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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 March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to
Commission file number 001-15789
STRATUS SERVICES GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-3499261
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Craig Road, Suite 201, Manalapan, New Jersey 07726
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(732) 866-0300
- --------------------------------------------------------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of May 14, 2002, 11,522,567 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>
March 31, 2002 September 30, 2001
-------------- ------------------
(Unaudited)
Current assets
Cash and cash equivalents $ 1,087,419 $ 171,822
Accounts receivable - less allowance for doubtful
accounts of $542,000 and $551,000 10,216,986 8,540,112
Unbilled receivables 1,426,828 1,566,417
Other receivables 500,000 --
Prepaid insurance 1,188,974 1,436,278
Investment 670,000 1,166,046
Prepaid expenses and other current assets 135,626 77,146
Net assets of discontinued Engineering Division -- 199,610
------------ ------------
15,225,833 13,157,431
Property and equipment, net of accumulated depreciation 1,449,556 1,427,216
Intangible assets, net of accumulated amortization 8,578,758 7,078,428
Deferred financing costs, net of accumulated amortization 22,261 454,878
Other assets 137,044 150,205
------------ ------------
$ 25,413,452 $ 22,268,158
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 111,184 $ 347,289
Notes payable - acquisitions (current portion) 1,456,331 1,110,726
Line of credit 8,030,110 7,306,581
Insurance obligation payable 74,104 549,460
Accounts payable and accrued expenses 4,488,692 3,421,796
Accrued payroll and taxes 1,537,654 1,461,738
Payroll taxes payable 545,049 306,230
------------ ------------
16,243,124 14,503,820
Loans payable (net of current portion) 290,782 291,243
Notes payable - acquisition (net of current portion) 2,015,473 1,403,847
Convertible debt 40,000 1,125,399
------------ ------------
18,589,379 17,324,309
Series A voting redeemable convertible stock, $.01 par value, 1,458,933 shares
issued and outstanding, liquidation preference of $4,376,799 (including
unpaid dividends of $39,000) -- 2,792,000
Temporary equity - put options 823,000 869,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized
Series A voting redeemable convertible preferred stock, $.01 par value,
1,458,933 shares issued and outstanding, liquidation preference of
$4,376,799 (including unpaid dividends of $193,000) 3,042,000 --
Series B non-voting convertible preferred stock, $.01 par value, 500,000
shares authorized, 263,300 and -0- shares issued and outstanding,
liquidation preference of $1,316,499 1,116,499 --
Common stock, $.01 par value, 25,000,000 shares authorized, 11,522,567 and
8,217,764 shares issued and outstanding 115,226 82,178
Additional paid-in capital 13,306,513 11,992,685
Accumulated deficit (9,898,135) (9,592,014)
Accumulated other comprehensive loss (1,681,030) (1,200,000)
------------ ------------
Total stockholders' equity 6,001,073 1,282,849
------------ ------------
$ 25,413,452 $ 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 Six Months Ended
March 31, March 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 17,505,428 $ 12,774,199 $ 32,298,652 $ 29,798,886
Cost of revenues 14,836,750 10,324,917 26,956,072 23,512,488
------------ ------------ ------------ ------------
Gross Profit 2,668,678 2,449,282 5,342,580 6,286,398
Selling, general and administrative expenses 3,305,380 3,813,202 6,206,867 7,259,572
------------ ------------ ------------ ------------
(Loss) from continuing operations (636,702) (1,363,920) (864,287) (973,174)
------------ ------------ ------------ ------------
Other income (expenses)
Finance charges -- -- -- (61,291)
Interest and financing costs (451,564) (786,437) (963,607) (975,506)
Other income (expense) 35,825 (4,520) 41,510 3,171
------------ ------------ ------------ ------------
(415,739) (790,957) (922,097) (1,033,626)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations
before income taxes (1,052,441) (2,154,877) (1,786,384) (2,006,800)
Income taxes (benefit) -- -- -- (88,000)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations (1,052,441) (2,154,877) (1,786,384) (1,918,800)
Discontinued operations - earnings (loss) from
discontinued Engineering Division (312,059) 2,229 (238,793) 79,651
Gain on sale of Engineering Division 1,759,056 -- 1,759,056 --
------------ ------------ ------------ ------------
Net earnings (loss) 394,556 (2,152,648) (266,121) (1,839,149)
Dividends and accretion on preferred stock (166,000) -- (290,000) --
------------ ------------ ------------ ------------
Net earnings (loss) attributable to common stockholders $ 228,556 $ (2,152,648) $ (556,121) $ (1,839,149)
============ ============ ============ ============
Net earnings (loss) per share attributable to common
stockholders
Basic:
(Loss) from continuing operations $ (.12) $ (.38) $ (.22) $ (.34)
Earnings from discontinued operations .14 -- .16 .01
------------ ------------ ------------ ------------
Net earnings (loss) $ .02 $ (.38) $ (.06) $ (.33)
============ ============ ============ ============
</Table>
See notes to condensed financial statements.
2
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Operations - Continued
(Unaudited)
<Table>
Diluted:
(Loss) from continuing operations $ (.12) $ (.38) $ (.22) $ (.34)
Earnings from discontinued operations .14 -- .16 .01
-------------- ------------- ------------- -------------
Net earnings (loss) $ .02 $ (.38) $ (.06) $ (.33)
============== ============= ============= =============
Weighted average shares, outstanding per common share
Basic 10,382,034 5,613,319 9,583,750 5,662,158
Diluted 10,382,034 5,613,319 9,583,750 5,662,158
</Table>
See notes to condensed financial statements.
