As Filed with the Securities and Exchange Commission on July 20, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STRATUS SERVICES GROUP, INC.
(Name of small business issuer in its charter)
Delaware 7363 223499261
(State or jurisdiction
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
500 Craig Road
Manalapan, New Jersey 07726
(732) 866-0300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Joseph J. Raymond
Chairman and Chief Executive Officer
Stratus Services Group, Inc.
500 Craig Road
Manalapan, New Jersey 07726
(732) 866-0300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies of all communications to:
Hank Gracin, Esq.
John A. Aiello, Esq. Lehman & Eilen, LLP
Giordano, Halleran & Ciesla, P.C. Suite 505
125 Half Mile Road, 50 Charles Lindbergh Blvd.
P.O. Box 190 Uniondale, New York 11553
Middletown, New Jersey 07748 (516) 222-0888
(732) 741-3900
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462 (d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
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Proposed Proposed
Title of each Maximum Maximum
Class of Offering Aggregate Amount of
Securities to be Amount to be Price Offering Registration
Registered Registered Per Share (1) Price(1) Fee
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Common Stock,
$0.01 par 1,500,000
value per share Shares $7.50 $11,250,000 $3,128
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Underwriter's 150,000
Warrants Wrts(2) --- --- (3)
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Common Stock
Underlying
Underwriter's 150,000
Warrants Shares $8.25 $ 1,237,500 $ 344
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Total $3,472
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) To be issued for nominal consideration to the Underwriter.
(3) Pursuant to Rule 457(g), no separate registration fee for the warrants is
required.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
------------------------------
<PAGE>
The information in this Prospectus is not complete and may be changed. These
securities may not be sold until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Preliminary Prospectus is
not an offer to sell nor does it seek an offer to buy these securities, in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion, Dated July 20, 1999
PROSPECTUS
1,500,000 SHARES
STRATUS SERVICES GROUP, INC.
COMMON STOCK
--------------------
This is an initial public offering of shares of Common Stock of Stratus
Services Group, Inc. All of the 1,500,000 shares of Common Stock are being sold
by Stratus Services Group, Inc.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price per
share will be between $6.00 and $9.00. Stratus Services Group intends to list
the Common Stock on the Nasdaq Smallcap Market under the symbol "SMSL."
--------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF COMMON STOCK.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Underwriting Proceeds, before
Discounts and expenses, to Stratus
Price to Public Commissions Services Group, Inc.
Per Share $ $ $
Total $ $ $
================================================================================
The underwriter may, subject to the terms of the underwriting agreement,
purchase up to an additional 225,000 shares from Stratus at the initial public
offering price, less the underwriting discount.
The underwriter expects to deliver the shares against payment in New York on
_______, 1999.
HORNBLOWER & WEEKS, INC.
The date of this Prospectus is ________ ___, 1999.
<PAGE>
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TABLE OF CONTENTS
Page
----
Prospectus Summary...................................... 2
Risk Factors............................................ 5
Use of Proceeds......................................... 13
Dividend Policy......................................... 13
Dilution................................................ 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 15
Business................................................ 21
Management.............................................. 37
Certain Relationships and Related Party Transactions.... 38
Principal Stockholders.................................. 40
Description of Securities............................... 41
Shares Eligible for Future Sale......................... 44
Underwriting............................................ 46
Legal Matters........................................... 48
Experts................................................. 48
Additional Information.................................. 48
Index to Consolidated Financial Statements.............. F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"STRATUS," "STRATUS SERVICES GROUP," "WE," "US" AND "OUR" REFER TO STRATUS
SERVICES GROUP, INC.
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are not historical facts but rather are
based on current expectations, estimates and projections about our industry, our
beliefs, and assumptions. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and are subject to
certain risks, uncertainties and other factors, some of which are beyond our
control, that are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in such forward-looking
statements. Such risks and uncertainties include those described in "Risk
Factors" and elsewhere in this Prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this Prospectus. We undertake no
obligation to update such statements or publicly release the result of any
revisions to these forward-looking statements that we may make to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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<PAGE>
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Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire Prospectus, especially
"Risk Factors" and the Financial Statements and Notes, before deciding to invest
in Stratus Services Group, Inc. Common Stock. Unless this Prospectus indicates
otherwise, all information contained in this Prospectus, including per share
data and information relating to the number of shares authorized and
outstanding, has been adjusted to reflect a proposed three for two reverse split
of our Common Stock and certain proposed amendments to our Certificate of
Incorporation and Bylaws.
