Company's independent public
accountants on the independence and objectivity of such accountants, and
reviewing the plan, scope and results of the Company's internal audit
operations. During fiscal 2000, the Audit Committee held two (2) meetings.
Messrs. Kingston, Feidt and Feld are members of the Compensation
Committee. The Compensation Committee reviews and approves compensation for
executive employees of the Company on a periodic basis, subject to approval of
the Board of Directors, and establishes and administers the Company's
compensation programs. The Compensation Committee also administers each of our
three (3) employee benefit plans one of which is subject to Stockholder approval
after the next Annual Meeting of Stockholders. During fiscal 2000, the
Compensation Committee held two (2) meetings.
THE EQUITY INCENTIVE PLANS
GENERAL. We have adopted a 1999 Equity Incentive Plan, a 2000 Equity
Incentive Plan and, subject to the approval of our stockholders, a 2001 Equity
Incentive Plan. Each of these plans is substantially similar. The Equity
Incentive Plans are administered by the Compensation Committee, which is
authorized to grant:
o Incentive stock options within the meaning of Section 422 of the
Internal Revenue Code
o Nonqualified stock options
o Stock appreciation rights
o Restricted stock grants
o Deferred stock awards
o Other stock based awards to employees of Stratus and its
subsidiaries and other persons and entities who, in the opinion of
the Compensation Committee, are in a position to make a significant
contribution to the success of Stratus and its subsidiaries.
29
The Compensation Committee determines:
o The recipients of awards
o The times at which awards will be made
o The size and type of awards, and
o The terms, conditions, limitations and restrictions of awards
Awards may be made singly, in combination or in tandem. We have reserved
for issuance a total of 500,000 shares under the 1999 Equity Incentive Plan,
500,000 shares under the 2000 Equity Incentive Plan and, subject to the approval
of our stockholders, 1,000,000 shares under the 2001 Equity Incentive Plan. The
maximum number of shares of common stock which can be issued to our Chief
Executive Officer under each Equity Incentive Plan pursuant to various awards
shall not exceed 35% of the total number of shares of common stock reserved for
issuance under the plan, and the maximum number of shares which can be issued to
any other employee or participant under each Equity Incentive Plan may not
exceed 20% of the total number of shares of common stock reserved for issuance.
The 1999 Equity Incentive Plan will terminate on September 1, 2009, the 2000
Equity Incentive Plan will terminate on July 21, 2010 and the 2001 Equity
Incentive Plan will terminate on December 14, 2010, in each case unless earlier
terminated by the Board of Directors. Options to acquire 500,000 shares of our
common stock have been issued under each of the 1999 Equity Incentive Plan and
the 2000 Equity Incentive Plan. No awards have been made under the 2001 Equity
Incentive Plan.
STOCK OPTIONS. The Compensation Committee can grant either incentive stock
options or nonqualified stock options. Only employees of Stratus and its
subsidiaries may be granted incentive stock options. The exercise price of an
incentive stock option shall not be less than the fair market value, or, in the
case of an incentive stock option granted to a 10% or greater stockholder of
Stratus, 100% of the fair market value of Stratus' common stock on the date of
grant. For purposes of the exercise price of an option, "fair market value"
shall mean the arithmetic average of the closing bid and asked priced of the
common stock reported on the Nasdaq SmallCap Market on a particular date. The
term of an option and the time or times at which such option is exercisable
shall be set by the Compensation Committee; provided, however, that no option
shall be exercisable more than ten (10) years (5 years for an incentive stock
option granted to a 10% or greater stockholder of Stratus) from the date of
grant, and with respect to an incentive stock option, the fair market value on
the date of grant of the shares of common stock which are exercisable by a
participant for the first time during any calendar year shall not exceed
$100,000. Payment of the exercise price shall be made in any form permitted by
the Compensation Committee, including cash and shares of Stratus' common stock.
STOCK APPRECIATION RIGHTS. The Compensation Committee may grant stock
appreciation rights either alone or in combination with an underlying stock
option. The term of an SAR and the time or times at which an SAR shall be
exercisable shall be set by the Compensation Committee; provided, that an SAR
granted in tandem with an option will be exercisable only at such times and to
the extent that the related option is exercisable. SAR's entitle the grantees to
receive an amount in cash or shares of common stock with a value equal to the
excess of the fair market value of a share of common stock on the date of
exercise over the fair market value of a share of common stock on the date the
SAR was granted, which represents the same economic value that would have been
derived from the exercise of an option. Payment may be made in cash, or shares
of common stock or a combination of both at the discretion of the Compensation
Committee. If an SAR, granted in combination with an underlying
30
stock option is exercised, the right under the underlying option to purchase
shares of common stock is terminated.
RESTRICTED STOCK GRANTS. The Compensation Committee may grant shares of
common stock under a restricted stock grant which sets forth the applicable
restrictions, conditions and forfeiture provisions which shall be determined by
the Compensation Committee and which can include restrictions on transfer,
continuous service with Stratus or any of its subsidiaries, achievement of
business objectives, and individual, subsidiary and Company performance. Shares
of common stock may be granted pursuant to a restricted stock grant for no
consideration or for any consideration as determined by the Compensation
Committee. A grantee is entitled to vote the shares of common stock and receive
any dividends thereon prior to the termination of any applicable restrictions,
conditions or forfeiture provisions.
DEFERRED STOCK AWARDS. The Compensation Committee may grant shares of
common stock under a deferred stock award, with the delivery of such shares of
common stock to take place at such time or times and on such conditions as the
Compensation Committee may specify. Shares of common stock may be granted
pursuant to deferred stock awards for no consideration or for any consideration
as determined by the Compensation Committee.
OTHER STOCK BASED AWARDS. The Compensation Committee may grant shares of
common stock to employees of Stratus or its subsidiaries as bonus compensation,
or if agreed to by an employee, in lieu of such employee's cash compensation.
OTHER INFORMATION. If there is a stock split, stock dividend or other
relevant change affecting Stratus' common stock, appropriate adjustments will be
made in the number of shares of common stock or in the type of securities to be
issued pursuant to any award granted before such event. In the event of a
merger, consolidation, combination or other similar transaction involving
Stratus in which Stratus is not the surviving entity, either all outstanding
stock options and SAR's shall become exercisable immediately and all restricted
stock grants and deferred stock awards shall immediately become free of all
restrictions and conditions, or the Compensation Committee may arrange to have
the surviving entity grant replacement awards for all outstanding awards. Upon
termination of service prior to age 65 for any reason other than death or
disability, or upon involuntary termination after age 65, stock options and
SAR's which are exercisable as of the date of such termination may be exercised
within three (3) months of the date of termination, and any restricted stock
grants and deferred stock which are still subject to any restriction shall be
forfeited to the Company. Upon death or disability or voluntary termination of
service after age 65, all stock options and SAR's become immediately exercisable
and may be exercised for a period of six (6) months after the date of
termination (three months in the case of voluntary termination after age 65),
and all restricted stock grants and deferred stock awards shall become
immediately free of all restrictions and conditions. The Compensation Committee
has the discretionary authority to alter or establish the terms and conditions
of an award in connection with termination of service. The Board of Directors
may amend, suspend or terminate the Equity Incentive Plan.
31
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Jeffrey J. Raymond, the son of the Company's Chairman and Chief Executive
Officer, serves as a consultant to the Company pursuant to an agreement which
requires him to supervise the collection of certain accounts receivable, to use
his best efforts to maintain relationships with certain clients and to assist in
due diligence investigations of acquisitions of other companies. The agreement
requires the Company to pay Jeffrey J. Raymond consulting fees of $2,200 per
week. Total consulting fees paid to Jeffrey Raymond in the fiscal years ended
September 30, 2000, 1999 and 1998 were $156,000, $107,000 and $175,000,
respectively. As of March 15, 2001, Jeffrey J. Raymond's wife, Joan Raymond, and
his children collectively owned approximately 8.8% of the Company's outstanding
common stock.
During the fiscal years ended September 30, 2000, 1999 and 1998, the
Company paid consulting fees of $9,000, $23,000 and $17,000 to RVR
Consulting, Inc., a corporation of which Joseph J. Raymond, Jr., the son of
Joseph J. Raymond, the Company's Chairman and Chief Executive Officer, is an
officer and 50% stockholder. Joseph J. Raymond, Jr. became the Chief
Executive Officer of Complete Wellness, Inc. in March 1999. During 1999,
Compete Wellness Centers, Inc. owed us $663,000 for staffing services
rendered in 1998 and 1999, however, on August 31, 1999, we entered into a
promissory note for $1,017,000 representing the outstanding balance plus
accrued interest. On September 23, 1999, we accepted 500,000 shares of
Complete Wellness Centers, Inc. restricted common stock as payment for the
promissory note. Substantially all of the indebtedness owed to us by
Complete Wellness, Inc. was incurred prior to Joseph J. Raymond Jr. becoming
an officer of Complete Wellness, Inc. Revenues for services rendered to
Complete Wellness were $364,000 in fiscal 2000 and $1,392,000 in fiscal
1999. On September 29, 2000, Joseph J. Raymond, Jr. resigned his position at
Complete Wellness. On April 23, 2000, the Company ceased servicing Complete
Wellness.
At various times throughout our history we have borrowed funds from Joseph
J. Raymond, our Chairman and CEO. This variable indebtedness bore interest at
the rate of 12% per annum. In June 1999, $50,000, plus accrued interest, owed to
Mr. Raymond was converted into 14,870 shares of our common stock.
In June 1998, we borrowed $400,000 from Joseph J. Raymond, Jr. The
remaining balance of this indebtedness, which bore interest at the rate of 12%
per annum, plus accrued interest, was converted into 116,533 shares of our
common stock in June 1999.
In November and December 1998, the Company borrowed $50,000 from Sanford
I. Feld, a director of Stratus. This loan was represented by a promissory note
which bore interest at the rate of 1.5% per month and was originally due in July
1999. In consideration for making the loan, the Company issued Mr. Feld warrants
to acquire 32,500 shares of the Company's common stock at an exercise price of
$7.50 per share. The warrants have a five-year term. The loan made by Mr. Feld
was repaid in May 2000.
In October 1998, the Company borrowed $250,000 from the estate of Irene
Lynch. J. Todd Raymond, General Counsel and Secretary, is the grandson of Irene
Lynch and the trustee of the Irene Lynch estate. This loan was represented by a
promissory note bearing interest at the rate of 2% per month that was due on
April 14, 1999. In consideration for making the loan, the Company issued 26,666
shares of its common stock to the estate. The loan was repaid in May 2000.
Payroll services have been provided to Sarahe, Inc., a privately held
company of which Joseph J. Raymond, the Company's Chairman and Chief Executive
Officer, is an officer and 50% stockholder.
32
Invoices were issued to Sarahe for $304,000 and $1,277,000 during the fiscal
years ended September 30, 1999 and 1998, respectively. Sarahe paid all amounts
owed to the Company for these services.
All prior and ongoing material transactions with related parties have been
reviewed and/or ratified by a majority of the Company's independent,
disinterested directors. The Company anticipates that from time to time it will
enter into additional transactions with related parties. However, all future
material transactions with related parties will be entered into on terms that
are no less favorable than those that can be obtained from unaffiliated third
parties. At all times, the Company's directors have access to the Company's
counsel to discuss Company related issues.
33
EXECUTIVE COMPENSATION
The following table provides certain summary information regarding
compensation paid by the Company during the fiscal years ended September 30,
1998, 1999 and 2000 to the Chief Executive Officer of the Company and to each of
the Company's other four most highly paid officers (together with the Chief
Executive Officer, the "Named Executive Officers"):
Long Term
Compensation
Annual Compensation Awards
-------------------------------------- --------------------
Number of Shares
Underlying Stock
Name and Principal Position Fiscal Year Salary(s) Bonus($) Options(#)
- ------------------------------------- -------------- ----------- ----------- --------------------
Joseph J. Raymond 2000 $ 127,885 $ 25,900 1,102,115
Chairman and Chief Executive Officer 1999 53,846 -- --
1998 45,308 10,000 --
Michael A. Maltzman 2000 $ 155,039 $ 21,975 102,115
Treasurer and Chief Financial Officer 1999 145,550 7,500 --
1998 133,704 7,500 --
Charles Sahyoun 2000 $ 160,962 $ 54,400 102,115
President, Engineering Services Division 1999 159,284 -- --
1998 107,284 35,000 83,333
Mark S. Levine 2000 $ 165,000 $ -- 1,855
Former Chief Marketing Officer (1) 1999 165,000 -- --
1998 66,635 50,000 83,333
A. George Komer 2000 $ 165,000 $ -- 1,855
Former President, Staffing Services 1999 165,000 -- --
Division (1) 1998 63,462 50,000 83,333
- --------------------
(1) The employment of this officer terminated in October 2000.
DIRECTORS' COMPENSATION
Directors who are employees of the Company are not compensated for serving
on the Board of Directors. Non-employee directors are paid a fee of $1,000 per
Board of Directors or committee meeting attended in person and $500 for
telephonic attendance.
EMPLOYMENT AGREEMENTS
In September 1997, the Company entered into an employment agreement (the
"Raymond Agreement") with Joseph J. Raymond, Chairman and Chief Executive
Officer, which had an initial term that expired in September 2000. The Raymond
Agreement has been extended through September 2002. Pursuant to the Raymond
Agreement and subsequent amendments, Mr. Raymond is entitled to a minimum annual
base salary of $175,000 which is reviewed periodically and subject to such
increases as the Board of Directors, in its sole discretion, may determine.
During the term of the Raymond Agreement, if Stratus is profitable, Mr. Raymond
is entitled to a bonus/profit sharing award equal to .4% of Stratus' gross
margin, but not in excess of 100% of his base salary. If Stratus is not
profitable, he is entitled to a $10,000 bonus. Mr. Raymond is eligible for all
benefits made available to senior executive employees, and is entitled to the
use of an automobile.
In the event Stratus terminates Mr. Raymond without "Good Cause", Mr.