3
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
Six Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Cash flows from operating activities
Net earnings (loss) from continuing operations $(1,826,384) $(1,918,800)
Net earnings from discontinued operations 1,520,263 79,651
Adjustments to reconcile net earnings (loss) to net cash used
by operating activities
Depreciation 265,971 179,632
Amortization 272,024 162,115
Provision for doubtful accounts 208,000 317,000
Deferred financing costs amortization 388,978 67,442
Gain on sale of Engineering Division (1,759,056) --
Loss on sales of shares of investment 9,550 --
Gain on extinguishment of convertible debt (3,277) --
Deferred taxes (benefit) -- (88,000)
Interest expense amortization for the intrinsic value of the
beneficial conversion feature of convertible debentures 104,535 650,362
Accrued interest 92,021 39,832
Compensation - stock options -- 29,535
Changes in operating assets and liabilities
Due to/from factor/accounts receivable (1,745,285) (1,075,807)
Prepaid insurance 247,304 236,091
Prepaid expenses and other current assets (58,480) (68,802)
Other assets 12,836 (30,110)
Insurance obligation payable (475,356) (271,993)
Accrued payroll and taxes 75,916 (2,124)
Payroll taxes payable 238,819 171,346
Accounts payable and accrued expenses 943,141 588,875
----------- -----------
Total adjustments (1,182,359) 905,394
----------- -----------
(1,488,480) (933,755)
=========== ===========
Cash flows (used in) investing activities
Purchase of property and equipment (246,399) (401,631)
Proceeds from sales of shares of investment 5,466 --
Payments for business acquisitions (181,920) (975,486)
Net proceeds from sale of Engineering Division 1,459,079 --
Loans receivable -- (105,000)
----------- -----------
1,036,226 (1,482,117)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock 222,083 --
Proceeds from issuance of Series B Preferred Stock 282,500 --
Proceeds from loans payable 321,195 60,000
Payments of loans payable (61,566) (27,428)
Payments of notes payable - acquisitions (142,769) (291,739)
Net proceeds from line of credit 723,529 766,816
Cost in connection with common stock issued for acquisition (2,000) --
Net proceeds from convertible debt 326,871 1,652,864
Redemption of convertible debt (301,992) --
Purchase of treasury stock -- (265,125)
----------- -----------
1,367,851 1,895,388
----------- -----------
Net change in cash and cash equivalents 915,597 (520,484)
Cash and cash equivalents - beginning 171,822 1,030,722
----------- -----------
Cash and cash equivalents - ending $ 1,087,419 $ 510,238
=========== ===========
</Table>
See notes to condensed financial statements.
4
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STRATUS SERVICES GROUP, INC.
Condensed Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
Six Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Supplemental disclosure of cash paid
Interest $ 437,693 $ 285,586
=========== ===========
Schedule of noncash investing and financing activities
Fair value of assets acquired $ 1,814,355 $ 1,125,486
Less: cash paid (334,355) (800,486)
Less: common stock and put options issued (380,000) --
----------- -----------
Liabilities assumed $ 1,100,000 $ 325,000
=========== ===========
Issuance of common stock in exchange for notes payable $ -- $ 1,000,000
=========== ===========
Issuance of Series B Preferred Stock in exchange for convertible and other debt $ 1,106,499 $ --
=========== ===========
Purchase of treasury stock in exchange for loans $ -- $ 402,000
=========== ===========
Issuance of common stock in exchange for accounts payable and accrued expenses $ 59,000 $ --
=========== ===========
Issuance of common stock upon conversion of convertible debt $ 736,003 $ --
=========== ===========
Issuance of warrants for fees $ 55,000 $ --
=========== ===========
Cumulative dividends and accretion on preferred stock $ 290,000 $ --
=========== ===========
</Table>
See notes to condensed financial statements.
5
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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 March 31, 2002, the Company had limited liquid resources. Current liabilities
were $16,243,124 and current assets were $15,225,833. The difference of
$1,017,291 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.
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. There were no dilutive
shares for the three and six months ended March 31, 2002 and 2001.
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% 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. 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).
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NOTE 6 - CONVERTIBLE DEBT
At various times during the year ended September 30, 2001 and the six months
ended March 31, 2002, the Company issued convertible debentures through private
placements. The debentures bore interest at 6% a year, payable quarterly and had
a maturity date of five years from issuance. Each debenture was 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 had the right to prepay any of the
debentures at any time at a prepayment rate that varied from 115% to 125% of the
amount of the debenture depending on when the prepayment was 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 six months ended March 31, 2002, the Company redeemed $258,394 of
debentures resulting in a gain of approximately $3,000 which is included in
"Other income (expense)" in the condensed statement of operations.
In March 2002, the Company entered into an agreement with the holder (the
"Debenture Holder") of all but $40,000 of the outstanding debentures pursuant to
which it issued to the Debenture Holder 231,300 shares of Series B Convertible
Preferred Stock (see Note 7) in exchange for (i) $456,499 aggregate principal
amount of Debentures, (ii) the cancellation of a $400,000 promissory note
previously issued by the Company to the Debenture Holder and (iii) $300,000 in
cash. As a result, only $40,000 of Debentures remains outstanding.
NOTE 7 - PREFERRED STOCK
a. SERIES A
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. For purposes of determining the number of shares which the Company
will be required to issue if it chooses to pay the redemption price in shares of
Common Stock, the Common Stock will have a value equal to the average closing
price of the Common Stock during the five trading days immediately preceding the
date of redemption.
At the Company's Annual Meeting of Shareholders held on March 28, 2002, the
stockholders approved the issuance by the Company of the full number of shares
of common stock which may be issued by the Company in connection with the
conversion of the Series A Preferred Stock. Accordingly, the Series A Preferred
Stock was reclassified to permanent equity.
b. SERIES B
The shares of Series B Preferred Stock have a stated value of $5 per share.
