EXHIBIT 99.1
STRATUS SERVICES GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
Page(s) No.
Independent Auditors Report...................................................................... 2
Financial Statements
Balance Sheets.............................................................................. 3
Statements of Operations.................................................................... 4
Statements of Cash Flows.................................................................... 5
Statements of Stockholders' Equity.......................................................... 7
Statements of Comprehensive Income.......................................................... 9
Notes to Financial Statements............................................................... 10 to 32
Independent Auditors' Report
To the Stockholders of
Stratus Services Group, Inc.
We have audited the accompanying balance sheets of Stratus Services Group, Inc.
as of September 30, 2001 and 2000, and the related statements of operations,
stockholders' equity, cash flows and comprehensive income for each of the three
years in the period ended September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratus Services Group, Inc. as
of September 30, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2001, in
conformity with generally accepted accounting principles in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described more fully in
Note 1 to the financial statements, the Company's substantial net losses and
accumulated deficit raise considerable doubt as to the Company's ability to
continue operations. The financial statements do not include any adjustments
regarding this uncertainty.
/s/ AMPER, POLITZINER & MATTIA, P.C.
AMPER, POLITZINER & MATTIA, P.C.
September 24, 2002
- --------------------------------------------------------------------------------
Edison, New Jersey
2
STRATUS SERVICES GROUP, INC.
Balance Sheets
Assets
SEPTEMBER 30,
-------------
2001 2000
---- ----
Current assets
Cash and cash equivalents $ 171,822 $ 1,030,722
Due from factor - less allowance for recourse obligation of $-0- and $30,000 -- 1,154,012
Accounts receivable - less allowance for doubtful accounts of $551,000
and $255,000 8,540,112 852,876
Unbilled receivables 1,566,417 1,236,002
Loans to related parties -- 64,500
Loans receivable -- 56,000
Prepaid insurance 1,436,278 432,674
Investment 1,166,046 --
Prepaid expenses and other current assets 77,146 278,169
Deferred taxes -- 340,000
Net assets of discontinued Engineering Division 199,610 --
---------------- ----------------
13,157,431 5,444,955
Property and equipment, net of accumulated depreciation 1,427,216 1,118,625
Intangible assets, net of accumulated amortization 7,078,428 3,716,538
Deferred financing costs, net of accumulated amortization 454,878 --
Other assets 150,205 38,163
---------------- ----------------
$ 22,268,158 $ 10,318,281
================ ================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 347,289 $ 27,012
Notes payable - acquisitions (current portion) 1,110,726 275,000
Line of credit 7,306,581 --
Insurance obligation payable 549,460 367,100
Accounts payable and accrued expenses 3,421,796 1,172,148
Accrued payroll and taxes 1,461,738 1,105,363
Payroll taxes payable 306,230 412,513
---------------- ---------------
14,503,820 3,359,136
Loans payable (net of current portion) 291,243 134,700
Notes payable - acquisitions (net of current portion) 1,403,847 25,000
Convertible debt 1,125,399 --
---------------- ---------------
17,324,309 3,518,836
Series A voting redeemable convertible preferred stock, $.01 par value,
1,458,933 and -0- shares issued and outstanding, liquidation preference of
$4,376,799 (including unpaid dividends of $39,000 and $-0-) 2,792,000 --
Temporary equity - put options 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; 8,217,764
and 5,712,037 shares issued and outstanding 82,178 57,120
Additional paid-in capital 11,992,685 10,554,782
Deferred compensation -- (67,900)
Accumulated deficit (9,592,014) (3,744,557)
Accumulated other comprehensive loss (1,200,000) --
---------------- ---------------
Total stockholders' equity 1,282,849 6,799,445
---------------- ---------------
$ 22,268,158 $ 10,318,281
================ ===============
See accompanying summary of accounting policies and notes to
financial statements.
3
STRATUS SERVICES GROUP, INC.
Statements of Operations
Years Ended September 30,
2001 2000 1999
---- ---- ----
Revenues $ 57,026,338 $ 36,199,671 $ 26,040,614
Cost of revenues 46,074,285 27,827,547 20,779,578
---------------- ---------------- ---------------
Gross profit 10,952,053 8,372,124 5,261,036
Selling, general and administrative expenses 13,421,634 7.844,534 6,068,054
Loss on impairment of goodwill 700,000 -- --
Other charges 375,306 -- --
---------------- ---------------- ---------------
Operating earnings (loss) from continuing operations (3,544,887) 527,590 (807,018)
---------------- ---------------- ---------------
Other income (expenses)
Finance charges (61,291) (453,827) (601,956)
Interest and financing costs (1,999,246) (298,386) (309,257)
Other income (expense) (47,963) 45,944 22,186
---------------- ---------------- ---------------
(2,108,500) (706,269) (889,027)
---------------- ---------------- ---------------
Earnings (loss) from continuing operations before income taxes (5,653,387) (178,678) (1,696,045)
Income taxes (benefit) 340,000 (340,000) --
---------------- ---------------- ---------------
Earnings (loss) from continuing operations (5,993,387) 161,322 (1,696,045)
Discontinued operations - earnings from discontinued Engineering Division 145,930 884,588 169,002
---------------- ---------------- ---------------
Net earnings (loss) (5,847,457) 1,045,910 (1,527,043)
Dividends and accretion on preferred stock (63,000) -- --
---------------- ---------------- ---------------
Net earnings (loss) attributable to common stockholders $ (5,910,457) $ 1,045,910 $ (1,527,043)
================ ================ ===============
Basic:
Earnings (loss) from continuing operations $ (1.01) $ .03 $ (.44)
Earnings from discontinued operations .02 .18 .04
---------------- ---------------- ---------------
Net earnings (loss) $ (.99) $ .21 $ (.40)
================ ================ ===============
Diluted:
Earnings (loss) from continuing operations $ (1.01) $ .03 $ (.44)
Earnings from discontinued operations .02 .17 .04
---------------- ---------------- ---------------
Net earnings (loss) $ (.99) $ .20 $ (.40)
================ ================ ===============
Weighted average shares, outstanding per common share
Basic 5,996,134 5,931,914 3,828,530
Diluted 5,996,134 5,223,508 3,828,530
See accompanying summary of accounting policies and notes to
financial statements.
4
STRATUS SERVICES GROUP, INC.
Statements of Cash Flows
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities
Net earnings (loss) from continuing operations $ (5,993,387) $ 161,322 $ (1,696,045)
Net earnings from discontinued operations 145,930 884,588 169,002
---------------- ---------------- ----------------
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation 409,860 175,419 74,970
Amortization 359,134 191,710 121,848
Provision for doubtful accounts 661,000 122,500 595,000
Loss on impairment of goodwill 700,000 -- --
Deferred financing costs amortization 209,897 -- --
Loss on extinguishments of convertible debt 70,560 -- --
Deferred taxes 340,000 (340,000) --
Interest expense amortization for the intrinsic value of the
beneficial conversion feature of convertible debentures 1,146,463 -- --
Imputed interest -- 57,652 25,645
Accrued interest 64,410 41,522 91,996
Compensation - stock options 67,900 46,800 46,800
Changes in operating assets and liabilities
Due to/from factor/accounts receivable (2,347,247) (2,938,890) (832,427)
Prepaid insurance (1,003,604) (175,461) (34,922)
Prepaid expenses and other current assets 201,023 (262,261) (10,778)
Other assets (65,652) 19,593 6,582
Insurance obligation payable 182,360 114,214 41,178
Accrued payroll and taxes 356,375 171,028 64,512
Payroll taxes payable (106,283) 186,281 82,920
Accounts payable and accrued expenses 2,195,797 (80,469) 259,274
---------------- ---------------- ----------------
Total adjustments 3,441,993 (2,670,362) 532,598
---------------- ---------------- ----------------
(2,405,464) (1,624,452) (994,445)
================ ================ ================
Cash flows (used in) investing activities
Purchase of property and equipment (755,801) (780,975) (283,466)
Payments for business acquisitions (1,218,674) (1,053,868) (194,930)
Costs incurred in connection with investment (17,046) -- --
Loans receivable (40,500) (120,500) --
---------------- ---------------- ----------------
(2,032,021) (1,955,343) (478,396)
---------------- ---------------- ----------------
Cash flows from financing activities
Proceeds from initial public offering -- 6,034,169 --
Proceeds from issuance of common stock 1,412,772 -- 732,126
Proceeds from loans payable 255,000 1,125,000 1,388,375
Payments of loans payable (70,180) (1,457,624) (370,746)
Payments of notes payable - acquisitions (320,394) (1,164,100) --
Net proceeds from line of credit 2,065,156 -- --
Net proceeds from convertible debt 2,664,239 -- --
Redemption of convertible debt (2,222,883) -- --
Proceeds from temporary equity - put options 60,000 -- --
Purchase of treasury stock (265,125) (350,000) --
Payments of registration costs -- -- (103,829)
---------------- ---------------- ----------------
3,578,585 4,187,445 1,645,926
---------------- ---------------- ----------------
Net change in cash and cash equivalents (858,900) 607,650 173,085
Cash and cash equivalents - beginning 1,030,722 423,072 249,987
---------------- ---------------- ----------------
Cash and cash equivalents - ending $ 171,822 $ 1,030,722 $ 423,072
================ ================ ================
See accompanying summary of accounting policies and notes to
financial statements.