Raymond will be
34
entitled to severance compensation equal to 2.9 times his base salary then in
effect plus any accrued and unpaid bonuses and unreimbursed expenses. As defined
in the Raymond Agreement "Good Cause" shall exist only if Mr. Raymond:
o willfully or repeatedly fails in any material respect to perform his
obligations under the Raymond Agreement, subject to certain
opportunities to cure such failure;
o is convicted of a crime which constitutes a felony or misdemeanor or
has entered a plea of guilty or no contest with respect to a felony
or misdemeanor during his term of employment;
o has committed any act which constitutes fraud or gross negligence;
o is determined by the Board of Directors to be dependent upon alcohol
or drugs; or
o breaches confidentiality or non-competition provisions of the
Raymond Agreement.
Mr. Raymond is also entitled to severance compensation in the event
that he terminates the Raymond Agreement for "Good Reason" which includes:
o the assignment to him or any duties inconsistent in any material
respect with his position or any action which results in a
significant diminution in his position, authority, duties or
responsibilities;
o a reduction in his base salary unless his base salary is, at the
time of the reduction, in excess of $200,000 and the percentage
reduction does not exceed the percentage reduction of gross sales of
Stratus over the prior twelve month period;
o Stratus requires Mr. Raymond to be based at any location other than
within 50 miles of Stratus' current executive office location; and
o a Change in Control of Stratus, which includes the acquisition by
any person or persons acting as a group of beneficial ownership of
more than 20% of the outstanding voting stock of Stratus, mergers or
consolidations of Stratus which result in the holders of Stratus'
voting stock immediately before the transaction holding less than
80% of the voting stock of the surviving or resulting corporation,
the sale of all or substantially all of the assets of Stratus, and
certain changes in the Stratus Board of Directors.
35
In the event that the aggregate amount of compensation payable to Mr.
Raymond would constitute an "excess parachute payment" under the Internal
Revenue Code of 1986, as amended (the "Code"), then the amount payable to Mr.
Raymond will be reduced so as not to constitute an "excess parachute payment."
All severance payments are payable within 60 days after the termination of
employment.
Mr. Raymond has agreed that during the term of the Raymond Agreement and
for a period of one year following the termination of his employment, he will
not engage in or have any financial interest in any business enterprise in
competition with Stratus that operates anywhere within a radius of 25 miles of
any offices maintained by the Company as of the date of the termination of
employment.
The Company entered into employment agreements with each of the other four
(4) officers named in the Executive Compensation table set forth above. The
agreements with Mr. Levine and Mr. Komer, which were terminated in October 2000,
provided for a signing bonus of $50,000, annual base salaries of $165,000 and
profit sharing awards based upon a percentage of the gross margin of the
accounts under their responsibility. The agreements with Mr. Sahyoun and Mr.
Maltzman provide for base salaries of $165,000 and $146,000, respectively. The
agreement with Mr. Sahyoun entitles him to a profit sharing award equal to 10%
of the Engineering Services Division's pre-tax income, but not in excess of his
base salary. Mr. Maltzman is entitled to profit sharing awards based upon the
Company's overall profitability. Each of these agreements is terminable by any
party at any time without cause. However, in the event that either of these
agreements are terminated by the Company without cause or by the executive with
good reason, the executive will be entitled to a severance payment equal to the
greater of one month's salary for each year worked or three months salary. In
addition, the Company will pay the executive any earned but unused vacation time
and any accrued but unpaid profit sharing. The Company is also required to
maintain insurance and benefits for a terminated executive during the severance
period.
36
OPTION GRANTS
Shown below is further information with respect to grants of stock options
in fiscal 2000 to the Named Officers by the Company which are reflected in the
Summary Compensation Table set forth under the caption "Executive Compensation."
INDIVIDUAL GRANTS
--------------------------------------------------------
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE APPRECIATION
SECURITIES OPTIONS FOR OPTION TERM
UNDERLYING GRANTED TO ---------------------------
OPTIONS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#)(1) YEAR ($/SH) DATE 5% 10%($)
- -------------------- -------------- ------------ ------------- ----------- ---------- ----------
Joseph J. Raymond 1,000,000 (1) 54.8% $6.00 4/05/10 $3,770,000 $9,560,000
2,115 (2) (3) 6.60 6/27/05 2,237 6,478
100,000 (2) 5.4 5.62 7/21/10 353,500 895,500
Michael A. Maltzman 2,115 (2) (3) 6.00 6/27/10 7,974 20,219
100,000 (2) 5.4 5.62 7/21/10 353,500 895,500
Charles Sahyoun 2,115 (2) (3) 6.00 6/27/10 7,974 20,219
100,000 (2) 5.4 5.62 7/21/10 353,500 895,500
Mark S. Levine 1,855 (2) (3) 6.00 6/27/10 6,993 17,733
A. George Komer 1,855 (2) (3) 6.00 6/27/10 6,993 17,733
- -------------------------------
(1) These options become exercisable only after the Company achieves earnings
of $1.00 per share in a fiscal year.
(2) These options are exercisable cumulatively in four (4) equal annual
installments commencing on the first anniversary of the date of grant.
(3) Less than one percent (1%).
37
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to options exercised by the Named
Executive Officers during fiscal 2000 and the value of unexercised options to
purchase the Company's common stock held by the Named Executive Officers at
September 30, 2000.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT FY-END(#) OPTIONS AT FY-END ($)(1)
---------------------------- ----------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Joseph J. Raymond.... --- --- 166,667 1,102,115 $645,835 $ ---
George Komer......... --- --- 41,666 43,552 98,956 98,959
Mark Levine.......... --- --- 41,666 43,552 98,956 98,959
Charles Sahyoun...... --- --- 41,666 143,782 98,956 98,959
Michael A. Maltzman.. --- --- 62,500 122,948 148,438 49,478
No options were exercised by the Named Executive Officers during the
fiscal year ended September 30, 2000.
- ---------------
(1) Represents market value of shares covered by in-the-money options on
September 30, 2000. The closing price of the common stock on such date was
$5.375. Options are in-the-money if the market value of shares covered
thereby is greater than the option exercise price.
38
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock, as at March 15, 2001 by:
o persons who are known by us to own beneficially more than 5% of our
shares;
o each of the persons named in the table under the caption "Executive
Compensation" who is currently an officer of the Company;
o each of our directors; and
o by all of our directors and executive officers as a group.
The calculations in this table are based on an aggregate of 5,788,286
shares calculated as outstanding as of March 15, 2001. Unless otherwise noted,
all addresses of the beneficial owners are 500 Craig Road, Manalapan, New
Jersey.
AMOUNT AND PERCENT
NATURE OF OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------------ -------------------- -----
Joseph J. Raymond.................................... 627,321(1) 10.5%
Joan Raymond......................................... 510,361(2) 8.8
Charles A. Sahyoun................................... 269,615(3) 4.6
Michael J. Rutkin.................................... 213,075(4) 3.7
Michael A. Maltzman.................................. 111,282(5) 1.9
Sanford I. Feld...................................... 57,834(6) (7)
H. Robert Kingston................................... 43,333(8) (7)
Donald W. Feidt...................................... 30,000(9) (7)
All Directors and Executive Officers as
a Group (9 persons)(1)(3)(4)(5)(6)(8)(9) and (10).. 1,406,803 22.8%
- ------------------------
(1) Includes 168,782 shares subject to options to purchase that are currently
exercisable or may become exercisable within 60 days of March 15, 2001.
Excludes 1,100,000 shares subject to options that are not exercisable
within 60 days of March 15, 2001.
(2) Includes 250,000 shares held by the children of Joan Raymond residing in
her household.
(3) Includes 64,615 shares subject to currently exercisable stock options.
Excludes 120,833 shares subject to options that are not exercisable within
60 days of March 15, 2001.
(4) Includes 30,000 shares held by the children of Michael Rutkin living in
his household and 10,000 shares held by his wife.
(5) Includes 64,615 shares subject to currently exercisable stock options.
Excludes 120,833 shares subject to options that are not exercisable within
60 days of March 15, 2001.
(6) Includes 49,167 shares subject to currently exercisable stock options and
warrants.
39
(7) Shares beneficially owned do not exceed 1% of the Company's outstanding
common stock.
(8) Includes 33,333 shares held by the Kingston Family Revocable Trust.
Includes 10,000 shares subject to options that become exercisable within
sixty (60) days of March 15, 2001.
(9) Includes 10,000 shares subject to options that become exercisable within
sixty (60) days of March 15, 2001.
(10) Includes 54,343 shares that are beneficially owned by J. Todd Raymond, the
Company's General Counsel and Corporate Secretary, including 22,115 shares
subject to currently exercisable options. Excludes 46,667 shares subject
to options that are not exercisable within sixty (60) days of March 15,
2001.
MANAGEMENT CONTROL
As of March 15, 2001, directors, officers and senior management employees
of Stratus controlled approximately 22.8% of our outstanding voting stock. As a
result, if they act together, they may have the ability to significantly
influence the outcome of all matters requiring stockholder approval, including
the election and removal of directors and any merger, consolidation or sale of
all or substantially all of our assets, and the ability to control our
management and affairs.
40
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the shares of common stock to be offered hereby as of
March 15, 2001, and as adjusted to reflect the sale of the common stock offered
hereby, by the selling stockholders. The information included in this table
concerning the selling stockholders who may offer common stock hereunder from
time to time is based on information provided to us by such stockholders, except
for the assumed conversion rate of the 6% debentures into shares of common stock
which is based solely on the assumptions discussed below. Information concerning
such stockholders may change from time to time and any changes of which we are
advised will be set forth in a prospectus supplement to the extent required.
Of the 5,096,180 shares of common stock offered by this prospectus, the
shares of common stock were issued or are issuable as follows:
o SHARES ISSUABLE UPON CONVERSION OF 6% DEBENTURES. The 6% debentures
are convertible into common stock at a conversion price equal to the
lesser of $4.65 or 75% of the average closing price of a share of
the common stock during the five (5) trading days preceding the
actual conversion date. Assuming a conversion price of $1.05 per
share, that the 6% debentures are outstanding until maturity and all
interest is paid in stock, the number of shares issuable upon
conversion of the 6% debentures is 1,892,762, notwithstanding the
4.999% limitation described below.
o SHARES ISSUABLE UPON EXERCISE OF WARRANTS. In connection with the
private placement completed in December 2000, we issued warrants to
one of the investors, King, LLC, to acquire 25,000 shares of common
stock at an exercise price of $7.50 per share. In addition, we
issued Hornblower & Weeks, Inc., one of the placement agents for the
offering, warrants to acquire 50,000 shares of common stock at an
exercise price of $5.00 per share. The other placement agent for the
offering, May Davis Group, Inc. was issued warrants to acquire
75,000 shares of common stock at $7.50 per share.
Each holder of the 6% debentures is prohibited from using them and, in the
case of the investor who was issued warrants, the warrants to acquire shares of
our common stock to the extent that such acquisition would result in such
holder, together with any affiliate thereof, beneficially owning in excess of
4.999% of the outstanding shares of our common stock following such acquisition.
This restriction may be waived by such holder on not less than 61 days' notice
to us.
Since the number of shares of our common stock that will be issuable upon
conversion of the 6% debentures is based upon fluctuations of the market price
of our common stock prior to a conversion thereunder, the actual number of
shares of our common stock that will be issuable and beneficially owned upon
conversion of the 6% debentures cannot be determined at this time. Because of
the fluctuating characteristic, we have agreed to register a number of shares of
our common stock that exceeds the number of shares of our common stock currently
beneficially owned by the holder thereof. The number of shares of our common
stock listed in the table below as being beneficially owned by each applicable
selling stockholder includes the shares of our common stock that are issuable to
it, subject to the 4.999% limitation, upon conversion of the 6% debentures.
However, the 4.999% limitation would not prevent a holder of the 6% debentures
from acquiring and selling in excess of 4.999% of shares of our common stock
through a series of conversions and sales under the 6% debentures while never
beneficially owning more than 4.999% at any one time.
41
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK PRIOR TO COMMON STOCK AFTER
OFFERING (1) NUMBER OF OFFERING (3)
-------------------------- SHARES OF ----------------------------
NUMBER OF PERCENT OF COMMON STOCK NUMBER OF PERCENT
NAME OF SELLING STOCKHOLDERS SHARES CLASS BEING OFFERED SHARES OF CLASS
- ---------------------------------------- ------------ ------------ ------------- ----------- -----------
Gary H. Anderson 136,809 2.3 247,618 -- --
Gertrude Gardner, Inc. 30,953 (2) 61,906 -- --
JC Financials, Inc. 37,142 (2) 74,284 -- --
Glenn DelRusso 123,809 2.1 247,618 -- --
Coastal Investment Group, Inc. 56,209 1 112,418 -- --
Randy Hansen 61,905 1.1 123,810 -- --
Carmelo Lupino 30,953 (2) 61,906 -- --
James L. Morrison 127,809 2.2 247,618 -- --
George W. Rachau 30,953 (2) 61,906 -- --
Texas International Investments, Inc.(4) 304,581 4.99 619,048 -- --
Paul X. Welch(4) 231,524 3.8 463,048 -- --
Thomas D. Wilbert 67,405 1.2 123,810 -- --
King LLC(5) 304,581 4.99 2,526,190 -- --
JM Consulting Management, Inc.(4) 304,581 4.99 2,476,190 -- --
May Davis Group, Inc. 15,000 (2) 15,000 -- --
Hornblower & Weeks, Inc. 50,000 (2) 50,000 -- --
Mark Angelo 15,000 (2) 15,000 -- --
Joseph Donohue 15,000 (2) 15,000 -- --
Hunter Singer 15,000 (2) 15,000 -- --
Robert Farrell 15,000 (2) 15,000 -- --
(1) Except as otherwise indicated, to the knowledge of the Company, all
securities are held beneficially and of record and all persons listed in
this table have sole voting and investment power with respect to their
securities, except to the extent that authority is shared by spouses under
applicable law.
(2) Less than one percent (1%).
(3) Because the selling stockholders may offer all or some of the common stock
pursuant to the offering contemplated by the prospectus, no estimate can
be given as to the amount of shares of common stock that will be held by
the selling stockholders at the completion of this offering.
(4) JM Consulting Management, Inc. has agreed to buy all of the 6% debentures
owned by King
42
LLC and a portion of the 6% debentures owned by Paul X. Welch and Texas
International Investments, Inc. The principle amount of 6% debentures
purchased will depend upon the conversion price then in effect. The number
of shares offered by Paul X. Welch and Texas International Investments
will be reduced to the extent that they sell 6% debentures to JM
Consulting Management, Inc. The information set forth above with respect
to JM Consulting Management, Inc. assumes the completion of the
transaction with King LLC. The number of shares offered by JM Consulting
Management, Inc. will increase to the extent it acquires 6% debentures
from Paul X. Welch and Texas International Investments, Inc.