Holders of the Series B Preferred Stock are entitled to cumulative dividends at
a rate of 6% of the stated value per annum, payable when and as declared by the
Board of Directors. Dividends may be paid in cash or, at the option of the
Company, in shares of Common Stock, under certain circumstances. Holders of
Series B Preferred Stock are entitled to a liquidation preference of $5.00 per
share plus accrued dividends. The Series B Preferred Stock is convertible into
shares of Common Stock at the option of the holder at any time. The number of
shares of Common Stock into which each
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share of Series B Convertible Preferred Stock is convertible is determined by
dividing the aggregate liquidation preference of the shares being converted
by the lesser of (i) $4.65 or (ii) 75% of the average closing price of the
Common Stock during the trading day preceding the date of conversion. The
discount arising from the beneficial conversion feature is being treated as a
dividend from the date of issuance to the earliest conversion date. If the
Company's Common Stock is reinstated for trading on the Nasdaq Stock Market,
the Company will be required to seek approval from its stockholders of a
proposal to approve the issuance of shares of Common Stock upon conversion of
the Series B Preferred Stock in excess of the limits imposed by the rules of
the Nasdaq Stock Market.
NOTE 8 - ACQUISITION
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. There was an additional $334,355 of costs
incurred in connection with the acquisitions. 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.
The following table summarizes the fair value of the assets acquired at the date
of acquisition based upon a third-party valuation of certain intangible assets:
Property and equipment $ 42,000
Intangible assets 468,596
Goodwill 1,303,759
----------
$1,814,355
==========
Of the $468,596 of intangible assets. $85,880 was assigned to a
covenant-not-to-compete and $382,716 was assigned to the customer list. The
intangible assets are being amortized over their estimated useful life of two to
four years. Goodwill is not being amortized under the provision of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
All of the goodwill is expected to be deductible for tax purposes.
NOTE 9 - DISCONTINUED OPERATIONS - SALE OF ENGINEERING DIVISION
On January 24, 2002 the Company entered into an agreement to sell the assets of
its Engineering Services Division (the "Division") to SEA Consulting Services
Corporation ("SEA"). Concurrent with the execution of the agreement the Company
transferred a 30% interest in the Division to Sahyoun, LLC, a company controlled
by Charles Sahyoun, the President of the Division. The agreement provided for a
purchase price of $2,200,000 of which the Company was to receive 80%
($1,760,000). In addition, the Company was to receive additional payments of
$250,000 each on June 30, 2002 and December 31, 2002. Closing of the sale was
contingent upon shareholder approval and receipt of a fairness opinion by the
Company.
On March 28, 2002, the Company completed the sale of the assets of the Division
to SEA pursuant to the Asset Purchase Agreement dated as of January 24, 2002
among the Company, SEP, LLC ("SEP"), Charles Sahyoun, Sahyoun Holdings LLC and
SEA. The transaction was approved by a vote of the Company's stockholders at the
Company's annual meeting of stockholders held on March 28, 2002.
The assets of the Division had been transferred to SEP, a limited liability
company in which the Company owns a 70% interest, at the time of the execution
of the Asset Purchase Agreement. Sahyoun Holdings, LLC, a company wholly owned
by Charles Sahyoun, the President of the Division, owns the remaining 30%
interest in SEP.
Under the terms of the Asset Purchase Agreement, the Company received an initial
cash payment of $1,560,000, which represented 80% of the initial $2,200,000
installment of the purchase price payable to SEP after the satisfaction of
certain liabilities and expenses of SEP. Sahyoun Holdings, LLC received the
other 20% of the initial net installment of the purchase price, or $440,000.
8
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The Asset Purchase Agreement requires SEA to make the following additional
payments to SEP:
(a) A payment of $1 million, plus or minus the amount by which SEA's profit
for the six months ending June 30, 2002, as determined pursuant to the
Asset Purchase Agreement, is greater or less than $600,000 (the "Second
Payment");
(b) A payment of $1 million, plus or minus the amount by which SEA's profit
for the six months ending December 31, 2002, as determined pursuant to
the Asset Purchase Agreement, is greater or less than $600,000 (the
"Third Payment");
(c) Five subsequent annual payments (the "Subsequent Payments") which will be
based upon a multiple of the annual successive increases, if any, in
SEA's profit during the five year period beginning on January 1, 2003 and
ending December 31, 2007.
Pursuant to an allocation and indemnity agreement entered into by the Company,
Sahyoun Holdings, LLC and Charles Sahyoun (the "Allocation and Indemnity
Agreement"), the Company is entitled to $250,000 of each of the Second Payment
and Third Payment. Sahyoun Holdings LLC and Charles Sahyoun have guaranteed the
$250,000 payments to be made to the Company from each of the Second Payment and
Third Payment, regardless of the operating results of SEA. Upon its receipt of
the payments required under the Allocation and Indemnity Agreement, the
Company's interest in SEP will terminate and the Company will not be entitled to
any additional payments under the Asset Purchase Agreement, including the
Subsequent Payments. Sahyoun Holdings LLC will be entitled to all amounts paid
to SEP under the Asset Purchase Agreement other than $500,000 of payments
payable to the Company pursuant to the Allocation and Indemnity Agreement and
guaranteed by Charles Sahyoun and Sahyoun Holdings, LLC as described above.
