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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 2001
-------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission file number 001-15789
-----------------------------------
STRATUS SERVICES GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-3499261
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Craig Road, Suite 201, Manalapan, New Jersey 07726
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(Address of principal executive offices)
(732) 866-0300
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(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
As of February 12, 2002, 9,980,625 shares of the Registrant's common stock were
outstanding.
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PART I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
STRATUS SERVICES GROUP, INC.
Condensed Balance Sheets
Assets
<Table>
<Caption>
December 31, 2001 September 30, 2001
------------------- --------------------
(Unaudited)
Current assets
Cash and cash equivalents $ 42,332 $ 171,822
Accounts receivable -- less allowance for doubtful
accounts of $362,000 and $551,000 9,888,085 8,540,112
Unbilled receivables 303,947 1,566,417
Prepaid insurance 1,390,661 1,436,278
Investment 1,256,756 1,166,046
Prepaid expenses and other current assets 116,331 77,146
Net assets of discontinued Engineering Division 199,610 199,610
------------ ------------
13,197,722 13,157,431
Property and equipment, net of accumulated depreciation 1,397,640 1,427,216
Intangible assets, net of accumulated amortization 6,939,865 7,078,428
Deferred financing costs, net of accumulated amortization 341,046 454,878
Other assets 273,114 150,205
------------ ------------
$ 22,149,387 $ 22,268,158
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 368,304 $ 347,289
Notes payable -- acquisitions (current portion) 1,123,343 1,110,726
Line of credit 7,454,127 7,306,581
Cash overdraft 286,584 --
Insurance obligation payable 296,416 549,460
Accounts payable and accrued expenses 3,437,307 3,421,796
Accrued payroll and taxes 1,237,015 1,461,738
Payroll taxes payable 319,020 306,230
------------ ------------
14,522,116 14,503,820
Loans payable (net of current portion) 216,944 291,243
Notes payable -- acquisition (net of current portion) 1,286,230 1,403,847
Convertible debt 1,056,588 1,125,399
------------ ------------
17,081,878 17,324,309
Series A voting redeemable convertible preferred stock, $.01 par value,
1,458,933 and 1,458,933 shares issued and outstanding, liquidation
preference of $4,376,799 (including unpaid dividends of $116,000
and $39,000) 2,916,000 2,792,000
Temporary equity -- put options 869,000 869,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
9,357,588 and 8,217,764 shares issued and outstanding 93,576 82,178
Additional paid-in capital 12,535,898 11,992,685
Accumulated deficit (10,252,691) (9,592,014)
Accumulated other comprehensive loss (1,094,274) (1,200,000)
------------ ------------
Total stockholders' equity 1,282,509 1,282,849
------------ ------------
$ 22,149,387 $ 22,268,158
============ ============
</Table>
See notes to condensed financial statements.
1
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Operations
(Unaudited)
<Table>
<Caption>
Three Months Ended
December 31,
2001 2000
------------ ------------
Revenues 14,793,224 $ 17,024,687
Cost of revenues 12,119,322 13,187,571
------------ ------------
Gross Profit 2,673,902 3,837,116
Selling, general and administrative expenses 2,901,487 3,446,370
------------ ------------
Earnings (loss) from continuing operations (227,585) 390,746
------------ ------------
Other income (expenses)
Finance charges -- (61,291)
Interest and financing costs (512,043) (189,069)
Other income 5,685 7,691
------------ ------------
(506,358) (242,669)
------------ ------------
Earnings (loss) from continuing operations before income taxes (733,943) 148,077
Income taxes (benefit) -- (88,000)
------------ ------------
Earnings (loss) from continuing operations (733,943) 236,077
Discontinued operations - earnings from discontinued
Engineering Division 73,266 77,422
------------ ------------
Net earnings (loss) (660,677) 313,499
Dividends and accretion on preferred stock (124,000) --
------------ ------------
Net earnings (loss) attributable to common stockholders $ (784,677) $ 313,499
============ ============
Net earnings (loss) per share attributable to common stockholders
Basic:
Earnings (loss) from continuing operations $ (.09) $ .04
Earnings from discontinued operations .01 .01
------------ ------------
Net earnings (loss) $ (.08) $ .05
============ ============
Diluted:
Earnings (loss) from continuing operations $ (.09) $ .04
Earnings from discontinued operations .01 .01
------------ ------------
Net earnings (loss) $ (.08) .05
============ ============
Weighted average shares, outstanding per common share
Basic 8,802,821 5,709,936
Diluted 8,802,821 6,112,727
</Table>
See notes to condensed financial statements.