(5) King LLC has agreed to sell all of the debentures held by it to JM
Consulting, Inc. Upon completion of such transaction, King, LLC will no
longer be a selling stockholder.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors in interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than this prospectus.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The selling stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a selling
stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares. The selling stockholders have advised the Company
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their
43
shares other than ordinary course brokerage arrangements, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling stockholders.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The investor and any broker-dealers or agents that are involved in selling
the shares are considered "underwriters" by the Securities and Exchange
Commission within the meaning of the Securities Act in connection with sales
under this prospectus. Accordingly, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them will be deemed underwriting commissions or discounts under the Securities
Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders. The Company has agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
44
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 25 million shares of common
stock, par value $0.01 per share and 5 million shares of preferred stock, par
value $0.01 per share. As of March 15, 2001, there were 5,788,286 shares of
common stock and no shares of preferred stock outstanding.
COMMON STOCK
Each share of common stock entitles the holder thereof to one vote on all
matters submitted to the stockholders. Since the common stock does not have
cumulative voting rights, holders of more than 50% of the outstanding shares can
select all of the directors and the remaining shares could not elect any
directors. The shares are not subject to redemption rights and there are no
preemptive rights. All outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock are entitled to receive dividends out of
funds legally available for distribution when, as and if declared by the Board
of Directors. The payment of cash dividends on the common stock is unlikely for
the foreseeable future. Upon any liquidation, dissolution or winding up of the
Company, holders of common stock are entitled to share pro rata in any
distribution to the holders of common stock.
PREFERRED STOCK
Our certificate of incorporation authorizes the Board of Directors to
issue shares of preferred stock in one or more series with such dividend,
liquidation, conversion, redemption and other rights as the Board establishes at
the time. Stockholder approval is not required to issue preferred stock. To the
extent that we issue any shares of Preferred Stock, the ownership interest and
voting power of existing stockholders could be diluted.
The preferred stock could be issued in one or more series with such
voting, conversion and other rights as would discourage possible acquirers from
making a tender offer or other attempt to gain control of the Company, even if
such transaction was generally favorable to our stockholders. In the event of a
proposed merger, tender offer or other attempt to gain control of the Company
which the Board does not approve, it might be possible for the Board to
authorize the issuance of a series of preferred stock with rights and
preferences which could impede the completion of such a transaction. The Board
could authorize holders of the preferred stock to vote, either separately as a
class or with the holders of common stock, on any merger, sale or exchange of
assets or other extraordinary corporate transaction. Preferred stock may be used
to discourage possible acquirors from making a tender offer or other attempt to
gain control of the Company with a view to imposing a merger or sale of all or
any part of the Company's assets, even though a majority of stockholders may
deem such acquisition attempts to be desirable.
Preferred stock may also be used as consideration for any acquisition that
we undertake, either alone or in combination with shares, notes or other assets
including cash or other liquid securities.
45
6% DEBENTURES
The outstanding 6% debentures issued in December 2000 are due December 1,
2005 but may be prepaid in whole or in part at any time by the Company upon ten
(10) trading days notice. Prepayment may be made in an amount equal to 115% of
the aggregate principal amount that the Company elects to prepay if the
prepayment occurs within 120 days of December 4, 2000 (the "Original Issue
Date"), in an amount equal to 120% of the aggregate principal amount that the
Company elects to prepay if the prepayment occurs after 120 days but before 181
days after the Original Issue Date and in an amount equal to 125% of the
aggregate principal amount that the Company elects to prepay if the prepayment
occurs 181 days or more after the Original Issue Date.
The 6% debentures require the Company to pay interest to the holders
thereof on a quarterly basis at a rate of 6% per annum in cash or, at the
election of the Company, common stock. If interest is paid in common stock, then
the number of shares issuable on account of such interest will equal the cash
amount of the interest divided by the conversion price in effect at the time of
conversion. The actual conversion price is the lesser of (i) $4.65 or (ii) 75%
of the average closing price of a share of common stock during the five (5)
consecutive trading days immediately preceding the applicable conversion date.
The shares of common stock issuable upon conversion of the 6% debentures are
identical to the shares of common stock described above. In addition, the shares
of common stock issuable upon conversion of the 6% debentures are being
registered pursuant to the registration statement of which this prospectus is a
part.
Subject to certain limitations on conversion, the 6% debentures are
convertible into shares of common stock at the option of the holder, in whole or
in part, at any time after the expiration of 120 days from the Original Issue
Date. A holder may not convert a 6% debenture or receive shares of common stock
as payment of interest in connection with a 6% debenture to the extent such
conversion or receipt of such interest payment would result in the holder,
together with any affiliate, beneficially owning in excess of 4.999% of the then
issued and outstanding shares of common stock (including shares issuable upon
conversion of, and payment of interest on, the 6% debentures held by such
holder). A holder of 6% debentures may waive this restriction.
The rules of the National Association of Securities Dealers, Inc. or NASD
provide that stockholder approval must be obtained in connection with a
transaction other than a public offering involving the sale or issuance of
common stock (or securities convertible into or exercisable for common stock)
equal to 20% or more of the voting power outstanding before the issuance for
less than the greater of the book or market value of the stock.
The 6% debentures contain provisions which would prohibit the issuance of
common stock upon the conversion of the 6% debentures in excess of the limit
imposed by the NASD rule. The failure to obtain stockholder approval of the full
number of shares of common stock issuable upon conversion of the 6% debentures
could require the Company to pay cash to a holder of 6% debentures in an amount
equal to the aggregate principal amount of the 6% debentures then held by such
holder for which a conversion would result in an issuance of common stock in
excess of the limit imposed by the NASD rule.
WARRANTS
In connection with the December 2000 private offering of 6% debentures,
the Company granted five (5) year warrants to a single investor and the
placement agents in the private offering. The Placement Agents received five (5)
year warrants to acquire 75,000 shares of common stock
46
at an exercise price of $7.50 per share and five (5) year warrants to acquire
50,000 shares of common stock at an exercise price of $5.00. A single investor
in the private placement received warrants to purchase 25,000 shares at an
exercise price of $7.50 per share. The shares of common stock issuable upon
exercise of the warrants are identical to the shares of common stock described
above. In addition, the shares of common stock issuable upon exercise of the
warrants are being registered pursuant to the registration statement of which
this prospectus is a part.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless:
o the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board
of Directors of the corporation before the person becomes an
interested stockholder;
o the interested stockholder acquired 85% or more of the outstanding
voting stock of the corporation in the same transaction that made
such person an interested stockholder (excluding shares owned by
persons who are both officers and directors of the corporation, and
shares held by certain employee stock ownership plans), or
o on or after the date the person becomes an interested stockholder,
the business combination is approved by the corporation's board of
directors and by the holders of at least 66-2/3% of the
corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder.
Under Section 203, an "interested stockholder" is defined as any person
who is the owner of 15% or more of the outstanding voting stock of the
corporation, or an affiliate or associate of the corporation and who was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, through
action of its stockholders, to exempt itself from coverage, provided that such
bylaw or certificate of incorporation amendment shall not become effective until
12 months after the date it is adopted. We have not adopted such an amendment to
our Certificate of Incorporation or Bylaws.
LIMITATION ON LIABILITIES AND INDEMNIFICATION MATTERS
Pursuant to our certificate of incorporation and bylaws and as permitted
by Delaware law, directors are not liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has received an improper personal benefit.
The Company's certificate of incorporation and bylaws also provide that
directors and officers shall be indemnified to the fullest extent authorized by
Delaware law against all expenses and
47
liabilities actually and reasonably incurred in undertaking their duties.
Non-officer employees and agents may be similarly indemnified at the discretion
of the Board of Directors. The certificate of incorporation and the by-laws
further permit the advancing of expenses incurred in defense of claims.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's bylaws provide that a special meeting of stockholders can
only be called by the Chief Executive Officer or by a majority of the Board of
Directors. The bylaws provide that only matters set forth in the notice of the
special meeting may be considered or acted upon at that special meeting. The
Company's Bylaws may be amended or repealed or new bylaws may be adopted by the
Board of Directors. Stockholders may vote to amend or repeal such Bylaws as
adopted or amended by the Board of Directors; however, such a right requires
approval from at least two-thirds of the stockholders voting.
The Company's certificate of incorporation and bylaws also provide that
any action required or permitted to be taken by the stockholders of the company
at an annual or special general meeting of stockholders must be effected at a
duly called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ANTI TAKEOVER EFFECTS OF THE CHARTER DOCUMENTS AND DELAWARE LAW
The Company's certificate of incorporation and bylaws include certain
provisions that may have anti-takeover effects. These provisions may delay,
defer or prevent a tender offer or takeover attempt that stockholders may
consider to be in their best interests including attempts that might result in a
premium over the market price for the shares held by the stockholders. These
provisions may also make it more difficult to remove incumbent management.
These provisions include
o authorizing our Board of Directors to issue preferred stock;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent;
o establishing advance notice requirements for nominations for
election of our board of directors or for proposing matters that can
be acted on by stockholder meetings and
o prohibiting cumulative voting in the election of directors.
LISTING
The common stock of the Company trades on the Nasdaq Smallcap Market under
the trading symbol SERV and on the Boston Stock Exchange under the trading
symbol SSG.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent is American Stock Transfer and Trust
Company.
"PENNY STOCK" RULES
48
The Nasdaq Stock Market has certain continuing listing criteria which the
Company must satisfy in order to maintain the listing of common stock on the
Nasdaq SmallCap Market, including criteria pertaining to net tangible assets,
market capitalization and net income. If the Company is unable to meet these
criteria, the Company's common stock could be delisted from trading on the
Nasdaq SmallCap Market. In the event that the common stock is delisted, the
common stock could be classified as a penny stock depending upon its market
price and the manner in which it is traded. The Securities and Exchange
Commission has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00, other than securities registered on
certain national securities exchanges or quoted on the Nasdaq Stock Market,
provided that current price and volume information is proved by the exchange or
the Nasdaq Stock Market. The penny stock rules require a broker-dealer, prior to
a transaction in a penny stock not otherwise exempt from the rules, to deliver a
risk disclosure document that provides information about penny stocks and the
nature and level of risk in the penny stock market and other information. In
addition, the penny stock rules require a broker-dealer to enter into a special
written agreement with respect to the transaction. These requirements may have
the effect of reducing the level of trading activity in the secondary market for
a security that becomes subject to the penny stock rules. Prices for penny
stocks are often not available and investors are often unable to sell such
stocks.
49
LEGAL PROCEEDINGS
We are involved, from time to time, in routine litigation arising in the
ordinary course of business. We do not believe that any currently pending
litigation will have a material adverse effect on our financial position or
results of operations.
LEGAL MATTERS
The legality of the shares offered by this prospectus will be passed upon
for us by Giordano, Halleran & Ciesla, a Professional Corporation, Middletown,
New Jersey.
EXPERTS
Certain financial statements included in this prospectus and elsewhere in
the registration statement have been audited by Amper, Politziner & Mattia, PA
independent auditors, as indicated in their reports with respect thereto, and
are included in reliance upon the authority of the firm as experts in giving
such reports.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form S-1 under the
Securities Act with respect to the offered common stock. We have not included in
this prospectus additional information contained in the Registration Statement
and you should refer to the Registration Statement and its exhibits for further
information. The Registration Statement and exhibits and schedules filed as a
part thereof, which may be inspected, without charge, at the Public Reference
Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices at the SEC located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60611-2511. The
SEC maintains a worldwide web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements regarding registrants that
file electronically with the SEC. Copies of all or any portion of the
Registration Statement may be obtained from the public reference section of the
SEC upon payment of the prescribed fees.
50
INDEX TO FINANCIAL STATEMENTS
STRATUS SERVICES GROUP, INC.
FOR THE YEAR ENDED SEPTEMBER 30, 2000
PAGE(S) NO.
Report of Independent Certified Public Accountants................. F-2
Balance Sheet...................................................... F-3
Statements of Operations........................................... F-4
Statement of Cash Flows............................................ F-5
Statements of Stockholders' Equity................................. F-6
Notes to Financial Statements...................................... F-7 - F17
STRATUS SERVICES GROUP, INC.
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE THREE
MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
PAGE(S) NO.
Independent Auditors' Report ...................................... F-18
Balance Sheets..................................................... F-19
Statements of Operations........................................... F-20
Statement of Stockholders' Deficiency.............................. F-21
Statements of Cash Flows........................................... F-22
Notes to Financial Statements...................................... F23-35
STRATUS SERVICES GROUP, INC.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
PAGE(S) NO.
Condensed Balance Sheet............................................ F-36
Condensed Statements of Operations................................. F-37
Condensed Statements of Cash Flows................................. F-38
Notes to Condensed Financial Statements............................ F-39-40
F-1
Independent Auditors' Report
To the Stockholders of
Stratus Services Group, Inc.
We have audited the accompanying balance sheet of Stratus Services Group, Inc.
as of September 30, 2000, and the related statements of operations,
stockholders' equity, and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratus Services Group, Inc. as
of September 30, 2000, and the results of its operations and its cash flows for
the two years then ended, in conformity with generally accepted accounting
principles.
/s/ AMPER, POLITZINER & MATTIA, P.A.
AMPER, POLITZINER & MATTIA, P.A.
December 14, 2000
Edison, New Jersey
F-2
STRATUS SERVICES GROUP, INC.