On April 15, 2002, by letter agreement between the Company, Sahyoun Holdings,
LLC and Joseph J. Raymond, Sr., the Chairman and Chief Executive Officer of the
Company, the parties agreed to a modification of the Allocation and Indemnity
Agreement. Per that letter agreement, Sahyoun Holdings, LLC provided the Company
with $200,000 cash in exchange for the Company's short-term, 90-day demand note,
due and payable by August 1, 2002 in the amount of $250,000. Such $250,000 shall
be payable by the Company from its share of the Second Payment currently
scheduled to be paid to the Company from distributions to be received by SEP,
LLC from SEA.
The balance sheet as at September 30, 2001 and the statement of operations have
been reclassified to reflect discontinued operations.
NOTE 9 - INCOME TAXES
There was no provision for income taxes for the three and six months ended March
31, 2002, because the Company has net operating loss carryforwards with a
corresponding valuation allowance against them. The income tax benefit for the
six months ended March 31, 2001, is the result of a decrease in the valuation
allowance.
9
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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; our ability to continue to maintain workers'
compensation, general liability, and other insurance coverages; the continued
cooperation of our creditors; 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 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. 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.
10
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RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS/ACQUISITION OR DISPOSITION OF ASSETS
On January 24, 2002 we entered into an agreement to sell the assets our
Engineering Services Division (the "Division") to SEA Consulting Services
Corporation ("SEA"). Concurrent with the execution of the agreement we
transferred a 30% interest in the Division to Sahyoun, LLC, a company controlled
by the President of the Division. The agreement provided for a purchase price of
$2,200,000 of which we were to receive 80% ($1,760,000). In addition, we were to
receive additional payments of $250,000 each on June 30, 2002 and December 31,
2002. Closing of the sale was contingent upon shareholder approval and receipt
of a fairness opinion by the Company.
On March 28, 2002, we completed the sale of the assets of the Division to SEA
pursuant to the Asset Purchase Agreement dated as of January 24, 2002 among us,
SEP, LLC ("SEP"), Charles Sahyoun, Sahyoun Holdings LLC and SEA. The transaction
was approved by a vote of our stockholders at the our annual meeting of
stockholders held on March 28, 2002.
The assets of the Division had been transferred to SEP, a limited liability
company in which the Company owns a 70% interest, at the time of the execution
of the Asset Purchase Agreement. Sahyoun Holdings, LLC, a company wholly owned
by Charles Sahyoun, the President of the Division, owns the remaining 30%
interest in SEP.
Under the terms of the Asset Purchase Agreement, we received an initial cash
payment of $1,560,000, which represented 80% of the initial $2,200,000
installment of the purchase price payable to SEP after the satisfaction of
certain liabilities and expenses of SEP. Sahyoun Holdings, LLC received the
other 20% of the initial net installment of the purchase price, or $440,000.
The Asset Purchase Agreement requires the Purchaser to make the following
additional payments to SEP:
(d) A payment of $1 million, plus or minus the amount by which SEA's profit
for the six months ending June 30, 2002, as determined pursuant to the
Asset Purchase Agreement, is greater or less than $600,000 (the "Second
Payment");
(e) A payment of $1 million, plus or minus the amount by which the SEA's
profit for the six months ending December 31, 2002, as determined
pursuant to the Asset Purchase Agreement, is greater or less than
$600,000 (the "Third Payment");
(f) Five subsequent annual payments (the "Subsequent Payments") which will be
based upon a multiple of the annual successive increases, if any, in the
SEA's profit during the five year period beginning on January 1, 2003 and
ending December 31, 2007.
Pursuant to an allocation and indemnity agreement entered into by us, Sahyoun
Holdings, LLC and Mr. Sahyoun (the "Allocation and Indemnity Agreement"), we are
entitled to $250,000 of each of the Second Payment and Third Payment. Sahyoun
Holdings LLC and Mr. Sahyoun have guaranteed the $250,000 payments to be made to
us from each of the Second Payment and Third Payment, regardless of the
operating results of the Purchaser. Upon its receipt of the payments required
under the Allocation and Indemnity Agreement, our interest in SEP will terminate
and we will not be entitled to any additional payments under the Asset Purchase
Agreement, including the Subsequent Payments. Sahyoun Holdings LLC will be
entitled to all amounts paid to SEP under the Asset Purchase Agreement other
than $500,000 of payments payable to us pursuant to the Allocation and Indemnity
Agreement and guaranteed by Charles Sahyoun and Sahyoun Holdings, LLC as
described above. Under the terms of the Asset Purchase Agreement, Sahyoun
Holdings LLC will not be entitled to any Subsequent Payments or its allocable
share of the Second and Third Payments if Mr. Sahyoun's employment with SEA
ceases for any reason other than death or permanent disability prior to December
31, 2003.
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Mr. Sahyoun and Sahyoun Holdings LLC have jointly and severally agreed to
indemnify us from and against all losses, damages, costs and expenses arising
out of or relating to (i) breaches of any covenants or agreements required to be
performed or complied with by Mr. Sahyoun or Sahyoun Holdings LLC prior to the
closing of the sale of the Division (the "Closing"); (ii) breaches of any
agreements, certificates, documents or instruments executed by Mr. Sahyoun or
Sahyoun Holdings LLC delivered pursuant to or in connection with the Asset
Purchase Agreement prior to or at Closing; (iii) the breach or fulfillment of
certain representations and warranties set forth in the Asset Purchase
Agreement; (iv) our negligence or the negligence of the Division in conducting
the business of the Division, to the extent that any such losses related to a
claim of a party other than us; (v) illegal conduct or willful misconduct on the
part of the employees of the Division; and (vi) breaches prior to the Closing of
any contracts pertaining to the provision of engineering services by the
Division to a party other than us. The obligations of Mr. Sahyoun and Sahyoun
Holdings LLC to provide indemnity apply only to the extent that our losses are
not covered by insurance.