2
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
Three Months Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Cash flows from operating activities
Net earnings (loss) from continuing operations $ (733,943) $ 236,077
Net earnings from discontinued operations 73,266 77,422
------------- -------------
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities
Depreciation 132,877 81,314
Amortization 138,563 75,599
Provision for doubtful accounts 25,000 --
Deferred financing costs amortization 245,585 10,879
Loss on sales of shares of investment 9,550 --
Loss on extinguishment of convertible debt 11,184 --
Deferred taxes (benefit) -- (88,000)
Interest expense amortization for the intrinsic value of
the beneficial conversion feature of convertible debentures 36,535 122,211
Accrued interest 50,221 --
Compensation - stock options -- 11,700
Changes in operating assets and liabilities
Due to/from factor/accounts receivable (110,503) (4,339,585)
Prepaid insurance 45,617 307,310
Prepaid expenses and other current assets (39,185) (54,041)
Other assets (122,909) (16,847)
Insurance obligation payable (253,044) (221,906)
Accrued payroll and taxes (224,723) 19,146
Payroll taxes payable 12,790 31,336
Accounts payable and accrued expenses 85,990 (155,639)
------------- -------------
Total adjustments 43,548 (4,216,523)
------------- -------------
(617,129) (3,903,024)
============= =============
Cash flows (used in) investing activities
Purchase of property and equipment (103,301) (229,527)
Proceeds from sales of shares of investment 5,466 --
Payments for business acquisitions -- (637,367)
Loans receivable -- (105,000)
------------- -------------
(97,835) (971,894)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock 193,250 --
Payments of loans payable (38,284) (6,520)
Payments of notes payable - acquisitions (105,000) (214,575)
Net proceeds from line of credit 147,546 3,350,342
Cash overdraft 286,584 --
Net proceeds from convertible debt 243,620 1,723,988
Redemption of convertible debt (145,242) --
Purchase of treasury stock -- (15,125)
------------- -------------
585,474 4,838,110
------------- -------------
Net change in cash and cash equivalents (129,490) (36,808)
Cash and cash equivalents - beginning 171,822 1,030,722
------------- -------------
Cash and cash equivalents - ending $ 42,332 $ 993,914
============ =============
Supplemental disclosure of cash paid
Interest $ 223,559 $ 57,037
Schedule of noncash investing and financing activities
Fair value of assets acquired $ -- $ 887,368
Less: cash paid -- (637,368)
Less: common stock and put options issued -- --
Liabilities assumed $ -- $ 250,000
============ =============
</Table>
See notes to condensed financial statements.
3
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash Flows - Continued
(Unaudited)
<Table>
<Caption>
Three Months Ended
December 31, 2001 December 31, 2000
----------------- -----------------
Issuance of common stock in exchange for notes payable $ -- $ 1,000,000
============ =============
Issuance of common stock in exchange for accounts payable and accrued expenses $ 59,000 $ --
============ =============
Issuance of common stock upon conversion of convertible debt $ 273,502 $ --
============ =============
Issuance of warrants for fees $ 55,000 $ --
============ =============
Cumulative dividends and accretion on preferred stock $ 124,000 $ --
============ =============
</Table>
See notes to condensed financial statements.
4
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STRATUS SERVICES GROUP, INC.
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed 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
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 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-K.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - LIQUIDITY
At December 31, 2001, the Company had limited liquid resources. Current
liabilities were $14,522,116 and current assets were $13,197,722. The difference
of $1,324,394 is a working capital deficit which is primarily the result of
losses incurred during each of the four quarters ended December 31, 2001.
Management believes that the liquidity position is currently manageable, but the
working capital deficit will remain until additional capital is raised.
On January 24, 2002 the Company entered into an agreement to sell the assets of
its Engineering Division (see Note 8). Approximately $1,796,000 of working
capital will be received by the Company from this transaction.