Balance Sheet
Assets
September 30,
2000
----
Current assets
Cash and cash equivalents $ 1,030,722
Due from factor - less allowance for recourse
obligation of $30,000 1,154,012
Accounts receivable - less allowance for doubtful
accounts of $255,000 852,876
Unbilled receivables 1,236,002
Loans to related parties 64,500
Loans receivable 56,000
Prepaid insurance 432,674
Prepaid expenses and other current assets 278,169
Deferred taxes 340,000
------------
5,444,955
Property and equipment, net of accumulated depreciation 1,118,625
Goodwill, net of accumulated amortization 3,716,538
Investment in marketable securities --
Other assets 38,163
------------
$ 10,318,281
============
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 27,012
Notes payable - acquisition (current portion) 275,000
Insurance obligation payable 367,100
Accounts payable and accrued expenses 1,172,148
Accrued payroll and taxes 1,105,363
Payroll taxes payable 412,513
------------
3,359,136
Loans payable (net of current portion) 134,700
Notes payable - acquisition (net of current portion) 25,000
------------
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, 5,712,037 shares issued and outstanding 57,120
Additional paid-in capital 10,554,782
Deferred compensation (67,900)
Accumulated deficit (3,744,557)
------------
Total stockholders' equity 6,799,445
------------
$ 10,318,281
============
See accompanying notes to financial statements.
F-3
STRATUS SERVICES GROUP, INC.
Statements of Operations
For the Years Ended September 30, 2000 and 1999
For the Year Ended
September 30,
2000 1999
---- ----
Revenues (including $364,000 and $1,696,000 from related parties) $ 41,676,587 $ 30,042,751
Cost of revenue (including $326,000 and $1,521,000
from related parties) 31,182,678 23,306,254
------------ ------------
Gross Profit 10,493,909 6,736,497
------------ ------------
Operating expenses
Selling, general and administrative expenses 8,792,417 6,659,449
Provision for recourse obligation 122,500 595,000
------------ ------------
8,914,917 7,254,449
------------ ------------
Earnings (loss) from operations 1,578,992 (517,952)
------------ ------------
Other income (expenses)
Finance charges (618,134) (722,020)
Interest expense (300,892) (309,257)
Other income 45,944 22,186
------------ ------------
(873,082) (1,009,091)
------------ ------------
Earnings (loss) before benefit from income taxes 705,910 (1,527,043)
Income tax benefit 340,000 --
------------ ------------
Net earnings (loss) $ 1,045,910 $ (1,527,043)
============ ============
Net earnings (loss) per common share -
Basic $ .21 $ (.40)
Diluted .20 (.40)
Weighted average shares, outstanding per common share
Basic 4,931,914 3,828,530
Diluted 5,223,508 3,828,530
See accompanying notes to financial statements.
F-4
STRATUS SERVICES GROUP, INC.
Statements of Cash Flows
For the Years Ended September 30, 2000 and 1999
For the Years Ended
September 30,
2000 1999
---- ----
Cash flows from operating activities
Net earnings (loss) $ 1,045,910 $(1,527,043)
----------- -----------
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation 175,419 74,970
Amortization 191,710 121,848
Deferred taxes - benefit (340,000) --
Imputed interest 57,652 25,645
Accrued interest 41,522 91,996
Compensation - stock options 46,800 46,800
Changes in operating assets and liabilities
Due to/from factor (1,837,936) 465,532
Accounts receivable (978,454) (702,959)
Prepaid insurance (175,461) (34,922)
Prepaid expenses and other current assets (262,261) (10,778)
Other assets 19,593 6,582
Insurance obligation payable 114,214 41,178
Accrued payroll and taxes 171,028 64,512
Payroll taxes payable 186,281 82,920
Accounts payable and accrued expenses (80,469) 259,274
----------- -----------
Total adjustments (2,670,362) 532,598
----------- -----------
$(1,624,452) $ (994,445)
=========== ===========
Cash flows (used in) investing activities
Purchase of property and equipment (780,975) (283,466)
Payments for business acquisitions (1,053,868) (194,930)
Loans receivable (120,500) --
----------- -----------
(1,955,343) (478,396)
----------- -----------
Cash flows from financing activities
Proceeds from initial public offering 6,034,169 --
Proceeds from sale of common stock -- 732,126
Proceeds from loans payable 1,125,000 1,388,375
Payments of loans payable (1,457,624) (370,746)
Payments of notes payable - acquisitions (1,164,100) --
Purchase of treasury stock (350,000) --
Payments of registration costs -- (103,829)
----------- -----------
4,187,445 1,645,926
----------- -----------
Net change in cash and cash equivalents 607,650 173,085
Cash and cash equivalents - beginning 423,072 249,987
----------- -----------
Cash and cash equivalents - ending $ 1,030,722 $ 423,072
=========== ===========
Supplemental disclosure of cash paid
Interest $ 201,718 $ 174,175
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 1,548,097 $ 2,421,903
Less: cash paid (1,048,097) (57,430)
Less: common stock and put options issued -- (520,000)
----------- -----------
Liabilities assumed $ 500,000 $ 1,844,473
=========== ===========
Issuance of common stock in exchange for notes payablenotes payable $ 1,000,000 $ 1,092,762
=========== ===========
Accrued and imputed interest $ 99,174 $ 117,641
=========== ===========
Purchase of property and equipment for notes $ 163,836 $ --
=========== ===========
See accompanying notes to financial statements.
F-5
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Equity
For the Years Ended September 30, 2000 and 1999
Common Stock
Total Amount Shares
------------ -------------- ------------
Balance - October 1, 1998 $ (3,356,310) $ 37,198 3,719,734
Net (loss) (1,527,043) -- --
Compensation expense in connection with stock
options granted (no tax effect) 46,800 -- --
Issuance of common stock in connection with
acquisition -- 347 34,667
Issuance of common stock in exchange for
notes payable 1,092,762 2,914 291,403
Proceeds from the private placement of
common stock (net of costs of $117,874)
for cash 732,126 2,266 226,666
------------ ------------ ------------
Balance - September 30, 1999 $ (3,011,665) $ 42,725 4,272,470
Net earnings 1,045,910 -- --
Compensation expense in connection with stock
options granted (no tax effect) 46,800 -- --
Issuance of common stock in exchange for
notes payable 1,000,000 1,933 193,333
Proceeds from the Initial Public Offering
of common stock (net of costs of $1,869,660) 5,930,340 13,000 1,300,000
Transfer from Temporary Equity 2,138,060 -- --
Purchase and retirement of Treasury Stock (350,000) (538) (53,766)
------------ ------------ ------------
Balance - September 30, 2000 $ 6,799,445 $ 57,120 5,712,037
============ ============ ============
Additional
Paid-In Deferred Accumulated
Capital Compensation Deficit
------------- -------------- --------------
Balance - October 1, 1998 $ 31,416 $ (161,500) $ (3,263,424)
Net (loss) -- -- (1,527,043)
Compensation expense in connection with stock
options granted (no tax effect) -- 46,800 --
Issuance of common stock in connection with
acquisition (347) -- --
Issuance of common stock in exchange for
notes payable 1,089,848 -- --
Proceeds from the private placement of
common stock (net of costs of $117,874)
for cash 729,860 -- --
------------ ------------ ------------
Balance - September 30, 1999 $ 1,850,777 $ (114,700) $ (4,790,467)
Net earnings -- -- 1,045,910
Compensation expense in connection with stock
options granted (no tax effect) -- 46,800 --
Issuance of common stock in exchange for
notes payable 998,067 -- --
Proceeds from the Initial Public Offering
of common stock (net of costs of $1,869,660) 5,917,340 -- --
Transfer from Temporary Equity 2,138,060 -- --
Purchase and retirement of Treasury Stock (349,462) -- --
------------ ------------ ------------
Balance - September 30, 2000 $ 10,554,782 $ (67,900) $ (3,744,557)
============ ============ ============
See accompanying notes to financial statements.
F-6
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Stratus Services Group, Inc. (the "Company") is a national
provider of staffing and productivity consulting services. As of
December 14, 2000, the Company operated a network of thirty-two
offices in eleven states.
The Company operates as one business segment. The one business
segment consists of its traditional staffing services, engineering
staffing services, and SMARTSolutions(TM), a structured program to
monitor and enhance the production of a client's labor resources.
The Company's customers are in various industries and are located
throughout the United States. Credit is granted to substantially all
customers. No collateral is maintained.
REVENUE RECOGNITION
The Company recognizes revenue as the services performed by its
workforce. The Company's customers are billed weekly. At balance
sheet dates, there are accruals for unbilled receivables and related
compensation costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the report amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
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.
CASH EQUIVALENTS AND CONCENTRATION OF CASH
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The
Company maintains its cash in bank deposit accounts, which, at times
may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
RECLASSIFICATION
Certain items in the Statement of Operations for the year ended
September 30, 1999 have been reclassified to conform to the year
ended September 30, 2000 presentation.
COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other
non-owner changes in equity and is not material.
EARNINGS/LOSS PER SHARE
The Company utilizes Statement of Financial Accounting Standards No.
128 "Earnings Per Share", (SFAS 128), whereby 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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
Estimated
METHOD USEFUL LIFE
Furniture and fixtures Declining balance 5 years
Office equipment Declining balance 5 years
Computer equipment Straight-line 5 years
Computer software Straight-line 3 years
Vans Straight-line 5 years
F-7
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- (CONTINUED)
GOODWILL
Goodwill is amortized on a straight-line basis over fifteen years.
FACTORING
The Company's factoring agreement (see Note 4) with a financing
institution ("factor") has been accounted for as a sale of
receivables under Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Services of Financial Assets
and Extinguishment of Liabilities". ("SFAS" No. 125)
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, accounts receivable, due
from factor, accounts payable and short-term borrowings approximate cost due to
the short period of time to maturity. Fair values of long-term debt, which have
been determined based on borrowing rates currently available to the Company for
loans with similar terms or maturity, approximate the carrying amounts in the
financial statements.
STOCK - BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock Based Compensation" ("SFAS" 123") allows a company to adopt a
fair value based method of accounting for its stock-based
compensation plans or continue to follow the intrinsic value method
of accounting prescribed by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees". The
Company accounts for stock-based compensation in accordance with the
provisions of APB No. 25, and complies with the disclosure
provisions of SFAS No. 123. Under APB No. 25, compensation cost for
stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets
and liabilities using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to be
recovered. The Company provides a valuation allowance for deferred
tax assets for which it does not consider realization of such assets
to be more likely than not.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The expenses for the
years ended September 30, 2000 and 1999 were $185,000 and $133,000,
respectively, and is included in selling, general and administrative
expenses.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
which is a replacement of SFAS No. 125. SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. The Company does not anticipate that this statement will
have a material impact on its financial position and results of operations.
F-8
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company believes their revenue recognition
policies do not significantly differ from SAB 101.
F-9
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. As amended by SFAS 138, SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement does not have a
material impact on the Company's financial position and results of operations.
NOTE 2 - INITIAL PUBLIC OFFERING
On May 5, 2000, the Company completed its initial public offering
("IPO") of 1,300,000 shares of common stock at a price of $6.00 per share,
generating net proceeds of approximately $5,930,000 after deducting underwriters
discounts and offering costs of approximately $1,870,000.
NOTE 3 - ACQUISITIONS
TANDEM
On June 26, 2000, the Company purchased substantially all of the
tangible and intangible assets, excluding accounts receivable, of eight offices
of Tandem, a division of Outsource International, Inc. ("Outsource"). The
purchase price was $1,300,000, of which $800,000 was paid in cash at the closing
and the remaining $500,000 was represented by two promissory notes. The first
note, representing $400,000 is payable in two installments of $200,000 plus
accrued interest at 8.5% a year, within 90 days and 180 days after closing.
Accordingly, $200,000 was paid in September 2000. The second note, representing
$100,000 bears interest at 8.5% a year and is payable in twelve equal monthly
installments beginning January 1, 2001.
The excess of cost paid over net assets acquired resulted in
goodwill of $1,562,693, computed as follows:
Net assets acquired
Furniture and equipment $ 38,175
Accrued holiday and vacation pay (47,000)
--------------
Amounts paid (8,825)
--------------
Cash 800,000
Notes payable 500,000
Finder's fees and other costs 253,868
--------------
1,553,868
--------------
Excess of amounts paid over net assets acquired - $ 1,562,693
goodwill
==============
B&R EMPLOYMENT, INC.
On January 4, 1999, the Company entered into an asset purchase agreement with
B&R Employment, Inc. ("B&R"). The Company purchased certain assets including
office equipment, furniture and fixtures, sales and operating records, customer
contracts and agreements, vendor lists, and seller's licenses and certificates.
The purchase price was $2,400,000, consisting of notes for $1,880,000 and
F-10
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
the issuance of 34,667 shares of the Company's common stock. B&R had a put
option to sell these shares back to the Company at $15 per share, provided that
the Company did not conduct an initial public offering within twenty-four
months. As a result of the IPO, $520,000 of "Temporary equity - put options"
representing 34,667 shares in connection with the acquisition was transferred to
additional paid-in capital. In February 2000, the Company entered into a
debt-equity conversion agreement with B&R whereby, B&R agreed to convert, except
for $666,000, the amounts due under the notes payable-acquisition, including
accrued interest, into shares of the Company's common stock upon the Company's
initial public offering of securities. The number of shares to be issued was
based on the offering price in the initial public offering. In April 2000, the
agreement was amended to provide that B&R would convert $500,000 into shares of
the Company's common stock. Accordingly, upon the completion of the IPO, B&R was
issued 83,333 shares of the Company's common stock and the notes were paid in
full.
NOTE 3 - ACQUISITIONS - (CONTINUED)
B&R EMPLOYMENT, INC.
In connection with this acquisition, the Company entered into an
employment and a non-compete agreement for a three-year period with the sole
stockholder of B&R. The excess of cost paid over net assets acquired resulted in
goodwill of $2,414,903, computed as follows:
Net assets acquired
Office equipment $ 7,000
--------------
Amounts paid
Notes payable (net of $35,527 discount) 1,844,473
Issuance of common stock and put options 520,000
Finder's fees 57,430
--------------
2,421,903
--------------
Excess of amounts paid over net assets acquired - $ 2,414,903
goodwill
==============
The above acquisitions have been accounted for as purchases. The
results of operations are included in the Company's statements of operations
from the effective date of acquisition.
NOTE 4 - FACTORING AGREEMENT
The Company has a factoring agreement under which it may sell up to
$3,000,000 of qualified trade accounts receivable, with limited recourse
provisions. The agreement, which was scheduled to expire August 10, 2000, has
been renewed on a month-to-month basis. The Company is required to repurchase or
replace any receivable remaining uncollected for more than 90 days. During the
years ended September 30, 2000 and 1999, gross proceeds from the sale of
receivables was $34,179,692 and $25,227,640, respectively. The provision for
recourse obligation includes the estimated recourse obligations on the sale of
receivables. As of September 30, 2000, $5,623,817 of the receivables sold to the
factor had not been collected.