We have agreed to indemnify Mr. Sahyoun and Sahyoun Holdings LLC from and
against all losses, damages, costs and expenses arising out of or related to (i)
breaches of any covenants or agreements required to be performed or complied
with by us prior to the Closing, (ii) breaches of any agreements, certificates,
documents or instruments executed by us prior to or at the Closing, and (iii)
the breach or nonfulfillment of certain representations and warranties set forth
in the Asset Purchase Agreement.
The Asset Purchase Agreement provides that Mr. Sahyoun will be entitled to an
annual salary of $175,000 from the Purchaser and, provided that the Purchaser
meets certain earnings tests, a bonus of $25,000 on each June 30 and December 31
during the term of his employment.
On April 15, 2002, by letter agreement between us, Sahyoun Holdings, LLC and
Joseph J. Raymond, Sr., the Chairman and Chief Executive Officer of the Company,
the parties agreed to a modification of the Allocation and Indemnity Agreement.
Per that letter agreement, Sahyoun Holdings, LLC provided us with $200,000 cash
in exchange for our short-term, 90-day demand note, due and payable by August 1,
2002 in the amount of $250,000. Such $250,000 shall be payable by us from our
share of the Second Payment currently scheduled to be paid to us from
distributions to be received by SEP, LLC from SEA.
CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUES. Revenues increased 37.0% to $17,505,428 for the three months ended
March 31, 2002 from $12,774,199 for the three months ended March 31, 2001.
Substantially all of the increase was a result of the acquisition of seven
offices of Provisional Employment Solutions, Inc. ("PES") on January 1, 2002.
Revenues from other operations were basically flat due primarily to the general
economic slowdown.
GROSS PROFIT. Gross profit increased 9.0% to $2,668,678 for the three months
March 31, 2002 from $2,449,282 for the three months ended March 31, 2001. Gross
profit as a percentage of revenues decreased to 15.2% for the three months ended
March 31, 2002 from 19.2% for the three months ended March 31, 2001. The
increased dollar amount was a result of the acquisition on January 1, 2002. The
decrease in the percentage 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
15.8% to $3,084,964 for the three months ended March 31, 2002 from $3,662,113
for the three months ended March 31, 2001. Selling, general and administrative
expenses, not including depreciation and amortization, as a percentage of
revenues decreased to 17.6% for the three months ended March 31, 2002 from 28.7%
for the three months ended March 31, 2001. The decrease is attributable to
significant cost reductions implemented by us.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
45.9% to $220,416 for the three months ended March 31, 2002 from $151,089 for
the three months ended March 31, 2001. Depreciation
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and amortization as a percentage of revenues increased to 1.3% for the three
months ended March 31, 2002 from 1.2% for the three months ended March 31, 2001.
The increase was primarily due to the amortization of goodwill and other
intangibles associated with acquisitions and the impact of increased capital
expenditures.
INTEREST AND FINANCING COSTS. Interest and financing costs decreased to $451,564
for the three months ended March 31, 2002 from $786,437 for the three months
ended March 31, 2001. Included in the amounts for the three months ended March
31, 2002 and 2001 is $68,000 and $528,151, respectively, which is the portion of
the discount on the beneficial conversion feature of convertible debt.
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the foregoing, we
had a net loss attributable to common stockholders of ($1,218,441) for the three
months ended March 31, 2002 compared to net loss attributable to common
stockholders of ($2,154,877) for the three months ended March 31, 2001.
SIX MONTHS ENDED MARCH 31, 2002 COMPARED TO SIX MONTHS ENDED MARCH 31, 2001
REVENUES. Revenues increased 8.4% to $32,298,652 for the six months ended March
31, 2002 from $29,798,886 for the six months ended March 31, 2001. The increase
from the acquisition on January 1, 2002 was significantly offset by a reduction
in revenue from other operations, particularly in the first quarter of fiscal
2002 due primarily to the general economic slowdown.
GROSS PROFIT. Gross profit decreased 15.0% to $5,342,580 for the six months
ended March 31, 2002 from $6,286,398 for the six months ended March 31, 2001.
Gross profit as a percentage of revenues decreased to 16.5% for the six months
ended March 31, 2002 from 21.1% for the six months ended March 31, 2001. This
decrease was a result of 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
17.5% to $5,761,360 for the six months ended March 31, 2002 from $6,981,718 for
the six months ended March 31, 2001. Selling, general and administrative
expenses, not including depreciation and amortization, as a percentage of
revenues decreased to 17.8% for the six months ended March 31, 2002 from 23.4%
for the six months ended March 31, 2001. The decrease is attributable to
significant cost reductions implemented by us.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
37.6% to $445,507 for the six months ended March 31, 2002 from $277,854 for the
six months ended March 31, 2001. Depreciation and amortization as a percentage
of revenues increased to 1.4% for the six months ended March 31, 2002 from 0.9%
for the six months ended March 31, 2001. The increase 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 decreased to $963,707
for the six months ended March 31, 2002 from $975,506 for the six months ended
March 31, 2001. Included in the amounts for the six months ended March 31, 2002
and 2001 is $104,535 and $650,362, respectively, which is the portion of the
discount on the beneficial conversion feature of convertible debt. Also included
in the amounts for the six months ended March 31, 2002 and 2001 is approximately
$329,000 and $17,000, respectively, of amortization of deferred financing costs
related to the convertible and other debt.
INCOME TAX BENEFIT. Income tax benefit of $88,000 for the six months ended March
31, 2001 is the result of a change in judgment about the realizability of
deferred tax assets.
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the foregoing, we
had a net loss of ($2,076,384) for the six months ended March 31, 2002 compared
to a net loss of ($1,918,800) for the six months ended March 31, 2001.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had limited liquid resources. Current liabilities were
approximately $16.2 million and current assets were approximately $15.2 million.