5
STRATUS SERVICES GROUP, INC.
Statements of Cash Flows - Continued
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
---- ---- ----
Supplemental disclosure of cash paid
Interest $ 739,872 $ 201,718 $ 174,175
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 4,568,674 $ 1,548,097 $ 2,421,903
Less: cash paid (1,218,674) (1,048,097) (57,430)
Less: common stock and put options issued (800,000) -- (520,000)
---------------- ---------------- ----------------
Liabilities assumed $ 2,550,000 $ 500,000 $ 1,844,473
================ ================ ================
Issuance of common stock in exchange for notes payable $ -- $ 1,000,000 $ 1,092,762
================ ================ ================
Accrued and imputed interest $ 64,410 $ 99,174 $ 117,641
================ ================ ================
Purchase of property and equipment for notes $ -- $ 163,836 $ --
================ ================ ================
Purchase of treasury stock in exchange for loans $ 402,000 $ -- $ --
================ ================ ================
Issuance of common stock in exchange for investment $ 61,000 $ -- $ --
================ ================ ================
Issuance of common stock upon conversion of convertible debt $ 542,500 $ -- $ --
================ ================ ================
Issuance of preferred stock in exchange for investment $ 1,592,000 $ -- $ --
================ ================ ================
Issuance of preferred stock for fees in connection with private
placement ($410,000) and investment ($727,000) $ 1,137,000 $ -- $ --
================ ================ ================
Issuance of common stock for fees in connection with private
placement and investment $ 30,000 $ -- $ --
================ ================ ================
Cumulative dividends and accretion on preferred stock $ 63,000 $ -- $ --
================ ================ ================
See accompanying summary of accounting policies and notes to
financial statements.
6
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Equity
Additional
Common Stock Treasury Paid-In
Total Amount Shares Stock Capital
------------- --------- ------------ ----------- --------------
Balance - October 1, 1998 $(3,356,310) $ 37,198 3,719,734 $ -- $ 31,416
Net (loss) (1,527,043) -- -- -- --
Compensation expense in connection with
stock options granted (no tax effect) 46,800 -- -- -- --
Issuance of common stock in connection
with acquisition -- 347 34,667 -- (347)
Issuance of common stock in exchange for
notes payable 1,092,762 2,914 291,403 -- 1,089,848
Proceeds from the private placement of
common stock (net of costs of $117,874)
for cash 732,126 2,266 226,666 -- 729,860
------------- --------- ------------ ----------- --------------
Balance - September 30, 1999 $(3,011,665) $ 42,725 4,272,470 $ -- $ 1,850,777
Net earnings 1,045,910 -- -- -- --
Compensation expense in connection with
stock options granted (no tax effect) 46,800 -- -- -- --
Issuance of common stock in exchange for
notes payable 1,000,000 1,933 193,333 -- 998,067
Proceeds from the initial public offering of
common stock (net of costs of ($1,869,660) 5,930,340 13,000 1,300,000 -- 5,917,340
Transfer from temporary equity 2,138,060 -- -- -- 2,138,060
Purchase and retirement of treasury stock (350,000) (538) (53,766) -- (349,462)
------------- --------- ------------ ----------- --------------
Balance - September 30, 2000 $ 6,799,445 $ 57,120 5,712,037 $ -- $10,554,782
Net (loss) (5,847,457) -- -- -- --
Unrealized loss on securities available for
sale (1,200,000) -- -- -- --
Dividends and accretion on preferred stock (63,000) -- -- -- (63,000)
Purchase and retirement of treasury stock (15,125) (33) (3,333) -- (15,092)
Purchase of treasury stock (652,000) -- -- (652,000) --
Beneficial conversion feature of
convertible debt 1,213,747 -- -- -- 1,213,747
Warrants issued in connection with
issuance of convertible debt 88,000 -- -- -- 88,000
Compensation expense in connection with
stock options granted (no tax effect) 67,900 -- -- -- --
Accumulated
Other
Deferred Comprehensive Accumulated
Compensation Loss Deficit
--------------- ------------------ ---------------
Balance - October 1, 1998 $ (161,500) $ -- $ (3,263,424)
Net (loss) -- -- (1,527,043)
Compensation expense in connection with
stock options granted (no tax effect) 46,800 -- --
Issuance of common stock in connection
with acquisition -- -- --
Issuance of common stock in exchange for
notes payable -- -- --
Proceeds from the private placement of
common stock (net of costs of $117,874)
for cash -- -- --
--------------- ------------------ ---------------
Balance - September 30, 1999 $ (114,700) $ -- $ (4,790,467)
Net earnings -- -- 1,045,910
Compensation expense in connection with
stock options granted (no tax effect) 46,800 -- --
Issuance of common stock in exchange for
notes payable -- -- --
Proceeds from the initial public offering of
common stock (net of costs of ($1,869,660) -- -- --
Transfer from temporary equity -- -- --
Purchase and retirement of treasury stock -- -- --
--------------- ------------------ ---------------
Balance - September 30, 2000 $ (67,900) -- $ (3,744,557)
Net (loss) -- -- (5,847,457)
Unrealized loss on securities available for
sale -- (1,200,000) --
Dividends and accretion on preferred stock -- -- --
Purchase and retirement of treasury stock -- -- --
Purchase of treasury stock -- -- --
Beneficial conversion feature of
convertible debt -- -- --
Warrants issued in connection with
issuance of convertible debt -- -- --
Compensation expense in connection with
stock options granted (no tax effect) 67,900 -- --
See accompanying summary of accounting policies and notes to
financial statements.
7
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Equity - Continued
Additional
Common Stock Treasury Paid-In
Total Amount Stock Stock Capital
------------- --------- ------------ ----------- --------------
Beneficial conversion feature of convertible
debt redeemed (631,881) -- -- -- (631,881)
Conversion of convertible debt 429,448 5,194 519,394 652,000 (227,746)
Issuance of common stock in connection
with acquisition -- 4,000 400,000 -- (4,000)
Proceeds from the private placements of
common stock (net of costs of $432,228)
for cash 1,002,772 14,497 1,449,666 -- 988,275
Issuance of shares for services provided 30,000 300 30,000 -- 29,700
Issuance of stock in exchange for investment 61,000 500 50,000 -- 60,500
Issuance of stock with put options -- 600 60,000 -- (600)
------------- --------- ------------ ----------- --------------
Balance - September 30, 2001 $ 1,282,849 $ 82,178 8,217,764 $ -- $11,992,685
============= ========= ============ =========== ==============
Accumulated
Other
Deferred Comprehensive Accumulated
Compensation Loss Deficit
--------------- ------------------ ---------------
Beneficial conversion feature of convertible
debt redeemed -- -- --
Conversion of convertible debt -- -- --
Issuance of common stock in connection
with acquisition -- -- --
Proceeds from the private placements of
common stock (net of costs of $432,228)
for cash -- -- --
Issuance of shares for services provided -- -- --
Issuance of stock in exchange for investment -- -- --
Issuance of stock with put options -- -- --
--------------- ------------------ ---------------
Balance - September 30, 2001 $ -- $ (1,200,000) $ (9,592,014)
=============== ================== ===============
See accompanying summary of accounting policies and notes to
financial statements.
8
STRATUS SERVICES GROUP, INC.