NOTE 3 - EARNINGS/LOSS PER SHARE
Basic "Earnings Per Share" ("EPS") excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted EPS assumes conversion of
dilutive options and warrants, and the issuance of common stock for all other
potentially dilutive equivalent shares outstanding. Dilutive shares were -0- and
402,791 for the three months ended December 31, 2001 and 2000 respectively.
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 90% of eligible
accounts receivable, as defined, not to exceed the lesser of $12 million or six
times the Company's tangible net worth (as defined). 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.
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The agreement expires on June 12, 2002. 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
At various times during the year ended September 30, 2001 and the three months
ended December 31, 2001, the Company issued convertible debentures through
private placements. The debentures bear interest at 6% a year, payable quarterly
and have a maturity date of five years from issuance. Each debenture is
convertible after 120 days from issuance into the number of shares of the
Company's 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 trading day immediately preceding the issuance date 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. The Company has the right to
prepay any of the debentures at any time at a prepayment rate that varies from
115% to 125% of the amount of the debenture depending on when the prepayment is
made.
The discount arising from the 75% beneficial conversion feature is charged to
interest expense during the period from the issuance of the debenture to the
earliest time at which the debenture becomes convertible.
During the three months ended December 31, 2001, the Company redeemed $123,394
of debentures resulting in a loss of approximately $11,000 which is included in
"Other income (expense)" in the condensed statement of operations.
NOTE 7 - PREFERRED STOCK
The difference between the carrying value and redemption value of the Series A
preferred stock is being accreted through a charge to additional paid-in-capital
through the June 30, 2008 redemption date.
The Series A preferred stock pays cumulative dividends at $.21 per share per
year, payable semi-annually, commencing on December 31, 2001 when and if
declared by the Board of Directors. Beginning on October 1, 2001 the preferred
stock shares are convertible at the option of the holder into shares of the
Company's common stock on a one-for-one basis. On June 30, 2008, the Company
will be required to redeem any shares of Series A preferred stock outstanding at
a redemption price of $3.00 per share together with accrued and unpaid
dividends, payable, at the Company's option, either in cash or in shares of
common stock.
NOTE 8 - DISCONTINUED OPERATIONS
On January 24, 2002 the Company entered into an agreement to sell the assets of
its Engineering Services Division ("SED") to SEA Consulting Services
Corporation. Concurrent with the execution of the agreement the Company
transferred a 30% interest in SED to Sahyoun, LLC, a company controlled by the
President of SED. The agreement provides for a purchase price of $2,200,000 of
which the Company will receive 80% ($1,760,000). In addition, the Company will
receive additional payments of $250,000 each on June 30, 2002 and December 31,
2002. Closing of the sale is contingent upon shareholder approval and receipt of
a fairness opinion by the Company.
The assets of SED which are being sold are as follows:
<Table>
<Caption>
December 31, 2001 September 30, 2001
----------------- ------------------
Property and equipment $ 185,000 $ 185,000
Other assets 14,610 14,610
----------------- ------------------
$ 199,610 $ 199,610
================= ===================
</Table>
The balance sheet and statement of operations have been reclassified to
reflect discontinued operations.
6
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NOTE 9 - INCOME TAXES
There was no provision for income taxes for the three months ended December 31,
2001, 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.
NOTE 10 - SUBSEQUENT EVENTS
a. Effective January 1, 2002, the Company purchased substantially all of
the tangible and intangible assets, excluding accounts receivable, of
seven offices of Provisional Employment Solutions, Inc. ("PES"). The
initial purchase price was $1,480,000, represented by a $1,100,000
promissory note and 400,000 shares of the Company's common stock. In
addition, PES is entitled to earnout payments of 15% of pretax profit
of the acquired business up to a total of $1.25 million or the
expiration of ten years, whichever occurs first. The note bears
interest at 6% a year and is payable over a ten-year period in equal
quarterly payments.
b. On January 17, 2002, the Company received a Nasdaq Staff Determination,
due to its failure to file its Form 10-K for the fiscal period ended
September 30, 2001, indicating the Company's noncompliance with the
requirement for continued listing set forth in Nasdaq's Marketplace
Rule 4310(c)(14), and that its securities are, therefore subject to
delisting. On January 24, 2002 the Company submitted a request for a
hearing to review the Staff Determination, staying the delisting. There
is no assurance the Panel will grant Stratus' request for continued
listing.
c. On January 29, 2002, $250,000 of convertible debt was converted into
520,800 shares of the Company's common stock.