The difference of approximately $1.0 million is a working capital deficit which
is primarily the result of the losses we had during the three quarters prior to
the quarter ended March 31, 2002. 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.
Net cash used in operating activities was $1,488,480 and $933,755 in the six
months ended March 31, 2002 and 2001, respectively.
Net cash provided by (used in) investing activities was $1,036,226 and
($1,482,117) in the six months ended March 31, 2002 and 2001, respectively. The
sale of our Engineering Division generated net cash proceeds of $1,459,079 which
was used to fund operating activities. Cash used for acquisitions for the six
months ended March 31, 2002 and 2001 was $181,920, and $975,486, respectively.
The balance in both periods was primarily for capital expenditures.
Net cash provided in financing activities was $1,367,851 and $1,895,388 in the
six months ended March 31, 2002 and 2001, respectively. We had net borrowings of
$723,529 and $766,816 under our line of credit in the six months ended March 31,
2002 and 2001, respectively. We also received net proceeds less redemptions of
$24,879 and $1,652,864 from the issuance of convertible debt in the six months
ended March 31, 2002 and 2001, respectively. During the six months ended March
31, 2002, we received $504,583 in proceeds from the issuance of our Common Stock
and Series B Preferred Stock.
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; workers' compensation,
general liability and other insurance coverages; 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 six months
ended March 31, 2002, we issued convertible debentures through private
placements. The debentures bore interest at 6% a year, payable quarterly and had
a maturity date of five years from issuance. Each debenture was 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 had the right to prepay any of the debentures at any
time at a prepayment rate that varied from 115% to 125% of the amount of the
debenture depending on when the prepayment was made.
The discount arising from the 75% beneficial conversion feature was charged to
interest expense during the period from the issuance of the debenture to the
earliest time at which the debenture became convertible.
As a result of certain transactions with the debenture holders, as outlined in
Item 2 - "Changes in Securities and Use of Proceeds", only $40,000 of debentures
remains outstanding.
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% 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 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 March 31, 2002, $8,030,110 was
outstanding under the credit agreement.
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Because we have a working capital deficit, we need to raise additional capital
to continue our operations. We anticipated that the sale of the Engineering
Services Division would provide the capital necessary to eliminate our working
capital deficit. However, due to losses sustained in the quarter ended March 31,
2002, the working capital deficit remains. 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 customer's business.
Historically, we have experienced lower revenues in the first calendar quarter
with revenues accelerating during the second and third calendar quarters and
then starting to slow again during the fourth calendar quarter.
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 March 31, 2002, our goodwill
subject to amortization was approximately $3,623,000, and annual amortization of
such goodwill was approximately $289,000. We expect to adopt SFAS No. 142 during
our first fiscal quarter of fiscal 2003. Because of the extensive effort
required to comply with the remaining provisions of SFAS Nos. 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
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credit up to 85% 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
In March 2002, we entered into an agreement with the holder (the "Debenture
Holder") of all but $40,000 of our outstanding 6% Convertible Debentures (the
"Debentures") pursuant to which we issued to the Debenture Holder 231,300 shares
of Series B Convertible Preferred Stock (the "Series B Preferred Stock") in
exchange for (i) $456,499 aggregate principal amount of Debentures, (ii) the
cancellation of a $400,000 promissory note previously issued by us to the
Debenture Holder and (iii) $300,000 in cash. In addition, the Debenture Holder
converted, between January 2002 and March 2002, $643,501 principal amount of
Debentures into 1,736,979 shares of Common Stock. As a result of these
transactions, only $40,000 of Debentures remains outstanding.
The shares of Series B Preferred Stock have a stated value of $5 per share.
Holders of the Series B Preferred Stock are entitled to cumulative dividends at
a rate of 6% of the stated value per annum, payable when and as declared by the
Board of Directors. Dividends may be paid in cash or, at our option, in shares
of Common Stock, under certain circumstances. Holders of Series B Preferred
Stock are entitled to a liquidation preference of $5.00 per share plus accrued
dividends. The Series B Preferred Stock is convertible into shares of Common
Stock at the option of the holder at any time. The number of shares of Common
Stock into which each share of Series B Convertible Preferred Stock is
convertible is determined by dividing the aggregate liquidation preference of
the shares being converted by the lesser of (i) $4.65 or (ii) 75% of the average
closing price of the Common Stock during the trading day preceding the date of
conversion. If our Common Stock is reinstated for trading on the Nasdaq Stock
Market, we will be required to seek approval from its stockholders of a proposal
to approve the issuance of shares of Common Stock upon conversion of the Series
B Preferred Stock in excess of the limits imposed by the rules of the Nasdaq
Stock Market.
OTHER TRANSACTIONS
In addition to the transactions described above, in March 2002, the holder of a
$160,000 promissory note previously issued by us exchanged the note for 32,000
shares of Series B Preferred Stock. Further, the holders of the Company's Series
A Preferred Stock and we agreed to an amendment of the Certificate of
Designation which will permit us to pay the redemption price of the Series A
Preferred Stock through the issuance of shares of our Common Stock. For purposes
of determining the number of shares which we will be required to issue if it
chooses to pay the redemption price in shares of Common Stock, the Common Stock
will have a value equal to the average closing price of the Common Stock during
the five trading days immediately preceding the date of redemption.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held at the Company's offices
at 500 Craig Road, Suite 201, Manalapan, New Jersey 07726 on March 28, 2002.