Statements of Comprehensive Income
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
---- ---- ----
Net earnings (loss) $ (5,847,457) $ 1,045,910 $ (1,527,043)
Unrealized loss on securities available for sale (1,200,000) -- --
--------------- ----------------- ----------------
Comprehensive income (loss) $ (7,047,457) $ 1,045,910 $ (1,527,043)
=============== ================= ================
See accompanying summary of accounting policies and notes to
financial statements.
9
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
OPERATIONS
Stratus Services Group, Inc. (the "Company") is a national
provider of staffing and productivity consulting services. As
of September 30, 2001, the Company operated a network of
thirty-five offices in ten states.
The Company operates as one business segment. The one business
segment consists of its traditional staffing services,
engineering staffing services, and SMARTSolutions(TM), a
structured program to monitor and enhance the production of a
client's labor resources. The Company's customers are in
various industries and are located throughout the United
States. Credit is granted to substantially all customers. No
collateral is maintained.
LIQUIDITY
At September 30, 2001, the Company had limited liquid
resources. Current liabilities were $14,503,820 and current
assets were $13,157,431. The difference of $1,346,389 is a
working capital deficit, which is primarily the result of
losses incurred during each of the three quarters ended
September 30, 2001. These conditions raise substantial doubts
about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to
reflect the possible future effect on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this
uncertainty.
The Company's continuation of existence is dependent upon its
ability to generate sufficient cash flow to meet its
continuing obligations on a timely basis, to fund the
operation and capital needs, and to obtain additional
financing as may be necessary.
Management of the Company has taken steps to revise and reduce
its operating requirement, which it believes will be
sufficient to assure continued operations and implementation
of the Company's plans. The steps include closing branches
that are not profitable, consolidating branches and reductions
in staffing and other selling, general and administrative
expenses.
REVENUE RECOGNITION
The Company recognizes revenue as the services are performed
by its workforce. The Company's customers are billed weekly.
At balance sheet dates, there are accruals for unbilled
receivables and related compensation costs. The Company
believes its revenue recognition policies do not significantly
differ from SAB 101.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND CONCENTRATION OF CASH
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. The Company maintains its cash in bank deposit
accounts, which, at times may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
RECLASSIFICATION
Certain items in the Statements of Cash Flows for the years
ended September 30, 1999 and 2000 have been reclassified to
conform to the year ended September 30, 2001 presentation.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss)
and other non-owner changes in equity including unrealized
gains or losses on available-for-sale marketable securities.
10
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
EARNINGS/LOSS PER SHARE
The Company utilizes Statement of Financial Accounting
Standards No. 128 "Earnings Per Share", (SFAS 128), whereby
basic earnings per share ("EPS") excludes dilution and is
computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding
during the period. Diluted EPS assumes conversion of dilutive
options and warrants, and the issuance of common stock for all
other potentially dilutive equivalent shares outstanding.
Following is a reconciliation of the numerator and denominator
of Basic EPS to the numerator and denominator of Diluted EPS
for all years presented.
Year Ended September 30,
2001 2000 1999
---- ---- ----
Numerator:
Basic EPS
Net earnings (loss) $ (5,847,457) $ 1,045,910 $ (1,527,043)
Dividends and accretion on
preferred stock 63,000 -- --
---------------- ---------------- --------------
Net earnings (loss) attributable to
common stockholders $ (5,910,457) $ 1,045,910 $ (1,527,043)
================ ================ ==============
Denominator:
Basic EPS
Weighted average shares outstanding 5,996,134 4,931,914 3,828,530
---------------- ---------------- --------------
Per share amount $ (.99) $ .21 $ (.40)
================ ================ ==============
Effect of stock options and warrants -- 291,594 --
Dilutive EPS
Weighted average shares outstanding
including incremental shares 5,996,134 5,223,508 3,828,530
---------------- ---------------- --------------
Per share amount $ (.99) $ .20 $ (.40)
================ ================ ==============
INVESTMENT
The investment represents securities available for sale which
are stated at fair value. Unrealized holding gains and losses
are reflected as a net amount in accumulated other
comprehensive loss until realized. There were no gross
realized gains and losses on sales of available-for-sale
securities for the years ended September 30, 2001, 2000 and
1999. At September 30, 2001, the Company's securities
available-for-sale consisted of an investment in a
publicly-traded foreign company (see note 4).
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated
useful lives of the assets as follows:
ESTIMATED
METHOD USEFUL LIFE
Furniture and fixtures Declining balance 5 years
Office equipment Declining balance 5 years
Computer equipment Straight-line 5 years
Computer software Straight-line 3 years
Vans Straight-line 5 years
11
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
GOODWILL
Goodwill is amortized on a straight-line basis over fifteen
years except for acquisitions after June 30, 2001 where
goodwill is not being amortized.
Periodically, the Company will determine if there has been a
permanent impairment of goodwill by comparing anticipated
undiscounted cash flows for operating activities of acquired
businesses with the carrying value of the related goodwill. In
this connection the Company charged $700,000 to operations in
the year ended September 30, 2001.
FACTORING
The Company's factoring agreement (see Note 5) with a
financing institution ("factor") has been accounted for as a
sale of receivables under Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Services of
Financial Assets and Extinguishment of Liabilities". ("SFAS"
No. 125)
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, accounts receivable,
due from factor, accounts payable and short-term borrowings
approximate cost due to the short period of time to maturity.
Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company
for loans with similar terms or maturity, approximate the
carrying amounts in the financial statements.
STOCK - BASED COMPENSATION
Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS" 123") allows
a company to adopt a fair value based method of accounting for
its stock-based compensation plans or continue to follow the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees". The Company accounts for stock-based
compensation in accordance with the provisions of APB No. 25,
and complies with the disclosure provisions of SFAS No. 123.
Under APB No. 25, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities
based on differences between the financial reporting and tax
bases of assets and liabilities using the enacted tax rates
and laws that are expected to be in effect when the
differences are expected to be recovered. The Company provides
a valuation allowance for deferred tax assets for which it
does not consider realization of such assets to be more likely
than not.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The expenses for
the years ended September 30, 2001, 2000 and 1999 were
$189,000, $185,000 and $133,000, respectively, and are
included in selling, general and administrative expenses.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived
assets in accordance with Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No.
121"). SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable
to such assets.
12
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. As amended by SFAS 138, SFAS No. 133 is
effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement did not
have a material impact on the Company's financial position and
results of operations.
In December 1999, the Securities and Exchange Commission staff
released Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101), which provides
guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company believes its
revenue recognition policies do not significantly differ from
SAB 101.
In September 2000, the FASB issued SFAS No. 140 "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which is a replacement of SFAS
No. 125. SFAS No. 140 is effective for transfers and servicing
of financial assets and extinguishment of liabilities
occurring after March 31, 2001. This statement did not have a
material impact on the Company's financial position and
results of operations.
In June 2001, the FASB issued 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 the Company's 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 September 30, 2001, the Company's net 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. 141 and 142, the Company
cannot reasonably estimate the impact on its financial
statements of these provisions beyond discontinuing
amortization.
13
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of". SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and requires that
those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No.
144 is effective for fiscal years beginning after December 15,
2001. The Company does not anticipate that this statement will
have a material impact on its financial position and results
of operations.
NOTE 2 - INITIAL PUBLIC OFFERING
On May 5, 2000, the Company completed its initial public
offering ("IPO") of 1,300,000 shares of common stock at a
price of $6.00 per share, generating net proceeds of
approximately $5,930,000 after deducting underwriters
discounts and offering costs of approximately $1,870,000.
NOTE 3 - ACQUISITIONS
On January 4, 1999, the Company entered into an asset purchase
agreement with B&R Employment, Inc. ("B&R"). The Company
purchased certain assets including office equipment, furniture
and fixtures, sales and operating records, customer contracts
and agreements, vendor lists, and seller's licenses and
certificates. The purchase price was $2,400,000, consisting of
notes for $1,880,000 and the issuance of 34,667 shares of the
Company's common stock. B&R had a put option to sell these
shares back to the Company at $15 per share, provided that the
Company did not conduct an initial public offering within
twenty-four months. As a result of the IPO, $520,000 of
"Temporary equity - put options" representing 34,667 shares in
connection with the acquisition was transferred to additional
paid-in capital. In February 2000, the Company entered into a
debt-equity conversion agreement with B&R whereby, B&R agreed
to convert, except for $666,000, the amounts due under the
notes payable-acquisition, including accrued interest, into
shares of the Company's common stock upon the Company's
initial public offering of securities. The number of shares to
be issued was based on the offering price in the initial
public offering. In April 2000, the agreement was amended to
provide that B&R would convert $500,000 into shares of the
Company's common stock. Accordingly, upon the completion of
the IPO, B&R was issued 83,333 shares of the Company's common
stock and the notes were paid in full.