7
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements relate to future
economic performance, plans and objectives of management for future operations
and projections of revenue and other financial items that are based on the
beliefs of our management, as well as assumptions made by, and information
currently available to, our management. The words "expect", "estimate",
"anticipate", "believe", "intend", and similar expressions are intended to
identify forward-looking statements. Such statements involve assumptions,
uncertainties and risks. If one or more of these risks or uncertainties
materialize or underlying assumptions prove incorrect, actual outcomes may vary
materially from those anticipated, estimated or expected. Among the key factors
that may have a direct bearing on our expected operating results, performance or
financial condition are economic conditions facing the staffing industry
generally; uncertainties related to the job market and our ability to attract
qualified candidates; uncertainties associated with our brief operating history;
our ability to raise additional capital; our ability to achieve and manage
growth; our ability to successfully identify suitable acquisition candidates,
complete acquisitions or integrate the acquired business into our operations;
our ability to attract and retain qualified personnel; our ability to develop
new services; our ability to cross-sell our services to existing clients; our
ability to enhance and expand existing offices; our ability to open new offices;
general economic conditions; and other factors discussed from time to time in
our filings with the Securities and Exchange Commission. These factors are not
intended to represent a complete list of all risks and uncertainties inherent in
our business. The following discussion and analysis should be read in
conjunction with the Condensed Financial Statements and notes appearing
elsewhere in this report.
INTRODUCTION
We provide a wide range of staffing, engineering and productivity consulting
services nationally through a network of offices located throughout the United
States. We recognize revenues based on hours worked by assigned personnel.
Generally, we bill our customers a pre-negotiated, fixed rate per hour for the
hours worked by our temporary employees. We are responsible for workers'
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and other general payroll related expenses for all of the temporary
employees we place. These expenses are included in the cost of revenue. Because
we pay our temporary employees only for the hours they actually work, wages for
our temporary personnel are a variable cost that increases or decreases in
proportion to revenues. Gross profit margin varies depending on the type of
services offered. Our Engineering Services Division typically generates higher
margins while Staffing Services division typically generates lower margins. In
some instances, temporary employees placed by us may decide to accept an offer
of permanent employment from the customer and thereby "convert" the temporary
position to a permanent position. Fees received from such conversions are
included in our revenues. Selling, general and administrative expenses include
payroll for management and administrative employees, office occupancy costs,
sales and marketing expenses and other general and administrative costs.
8
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RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On January 24, 2002 the Company entered into an agreement to sell the assets of
its Engineering Services Division ("SED") to SEA Consulting Services
Corporation. Concurrent with the execution of the agreement the Company
transferred a 30% interest in SED to Sahyoun, LLC, a company controlled by the
President of SED. The agreement provides for a purchase price of $2,200,000 of
which the Company will receive 80% ($1,760,000). In addition, the Company will
receive additional payments of $250,000 each on June 30, 2002 and December 31,
2002. Closing of the sale is contingent upon shareholder approval and receipt of
a fairness opinion by the Company.
CONTINUING OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2000
REVENUES. Revenues decreased 13.1% to $14,793,224 for the three months ended
December 31, 2001 from $17,024,807 for the three months ended December 31, 2000.
We experienced a reduction in revenue due primarily to a general economic
slowdown.
GROSS PROFIT. Gross profit decreased 30.3% to $2,673,902 for the three months
ended December 31, 2001 from $3,837,116 for the three months ended December 31,
2000. Gross profit as a percentage of revenues decreased to 18.1% for the three
months ended December 31, 2001 from 22.5% for the three months ended December
31, 2000. This decrease was a result to increased pricing competition of
staffing services. We also saw a deterioration in margins as a result of the
downturn in the economy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, not including depreciation and amortization, decreased
20.0% to $2,630,047 for the three months ended December 31, 2001 from $3,289,457
for the three months ended December 31, 2000. Selling, general and
administrative expenses, not including depreciation and amortization, as a
percentage of revenues decreased to 17.8% for the three months ended December
31, 2001 from 19.3% for the three months ended December 31, 2000. The decrease
is attributable to significant cost reductions implemented by us.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 73.0% to $271,440 for the three months ended December 31, 2001 from
$156,913 for the three months ended December 31, 2000. Depreciation and
amortization as a percentage of revenues increased to 1.8% for the three
months ended December 31, 2001 from 0.9% for the three months ended December
31, 2000. The increased dollar amount was primarily due to the amortization
of goodwill and other intangibles associated with acquisitions 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.