On December 12, 2000, the Company terminated its agreement with the
factor and repurchased all accounts receivable from the factor with proceeds
from a new line of credit (See note 18).
F-11
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
NOTE 5 - PROPERTY AND EQUIPMENT
Furniture and fixtures $ 206,307
Office equipment 72,729
Computer equipment 810,226
Computer software 113,500
Vans 208,570
--------------
1,411,332
Accumulated depreciation (292,707)
--------------
Net property and equipment $ 1,118,625
==============
NOTE 6 - GOODWILL
Goodwill $ 4,030,096
Less: accumulated amortization (313,558)
--------------
$ 3,716,538
==============
NOTE 7 - LOANS PAYABLE
a. RELATED PARTIES
During the years ended September 30, 2000 and 1999, various
stockholders advanced funds to the Company for working capital.
These loans bore interest at the rate of 12% per year and were
payable upon demand. Interest expense on these loans for the
years ended September 30, 2000 and 1999 was $15,000 and $43,544,
respectively. All outstanding loans were repaid from proceeds of
the IPO.
NOTE 7 - LOANS PAYABLE - (CONTINUED)
a. RELATED PARTIES
In August 1999, the Chief Executive Officer of the Company and
his son agreed to exchange, effective June 30, 1999, $440,000 of
notes payable by the Company to them, plus accrued interest of
$52,762 for 131,403 shares of the Company's common stock. The
stock was valued at $3.75 per share, which represents fair value
based on the latest stock transactions and no gain or loss was
recorded on the transaction.
b. OTHER
Loans payable is comprised of the following:
(i) $75,847 comprised of three notes bearing interest at
approximately 10% a year, payable $1,637 per month for
sixty months beginning September 2000. These notes are
secured by vans with a book value of $79,905 at
September 30, 2000.
(ii) $85,865 representing an unsecured note bearing interest
at 9.25% a year, payable $1,816 a month for sixty months
beginning September 2000.
The above loans are due as follows:
F-12
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
For the Year Ending
September 30,
-------------------------
2001 $ 27,012
2002 29,727
2003 32,730
2004 36,027
2005 36,216
--------------
$ 161,712
==============
Other loans aggregating $600,000 were settled by the issuance of
160,000 shares of the Company's common stock at $3.75 per share during the year
ended September 30, 1999. Others loans during the year ended September 30, 2000,
aggregating $100,000, $200,000 and $200,000 were settled by the issuance of
26,667 shares at $3.75 per share and 50,000 shares at $4.00 per share and 33,333
shares at $6.00 per share, respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT
The son of the Chief Executive Officer of the Company provides
consulting services to the Company. Consulting expense was $156,000 and $107,000
for the years ended September 30, 2000 and 1999, respectively. As at September
30, 2000, $64,500 of advances were made to a company controlled by this related
party.
The Company has paid consulting fees to an entity whose stockholder
is another son of the Chief Executive Officer of the Company. Consulting fees
amounted to $9,000 and $23,000 for the years ended September 30, 2000 and 1999,
respectively.
REVENUES
The Company provided payroll services to an entity whose Chief
Executive Officer is the son of the Chief Executive Officer of the Company.
Revenues related thereto for the years ended September 30, 2000 and 1999, were
$364,000 and $1,392,000, respectively. In August 1999, $663,000 of accounts
receivable from this related party was converted into a note of $1,017,000. The
difference was attributable to interest, which has not been accrued by the
Company since all of the receivable had previously been reserved for as a
doubtful account. All of the doubtful accounts receivable arose prior to the
entity becoming a related party. The accounts receivable were generated through
December 1998 and the entity became a related party in March 1999. In September
1999, the Company had agreed to accept 500,000 shares of the related party's
common stock as full payment for the note. Although the shares of the related
party's common stock are publicly traded, the 500,000 shares held by the Company
were
NOTE 8 - RELATED PARTY TRANSACTIONS - CONTINUED
REVENUES
restricted at the time of issuance. Accordingly, the investment was
valued at $-0-. The shares are no longer restricted at September 30, 2000 and
although the market price of unrestricted common shares of the related party at
September 30, 2000 was $.84 per common share, the Company believes that the
investment should still be valued at $-0-. As of December 14, 2000, the market
price of those shares was $.04 per share. A realized gain will be recognized in
the statement of operations upon the sale or exchange of these freely traded
shares.
F-13
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
The Company also provided payroll services to a non-public entity
whose common stock is owned 50% by the Chief Executive Officer of the Company.
For the years ended September 30, 2000 and 1999, revenues were $-0- and
$304,000, respectively.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable $ 980,880
Accrued compensation 94,457
Accrued other 96,811
--------------
$ 1,172,148
==============
NOTE 10 - INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities follow:
Current assets and liabilities
Allowance for recourse obligation $ 12,000
Allowance for doubtful accounts 102,000
Net operating loss carryforward 340,000
Valuation allowance (114,000)
-------------
Net current deferred tax asset $ 340,000
=============
Non-current assets and liabilities
Net operating loss carryforward $ 462,000
Stock compensation 27,000
Depreciation (5,000)
Valuation allowance (484,000)
-------------
Net non-current deferred tax asset (liability) $ --
=============
The change in valuation allowances was a decrease of $560,000 and an
increase of $143,000 for the years ended September 30, 2000 and 1999,
respectively.
For the Years Ended
September 30
2000 1999
------------ ------------
Income tax benefit is comprised of:
Current $ -- $ --
Deferred 220,000 --
Change in valuation allowance (560,000) --
------------ ------------
$(340,000) $ --
============ ============
F-14
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
NOTE 10 - INCOME TAXES - (CONTINUED)
At September 30, 2000, the Company has available the following
federal net operating loss carryforwards for tax purposes:
Expiration Date
Year Ending
September 30,
-------------------------
2012 $ 124,000
2018 1,491,000
2019 391,000
The effective tax rate on net earnings (loss) varies from the
statutory federal income tax rate for periods ended September 30, 2000 and 1999.
2000 1999
------------ ------------
Statutory rate 34.0% (34.0)%
State taxes net 6.0 (6.0)
Other differences, net 1.4 1.3
Valuation allowance (79.4) 38.7
Benefit from net operating loss carryforwards (10.2) --
------------ ------------
(48.2)% --%
============ ============
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OFFICE LEASES
The Company leases offices and equipment under various leases
expiring through 2005. Monthly payments under these leases are $39,000.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year, as of September 30, 2000.
For the Years Ending
September 30,
-------------------------
2001 $ 444,000
2002 326,000
2003 219,000
2004 99,000
2005 18,000
Rent expense was $356,000 and $342,000 for the years ended September
30, 2000 and 1999, respectively.
ROYALPAR INDUSTRIES, INC. ("ROYALPAR")
F-15
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
In connection with the acquisition of certain assets and
assumption of certain liabilities of Royalpar in 1997, there was an earn-out
provision whereby the Company is obligated to pay to Royalpar creditors or
disbursing agents an amount equal to 2% or 3% of the Company's income before
taxes over a five-year period ending September 30, 2001. No amounts are
currently due under this provision.
OTHER
From time to time, the Company is involved in litigation incidental
to its business including employment practices claims. There is currently no
litigation that management believes will have a material impact on the Company's
financial portion.
NOTE 12 - TEMPORARY EQUITY - COMMON STOCK
Certain stockholders of the Company may have had a right to pursue
claims against the Company as a result of possible technical violations of the
laws and regulations governing the private placement and issuance of securities.
Accordingly, the Company had recorded the original total proceeds of the sale of
the shares to these certain stockholders in the amount of $1,618,060 as
temporary equity - common shares in the balance sheet. The Company made a
recission offer to stockholders holding approximately 2.8 million shares,
pursuant to which the Company offered to repurchase the shares at their original
purchase price (plus applicable interest) which ranged from $0.75 to $3.75 per
share. As a result of no one accepting the recission offer during the recission
period and the expiration, in certain cases, of applicable statutes of
limitation, the $1,618,060 of temporary equity - common shares was transferred
to additional paid-in capital during the year ended September 30, 2000.
NOTE 13 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees with terms of five
to ten years. The options may be granted for 987,205 shares.
In addition, the Company has issued to the Chief Executive Officer
of the Company, options to acquire 1,000,000 shares at $6.00 per share. These
options have a ten-year term and are exercisable at the earlier of five years or
when the Company achieves earnings of $1.00 per share in a fiscal year. These
options will be forfeited if the Chief Executive Officer leaves the employment
of the Company.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement ("FASB No. 123"),
and has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value for these options was
estimated at the date of grant using the Black-Scholes option-pricing model.
The Black-Scholes method option-pricing model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
F-16
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
The following weighted-average assumptions were used:
September 30,
2000 1999
------------ ------------
Risk- free interest rate 6% 5%
Dividend yield 0% 0%
Expected life 4-7 years 4 years
Volatility 54% --
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
For the Years Ended
September 30,
2000 1999
------------ ------------
Pro forma net earnings (loss) $ 507,051 $(1,583,829)
Pro forma earnings (loss) per common share -
Basic $ .10 $ (.41)
Diluted .10 (.41)
NOTE 13 - STOCK OPTIONS AND WARRANTS - (CONTINUED)
Compensation expense under APB 25 was $46,800 for each of the years
ended September 30, 2000 and 1999. Deferred compensation at September 30, 2000,
was $67,900 and is to be amortized over the remaining vesting period.
A summary of the Company's stock option activity and related
information for the years ended September 30 follows:
Weighted Average
Options Exercise Price
------------------ -----------------
Outstanding at September 30, 1998 534,000 $ 2.55
Granted -- --
Canceled -- --
Exercised -- --
------------------ -----------------
Outstanding at September 30, 1999 534,000 2.55
Granted 1,453,205 5.91
Canceled -- --
Exercised -- --
------------------ -----------------
Outstanding at September 30, 2000 1,987,205 $ 5.01
================== =================
Exercisable at September 30, 2000 473,536 $ 3.45
================== =================
F-17
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
The exercise prices range from $1.50 to $6.00 per share.
In connection with the IPO, the Company has issued 130,000 warrants
to its underwriters to purchase shares at $8.70 per share, expiring in 2004. The
Company has also issued the following warrants:
Number of
Warrants Price Per Share Expiring In
---------------------- --------------------- ---------------------
66,667 $ 7.50 2004
65,000 4.00 2005
10,000 5.00 2005
20,000 6.00 2005
Following is a summary of the status of stock options outstanding at
September 30, 2000:
Outstanding Options Exercisable Options
----------------------- -------------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Exercise Number Exercise Price
----------- ---------- ----------- ---------- ---------- -------------
Life Price
----------- ----------
$ 1.50 166,667 1.9 years $ 1.50 166,667 $ 1.50
3.00 360,000 7.3 years 3.00 207,498 3.00
4.50 7,333 7.7 years 4.50 3,666 4.50
5.625 357,500 9.8 years 5.625 -- --
6.00 1,095,705 9.6 years 6.00 95,705 6.00
---------- ----------
1,987,205 473,536
========== ==========
As of September 30, 2000, no stock options or warrants have been
exercised. Not included in the above table are options with respect to 400,000
shares, exercisable at $5.625 per share, which were granted in July 2000,
subject to shareholder approval. On December 14, 2000, the options were amended
to eliminate the requirement for shareholder approval.
NOTE 14 - MAJOR CUSTOMERS
The Company had one customer who accounted for 12% of total revenues
for the year ended September 30, 2000 and two customers who accounted for 30% of
total revenues for the year ended September 30, 1999. Major customers are those
who account for more than 10% of total revenues.
NOTE 15 - RETIREMENT PLANS
F-18
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
The Company maintains two 401(k) savings plans for its employees.
The terms of the plan define qualified participants as those with at least three
months of service. Employee contributions are discretionary up to a maximum of
15% of compensation. The Company can match up to 20% of the employees' first 5%
contributions. The Company's 401(k) expense for the years ended September 30,
2000 and 1999 was $37,000 and $26,000, respectively.
NOTE 16 - PRIVATE PLACEMENT
The Company raised $1,000,000 in gross proceeds through a private
placement during the year ended September 30, 1999. Each private placement
"unit" was a combination of debt and equity. For each $50,000 unit, the investor
received a $50,000 promissory note from the Company and 3,333 shares of the
Company's common stock valued at $3.75 per share (see Note 7).
In August 1999, each private placement participant was offered an
additional 10,000 shares of the Company's common stock in exchange for the
original debt portion of the unit, thereby exchanging each unit acquired by an
investor accepting the offer into 13,333 shares of common stock at $3.75 per
share. In connection with this offer, participants representing sixteen units
agreed to this offer.
As each private placement investor representing the remaining
$200,000 received both debt (in the form of a promissory note payable by the
Company) and equity (in the form of the Company's common stock), a portion of
the $200,000 face value of the debt was allocated to equity based on the value
of $3.75 per share of common stock. As such, the Company had allocated $133 and
$49,867 to common stock and additional paid-in capital, respectively. The
remainder of $150,000 was allocated to short-term debt. The difference between
the face value and the amount recorded in short-term debt was accrued to
interest expense. All private placement debt was paid in full from proceeds of
the IPO.
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Year ended September 30, 2000:
Revenues $ 7,723,887 $ 9,201,351 $ 8,859,979 $15,891,370
Gross profit 2,113,870 2,273,985 2,352,357 3,753,697
Net earnings 155,936 161,603 177,896 550,475
Net earnings per common share:
Basic .04 .04 .03 .10
Diluted .03 .04 .03 .10
Year ended September 30, 1999:
Revenues 5,912,643 7,007,582 8,343,592 8,778,934
Gross profit 1,262,905 1,441,052 1,933,089 2,099,451
Net earnings (loss) (997,849) (756,005) 75,049 151,762
Net earnings per common share:
Basic (.27) (.20) .02 .05
Diluted (.27) (.20) .02 .05
F-19
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
NOTE 18 - SUBSEQUENT EVENTS
a. On October 26, 2000, the Board of Directors approved a private
placement offering for $1,000,000 to $3,000,000 of 6% convertible
debentures ("Debenture"). The Debentures have a maturity date of
five years from issuance. Each debenture is convertible into the
number of shares of common stock determined by dividing the
principal amount of the debenture by the lesser of (a) 120% of
the closing bid price of the common stock on the date prior to
initial issuance of the debentures or (b) 75% of the average
closing bid price of the common stock for the five trading days
immediately preceding the date of the conversion. As of December
14, 2000, $1,922,400 has been received.
b. On October 27, 2000, the Company purchased substantially all of
the tangible and intangible assets, excluding accounts
receivable, of an additional seven offices of Tandem, a division
of Outsource International, Inc. (see Note 3). 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 is 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 addition,
the Company will be required, for a two-year period to make
quarterly payments of thirty percent of the quarterly Earnings
Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
of the acquired business.
c. 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 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 (Note 4).