In connection with this acquisition, the Company entered into
an employment and a non-compete agreement for a three-year
period with the sole stockholder of B&R. The excess of cost
paid over net assets acquired resulted in goodwill of
$2,414,903, computed as follows:
Net assets acquired
Office equipment $ 7,000
Amounts paid
Notes payable (net of $35,527 discount) 1,844,473
Issuance of common stock and put options 520,000
Finders' fees 57,430
-------------------
2,421,903
-------------------
Excess of amounts paid over net assets acquired - goodwill $ 2,414,903
===================
On June 26, 2000, the Company purchased substantially all of
the tangible and intangible assets, excluding accounts
receivable, of eight offices of Tandem, a division of
Outsource International, Inc. ("Outsource"). The purchase
price was $1,300,000, of which $800,000 was paid in cash at
the closing and the remaining $500,000 was represented by two
promissory notes. The first note, representing $400,000 was
payable in two installments of $200,000 plus accrued interest
at 8.5% a year, within 90 days and 180 days after closing. The
second note, representing $100,000 bears interest at 8.5% a
year and is payable in twelve equal monthly installments
beginning January 1, 2001. As of September 30, 2001, the
Company paid only two installments on the second note and the
balance of approximately $83,000 is included in the current
portion of "Notes payable - acquisitions" on the attached
balance sheet as of September 30, 2001.
14
NOTE 3 - ACQUISITIONS - CONTINUED
The excess of cost paid over net assets acquired resulted in
goodwill of $1,562,693, computed as follows:
Net assets acquired
Furniture and equipment $ 38,175
Accrued holiday and vacation pay (47,000)
---------------------
(8,825)
---------------------
Amounts paid
Cash 800,000
Notes payable 500,000
Finder's fees and other costs 253,868
---------------------
1,553,868
---------------------
Excess of amounts paid over net assets acquired - goodwill $ 1,562,693
=====================
On October 27, 2000, the Company purchased substantially all
of the tangible and intangible assets, excluding accounts
receivable, of seven offices of Tandem, a division of
Outsource International, Inc. The initial purchase price for
the assets was $125,000; of which $50,000 was paid in cash at
the closing and the remaining $75,000 was represented by a
promissory note secured by the assets purchased by the
Company. The note was payable in twenty-four equal monthly
installments of principal and interest at a variable rate of
prime plus two percent beginning December 1, 2000. In January
2001, the Company exercised an option to repay the outstanding
balance of the note plus $175,000 in lieu of an earnout
payment of thirty percent of the Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") of the
acquired business for a two year period.
The excess of cost paid over net assets acquired resulted in
goodwill of $855,718, computed as follows:
Net assets acquired
Furniture and equipment $ 31,650
Accrued holiday and vacation pay (21,758)
----------------------
9,892
----------------------
Amounts paid
Cash 50,000
Note payable 75,000
Earnout payable 175,000
Finder's fees and other costs 565,610
----------------------
865,610
----------------------
Excess of amounts paid over net assets acquired - goodwill $ 855,718
======================
On January 2, 2001, the Company purchased substantially all of
the tangible and intangible assets of Cura Staffing, Inc. and
The WorkGroup Professional Services, Inc. The purchase price
was $175,000 of which $100,000 was paid in cash at the closing
and the remaining $75,000 was represented by a 90-day
promissory note for $50,000 and $25,000 payable $5,000 a month
beginning after the payment of the 90-day promissory note. The
promissory note bears interest at 6% a year. As of September
30, 2001, the Company has not paid a portion of the $50,000
note and the entire $25,000 note. The balance of approximately
$31,000 is included in the current portion of "Notes payable -
acquisitions" on the attached balance sheet as of September
30, 2001.
The excess of cost paid over net assets acquired resulted in
goodwill of $228,144, computed as follows:
15
NOTE 3 - ACQUISITIONS - CONTINUED
Net assets acquired
Furniture and equipment $ 11,000
Accrued holiday and vacation pay (12,000)
---------------------
(1,000)
---------------------
Amounts paid
Cash 100,000
Note payable and other payables 75,000
Finder's fees and other costs 52,144
---------------------
227,144
---------------------
Excess of amounts paid over net assets acquired - goodwill $ 228,144
=====================
On July 27, 2001, the Company purchased substantially all of
the tangible and intangible assets, excluding accounts
receivable of the clerical and light industrial staffing
division of Source One Personnel, Inc. ("Source One"). As a
result of the acquisition, the Company will expand its
presence in the Philadelphia to New York corridor.
The initial purchase price for the assets was $3,400,000, of
which $200,000, in cash, and 400,000 shares of the Company's
restricted common stock were paid at the closing and the
remaining $2,400,000 was represented by two promissory notes.
In addition, Source One is entitled to earnout payments based
upon the acquired business achieving certain performance
levels during each of the three fiscal years beginning October
1, 2001. There was an additional $42,163 of costs incurred in
connection with the acquisition. The first note, representing
$600,000, is payable in one installment of $600,000 plus
accrued interest at 7% per year, at 180 days after the
closing. The second note, representing $1,800,000 bears
interest at 7% per year and is payable over a four-year period
in equal quarterly payments beginning 120 days after the
closing. Source One has agreed to allow the Company to defer
the payment of the first note and the February 2002
installment of the second note until the earlier of the
receipt of the proceeds from the sale of the Company's
Engineering Division (see Note 24) or April 30, 2002. Source
One has a put option to sell the shares back to the Company at
$2 per share between 24 months after the closing and final
payment of the second note, but not less than 48 months.
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 $ 105,000
Intangible assets 636,300
Goodwill 2,700,863
----------------
Total assets acquired $ 3,442,163
================
Of the $636,300 of intangible assets, $127,300 was assigned to
a covenant-not-to-compete and $509,000 was assigned to the
customer list. The intangible assets are being amortized over
their estimated useful life of four years. Goodwill is not
being amortized under the provision of SFAS No. 142. All of
the goodwill is expected to be deductible for tax purposes.
The above acquisitions have been accounted for as purchases.
The results of operations are included in the Company's
statements of operations from the effective date of
acquisition.
The unaudited pro forma results of operations presented below
assume that the acquisitions had occurred at the beginning of
fiscal 2000. This information is presented for informational
purposes only and include certain adjustments such as goodwill
amortization resulting from the acquisitions and interest
expense related to acquisition debt.
16
NOTE 3 - ACQUISITIONS - CONTINUED
Year Ending September 30,
2001 2000
---- ----
Revenues $ 74,803,000 $ 82,593,000
Net earnings (loss) attributable to
common stockholders (5,261,000) 2,408,000
Net earnings (loss) per share attributable
to common stockholders
Basic $ (.88) $ .49
Diluted $ (.88) $ .46
The maturities on notes payable-acquisitions are as follows:
Year Ending September 30
-------------------------------------------
2002 $ 1,110,726
2003 435,875
2004 467,197
2005 500,775
--------------------
$ 2,514,573
====================
NOTE 4 - TRANSACTIONS WITH ARTISAN (UK) PLC
On June 26, 2001, the Company entered into an agreement to
purchase 63,025,000 ordinary shares, representing 26.3% of the
outstanding shares of enterpriseAsia. com ("EPA"), a London
AIM listed company, from Artisan (UK) plc ("Artisan"). In
exchange, the Company agreed to issue to Artisan 850,837
shares of the Company's Series A preferred stock. The Series A
preferred stock pays cumulative dividends at $.21 per share
per year, payable semi-annually, commencing on December 31,
2001. 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. This transaction was consummated, effective
August 15, 2001.
The cost of the investment in EPA and value assigned to the
preferred stock issued was based upon the market price per
share of EPA on the date the transaction was consummated.
Accordingly, the original cost of the investment was
$1,592,000 and, therefore, the 850,837 shares of preferred
stock were assigned a value of $1.87 per share.