The seven matters to be considered and acted upon at the meeting were (i) the
election of a new Board of Directors, (ii) a proposal to sell the assets of the
Company's Engineering Services Division, (iii) a proposal to adopt the Company's
2002 Equity Incentive Plan, (iv) a proposal to approve the issuance to the
holders of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock") of the full number of shares of Common Stock to which such holders are
entitled upon conversion of the Preferred Stock, (v) a proposal to approve the
issuance to the holders of the Company's 6% Convertible Debentures due December
1, 2005 (the "6% Debentures") of the full number of shares of Common Stock to
which such holders are entitled upon conversion of the 6% Debentures, (vi) a
proposal to approve the issuance of up to 5,000,000 shares of Common Stock, or
securities convertible into up to 5,000,000 shares of Common Stock, at prices
which may be below the book and market value of the Common Stock, and (vii) a
proposal to amend the Company's Amended and Restated Certificate of
Incorporation to effect a reverse stock split of the Company's Common Stock.
At the meeting, the stockholders elected the following directors:
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For Withheld
Joseph J. Raymond 10,496,301 725,597
Michael J. Rutkin 10,521,601 697,597
Harry Robert Kingston 10,522,601 696,597
Donald W. Feidt 10,526,201 692,997
Sanford I. Feld 10,526,601 692,597
Charles Sahyoun 10,487,851 731,347
The matters voted upon at the meeting, and the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter, is set forth below.
With regard to the proposal to proposal to approve the sale of the assets of the
Company's Engineering Services Division, 61% of the votes were cast in favor of
this proposal. Of the votes cast 7,267,143 shares of the Company's Common Stock
and Preferred Stock were voted in favor of the approval of the Company's sale of
the Engineering Services Division, 55,872 shares of the Company's Common Stock
and Preferred Stock were voted against the approval of the sale, 11,192 shares
of the Company's Common Stock and Preferred Stock abstained from voting and
there were broker non-votes with respect to 3,884,961 shares of the Company's
Common Stock and Preferred Stock.
With regard to the proposal to adopt the Company's 2002 Equity Incentive Plan,
88% of the votes were cast in favor of this proposal. Of the votes cast
6,412,418 shares of the Company's Common Stock and Preferred Stock were voted in
favor of the adoption of the Company's 2002 Equity Incentive Plan, 526,372
shares of the Company's Common Stock and Preferred Stock were voted against the
adoption, 395,417 shares of the Company's Common Stock and Preferred Stock
abstained from voting and there were broker non-votes with respect to 3,884,961
shares of the Company's Common Stock and Preferred Stock.
With regard to the proposal to approve the issuance to the holders of the
Company's Series A Preferred Stock of the full number of shares of the Company's
Common Stock to which such holders are entitled upon conversion of the Series A
Preferred Stock, 89% of the votes were cast in favor of this proposal. Of the
votes cast 4,854,952 shares of the Company's Common Stock were voted in favor of
approval of the Company's issuance to holders of the Company's Series A
Preferred Stock upon conversion of the Preferred Stock, 241,480 shares of the
Company's Common Stock were voted against the approval of issuance, 403,842
shares of the Company's Common Stock abstained from voting and there were broker
non-votes with respect to 3,884,961 shares of the Company's Common Stock.
With regard to the proposal to approve the issuance to the holders of the
Company's 6% Convertible Debentures of the full number of shares of Common Stock
to which such holders are entitled upon conversion of the 6% Debentures, 89% of
the votes were cast in favor of this proposal. Of the votes cast 6,478,111
shares of the Company's Common Stock and Preferred Stock were voted in favor of
approval of the Company's issuance to holders of the Company's 6% Debentures of
the full number of shares of the Company's Common Stock upon conversion of the
6% Debentures, 427,380 shares of the Company's Common Stock and Preferred Stock
were voted against the approval of issuance, 428,716 shares of the Company's
Common Stock and Preferred Stock abstained from voting and there were broker
non-votes with respect to 3,884,961 shares of the Company's Common Stock and
Preferred Stock.
With regard to the a proposal to approve the issuance of up to 5,000,000 share
of Common Stock, or securities convertible into up to 5,000,000 shares of Common
Stock, at prices which may be below book and market value
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of the Common Stock, 86% of the votes were cast in favor of this proposal. Of
the votes cast 6,227,952 shares of the Company's Common Stock and Preferred
Stock were voted in favor of approval of the Company's issuance of up to
5,000,000 shares of Common Stock, or securities convertible into up to 5,000,000
shares of Common Stock, at prices which may be below book and market value of
the Common Stock, 695,055 shares of the Company's Common Stock and Preferred
Stock were voted against the approval of issuance, 411,200 shares of the
Company's Common Stock and Preferred Stock abstained from voting and there were
broker non-votes with respect to 3,884,961 shares of the Company's Common Stock
and Preferred Stock.
With regard to the proposal to amend the Company's Amended and Restated
Certificate of Incorporation to affect a reverse stock split of the Company's
Common Stock, 90% of the votes were cast in favor of this proposal. Of the votes
cast 10,103,789 shares of the Company's Common Stock and Preferred Stock were
voted in favor of approval of the amendment to the Company's Amended and
Restated Certificate of Incorporation to affect a reverse stock split of the
Company's Common Stock, 589,442 shares of the Company's Common Stock and
Preferred Stock were voted against the approval of the amendment, 525,967 shares
of the Company's Common Stock and Preferred Stock abstained from voting and
there were broker non-votes with respect to 0 shares of the Company's Common
Stock and Preferred Stock.