F-20
Independent Auditors' Report
To the Stockholders of
Stratus Services Group, Inc.
We have audited the accompanying balance sheets of Stratus Services Group, Inc.
as of September 30, 1999 and 1998, and the related statements of operations,
stockholders' deficiency, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratus Services Group, Inc. as
of September 30, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit, which raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
AMPER, POLITZINER & MATTIA P.A.
AMPER, POLITZINER & MATTIA P.A.
December 1, 1999
Edison, New Jersey
F-21
STRATUS SERVICES GROUP, INC.
Balance Sheets
Assets
September 30, September 30, December 31,
1999 1998 1999
---- ---- ----
(Unaudited)
Current assets
Cash and cash equivalents $ 423,072 $ 249,987 $ 11,192
Due from factor - less allowance for recourse
obligation of $-0-, $-0- and $70,000 -- -- 256,468
Accounts receivable - less allowance for doubtful
accounts of $703,000, $37,000 and 571,679 $703,000 65,536 632,274
Unbilled receivables 486,338 282,485 526,110
Unbilled receivables - related parties 15,408 22,445 --
Prepaid insurance 257,213 222,291 86,336
Prepaid expenses and other current assets 15,908 5,130 68,592
------------ ------------ -----------
1,769,618 847,874 1,580,972
Property and equipment, net of accumulated depreciation 311,058 95,562 355,065
Goodwill 2,345,555 -- 2,304,431
Investment in marketable securities -- -- --
Deferred registration costs 326,878 -- 391,977
Other assets 172,756 151,213 166,643
------------ ------------ -----------
$ 4,925,865 $ 1,094,649 $ 4,799,088
============ ============ ============
Liabilities and Stockholders' Deficiency
Current liabilities
Loans payable $ 772,460 $ -- $ 984,344
Loans payable - related parties 15,500 406,350 252,500
Notes payable - acquisition (current 1,117,810 portion) -- 1,208,335
Insurance obligation payable 252,886 211,708 102,842
Due to factor - less allowance for recourse obligation
of $50,000, $795,000 and $-0- 683,924 2,602 --
Accounts payable and accrued expenses 1,410,367 927,743 1,584,449
Accrued payroll and taxes 934,335 869,823 503,990
Payroll taxes payable 226,232 143,312 277,522
Litigation fees payable 133,299 271,361 133,299
------------ ------------ -----------
5,546,813 2,832,899 5,047,281
Notes payable - acquisition (net of 252,657 current portion) 252,657 -- 157,776
------------ ------------ -----------
5,799,470 2,832,899 5,205,057
Temporary equity - common shares 1,618,060 1,618,060 1,618,060
Temporary equity - put options 520,000 -- 520,000
Commitments and contingencies
Stockholders' deficiency
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,272,470, 3,719,734 and 4,349,137
shares issued and outstanding 42,725 37,198 43,492
Additional paid-in capital 1,850,777 31,416 2,150,010
Deferred compensation (114,700) (161,500) (103,000)
Accumulated deficit (4,790,467) (3,263,424) (4,634,531)
------------ ------------ -----------
Total stockholders' deficiency (3,011,665) (3,356,310) (2,544,029)
------------ ------------ -----------
$ 4,925,865 $ 1,094,649 $ 4,799,088
============ ============ ============
See accompanying notes to financial statements
F-22
STRATUS SERVICES GROUP, INC.
Statements of Operations
For the Years Ended September 30, 1999 and 1998
and for the Three Months Ended December 31, 1999 and 1998 (Unaudited)
For the Year Ended For the Three Months Ended
September 30, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues (including $1,696,000, $3,598,000,
$194,000 and $996,000 from related parties) $ 30,042,751 $ 24,919,639 $ 7,723,887 $ 5,912,643
Cost of revenue (including $1,521,000, $3,228,000
$172,000 and $929,000 from related parties) 23,306,254 20,329,718 5,610,017 4,649,738
------------ ------------ ------------ ------------
Gross Profit 6,736,497 4,589,921 2,113,870 1,262,905
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative expenses 6,659,449 5,617,843 1,662,544 1,447,856
Provision for recourse obligation 595,000 670,445 20,000 595,000
Impairment of JPI assets -- 174,688 -- --
------------ ------------ ------------ ------------
7,254,449 6,462,976 1,682,544 2,042,856
------------ ------------ ------------ ------------
Earnings (loss) from operations (517,952) (1,873,055) 431,326 (779,951)
------------ ------------ ------------ ------------
Other income (expenses)
Finance charges (722,020) (524,649) (173,115) (199,448)
Interest expense (309,257) (48,170) (104,172) (31,600)
Other income 22,186 33,729 1,897 13,150
------------ ------------ ------------ ------------
(1,009,091) (539,090) (275,390) (217,898)
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,527,043) $ (2,412,145) $ 155,936 $ (997,849)
============ ============ ============ ============
Net earnings (loss) per common share -
Basic $ (.40) $ (.67) $ .04 $ (.27)
Diluted (.40) (.67) .03 (.27)
Weighted average shares, outstanding per common share share
Basic 3,828,530 3,602,086 4,308,131 3,719,733
Diluted 3,828,530 3,602,086 4,492,024 3,719,733
See accompanying notes to financial statements
F-23
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Deficiency
For the Years Ended September 30, 1999 and 1998
and for the Three Months Ended December 31, 1999 (Unaudited)
Additional
Deferred Accumulated Paid-In Common Stock
Total Compensation Deficit Capital Amount Shares
----------- ------------ ----------- ----------- ----------- -----------
Balance - October 1, 1997 $ (500,395) $ -- $ (534,109) $ -- $ 33,714 3,371,334
Net (loss) (2,412,145) -- (2,412,145) -- -- --
Deferred compensation in connection with stock
options granted (no tax effect) -- (187,500) -- 187,500 -- --
Compensation expense in connection with stock
options granted (no tax effect) 26,000 26,000 -- -- -- --
Proceeds from sale of private placement of
common stock (net of cost of $501,270)
for cash (501,270) -- (317,170) (187,500) 3,400 340,000
Issuance of common stock to employees
(compensation expense of $31,500) 31,500 -- -- 31,416 84 8,400
----------- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 1998 (3,356,310) (161,500) (3,263,424) 31,416 37,198 3,719,734
Net (loss) (1,527,043) -- (1,527,043) -- -- --
Compensation expense in connection with stock
options granted (no tax effect) 46,800 46,800 -- -- -- --
Issuance of common stock in connection with
acquisition -- -- -- (347) 347 34,667
Issuance of common stock in exchange for
notes payable 1,092,762 -- -- 1,089,848 2,914 291,403
Proceeds from the sale of private placement of
common stock (net of costs of $117,874)
for cash 732,126 -- -- 729,860 2,266 226,666
----------- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 1999 $(3,011,665) $ (114,700) $(4,790,467) $ 1,850,777 $ 42,725 4,272,470
Net earnings for the three months ended
December 31, 1999 (unaudited) 155,936 -- 155,936 -- -- --
Compensation expense in connection with stock
options granted (no tax effect) (unaudited) 11,700 11,700
Issuance of common stock in exchange for
notes payable (unaudited) 300,000 299,233 767 76,667
----------- ----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 (unaudited) $(2,544,029) $ (103,000) $(4,634,531) $ 2,150,010 $ 43,492 4,349,137
=========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements
F-24
STRATUS SERVICES GROUP, INC.
Statements of Cash flows
For the Years Ended September 30, 1999 and 1998
and for the Three Months Ended December 31, 1999 and 1998 (Unaudited)
For the Year Ended For the Three Months Ended
September 30, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings (loss) $(1,527,043) $(2,412,145) $ 155,936 $ (997,849)
----------- ----------- ----------- -----------
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation 74,970 40,656 29,319 11,477
Amortization 121,848 -- 41,124 --
Imputed interest 25,645 -- 18,253 --
Accrued interest 91,996 -- 28,275 --
Compensation for issuance of common stock -- 31,500 -- --
Impairment of JPI assets -- 174,688 -- --
Compensation - stock options 46,800 26,000 11,700 11,700
Changes in operating assets and liabilities
Due to/from factor 465,532 437,663 (940,392) 808,267
Accounts receivable (702,959) (209,214) (84,959) (242,667)
Prepaid insurance (34,922) 338,917 170,877 130,729
Prepaid expenses and other current assets (10,778) 8,462 (52,684) (1,973)
Other assets 6,582 (29,357) 6,113 (4,574)
Insurance obligation payable 41,178 (153,467) (150,044) (158,781)
Accrued payroll and taxes 64,512 392,899 (430,345) (508,867)
Payroll taxes payable 82,920 (95,471) 51,290 (2,634)
Litigation fees payable (138,062) 271,361 -- (40,151)
Accounts payable and accrued expenses 397,336 538,020 165,695 76,445
----------- ----------- ----------- -----------
Total adjustments 532,598 1,772,657 (1,135,778) 78,971
----------- ----------- ----------- -----------
$ (994,445) $ (639,488) $ (979,842) $ (918,878)
=========== =========== =========== ===========
Cash flows (used in) investing activities
Purchase of property and equipment (283,466) (96,789) (73,326) (70,824)
Payments for business acquisitions (194,930) (89,688) -- --
----------- ----------- ----------- -----------
(478,396) (186,477) (73,326) (70,824)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from sale of common stock 732,126 735,230 -- --
Proceeds from loans payable 1,388,375 550,000 750,000 775,000
Payments of loans payable (370,746) (302,150) (52,000) --
Payments of registration costs (103,829) -- (56,712) --
----------- ----------- ----------- -----------
1,645,926 983,080 641,288 775,000
----------- ----------- ----------- -----------
Net change in cash and cash equivalents 173,085 157,115 (411,880) (214,702)
Cash and cash equivalents - beginning 249,987 92,872 423,072 249,987
----------- ----------- ----------- -----------
Cash and cash equivalents - ending $ 423,072 $ 249,987 $ 11,192 $ 35,285
=========== =========== =========== ===========
Supplemental disclosure of cash paid
Interest $ 174,175 $ 37,872 $ 29,294 $ 16,500
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 2,421,903 $ 289,688 $ -- $ --
Less: cash paid (57,430) (89,688) -- --
Less: common stock and put options issued (520,000) -- -- --
----------- ----------- ----------- -----------
Liabilities assumed $ 1,844,473 $ 200,000 $ -- $ --
=========== =========== =========== ===========
Issuance of common stock in exchange for
notes payable $ 1,092,762 $ -- $ 300,000 $ --
=========== =========== =========== ===========
Accrued and imputed interest $ 117,641 $ -- $ 46,528 $ --
=========== =========== =========== ===========
See accompanying notes to financial statements
F-25
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 1 - LIQUIDITY
Stratus Services Group, Inc. ("Company") has been experiencing
significant losses from operations due to increasing overhead in
anticipation of additional future revenues, litigation fees, and
unusual reserves for estimated recourse obligations. The accompanying
financial statements have been prepared assuming the Company will
continue as a going concern.
Management's plans consist of reducing overhead by eliminating and
consolidating locations and applicable staff, and implementing cost
reduction measures such as decreasing salaries. The Company completed a
private placement of its common stock and notes in June 1999 raising
approximately $1,000,000 for working capital purposes. Thirdly, the
Company is in the registration process with the Securities & Exchange
Commission to raise additional capital.
NOTE 2 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
The Company was incorporated on March 11, 1997, for the purpose of
providing contract labor and staffing services. The only activity
between March 11, 1997 and August 11, 1997, was the issuance of 667
shares of common stock. The Company commenced operations on August 11,
1997, when it acquired certain assets and assumed certain liabilities
of Royalpar Industries, Inc. ("Royalpar") and its subsidiaries (an
entity in bankruptcy). This acquisition enabled the Company to
immediately commence its temporary staffing business by providing
customers, qualified staff and accounting and payroll support services
from offices in New Jersey, Colorado, Texas, California and Arizona.
The Company operates as one business segment. The one business segment
consists of its traditional staffing services, engineering staffing
services, and SMARTSolutions(TM), a structured program to monitor and
enhance the production of a client's labor resources. The Company's
customers are in various industries and are located throughout the
United States. Credit is granted to substantially all customers. No
collateral is maintained.
REVENUE RECOGNITION
The Company recognizes revenue as the services are performed by its
workforce. The Company's customers are billed weekly. At balance sheet
dates, there are accruals for unbilled receivables and related
compensation costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-26
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 2 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
INTERIM FINANCIAL STATEMENTS
The financial statements as of December 31, 1999 and for the three
months ended December 31, 1999 and 1998 have been prepared by the
Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position as of December 31, 1999 and the results
of operations and cash flows for the three months ended December 31,
1999 and 1998 have been made. The results of operations for the three
months ended December 31, 1999 are not necessarily indicative of the
results to be expected for the year ending September 30, 2000.
RECLASSIFICATION
Certain items in the Statement of Operations for the year ended
September 30, 1998 have been reclassified to conform to the year ended
September 30, 1999 presentation.
EARNINGS/LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share," (SFAS 128). SFAS 128 replaces the presentation of
primary earnings per share ("EPS") and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic 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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful lives
of the assets as follows:
Estimated
Method Useful Life
------ -----------
Computer equipment Straight-line 3 years
Office equipment Declining balance 5 years
Furniture and fixtures Declining balance 5 years
GOODWILL
Goodwill is amortized on a straight-line basis over fifteen years.
FACTORING
The Company's factoring agreement (see Note 4) with a financing
institution ("factor") has been accounted for as a sale of receivables
under Statement of Financial Accounting Standards No. 125 "Accounting
for Transfers and Services of Financial Assets and Extinguishment of
Liabilities."