On July 3, 2001, the Company received $900,000 from
Artisan.com Limited ("Artisan.com"), a company affiliated with
Artisan, in exchange for 900,000 shares of the Company's
common stock in a private placement. The transaction was in
accordance with an agreement dated June 26, 2001 between the
Company and Artisan.com. The agreement provides that the
Company may offer and Artisan.com may buy additional shares of
the Company's common stock not exceeding $2,200,000 between
August 15, 2001 and December 31, 2001. The price per share is
the average market price per share over the five trading days
immediately preceding the issuance of the shares.
In connection with the transactions with Artisan and
Artisan.com, the Company issued 608,096 shares of its Series A
preferred stock and 30,000 shares of its common stock for
finders' fees to third parties.
The value of the preferred stock and common stock issued for
finders' fees was allocated to the investment in EPA and a
reduction to additional paid-in capital based on the relative
value of the original investment of $1,592,000 and the
$900,000 received for the 900,000 shares of the
17
NOTE 4 - TRANSACTIONS WITH ARTISAN (UK) PLC - CONTINUED
Company's common stock. Accordingly, the original cost of the
investment in EPA increased by $757,000 and additional paid-in
capital was reduced by $417,700.
The Company is unable to exercise significant influence over
EPA's operating and financial policies. Therefore, the
investment in EPA is classified as available-for-sale
securities and reported at fair value in the attached balance
sheet.
NOTE 5 - FACTORING AGREEMENT
The Company had a factoring agreement under which it was able
to sell up to $3,000,000 of 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. During the years ended
September 30, 2001, 2000 and 1999, gross proceeds from the
sale of receivables was $10,204,208, $34,179,692 and
$25,227,640, respectively.
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 6).
NOTE 6 - 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. 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 5). The prime rate at September 30, 2001 was
6%.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of
September 30:
2001 2000
------------------ ---------------------
Furniture and fixtures $ 614,980 $ 206,307
Office equipment 109,498 72,729
Computer equipment 1,130,301 810,226
Computer software 244,095 113,500
Vans 216,319 208,570
------------------ ---------------------
2,315,193 1,411,332
Accumulated depreciation (702,977) (292,707)
------------------ ---------------------
Net property and equipment $ 1,612,216 $ 1,118,625
================== =====================
NOTE 8 - INTANGIBLE ASSETS
Intangible assets consist of the following as of September 30:
2001 2000
------------------ ---------------------
Goodwill $ 7,814,822 $ 4,030,096
Covenant-not-to-compete 127,300 --
Customer list 509,000 --
Less: accumulated amortization (672,694) (313,558)
Less: impairment loss (700,000) --
------------------ ---------------------
$ 7,078,428 $ 3,716,538
================== =====================
18
NOTE 9 - JOINT VENTURE
The Company provides information technology staffing services
through a joint venture, Stratus Technology Services, LLC
("STS"), in which the Company has a 50% interest. A son of the
Chief Executive Officer and the Secretary and General Counsel
of the Company have a minority interest in the other 50%
venturer. STS commenced operations during the year ended
September 30, 2001. The Company's loss from operations of STS
of $6,933 for the year ended September 30, 2001 is included in
other revenue (expense) on the statements of operations.
NOTE 10 - LOANS PAYABLE
Loans payable consist of the following as of September 30:
2001 2000
------------------ -------------------
Notes, secured by vans with a book value
of $147,528 as of September 30, 2001 (i) $ 134,698 $ 161,712
18% promissory notes (ii) 240,000 --
Stock repurchase note (iii) 248,834 --
Other 15,000 --
------------------ -------------------
638,532 161,712
Less current portion (347,289) (27,012)
------------------ -------------------
Current portion $ 291,243 $ 134,700
================== ===================
(i) Payable $3,453 per month, including interest at 9.25% to
10% a year.
(ii) Due in April 2002 interest is payable monthly at 18% a
year. In addition, the Company issued 60,000 shares of
its common stock to the noteholders. The noteholders
have the right to demand the repurchase by the Company
of the shares issued, until the notes are paid in full,
at $1.00 per share plus 15% interest. Accordingly,
$9,000 was charged to interest expense in the year ended
September 30, 2001 and $69,000, representing the put
option plus interest, is included in "Temporary equity -
put options" on the attached balance sheet as of
September 30, 2001.
(iii) Promissory note issued in January 2001 in connection
with the purchase of treasury stock. Note is payable
$8,000 per month, including interest at 15% a year.
The maturities on loans payable are as follows:
Year Ending September 30
-------------------------------------------
2002 $347,289
2003 105,345
2004 120,317
2005 65,581
--------------------
$638,532
====================
Other loans aggregating $600,000 were settled by the issuance
of 160,000 shares of the Company's common stock at $3.75 per
share during the year ended September 30, 1999. Other loans
during the year ended September 30, 2000, aggregating
$100,000, $200,000 and $200,000, were settled by the issuance
of 26,667 shares at $3.75 per share and 50,000 shares at $4.00
per share and 33,333 shares at $6.00 per share, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT
The son of the Chief Executive Officer of the Company provides
consulting services to the Company. Consulting expense was
$281,000, $156,000 and $107,000 for the years ended September
30, 2001, 2000 and 1999, respectively.
The Company has paid consulting fees to an entity whose
stockholder is another son of the Chief Executive Officer of
the Company. Consulting fees amounted to $119,000, $9,000 and
$23,000 for the years ended September 30, 2001, 2000 and 1999,
respectively.
19
NOTE 11 - RELATED PARTY TRANSACTIONS - CONTINUED
REVENUES
The Company provided payroll services to an entity whose Chief
Executive Officer is the son of the Chief Executive Officer of
the Company. Revenues related thereto for the years ended
September 30, 2001, 2000 and 1999, were $-0-, $364,000 and
$1,392,000, respectively. In August 1999, $663,000 of accounts
receivable from this related party was converted into a note
of $1,017,000. The difference was attributable to interest,
which has not been accrued by the Company since all of the
receivable had previously been reserved for as a doubtful
account. All of the doubtful accounts receivable arose prior
to the entity becoming a related party. The accounts
receivable were generated through December 1998 and the entity
became a related party in March 1999. In September 1999, the
Company had agreed to accept 500,000 shares of the related
party's common stock as full payment for the note. Although
the shares of the related party's common stock were publicly
traded, the 500,000 shares held by the Company were restricted
at the time of issuance. Accordingly, the investment was
valued at $-0-. Subsequent thereto, the related party filed
for bankruptcy and discontinued its operations.
The Company also provided payroll services to a non-public
entity whose common stock is owned 50% by the Chief Executive
Officer of the Company. For the years ended September 30,
2001, 2000 and 1999, revenues were $-0-, $-0- and $304,000,
respectively.
In August 1999, the Chief Executive Officer of the Company and
his son agreed to exchange, effective June 30, 1999, $440,000
of notes payable by the Company to them, plus accrued interest
of $52,762 for 131,403 shares of the Company's common stock.
The stock was valued at $3.75 per share, which represented
fair value based on the latest stock transactions and no gain
or loss was recorded on the transaction.
SALE OF COMMON STOCK
During the year ended September 30, 2001, the Company sold
382,999 shares of its common stock in private placements to
relatives of the Chief Executive Officer of the Company at
prices approximating the then current market of $.93 to $1.43
per share, for total gross proceeds of $410,000, less expenses
of $5,958.
NOTE 12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2001 2000
------------------ -------------------
Accounts payable $ 2,513,749 $ 980,880
Accrued compensation 285,022 94,457
Workers' compensation claims reserve 273,657 --
Accrued other 349,368 96,811
------------------ -------------------
$ 3,421,796 $ 1,172,148
================== ===================
NOTE 13 - INCOME TAXES
Deferred tax attributes resulting from differences between
financial accounting amounts and tax bases of assets and
liabilities follow:
2001 2000
------------------- ---------------------
Current assets and liabilities
Allowance for doubtful accounts $ 220,000 102,000
Allowance for recourse obligation -- $ 12,000
Net operating loss carryforward -- 340,000
Valuation allowance (220,000) (114,000)
------------------- ---------------------
Net current deferred tax asset $ -- $ 340,000
=================== =====================
20
NOTE 13 - INCOME TAXES - CONTINUED
Non-current assets and liabilities
Net operating loss carryforward $ 2,694,000 $ 462,000
Stock compensation -- 27,000
Depreciation -- (5,000)
Valuation allowance (2,694,000) (484,000)
------------------- ---------------------
Net non-current deferred tax asset (liability) $ -- $ --
=================== =====================
The change in valuation allowances was an increase of
$2,316,000 and a decrease of $560,000 for the years ended
September 30, 2001 and 2000, respectively.