INTEREST AND FINANCING COSTS. Interest and financing costs increased to $512,043
for the three months ended December 31, 2001 from $189,069 for the three months
ended December 31, 2000. Included in the amounts for the three months ended
December 31, 2001 and 2000 is $36,535 and $122,211, respectively, which is the
portion of the discount on the beneficial conversion feature of convertible
debt. Also included in the amounts for the three months ended December 31, 2001
and 2000 is approximately $224,000 and $6,000, respectively, of amortization of
deferred financing costs related to the convertible debt.
INCOME TAX BENEFIT. Income tax benefit of $88,000 for the three months ended
December 31, 2001 is the result of a change in judgment about the realizability
of deferred tax assets.
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NET EARNINGS (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the
foregoing, we had a net loss attributable to common stockholders of $(857,943)
for the three months ended December 31, 2001 compared to net earnings
attributable to common stockholders of $313,499 for the three months ended
December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had limited liquid resources. Current liabilities were
approximately $14.5 million and current assets were approximately $13.2 million.
The difference of approximately $1.3 million is a working capital deficit which
is primarily the result of the losses we had during the last three quarters.
This situation has also made it difficult for us to make timely payments to our
vendors.
We believe that our liquidity position is currently manageable, but the working
capital deficit will remain until additional capital is raised.
On January 24, 2002 were entered into an agreement to sell the assets of our
Engineering Division. We estimate that approximately $1,796,000 of working
capital will be received by us and be available to eliminate our working capital
deficit if the sale is consummated. See Part II - Item 5 of this report.
Net cash used in operating activities was $617,129 and $3,903,024 in the three
months ended December 31, 2001 and 2000, 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 on December 12, 2000. 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 $97,835 and $971,894 in the three
months ended December 31, 2001 and 2000, respectively. Cash used for
acquisitions for the three months ended December 31, 2000 was $637,367. The
balance in both periods was primarily for capital expenditures.
Net cash provided in financing activities was $585,474 and $4,838,110 in the
three months ended December 31, 2001 and 2000, respectively. We had net
borrowings of $147,546 and $3,350,342 under the line of credit obtained on
December 12, 2000 in the three months ended December 31, 2001 and 2000,
respectively. We also received net proceeds less redemptions of $98,378 and
$1,723,988 from the issuance of convertible debt in the three months ended
December 31, 2001 and 2000, respectively.
Our principal uses of cash are to fund temporary employee payroll expense and
employer related payroll taxes; investment in capital equipment; start-up
expenses of new offices; expansion of services offered; and costs relating to
other transactions such as acquisitions. Temporary employees are paid weekly.
At various times during the year ended September 30, 2001 and the three months
ended December 31, 2001, we issued convertible debentures through private
placements. The debentures bear interest at 6% a year, payable quarterly and
have a maturity date of five years from issuance. Each debenture is convertible
after 120 days from issuance into the number of shares of our 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 trading day
immediately preceding the issuance date 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. We have the right to prepay any of the debentures at any
time at a prepayment rate that varies from 115% to 125% of the amount of the
debenture depending on when the prepayment is made.
The discount arising from the 75% beneficial conversion feature is charged to
interest expense during the period from the issuance of the debenture to the
earliest time at which the debenture becomes convertible.
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 90% 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
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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. As of December 31, 2001, $7,454,127 was outstanding under the credit
agreement. The agreement expires June 12, 2002.
Because we have a working capital deficit, we need to raise additional capital
to continue our operations. We anticipate that the sale of the Engineering
Services Division, if completed, will provide the capital necessary to eliminate
our working capital deficit. In addition, we are currently seeking other sources
of capital. There can be no assurance that we will be able to obtain additional
capital at acceptable rates.