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25. "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock options.
Under this method, compensation cost is measured as the amount by which
the market price of the underlying stock exceeds the exercise price of
the stock option at the date at which both the number of options
granted and the exercise price are known.
F-27
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 2 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. The expenses for the years
ended September 30, 1999 and 1998 and the three months ended December
31, 1999 and 1998 was $133,000, $110,000, $37,000 and $24,000
respectively, and is included in selling, general and administrative
expenses.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires recognition
of impairment of long-lived assets in the event the net book value of
such assets exceeds the future undiscounted cash flows attributable to
such assets.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company operates as a
single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities and
measure them at a fair value. Under certain circumstances, the gains
or losses from derivatives may be offset against those from the
items the derivatives hedge against. The Company will adopt SFAS
No. 133 in the fiscal year ending September 30, 2001. The Company
does not anticipate that SFAS No. 133 will have a material impact.
NOTE 3 - ACQUISITIONS
JP INDUSTRIAL, LLC
On August 10, 1998, the Company acquired certain assets of JP
Industrial, LLC, ("JPI") an engineering services company in Oregon for
$289,688 of which $89,688 was paid at closing and the remainder payable
in monthly installments through May 1999. The assets acquired consisted
of equipment, customer and vendor lists and any open and pending
contracts and purchase orders. The Company did not assume any
liabilities or obligations unless expressly agreed to. Shortly after
the acquisition and before assigning values to the assets, the Company
filed a lawsuit alleging breach of contract by the former owners of
JPI. The former owners of JPI have filed a counter claim. Arbitration
is to commence in early 2000.
Management believes that the breach of contract has impaired the value
of assets purchased and has consequently charged operations for
$174,688 during the year ended September 30, 1998.
F-28
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 3 - ACQUISITIONS - (CONTINUED)
B & R EMPLOYMENT, INC.
On January 4, 1999, the Company entered into an asset purchase
agreement with B&R Employment, Inc. ("B&R"). The Company purchased
certain assets including office equipment, furniture and fixtures,
sales and operating records, customer contracts and agreements, vendor
lists, and seller's licenses and certificates. The purchase price was
$2,400,000, consisting of a note for $1,610,000 (Note #1), a note for
$270,000 (Note #2) and the issuance of 34,667 shares of the Company's
common stock. B&R has a put option to sell these shares back to the
Company at $15 per share, provided that the Company does not conduct an
initial public offering within twenty-four months.
In addition, the Company purchased existing accounts receivable of
$657,000 from B&R and sold them to the factor. Any uncollectible
accounts receivable and costs associated therewith are deductible from
the notes payable. In this connection, $197,186 has been credited
against Note #1 at September 30, 1999 and December 31, 1999. In
addition, B&R's $57,430 share of a finder's fee paid by the Company has
also been credited against Note #1.
A payment of $269,000 was made against Note #1 in April 1999. In
addition, payments of $12,000 a month began June 1999. Note #1 accrues
interest at 10% a year and is due thirty days after successful
completion of an initial public offering or March 1, 2000, whichever is
sooner. Note #2 is payable in eight quarterly installments of principal
and interest commencing ninety days after payment of Note #1 with
interest accruing at 12%.
Notes payable - acquisition comprises the following:
September 30, December 31,
1999 1999
------------- -------------
(Unaudited)
Note #1 $ 1,025,814 $ 986,814
Note #2 270,000 270,000
Accrued interest 91,996 120,271
Less: unamortized discount (17,343) (10,974)
------------- -------------
1,370,467 1,366,111
Less: current portion (1,117,810) (1,208,335)
------------- -------------
$ 252,657 $ 157,776
============= =============
In connection with this acquisition, the Company entered into an
employment and a non-compete agreement for a three year period with the
sole stockholder of B&R. The excess of cost paid over net assets
acquired resulted in goodwill of $2,414,903, computed as follows:
Net assets acquired
Office equipment $ 7,000
-----------
Amounts paid
Notes payable (net of $35,527 discount) 1,844,473
Issuance of common stock and put options 520,000
Finder's fee 57,430
-----------
2,421,903
-----------
Excess of amounts paid over net assets
Acquired-goodwill $ 2,414,903
===========
F-29
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 4 - FACTORING AGREEMENT
The Company has a factoring agreement under which it may sell up to
$3,000,000 of qualified trade accounts receivable, with limited
recourse provisions. The agreement expires August 10, 2000 and is
renewed automatically for one year periods unless either party is
notified of termination 60 days prior to renewal. The Company is
required to repurchase or replace any receivable remaining uncollected
for more than 90 days. During the years ended September 30, 1999 and
1998, and the three months ended December 31, 1999 and 1998, gross
proceeds from the sale of receivables were $25,227,640, $23,146,923,
$6,557,788 and $5,239,179, respectively. The provision for recourse
obligation includes the estimated recourse obligations on the sale of
receivables. As of September 30, 1999 and 1998 and December 31, 1999,
$3,789,000, $2,943,000, and $2,981,000, respectively, of the
receivables sold to the factor had not been collected.
As of September 30, 1999 and 1998 and December 31, 1999, $-0-,
$1,105,000, and $-0-, respectively, of related-party receivables sold
to the factor had not been collected. Reserves for recourse obligations
of $-0-, $500,000 and $-0-, respectively, have been provided against
these receivables.
The Company is an impaired seller under the terms of the factoring
agreement. Although in technical violation for not repurchasing
outstanding receivables over 90 days, the factor is not exercising any
of the remedies available to them. However, two stockholders of the
Company have pledged 1,055,334 shares of the Company as collateral.
As of January 21, 2000 the factor confirmed that the Company was no
longer in technical violation and is releasing the shares held as
collateral.
NOTE 5 - PROPERTY AND EQUIPMENT
September 30, December 31,
1999 1998 1999
------------ ------------ ------------
(Unaudited)
Furniture and fixtures $ 42,071 $ 10,700 $ 43,195
Office equipment 34,423 26,223 57,275
Computer equipment 296,960 78,362 336,559
Computer software 54,892 22,593 64,642
------------ ------------ ------------
428,346 137,878 501,671
Accumulated depreciation (117,288) (42,316) (146,606)
------------ ------------ ------------
Net property and equipment $ 311,058 $ 95,562 $ 355,065
============ ============ ============
F-30
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 6 - GOODWILL
September 30, December 31,
1999 1998 1999
------------ ---------- ------------
(Unaudited)
Goodwill $ 2,467,403 $ -- $2,467,403
Less: accumulated amortization (121,848) -- (162,972)
------------ ---------- ------------
$ 2,345,555 $ -- $2,304,431
============ ========== ============
NOTE 7 - LOANS PAYABLE
a. RELATED PARTIES
As of September 30, 1999 and 1998 and December 31, 1999,
various stockholders advanced funds to the Company for working
capital and payment of litigation expenses (see Note 8). These
loans bear interest at the rate of 12% per annum and are
payable upon demand. Interest expense for the years ended
September 30, 1999 and 1998 and the three months ended
December 31, 1999 and 1998, was $43,544, $40,863, $5,000 and
$11,600, respectively.
In August 1999, the Chief Executive Officer of the Company and
his son agreed to exchange, effective June 30, 1999, $440,000
of notes payable by the Company to them plus accrued interest
of $52,762 for 131,403 shares of the Company's common stock.
The stock was valued at $3.75 per share which represents fair
value based on the latest stock transactions and no gain or
loss was recorded on the transaction.
b. OTHER
Loans payable is comprised of the following:
(i) $365,000 as of September 30, 1998 and
December 31, 1999, bearing interest at the
rates of 18% to 24% a year, due on demand;
(ii) $157,460 and $169,344 as of September 30,
1999 and December 31, 1999, respectively,
representing the discounted notes ($200,000
face value) from the private placement (see
Note 17). These notes bear interest at the
rate of 13% and are due upon the earlier of
one year or the successful completion of the
IPO;
(iii) $150,000 as of September 30, 1999 and
December 31, 1999, due on demand, bearing
interest at 12% a year;
(iv) $100,000 as of September 30, 1999 and
December 31, 1999, due on demand, bearing
interest at 30% a year; and
(v) $200,000 as of December 31, 1999, due on
demand, bearing interest at 12% a year.
Other loans aggregating $600,000 were settled by the issuance of
160,000 shares of the Company's common stock at $3.75 per share in
September 1999. Other loans during the three months ended December 31,
1999 aggregating $100,000 and $200,000 were settled by the issuance of
26,667 shares at $3.75 per share in October 1999 and 50,000 shares at
$4.00 per share in November and December 1999.
F-31
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 8 - LITIGATION FEES PAYABLE
The Company and four individuals were defendants in a legal action
alleging breach of various agreements. The action was settled in June
1998 as a result of which the Company paid $408,000 (for plaintiff's
attorneys fees) and incurred $390,000 for its own legal fees. The
Company owed $133,299, $271,361 and $133,299 at September 30, 1999,
September 30, 1998 and December 31, 1999, respectively, and is making
periodic payments.
NOTE 9 - RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT
The former president of Royalpar, who is the son of the Chief Executive
Officer of the Company, provides consulting services to the Company.
Consulting expense was $107,000, $175,000, $31,000 and $21,000 for the
years ended September 30, 1999 and 1998, and the three months ended
December 31, 1999 and 1998, respectively.
The Company has paid consulting fees to an entity whose stockholder is
another son of the Chief Executive Officer of the Company. Consulting
fees amounted to $23,000, $17,000, $-0- and $19,000 for the years ended
September 30, 1999 and 1998, and the three months ended December 31,
1999 and 1998, respectively.
REVENUES
The Company provides payroll services to an entity whose Chief
Executive Officer is the son of the Chief Executive Officer of the
Company. Revenues related thereto for the years ended September 30,
1999 and 1998 and the three months ended December 31, 1999 and 1998,
were $1,392,000, $2,321,000, $194,000 and $692,000, respectively. In
August 1999, $663,000 of accounts receivable from this related party
were converted into a note of $1,017,000. The difference was
attributable to interest which has not been accrued by the Company
since all of the receivable had previously been reserved for as a
doubtful account. All of the doubtful accounts receivable arose prior
to the entity becoming a related party. The accounts receivable were
generated through December 1998 and the entity became a related party
in March 1999. In September 1999, the Company had agreed to accept
500,000 shares of the related party's common stock as full payment for
the note. Although the shares of the related party's common stock are
publicly traded, the 500,000 shares held by the Company are restricted.
Accordingly, the investment has been valued at $-0-. A value will be
assigned to the common stock when the shares are registered and the
restriction is released. A realized gain will be recognized in the
statement of operations upon the sale or exchange of these freely
traded shares. The market price of unrestricted common shares of the
related party at September 30, 1999 and December 31, 1999, was $2.69
and $1.38 per common share, respectively.
The Company also provided payroll services to a non-public entity whose
common stock is owned 50% by the Chief Executive Officer of the
Company. For the years ended September 30, 1999 and 1998, and the three
months ended December 31, 1999 and 1998, revenues were $304,000,
$1,277,000, $-0- and $304,000, respectively.
F-32
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
September 30, December 31,
1999 1998 1999
--------------- -------------- --------------
(Unaudited)
Accounts payable $ 535,883 $ 220,370 $ 681,548
Accrued compensation 303,430 312,402 276,896
Accrued legal 261,894 -- 338,032
Accrued other 122,751 107,124 104,591
Accrued interest 19,133 71,242 22,987
Accrued lease 52,276 101,605 45,395
Due to JPI (see Note 3) 115,000 115,000 115,000
--------------- -------------- --------------
$ 1,410,367 $ 927,743 $ 1,584,449
=============== ============== ==============
NOTE 11 - INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities follow:
September 30, December 31,
1999 1998 1999
--------------- ------------- -------------
(Unaudited)
Current assets and liabilities
Allowance for recourse
obligation $ 20,000 $ 318,000 $ 28,000
Allowance for doubtful accounts 281,000 12,000 281,000
Valuation allowance (301,000) (330,000) (309,000)
--------------- ------------- -------------
Net current deferred tax asset
(liability) $ -- $ -- $ --
=============== ============= =============
Non-current assets and liabilities
Net operating loss carryforward $ 844,000 $ 683,000 $ 764,000
Stock compensation 29,000 11,000 34,000
Depreciation (16,000) (9,000) (16,000)
Valuation allowance (857,000) (685,000) (782,000)
--------------- ------------- -------------
Net non-current deferred tax asset
(liability) $ -- $ -- $ --
=============== ============= =============
There were no provisions for income taxes for the years ended September
30, 1999 and 1998, and the three months ended December 31, 1999 and
1998, because the Company has net operating loss carryforwards with a
corresponding valuation allowance against them. The change in the
valuation allowances was an increase of $143,000 and $87,000 and a
decrease of $67,000 and $-0- for the years ended September 30, 1999 and
1998, respectively.
F-33
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 11 - INCOME TAXES - (CONTINUED)
At September 30, 1999, the Company has available the following federal
net operating loss carryforwards for tax purposes:
Expiration Date
Year Ending
September 30,
---------------------
2012 $ 218,000
2018 1,491,000
2019 400,000
The utilization of the net operating loss carryforwards may be limited
due to possible changes in control from private placements.
The effective tax rate on net loss varies from the statutory federal
income tax rate for periods ended September 30, 1999 and 1998.
1999 1998
--------------- -------------
Statutory rate (34.0)% (34.0)%
State taxes net (6.0) (6.0)
Other differences, net 1.3 0.9
Valuation allowance 38.7 39.1
--------------- -------------
-- % -- %
=============== =============
NOTE 12 - COMMITMENTS AND CONTINGENCIES
OFFICE LEASES
The Company leases offices and equipment under various leases expiring
through July 31, 2004. Monthly payments under these leases are $20,000.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year, as of
September 30, 1999.
For the Years Ending
September 30,
----------------------
2000 $ 236,000
2001 207,000
2002 117,000
2003 26,000
2004 22,000
Rent expense was $342,000, $187,000, $75,000 and $78,000 for the years
ended September 30, 1999 and 1998, and the three months ended December
31, 1999 and 1998, respectively.