2001 2000 1999
--------------- ---------------- ---------------
Income taxes (benefit) is comprised of:
Current $ -- $ -- $ --
Deferred (1,976,000) 220,000 --
Change in valuation allowance 2,316,000 (560,000) --
--------------- ---------------- ---------------
$ 340,000 $ (340,000) $ --
=============== ================ ===============
At September 30, 2001, the Company has available the following
federal net operating loss carryforwards for tax purposes:
Expiration Date
Year Ending
September 30,
-----------------------------------
2012 $ 123,000
2018 1,491,000
2019 392,000
2021 4,730,000
The utilization of the net operating loss carryforwards may be
limited due to changes in control.
The effective tax rate on net earnings (loss) varies from the
statutory federal income tax rate for periods ended September
30, 2001, 2000 and 1999.
2001 2000 1999
---------------- ------------------ ----------------
Statutory rate (34.0)% 34.0% (34.0)%
State taxes net (6.0) 6.0 (6.0)
Other differences, net (0.4) 1.4 1.3
Valuation allowance 40.4 (79.4) 38.7
Benefit from net operating loss
carryforwards -- (10.2) --
---------------- ------------------ ----------------
--% (48.2)% --%
================ ================== ================
NOTE 14 - CONVERTIBLE DEBT
At various times during the year ended September 30, 2001, the
Company issued, through private placements, a total of
$3,643,402 of convertible debentures. 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
21
NOTE 14 - CONVERTIBLE DEBT - CONTINUED
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 aggregated $1,213,747 and is charged to interest
expense during the period from the issuance of the debenture
to the earliest time at which the debenture becomes
convertible.
Deferred finance costs incurred in connection with the
issuance of the debentures aggregated approximately $738,000
and is being amortized over the five year term of the
debentures. Included in the $738,000 is $88,000 for 50,000
five-year $5.00 warrants and 100,000 five-year $7.50 warrants
issued as finders' fees. In addition, the Company paid
approximately $280,000 in exchange for extending the earliest
conversion date and the maturity date by an additional 120
days on approximately $1,048,500 of debentures. This amount
was charged to deferred finance costs and is being amortized
over 120 days. Included in interest expense for the year ended
September 30, 2001 is approximately $146,000 for amortization
of deferred finance costs in connection with the debentures.
During the year ended September 30, 2001, the Company redeemed
$1,897,220 of debentures resulting in a loss of approximately
$71,000 which is included in "Other income (expense)" in the
statement of operations. The loss is comprised of prepayment
premiums ($326,000), and the write-off of deferred finance
costs ($377,000), less the amount of the beneficial conversion
feature ($632,000).
During the year ended September 30, 2001, $542,500 of
debentures were converted into 628,060 shares of common stock
at prices ranging from $.85 to $.90 per share. The Company
issued 108,666 shares of treasury stock to a debenture holder
in connection with a conversion.
The balance of the convertible debt on the attached balance
sheet as of September 30, 2001 is net of unamortized discount
of $78,285 and is due at various dates in the year ended
September 30, 2006.
NOTE 15 - PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock
of which 1,458,933 shares have been designated as Series A
preferred stock and issued in connection with transactions
with Artisan (see Note 4).
The difference between the carrying value and redemption value
of the preferred stock is being accreted through a charge to
additional paid-in-capital through the June 30, 2008
redemption date.
NOTE 16 - OTHER CHARGES
During the year ended September 30, 2001, the Company
discontinued negotiations to sell the Engineering Division and
discontinued efforts to make certain acquisitions. In this
connection, costs associated with these activities were
charged to operations. The Company also charged operations for
costs incurred in connection with various financing not
obtained and costs associated with closed offices. The total
charged to operations for the foregoing was $460,800.
In September 2001, the Company placed 1,500,000 of
unregistered shares of its common stock into an escrow account
in anticipation of receiving a loan which was to be
collateralized by the shares of common stock. The loan
transaction was never consummated, but in October 2001 the
shares were illegally transferred out of the escrow account by
a third party. Subsequent thereto, all but 89,600 shares were
returned to the Company and cancelled. The Company recorded a
$59,000 charge to operations in the year ended September 30,
2001, representing the market value of the shares not
returned. The 89,600 shares will be recorded as issued shares
in the quarter ended December 31, 2001 and $59,000 will be
credited to stockholders' equity.
22
NOTE 17 - COMMITMENTS AND CONTINGENCIES
OFFICE LEASES
The Company leases offices and equipment under various leases
expiring through 2006. Monthly payments under these leases are
$36,000.
The following is a schedule by years of approximate future
minimum rental payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess
of one year, as of September 30, 2001.
For the Years Ending
September 30,
----------------------------------
2002 $ 548,000
2003 434,000
2004 298,000
2005 263,000
2006 224,000
Rent expense was $697,000, $356,000 and $342,000 for the years
ended September 30, 2001, 2000 and 1999, respectively.
OTHER
From time to time, the Company is involved in litigation
incidental to its business including employment practices
claims. There is currently no litigation that management
believes will have a material impact on the Company's
financial portion.
NOTE 18 - TEMPORARY EQUITY
Certain stockholders of the Company may have had a right to
pursue claims against the Company as a result of possible
technical violations of the laws and regulations governing the
private placement and issuance of securities. Accordingly, the
Company had recorded the original total proceeds of the sale
of the shares to these certain stockholders in the amount of
$1,618,060 as temporary equity - common shares in the balance
sheet. The Company made a rescission offer to stockholders
holding approximately 2.8 million shares, pursuant to which
the Company offered to repurchase the shares at their original
purchase price (plus applicable interest) which ranged from
$0.75 to $3.75 per share. As a result of no one accepting the
rescission offer during the rescission period and the
expiration, in certain cases, of applicable statutes of
limitation, the $1,618,060 of temporary equity - common shares
was transferred to additional paid-in capital during the year
ended September 30, 2000.
At September 30, 2001 "Temporary equity - put options" is
comprised of $800,000 for put options on 400,000 shares of the
Company's stock issued in connection with the acquisition of
Source One (see Note 3) and $69,000 for put options on 60,000
shares of the Company's stock (see Note 10).
NOTE 19 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees with terms
of five to ten years. The options may be exercised for
2,107,741 shares.
In addition, the Company has issued to the Chief Executive
Officer of the Company, options to acquire 1,000,000 shares at
$6.00 per share and 500,000 shares at $1.10 per share. These
options have a ten-year term and are exercisable at the
earlier of five years or when the Company achieves earnings of
$1.00 per share in a fiscal year. These options will be
forfeited if the Chief Executive Officer leaves the employment
of the Company.
Pro forma information regarding net income and earnings per
share is required by the Financial Accounting Standards Board
Statement ("FASB No. 123"), and has been determined as if the
23
NOTE 19 - STOCK OPTIONS AND WARRANTS - CONTINUED
Company had accounted for its employee stock options under the
fair value method. The fair value for these options was
estimated at the date of grant using the Black-Scholes
option-pricing model.
The Black-Scholes method option-pricing model was developed
for use in estimating the fair value of traded options, which
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair
value of its employee stock options.
The following weighted-average assumptions were used:
September 30,
2001 2000 1999
-------------- -------------- ---------------
Risk- free interest rate 5% 6% 5%
Dividend yield 0% 0% 0%
Expected life 4-7 years 4-7 years 4 years
Volatility 84% 54% --
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
For the Years Ended
September 30,
2001 2000 1999
-------------- -------------- --------------
Pro forma net earnings (loss) attributable
to common stockholders $(8,064,810) $ 507,051 $ (1,583,829)
Pro forma net earnings (loss) per common
share attributable to common stockholders
Basic $ (1.35) $ .10 $ (.41)
Diluted (1.35) .10 (.41)
Compensation expense under APB 25 for the years ended
September 30, 2001, 2000 and 1999 was $67,900, $46,800 and
$46,800, respectively.