SEASONALITY
Our business follows the seasonal trends of our customers business.
Historically, Staffing Services has experienced lower revenues in the first
calendar quarter with revenues accelerating during the second and third calendar
quarters and then 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.
IMPACT OF INFLATION
We believe that since our inception, inflation has not had a significant impact
on our results of operations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 141
also requires that acquired intangible assets be recognized as assets apart from
goodwill if they meet one of the two specified criteria. Additionally, the
statement adds certain disclosure requirements to those required by APB 16,
including disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Use of the pooling-of-interests method is
prohibited. The adoption of SFAS No. 141 did not have an impact on our financial
condition or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.
Under SFAS No. 142, entities are required to determine the useful life of other
intangible assets and amortize the value over the useful life. If the useful
life is determined to be indefinite, no amortization will be recorded. For
intangible assets recognized prior to the adoption of SFAS No. 142, the useful
life should be reassessed. Other intangible assets are required to be tested for
impairment in a manner similar to goodwill. At December 31, 2001, the Company's
goodwill was approximately $7,815,000, and annual amortization of such goodwill
was approximately $341,000. The Company expects to adopt SFAS No. 142 during its
first fiscal quarter of fiscal 2003. Because of the extensive effort required to
comply with the remaining provisions of SFAS Nos.
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141 and 142, we cannot reasonably estimate the impact on its financial
statements of these provisions beyond discontinuing amortization.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We are subject to the risk of fluctuating interest rates in the ordinary course
of business for borrowings under our Loan and Security Agreement with Capital
Tempfunds, Inc. This credit agreement provides for a line of credit up to 90% 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 are also exposed to equity price risk on our investment in
enterpriseAsia.com, a publicly-traded foreign company. We do not attempt to
reduce or eliminate our market exposure on this investment.
We believe that our business operations are not exposed to market risk relating
to foreign currency exchange risk or commodity price risk.
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PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
6% DEBENTURES
During the Quarter ended December 31, 2001, we sold an additional $408,050 of
our 6% convertible debentures, which become due December 1, 2005, but may be
prepaid in whole or in part at any time upon ten (10) trading days notice.
Prepayment may be made in an amount equal to 115% of the aggregate principal
amount that we elect to prepay if the prepayment occurs within 120 days of date
of purchase (the "Original Issue Date"), in an amount equal to 120% of the
aggregate principal amount that we elect 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 we elect to prepay
if the prepayment occurs 181 days or more after the Original Issue Date.
The 6% debentures require us to pay interest to the holders thereof on a
quarterly basis at a rate of 6% per annum, in cash or at our election, of 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.
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 us to pay cash to a holder of 6% debentures in an amount equal to
the aggregate principal amount of the 6% debentures than 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.
We received net proceeds of approximately $244,000 from these sales, which
was used to pay outstanding indebtedness and for general working capital
purposes. The offering was conducted under Section 4(2) of and Rule 506 under
the Securities Act of 1933.
During the period 6% Convertible Debenture holders representing $375,000 amount
of principal exercised their right to convert their Debentures into common
stock. Conversion prices ranged from $0.40 to $0.60 and resulted in the issuance
of 800,500 shares of our Common Stock.
PRIVATE PLACEMENTS
During the Quarter ended December 31, 2001 we sold 266,670 shares of our
Common Stock at $0.75 per share through a Private Placement. We have an
obligation to register the shares for resale over a staggered 6-month period.
This offering was conducted under Section 4(2) of and Rule 506 under the
Securities Act of 1933.
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WARRANTS
In connection with the private placement, we granted five (5) year warrants to
the placement agents in the private offering. The placement agents received five
(5) year warrants acquiring 26,667 shares of common stock at an exercise price
of $0.75 per share.
In October 2001, we granted five (5) year warrants to a consultant to acquire
200,000 shares of common stock at an exercise price of $1.00 per share in
connection with consulting services rendered.
The issuance of the warrants was made under Section 4(2) of and Rule 506
under the Securities Act of 1933.