F-34
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 12 - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with five
executives. The terms of the agreements stipulate annual salaries,
aggregating $916,000 plus additional bonuses with stock options of
500,000 shares granted and vested over three to four years. The
agreement with the Chief Executive Officer is for three years, while
the others continue until terminated by the Company. The agreement with
the Chief Executive Officer entitles him to severance compensation
equal to 2.9 times his base salary.
ROYALPAR INDUSTRIES, INC. ("ROYALPAR")
In connection with the acquisition of certain assets and assumption of
certain liabilities of Royalpar, there was an earn-out provision
whereby the Company is obligated to pay to Royalpar creditors or
disbursing agents an amount equal to 2% or 3% of the Company's income
before taxes over a five year period. No amounts are currently due
under this provision.
OTHER
The Company is a defendant in the normal course of business involving a
few unfair labor practices. Management believes that the ultimate
resolution of these matters will not have a material adverse effect on
the Company's financial position and results of operations.
NOTE 13 - TEMPORARY EQUITY - COMMON STOCK
Certain stockholders of the Company may have a right to pursue claims
against the Company as a result of possible technical violations of the
laws and regulations governing the private placement and issuance of
securities. In connection therewith, the Company intends to make a
rescission offer to these stockholders, representing 3,444,667 shares,
whereby the Company will offer to repurchase the shares at their
original purchase price which ranges from $.075 to $3.75 per share.
Accordingly, the Company has recorded the original total proceeds of
the sale of the shares in the amount of $1,618,060 as temporary equity
- common shares in the balance sheet. The Chief Executive Officer of
the Company has agreed to assume the Company's obligation to purchase
shares from any stockholder who elects rescission. The net worth of the
Chief Executive Officer is in excess of $1,700,000. The amount related
to any shares held by stockholders who do not elect rescission within
thirty days of the rescission offer (expiration date) and any shares
purchased by the Chief Executive Officer pursuant to his assumption
obligation will be reclassified to additional paid-in capital.
NOTE 14 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees with terms of three
to four years. The options may be granted for 534,000 shares.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement ("FASB
No. 123"), and has been determined as if the Company had accounted for
its employee stock options under the fair value method. The fair value
for these options was estimated at the date of grant using the minimum
method option pricing model.
F-35
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 14 - STOCK OPTIONS AND WARRANTS - (CONTINUED)
The minimum method option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
The following weighted-average assumptions were used:
September 30,
1999 1998
--------------- --------------
Risk-free interest rate 5 % 6 %
Dividend yield 0 % 0 %
Expected life 4 years 4 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
For the Years Ended
September 30,
1999 1998
--------------- --------------
Pro forma net loss $(1,583,829) $(2,434,525)
Pro forma loss per common share -
Basic and diluted $ (.41) $ (.68)
Compensation expense under APB 25 was $46,800 and $26,000 for the years
ended September 30, 1999 and 1998, respectively. Deferred compensation
at September 30, 1999, was $114,700 to be amortized over the remaining
vesting period.
A summary of the Company's stock option activity, and related
information for the years ended September 30, follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at September 30, 1997 -- $ --
Granted 534,000 2.55
Canceled -- --
Exercised -- --
Outstanding at September 30, 1998 534,000 2.55
Granted -- --
Canceled -- --
Exercised -- --
------- -----
Outstanding at September 30, 1999 534,000 $2.55
======= =====
Exercisable at September 30, 1999 230,444 $2.29
======= =====
F-36
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 14 - STOCK OPTIONS AND WARRANTS - (CONTINUED)
The exercise prices range from $1.50 to $4.50 per share.
The Company has also issued 66,667 warrants to purchase shares at $7.50
per share, expiring in 2003 and 6,667 warrants to purchase shares at
$7.50 per share expiring in 2004.
Following is a summary of the status of stock options outstanding at
September 30, 1999:
Outstanding Options Exercisable Options
---------------------- ------------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Exercise Number Exercise
Life Price Price
----- ------ ----------- -------- ------ --------
$ 1.50 166,667 2.9 years $ 1.50 111,111 $ 1.50
3.00 360,000 2.3 years 3.00 117,500 3.00
4.50 7,333 2.7 years 4.50 1,833 4.50
-----------
230,444
===========
As of September 30, 1999, no stock options nor warrants have been
exercised.
NOTE 15 - MAJOR CUSTOMERS
The Company had two customers who accounted for 30% and 31% of total
revenues for the years ended September 30, 1999 and 1998, respectively.
Major customers are those who account for more than 10% of total
revenues. For the three months ended December 31, 1999, the Company had
three customers who accounted for 36% of total revenues. For the three
months ended December 31, 1998, the Company had two customers who
accounted for 33% of total revenues.
NOTE 16 - RETIREMENT PLANS
The Company maintains two 401(k) savings plans for its employees. The
terms of the plan define qualified participants as those with at least
three months of service. Employee contributions are discretionary up to
a maximum of 15% of compensation. The Company can match up to 20% of
the employees' first 5% contributions. The Company's 401(k) expense for
the years ended September 30, 1999 and 1998, and the three months ended
December 31, 1999 and 1998 were $26,000, $16,000, $7,000 and $7,000,
respectively.
The Company has determined that its 401(k) plans may be disqualified
due to operational deficiencies. Management is attempting to remedy the
deficiencies. The effects on the Company's financial position and
results of operations are not determinable at this time.
NOTE 17 - YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's operational equipment or internal computer software that
have time sensitive programs may recognize a date using "00 as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruption of operations including, among
other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business.
F-37
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of 12/31/99 and for the Three Months Ended 12/31/99 and
12/31/98 is unaudited)
NOTE 17 - YEAR 2000 ISSUE - (CONTINUED)
The Company has assessed the implications on its operations of the Year
2000 Issue. At September 30, 1999, the process of evaluating the
Company's internal systems was completed and such systems are presently
year 2000 compliant. At this time, the Company is satisfied that all of
its major vendors have verified, or are in the process of verifying to
the Company their year 2000 compliance. The Company's internal systems
have been updated, where appropriate, to accommodate year 2000
compliance and actual impact of year 2000 compliance on the Company's
future results of operations, capital spending, and business operations
is not expected to be material.
NOTE 18 - PRIVATE PLACEMENT
The Company raised $1,000,000 gross proceeds through a private
placement during the year ended September 30, 1999. Each private
placement "unit" was a combination of debt and equity. For each $50,000
unit, the investor received a $50,000 promissory note from the Company
and 3,333 shares of the Company's common stock valued at $3.75 per
share (see Note 7).
In August 1999, each private placement participant was offered an
additional 10,000 shares of the Company's common stock in exchange for
the original debt portion of the unit, thereby exchanging each unit
acquired by an investor accepting the offer into 13,333 shares of
common stock at $3.75 per share. In connection with this offer,
participants representing sixteen units agreed to this offer.
As each private placement investor representing the remaining $200,000
received both debt (in the form of a promissory note payable by the
Company) and equity (in the form of the Company's common stock), a
portion of the $200,000 face value of the debt was allocated to equity
based on the value of $3.75 per share of common stock. As such, the
company has allocated $133 and $49,867 to common stock and additional
paid-in capital, respectively. The remainder of $150,000 was allocated
to short-term debt. The difference between the face value and the
amount recorded in short-term debt is being accrued to interest expense
over the expected life of the debt.
NOTE 19 - REVERSE STOCK SPLIT
The Company's Board of Directors has approved a two for three reverse
stock split of common stock to be effective prior to the effective date
of the Company's IPO. All common stock and per share information has
been adjusted to reflect the reverse stock split as if such split had
taken place at the beginning of the periods presented.
NOTE 20 - SUBSEQUENT EVENT
In November 1999, the Company entered into a debt-equity conversion
agreement with B&R (see Note 3) whereby B&R will convert, except for
$24,000, the amounts due under the notes payable - acquisition,
including accrued interest, into shares of the Company's common stock
upon the Company's initial public offering of securities. The number of
shares to be issued will be based on the offering price in the initial
public offering. The agreement is null and void if the offering does
not take place by March 1, 2000.
In February 2000, the Company and B&R agreed to extend the agreement
until March 31, 2000 with a modification whereby $666,000 of the debt
will not be converted into shares of the Company's common stock.
F-38
STRATUS SERVICES GROUP, INC.
Condensed Balance Sheets
(Unaudited)
Assets
December 31, September 30,
2000 2000
------------ ------------
(Unaudited)
Current assets
Cash and cash equivalents $ 993,914 $ 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 $335,000 and $225,000 11,586,515 852,876
Unbilled receivables 1,137,385 1,236,002
Loans to related parties 64,500 64,500
Loans receivable 161,000 56,000
Prepaid insurance 125,364 432,674
Prepaid expenses and other current assets 332,210 278,169
Deferred taxes 428,000 340,000
------------ ------------
14,828,888 5,444,955
Property and equipment, net of accumulated depreciation 1,298,488 1,118,625
Goodwill, net of accumulated amortization 4,496,656 3,716,538
Deferred financing costs, net of accumulated amortization 444,849 --
Other assets 55,010 38,163
------------ ------------
$ 21,123,891 $ 10,318,281
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 27,662 $ 27,012
Notes payable - acquisition (current portion) 160,425 275,000
Line of credit 8,607,083 --
Insurance obligation payable 145,194 367,100
Accounts payable and accrued expenses 1,191,509 1,172,148
Accrued payroll and taxes 1,124,509 1,105,363
Payroll taxes payable 443,849 412,513
------------ ------------
11,700,231 3,359,136
Loans payable (net of current portion) 127,530 134,700
Notes payable - acquisition (net of current portion) -- 25,000
Convertible debt 1,436,724 --
------------ ------------
13,264,485 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 outstanding 57,087 57,120
Additional paid-in capital 11,289,577 10,554,782
Deferred compensation (56,200) (67,900)
Accumulated deficit (3,431,058) (3,744,557)
------------ ------------
Total stockholders' equity 7,859,406 6,799,445
------------ ------------
$ 23,123,891 $ 10,318,281
============ ============
See accompanying notes to financial statements
F-39
STRATUS SERVICES GROUP, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
December 31,
2000 1999
------------ -----------
Revenues (including $ -0- and $194,000
from related parties) $ 18,660,417 $ 7,723,887
Cost of revenue (including $ -0- and
$172,000 from related parties) 14,361,842 5,610,017
------------ -----------
Gross Profit 4,298,575 2,113,870
Selling, general and administrative expenses 3,781,335 1,682,544
------------ -----------
Earnings from operations 517,240 431,326
------------ -----------
Other income (expenses)
Finance charges (100,934) (173,115)
Interest and financing costs (198,498) (104,172)
Other income 7,691 1,897
------------ -----------
(291,741) (275,390)
------------ -----------
Earnings before benefit from income taxes 225,499 155,936
Income tax benefit 88,000 --
------------ -----------
Net earnings $ 313,499 $ 155,936
============ ===========
Net earnings per common share -
Basic $ .05 $ .04
Diluted $ .05 .03
Weighted average shares, outstanding per common share
Basic 5,709,936 4,308,131
Diluted 6,112,727 4,492,024
See accompanying notes to financial statements
F-40
STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash Flows
(Unaudited)
December 31, 2000 December 31, 1999
----------------- -----------------
Cash flows from operating activities
Net earnings $ 313,499 $ 155,936
----------- -----------
Adjustments to reconcile net earnings
to net cash used by operating activities
Depreciation 81,314 29,319
Amortization 75,599 41,124
Deferred financing costs amortization 10,879 --
Deferred taxes - benefit (88,000) --
Imputed interest 122,211 18,253
Accrued interest -- 28,275
Compensation - stock options 11,700 11,700
Changes in operating assets and liabilities
Due from factor/Accounts receivable (4,339,585) (1,025,351)
Prepaid insurance 307,310 170,877
Prepaid expenses and other current assets (54,041) (52,684)
Other assets (16,847) 6,113
Insurance obligation payable (221,906) (150,044)
Accrued payroll and taxes 19,146 (430,345)
Payroll taxes payable 31,336 51,290
Accounts payable and accrued expenses (155,639) 165,695
----------- -----------
Total adjustments (4,216,523) (1,135,778)
----------- -----------
$(3,903,024) $ (979,842)
=========== ===========
Cash flows (used in) investing activities
Purchase of property and equipment (229,527) (73,326)
Payments for business acquisitions (637,367) --
Loans receivable (105,000) --
----------- -----------
(971,894) (73,326)
----------- -----------
Cash flows from financing activities
Proceeds from loans payable -- 750,000
Payments of loans payable (6,520) (52,000)
Payments of notes payable - acquisitions (214,575) --
Net proceeds from line of credit 3,350,342 --
Net proceeds from convertible debt 1,723,988 --
Purchase of treasury stock (15,125) --
Payments of registration costs -- (56,712)
----------- -----------
4,838,110 641,288
----------- -----------
Net change in cash and cash equivalents (36,808) (411,880)
Cash and cash equivalents - beginning 1,030,722 423,072
----------- -----------
Cash and cash equivalents - ending $ 993,914 $ 11,192
=========== ===========
Supplemental disclosure of cash paid
Interest $ 57,037 $ 29,294
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 887,367 $ --
Less: cash paid (637,367) --
Liabilities assumed $ 250,000 $ --
=========== ===========
Issuance of common stock in exchange for notes payable $ -- 300,000
=========== ===========
Accrued and imputed interest $ 122,211 $ 46,528
=========== ===========
See accompanying notes to financial statements
F-41
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
months ended December 31, 1999 have been reclassified to conform to the three
months ended December 31, 2000 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 402,791 and 183,893 for the three months ended December 31, 2000 and
1999, respectively.
NOTE 3 - ACQUISITION
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
F-42
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
===============
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.
F-43
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.
NOTE 7 - INCOME TAXES
There was no provision for income taxes for the three months ended December 31,
1999, because the Company has net operating loss carryforwards with a
corresponding valuation allowance against them. The income tax benefit for the
three months ended December 31, 2000, is the result of a decrease in the
valuation allowance.
F-44
STRATUS SERVICES GROUP, INC.
5,096,180 SHARES
COMMON STOCK
PROSPECTUS
APRIL 3, 2001
Stratus Services Group, Inc.
500 Craig Road, Suite 201
Manalapan, New Jersey 07726
WWW.STRATUSSERVICES.COM
(732) 866-0300