A summary of the Company's stock option activity and related
information for the years ended September 30 follows:
Weighted Average
Options Exercise Price
------------------------ ----------------------
Outstanding at September 30, 1998 534,000 $ 2.55
Granted -- --
Canceled -- --
Exercised -- --
------------------------
Outstanding at September 30, 1999 534,000 2.55
Granted 1,453,205 5.91
Canceled -- --
Exercised -- --
------------------------ ----------------------
24
NOTE 19 - STOCK OPTIONS AND WARRANTS - CONTINUED
Outstanding at September 30, 2000 1,987,205 5.01
Granted 1,900,000 2.05
Canceled (279,464) 4.08
Exercised -- --
------------------------ ----------------------
Outstanding at September 30, 2001 3,607,741 $ 3.52
======================== ======================
Exercisable at September 30, 2001 1,341,908 $ 2.26
======================== ======================
The exercise prices range from $1.10 to $6.00 per share.
In connection with the IPO, the Company issued 130,000
warrants to its underwriters to purchase shares at $8.70 per
share, expiring in 2004. The Company has also issued the
following warrants:
Number of
Warrants Price Per Share Expiring In
------------------------------- --------------------------- --------------------------
66,667 $ 7.50 2004
65,000 4.00 2005
10,000 5.00 2005
20,000 6.00 2005
16,667 0.75 2006
50,000 5.00 2006
100,000 7.50 2006
Following is a summary of the status of stock options
outstanding at September 30, 2001:
Outstanding Options Exercisable Options
--------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Exercise Number Exercise
Price
-------------- -------------- --------------- -------------- -------------- -------------
Life Price
--------------- --------------
$1.10 1,500,000 9.5 years $ 1.10 750,000 $ 1.10
1.50 166,667 0.9 years 1.50 166,667 1.50
3.00 193,333 6.0 years 3.00 172,500 3.00
5.625 690,000 8.8 years 5.625 195,000 5.625
6.00 1,057,741 8.5 years 6.00 57,741 6.00
-------------- -------------
3,607,741 1,341,908
============== =============
As of September 30, 2001, no stock options or warrants have
been exercised.
NOTE 20 - MAJOR CUSTOMERS
The Company had one customer who accounted for 10% and 12% of
total revenues for the years ended September 30, 2001 and
2000, respectively, and two customers who accounted for 30% of
total revenues for the year ended September 30, 1999. Major
customers are those who account for more than 10% of total
revenues.
NOTE 21 - RETIREMENT PLANS
The Company maintains two 401(k) savings plans for its
employees. The terms of the plan define qualified participants
as those with at least three months of service. Employee
contributions are discretionary up to a maximum of 15% of
compensation. The Company can match up to 20% of the
employees' first 5% contributions. The Company's 401(k)
expense for the years ended September 30, 2001, 2000 and 1999
was $50,000, $37,000 and $26,000, respectively.
25
NOTE 22 - PRIVATE PLACEMENTS
In June 2001, the Company entered into an agreement with an
investment banker to raise $1,200,000 through the sale of the
Company's stock through private placements at a price per
share calculated at a 30% discount to the 20-day average of
the mean between the closing bid and asked prices. The
agreement provides that the Company pays a placement fee to
the investment banker of 10% of the gross proceeds received
from the private placements and also issues five-year warrants
equal to 10% of the number of shares sold at an exercise price
equal to the price per share of the private placement. In
addition, the Company is to pay the investment banker's
expenses in connection with the agreement, not to exceed
$50,000. During the year ended September 30, 2001, the Company
sold 166,667 shares at $.75 per share under this agreement. In
connection therewith, the Company paid $16,250 to the
investment banker and issued warrants to purchase 16,667
shares of the Company's common stock.
For the year ended September 30, 2001, private placements
resulted in the issuance of 1,449,666 shares of common stock
(see Notes 4 and 11 above).
The Company raised $1,000,000 in gross proceeds through a
private placement during the year ended September 30, 1999.
Each private placement "unit" was a combination of debt and
equity. For each $50,000 unit, the investor received a $50,000
promissory note from the Company and 3,333 shares of the
Company's common stock valued at $3.75 per share.
In August 1999, each private placement participant was offered
an additional 10,000 shares of the Company's common stock in
exchange for the original debt portion of the unit, thereby
exchanging each unit acquired by an investor accepting the
offer into 13,333 shares of common stock at $3.75 per share.
In connection with this offer, participants representing
sixteen units agreed to this offer.
As each private placement investor representing the remaining
$200,000 received both debt (in the form of a promissory note
payable by the Company) and equity (in the form of the
Company's common stock), a portion of the $200,000 face value
of the debt was allocated to equity based on the value of
$3.75 per share of common stock. As such, the Company had
allocated $133 and $49,867 to common stock and additional
paid-in capital, respectively. The remainder of $150,000 was
allocated to short-term debt. The difference between the face
value and the amount recorded in short-term debt was accrued
to interest expense. All private placement debt was paid in
full from proceeds of the IPO.
26
NOTE 23 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ------------- -------------- --------------
Year ended September 30, 2001:
Revenues from continuing operations $ 17,024,687 $ 12,774,199 $ 12,692,761 $ 14,534,691
Gross profit from continuing operations 3,837,116 2,449,282 2,197,927 2,467,728
Net earnings (loss) from discontinued
Engineering Division 77,422 2,229 (10,226) 76,505
Net earnings (loss) from continuing
operations 236,077 (2,154,877) (1,514,282) (2,560,305)
Net earnings (loss) attributable to
common stockholders 313,499 (2,152,648) (1,524,508) 2,546,800)
Basic earnings (loss) per share
attributable to common stockholders:
Continuing operations .04 (.38) (.26) (.37)
Discontinued operations .01 -- -- .01
Total .05 (.38) (.26) (.36)
Diluted earnings (loss) per share
attributable to common stockholders:
Continuing operations .04 (.38) (.26) (.37)
Discontinued operations .01 -- -- .01
Total .05 (.38) (.26) (.36)
Year ended September 30, 2000:
Revenues from continuing operations $ 6,442,533 $ 8,105,968 $ 7,389,381 $ 14,261,789
Gross profit from continuing operations 1,496,995 1,946,929 1,845,038 3,083,162
Net earnings from discontinued
Engineering Division 316,334 29,617 208,690 329,947
Net earnings (loss) from continuing
operations (160,398) 131,986 (30,794) 220,528
Net earnings (loss) attributable to
common stockholders 155,936 161,603 177,896 550,475
Basic earnings (loss) per share
attributable to common stockholders:
Continuing operations (.03) .03 (.01) .04
Discontinued operations .07 .01 .04 .04
Total .04 .04 .03 .10
Diluted earnings (loss) per share
attributable to common stockholders:
Continuing operations (.03) .03 (.01) .04
Discontinued operations .06 .01 .04 .06
Total .03 .04 .03 .10
27
NOTE 23 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ------------- -------------- --------------
Year ended September 30, 1999:
Revenues from continuing operations $ 4,880,083 $ 6,050,756 $ 7,346,155 $ 7,763,620
Gross profit from continuing operations 836,154 1,105,768 1,580,792 1,738,322
Net earnings (loss) from discontinued
Engineering Division 107,151 (97,808) 88,154 71,505
Net earnings (loss) from continuing
operations (1,105,000) (658,197) (13,105) 80,257
Net earnings (loss) attributable to
common stockholders (997,849) (756,005 (75,049) 151,762
Basic earnings (loss) per share
attributable to common stockholders:
Continuing operations (.30) (.17) -- .03
Discontinued operations .03 (.03) .02 .02
Total (.27) (,20) .02 .05
Diluted earnings (loss) per share
attributable to common stockholders:
Continuing operations (.30) (.17) -- .03
Discontinued operations .03 (.03) .02 .02
Total (.27) (.20) .02 .05
NOTE 24 - 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 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"). 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.
28
NOTE 24 - SUBSEQUENT EVENTS - CONTINUED
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.
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 was entitled to $250,000 of
the Second Payment and $250,000 of the Third Payment.
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 was repaid by the Company from its $250,000
share of the Second Payment which was received in
June 2002. Sahyoun Holdings LLC and Charles Sahyoun
have guaranteed the $250,000 payment to be made to
the Company from the Third Payment, regardless of the
operating results of SEA. Upon its receipt of all 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 is entitled to all amounts paid to SEP
under the Asset Purchase Agreement other than
$500,000 of payments made or payable to the Company
pursuant to the Allocation and Indemnity Agreement
and guaranteed by Charles Sahyoun and Sahyoun
Holdings, LLC as described above.