ITEM 5 - OTHER INFORMATION
Proposed Transaction
Artisan (UK) plc ("Artisan") has entered into a Subscription Agreement with us,
effective as of March 28, 2002, subject to our obtaining the requisite
shareholder approval, for Artisan to purchase $4,700,000 (47,000 shares) of our
Series C Preferred Stock ("the Artisan Transaction"), which Series C Preferred
Stock has not yet been created. The proceeds that we will receive from the sale
of the Series C Preferred Stock will be used to redeem our outstanding Series A
Preferred Stock, together with all outstanding interest and dividends.
The Subscription Agreement and related documents memorializing the Artisan
Transaction also provide as follows: (1) Artisan grants Joseph J. Raymond, Sr. a
proxy to vote all of the Artisan's Series C Preferred Stock and Common Stock
underlying the Series C Preferred Stock, if converted, for a period of two (2)
years provided that Mr. Raymond remains Chairman of our Board of Directors; (2)
Artisan is entitled to appoint one Director to our Board of Directors and, in
turn, we are entitled to appoint one Director to Artisan's Board of Directors;
and (3) certain members of the Raymond family provided Artisan with a right of
first refusal in the event they sell their shares in the Company. No assurance
can be given that the proposed transaction with Artisan will be completed.
Holders of the Series C Preferred Stock will be entitled to cumulative dividends
at a rate of seven percent (7%) per annum, payable semi-annually, when and as
declared by our Board of Directors, in preference and priority to any payment of
any dividend on the Common Stock or the Series A or Series B Preferred Stock of
the Company. Dividends may be paid, at our option, either in cash or in shares
of Common Stock, valued at the Series C Conversion Price (as defined below), if
the Common Stock issuable upon conversion of such Series C Preferred Stock has
been registered for resale under the Securities Act of 1933. Holders of Series C
Preferred Shares are entitled to a liquidation preference of $100.00 per share
plus accrued and unpaid dividends.
The Series C Preferred Stock is convertible into Common Stock at any time at
the option of the holder. The number of shares issuable upon conversion is
determined by multiplying the number of shares of Series C Preferred Stock to
be converted by $100.00 and dividing the result by the conversion price then
in effect (the "Series C Conversion Price"). Under the terms of the
Subscription Agreement, the Series C Conversion Price is $0.75. As a result,
as of April 30, 2002, each share of Series C Preferred Stock will be
convertible into one hundred thirty-three (133) shares of Common Stock. Thus,
if all of the 400,000 shares of Series C Preferred Stock were indeed
converted into Common Stock, we would be required to issue 53,333,333 shares
of Common Stock.
Holders of Series C Preferred Stock will be entitled to vote on all matters
submitted to a vote of the stockholders of the Company, with each share of
Series C Preferred Stock entitling the holder to a number of votes equal to the
number of full shares of Common Stock into which such share of Series C
Preferred Stock is then convertible. Initially, each share of Series C Preferred
Stock will represent 133 votes. The Series C Preferred Stock will vote together
with the Common Stock on each matter submitted to a vote of stockholders, except
that
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the holders of the Series C Preferred Stock will be entitled to vote together as
a single class on any (a) proposed amendment of the Company's Certificate of
Incorporation which would increase or decrease the aggregate number of
authorized shares of Series C Preferred Stock, (b) proposal to create a new
class of shares having rights and preferences equal to or having priority over
the Series C Preferred Stock or (c) proposed amendments of the Certificate of
Incorporation that could adversely affect the powers, preferences,
participations, rights, qualifications or restrictions of the Series C Preferred
Stock.
The Company will be required to register the shares of Common Stock issuable
upon conversion of the Series C Preferred Stock issued to Artisan under the
Securities Act of 1933 (the "Securities Act") upon the request of Artisan. If
(a) the registration statement is not declared effective by the Securities and
Exchange Commission within 120 days after a request for registration by Artisan,
(b) sales cannot be made under an effective registration statement, subject to
certain exceptions, for any reason or (c) the Common Stock is not included for
trading on the OTC Bulletin Board, the Nasdaq Stock Market or the New York Stock
Exchange, then the Company is required to pay Artisan an amount equal to 2% of
the amount of Artisan's aggregate investment for any month or pro rata portion
thereof during which any of such events occurs or is continuing.
RESIGNATION OF DIRECTOR
Effective May 3, 2002, Charles A. Sahyoun has resigned his position as a member
of our Board of Directors. The Company will currently not appoint anyone to fill
Mr. Sayhoun's seat on the Board.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
2.9 Letter Agreement dated April 15, 2002 between Stratus
Services Group, Inc., Sahyoun Holdings, LLC and Joseph J.
Raymond, Sr. amending the Allocation and Indemnity
Agreement dated April 15, 2002.
4.1.6 Subscription Agreement dated as of March 28, 2002 between
Stratus Services Group, Inc. and Artisan (UK) plc.
4.1.7 Right of First Refusal Agreement between certain members of
the Raymond Family and Artisan (UK) plc.
9.1.1 Voting proxy agreement between Artisan (UK) plc, Stratus
Services Group, Inc. and Joseph J. Raymond, Sr.
(b) Reports on Form 8-K
On March 4, 2002, the Company filed form 8-K/A with the
Securities and Exchange Commission to amend and restate its
current report on Form 8-K filed with the Securities and
Exchange Commission on January 2, 2002, which excluded
certain financial statements and pro forma financial
information not available at the time of filing.
On March 5, 2002, the Company's Form 8-K/A was refiled due
to typographical errors on the original filing.
On April 4, 2002, the Company filed Form 8-K with the
Securities and Exchange Commission to report on the closing
of the sale of the assets of its Engineering Division.
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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: May ___, 2002 By: /s/ Joseph J. Raymond
---------------------------------------
Joseph J. Raymond
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May ___, 2002 By: /s/ Michael A. Maltzman
---------------------------------------
Michael A. Maltzman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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