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ITEM 5 - OTHER INFORMATION
In January 2002, we entered into an agreement (the "Asset Purchase Agreement")
to sell the assets of our Engineering Services Division to SEA Consulting
Services Corporation (the "Purchaser"). Contemporaneously with the execution of
the agreement, we contributed the assets of the Engineering Services Division to
SEP LLC, a New Jersey limited liability company of which the Company was the
sole member. At the same time, we transferred a thirty percent (30%) interest in
SEP LLC to Charles Sahyoun, the President of the Engineering Services Division,
who contributed the interest to Sahyoun Holdings LLC, a company wholly owned by
him. We transferred this thirty percent (30%) interest to Mr. Sahyoun in
consideration of, among other things, (i) his agreement to cancel options to
acquire 385,448 shares of Common Stock having exercise prices ranging from $1.10
to $6.00, (ii) his contributions to the development of the business of the
Engineering Services Division, (iii) his agreement to guaranty a certain level
of contingent payments from the Purchaser and (iv) his agreement to indemnify us
in the event we sustain losses attributable to breaches of certain
representations and warranties contained in the Asset Purchase Agreement or our
obligation to indemnify the Purchaser for losses and damages arising out of
certain events prior to closing.
The purchase price for the assets consists of (a) an initial payment (the "First
Payment") of $2,200,000 (which amount may be increased or decreased depending
upon whether the net value of the assets being sold is greater or less than
$200,000 on the date of closing), (b) a second payment (the "Second Payment") of
$1,000,000 (which amount may be increased or decreased depending upon whether
the Purchaser's profit for the six month period ending June 30, 2002 is greater
or less than $600,000), (c) a third payment (the "Third Payment") of $1,000,000
(which amount may be increased or decreased depending upon whether the
Purchaser's profit for the six month period ending December 31, 2002 is greater
or less than $600,000) and (d) subsequent annual payments ("Contingent
Payments") based upon a multiple of the successive annual increases, if any, in
the Purchaser's annual profit during the five year period ending December 31,
2007.
We will receive (a) 80% of the First Payment after the satisfaction of the
expenses and liabilities of SEP LLC and (b) $250,000 of each of the Second
Payment and Third Payment (which payments have been guaranteed by Mr. Sahyoun
and Sahyoun Holdings LLC regardless of the total amount of such payments made by
the Purchaser). We will not receive any of the Contingent Payments. Sahyoun
Holdings LLC will be entitled to receive all of the First Payment, Second
Payment and Third Payment not paid to us, and all of the Contingent Payments.
The closing of the proposed asset sale is subject to the approval of the
Company's stockholders, the receipt of a fairness opinion and other customary
conditions.
We expect to use the proceeds of the asset sale for working capital purposes and
to reduce indebtedness, including trade payables and a $600,000 promissory note
which was originally due in January 2002. The holder of this note has agreed to
forbear from exercising remedies under the note until April 2002.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement dated December 27, 2001, by and
between Stratus Services Group, Inc. and Provisional
Employment Solutions, Inc. (1)
10.1 Non-Competition Agreement dated December 27, 2001, between
Stratus Services Group, Inc. and Provisional Employment
Solutions, Inc. (1)
10.2 Promissory Note and Security Agreement in the amount of
$1,100,000, dated as of December 27, 2001, issued by Stratus
Services Group, Inc. to Provisional Employment Solutions, Inc.
(1)
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(b) Reports on Form 8-K
On October 5, 2001, the Company filed Form 8-K/A with the
Securities and Exchange Commission which contained financial
information related to its acquisition of certain assets of
Source One Personnel, Inc.
On January 2, 2002, the Company filed Form 8-K with the
Securities and Exchange Commission reflecting the December 27,
2001 purchase of certain assets of Provisional Employment
Solutions, Inc.
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Footnote 1 Incorporated by reference to similarly numbered Exhibits
filed with Form 8-K (Commission File No. 001-15789) as filed
with the Securities and Exchange Commission on January 2,
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATUS SERVICES GROUP, INC.
Date: February 13, 2002 By: /s/ Joseph J. Raymond
--------------------------------------------
Joseph J. Raymond
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: February 13, 2002 By: /s/ Michael A. Maltzman
--------------------------------------------
Michael A. Maltzman
Chief Financial Officer
(Principal Financial and Accounting Officer)
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