The statements of operations for all periods
presented have been reclassified to reflect the
operating results of the Division as discontinued
operations.
c. 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.
On February 26, 2002, the Nasdaq Stock Market Listing
Qualifications Panel (the "Panel") made a
determination that the Company was not in compliance
with the Continued Listing Standards of the Nasdaq
SmallCap Market, and the Company's stock was delisted
from the Nasdaq SmallCap Market on February 27, 2002.
The Company appealed the decision of the Panel to the
Nasdaq Listing and Hearing Review Council (the
"Review Council").
29
NOTE 24 - SUBSEQUENT EVENTS - (CONTINUED)
On July 2, 2002, the Company received the decision of
the Review Council which reversed the February 26,
2002, decision of the Panel to delist the Company's
securities from the Nasdaq SmallCap Market.
The Review Council reversed and remanded the Panel's
decision to the Panel, subject to certain conditions.
These conditions were further subject to the Panel's
discretion to impose additional monitoring
restrictions. The Review Council's decision required
that (a) by September 30, 2002, the Company
demonstrate a closing price of at least $1.00 per
share and immediately thereafter maintain a closing
bid price of at least $1.00 per share for a minimum
of ten consecutive trading days, (b) the Company
report shareholders' equity of at least $4,500,000 as
of June 30, 2002, $3,750,000 as of September 30, 2002
and $3,500,000 as of December 31, 2002 and (c)
demonstrate compliance with all requirements for
continued listing.
The Panel notified the Company in August 2002, that
it was denying relisting due to the Company's failure
to meet conditions specified in the Council's
decision that required the Company to have
stockholder's equity of at least $4,500,000 as of
June 30, 2002, and a minimum stock bid price of at
least $1.00 for 10 consecutive trading days. The
Company has again filed an appeal of this decision.
d. In March 2002, the Company entered into an agreement
with the holder (the "Debenture Holder") of all but
$40,000 of the then outstanding convertible
debentures pursuant to which it issued to the
Debenture Holder 231,200 shares of Series B
Convertible Preferred Stock in exchange for (i)
$456,499 aggregate principal amount of debentures,
(ii) the cancellation of a $400,000 promissory note
issued in March 2002, by the Company to the Debenture
Holder and (iii) $300,000 in cash. As a result, only
$40,000 of debentures remains outstanding.
The shares of Series B Convertible Preferred Stock
(the "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 share of Series B
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 closing bid price of the common stock
on 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.
In June 2002, the Company, at its option, redeemed
for cash, 91,000 shares of Series B Preferred Stock
at $5.00 per share, totaling $455,000.
At a Special Meeting of Stockholders held on July 26,
2002, the Company received 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, in the event
that the Company's common stock is reinstated for
trading on the Nasdaq Stock Market.
e. At the Company's Annual Meeting of Stockholders 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 Company's
obligation to redeem a portion of the outstanding
shares of Series A Preferred Stock, if such approval
was not obtained, was terminated and the Series A
Preferred Stock was reclassified to permanent equity.
30
NOTE 24 - SUBSEQUENT EVENTS - (CONTINUED)
f. In July 2002, the Company sold 7,650 shares of newly
created Series E Preferred Stock in a private
placement for $765,000 in cash and issued an
additional 8.615 shares of Series E Preferred Stock
in exchange for all of the outstanding shares of
Series B Preferred Stock which had an aggregate
stated value of $861,500. In addition, $41,790 of
dividends and penalties had accrued on the Series B
Preferred Stock prior to the exchange. Of the 172,300
shares of Series B Preferred Stock surrendered in the
exchange, 32,000 shares were held by a corporation of
which the Company's President and Chief Executive
Officer is the sole owner.
The shares of Series E Preferred Stock have a stated
value of $100 per share. The holders of the Series E
Preferred Stock are entitled to cumulative dividends
at a rate of 6% per annum of the stated value,
payable every 120 days, in preference and priority to
any payment, of any dividend on the Company's common
stock. Dividends may be paid, at the Company's
option, either in cash or in shares of common stock,
valued at the Series E Conversion Price (as defined
below), if the common stock issuable upon conversion
of such Series E Preferred Stock has been registered
for resale under the Securities Act of 1933. Holders
of Series E Preferred shares are entitled to a
liquidation preference of $100 per share, plus
accrued and unpaid dividends.
The Series E Preferred Stock is convertible into
common stock at a conversion price (the "Series E
Conversion Price") equal to 75% of the average of the
closing bid prices, for the five trading days
preceding the conversion date, for the common stock.
The number of shares issuable upon conversion is
determined by multiplying the number of shares of
Series E Preferred Stock to be converted by $100, and
dividing the result by the Series E Conversion Price
then in effect.
Holders of Series E Preferred Stock do not have any
voting rights, except as required by law.
The Company may redeem the shares of the Series E
Preferred Stock at any time prior to conversion at a
redemption price of 115% of the purchase price paid
for the Series E Preferred Shares plus any accrued
but unpaid dividends.
g. In July 2002, Joseph J. Raymond, the Company's
President and Chief Executive Officer invested
$1,000,000 in the Company in exchange for 10,000
shares of newly created Series F Preferred Stock,
which has a stated value of $100 per share.
The holders of the Series F Preferred Stock are
entitled to receive, from assets legally available
therefore, cumulative dividends at a rate of 7% per
annum, accrued daily, payable monthly, in preference
and priority to any payment of any dividend on the
common stock and on the Series E Preferred Stock.
Dividends may be paid, at the Company's option,
either in cash or in shares of common stock, valued
at the Series F Conversion Price (as defined below),
if the common stock issuable upon conversion of such
Series F Preferred Stock has been registered for
resale under the Securities Act of 1933. Holders of
Series F Preferred shares are entitled to a
liquidation preference of $100 per share, plus
accrued and unpaid dividends.
The Series F Preferred Stock is convertible into
common stock at a conversion price (the "Series F
Conversion Price") equal to $.10 per share, the
market price at the date of issuance of the Series F
Preferred Stock. The number of shares issuable upon
conversion is determined by multiplying the number of
shares of Series F Preferred Stock to be converted by
$100 and dividing the result by the Series F
Conversion Price then in effect.
31
NOTE 24 - SUBSEQUENT EVENTS - (CONTINUED)
Except as otherwise required by law, holders of
Series F Preferred Stock and holders of common stock
shall vote together as a single class on each matter
submitted to a vote of stockholders. Each outstanding
share of Series F Preferred Stock shall be entitled
to the number of votes equal to the number of full
shares of common stock into which each such share of
Series F Preferred Stock is then convertible on the
date for determination of stockholders entitled to
vote at the meeting. Holders of the Series F
Preferred Stock are entitled to vote as a separate
class on any proposed amendment to the terms of the
Series F Preferred Stock which would increase or
decrease the number of authorized shares of Series F
Preferred Stock or have an adverse impact on the
Series F Preferred Stock and on any proposal to
create a new class of shares having rights or
preferences equal to or having priority to the Series
F Preferred Stock.
h. The Company issued promissory notes to Source One in
the principal amounts of $600,000 ("Note 1") and
$1,800,000 ("Note 2"), respectively, on July 27,
2001, in connection with an acquisition transaction
(see Note 3). The Company was unable to make the
following payments when due:
(i) a payment of $600,000 of principal and
$21,000 of accrued interest due on
January 28, 2002 under Note 1;
(ii) a payment of $100,766 of principal and
$29,951 of accrued interest due on
February 27, 2002 under Note 2; and
(iii) a payment of $102,530 of principal and
$28,187 of accrued interest due on May 27,
2002 under Note 2.
Pursuant to a Forbearance Agreement executed in
January 2002, and amended in June 2002, Source One
agreed to forbear from exercising remedies against
the Company until June 30, 2002. On July 31, 2002,
the Company cured all payment defaults under Note 1
and Note 2 and repaid $200,000 loaned to the Company
by Source One on June 4, 2002, which was due June 30,
2002, and bore interest at 7% a year.
i. In November 2001 and June 2002, the Company sold
400,000 shares and 62,625,000 shares, respectively,
representing its entire 26.3% investment in EPA (see
Note 4). The Company received net proceeds of
$206,631 and recorded a loss on the sales of
$2,159,415.
32