PROSPECTUS SUMMARY
The Company
Stratus Services Group, Inc. is a New Jersey based provider of temporary
staffing and engineering services. We currently operate through a network of
fifteen offices in ten states. We provide a wide range of commercial staffing
services including light industrial, clerical, distribution, technical,
specialty and other professional services. We also have a dedicated engineering
services staff providing a broad range of staffing, project consulting and
outsourcing services. Our SMARTSolutions(TM) service provides a structured
program to monitor and enhance the productivity of a customer's labor resources.
As of March 31, 1999, we were providing approximately 1000 staffing employees to
more than 200 businesses.
The Company's strategy is to continue to expand our operation through
internal growth and strategic acquisitions.
In 1999, we acquired a staffing company and an engineering company. We
intend to pursue other acquisitions in new markets to expand the geographic
scope of our operations and acquire complimentary businesses or specialty lines
of business. We believe that this strategy will enable us to take advantage of
the opportunities available in the rapidly growing staffing services industry.
Our executive offices are located at 500 Craig Road, Manalapan, New
Jersey. Our phone number is (732) 866-0300.
2
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<PAGE>
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The Offering
Shares of Common Stock Offered................. 1,500,000 shares.
Shares to be Outstanding After this Offering... 5,299,400 shares.
Use of Proceeds................................ Repayment of
approximately $2,000,000
of debt, payment of
$1,210,000 owed in
connection with an
acquisition and for
working capital,
including possible
acquisitions of
complementary businesses.
Proposed Nasdaq National Market Symbol......... SMSL.
Risk Factors................................... The Common Stock being offered
involves a high degree of risk.
These risks are described in the
section of this Prospectus
captioned "Risk Factors."
The above information is based on shares outstanding as of July 15, 1999
and excludes 901,000 shares issuable upon the exercise of options and warrants
to acquire our Common Stock that were outstanding as of July 15, 1999 and
150,000 shares issuable pursuant to warrants to be issued to the underwriter in
connection with this offering. The information also assumes that the underwriter
will not exercise its option to purchase additional shares of Common Stock in
the offering.
3
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<PAGE>
Summary Financial Information
(Amounts in thousands)
August 11,
1997 Six Months Ended
(inception) to Year Ended March 31,
September September --------------------------
30, 1997 30, 1998 1998 1999
------------ ---------- ----------- ------------
(Unaudited) (Unaudited)
Statement of Operations
Data:
Revenues ............. $ 2,442,191 $ 24,919,639 $ 10,474,459 $ 12,920,225
Gross profit ......... 436,344 4,589,921 1,832,289 2,612,515
Operating (loss) ..... (355,072) (866,411) (133,628) (1,037,477)
Other income (expenses) (54,322) (1,613,384) (191,012) (716,377)
Net income (loss) .... (409,394) (2,479,795) (324,640) (1,753,854)
As of March 31,
1999
---------------
(Unaudited)
Selected Balance Sheet Data:
Cash ............................................ $ 404,047
Accounts Receivable ............................. 573,644
Other Assets .................................... 3,558,135
Total Assets .................................... 4,535,826
Loans Payable ................................... 3,056,734
Accrued payroll and taxes ....................... 1,077,876
Due to factor ................................... 1,107,126
Accounts payable, accrued expenses and other..... 2,242,797
Total Liabilities ............................... 7,484,530
Temporary Equity ................................ 520,000
Stockholders' Equity (Deficit) .................. (3,468,704)
4
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<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN
INVESTMENT DECISION. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO
ANY OF THESE RISKS AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. YOU ALSO
SHOULD REFER TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING
OUR FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
RELATE TO FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN
IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY", "WILL",
"SHOULD", "COULD", "EXPECTS", "PLANS", "ANTICIPATES", "BELIEVES", "ESTIMATES",
"PREDICTS", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER
COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. IN EVALUATING
THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING
THE RISKS OUTLINED BELOW. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS".
Financial Risks
We may not become profitable in the future.
We cannot assure investors that we will become profitable in the future.
We have incurred net losses in recent periods, including net losses of
$2,479,795 in the year ended September 30, 1998 and $1,753,854 in the six months
ended March 31, 1999. As a result of our losses we have a stockholders deficit
of $3,468,704 as of March 31, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Our technical default under a factoring agreement will affect our growth
if it continues.
We are in technical default under a factoring agreement and could be
called at any time to repurchase receivables that we have factored. If we are
called to repurchase the receivables, the potential to grow the business will be
limited and our financial viability could be affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
There are doubts as to our ability to continue as a going concern.
Our Auditors have qualified our Financial Statements for the year ending
September 30, 1998 with a qualification which raises doubts as to our ability to
continue as a going concern. While we have plans to use the funds raised from
this offering to increase sales (See "Business-Strategy") and reduce debt in
order to reduce the demand on working capital (See "Use of Proceeds"), there can
be no assurance as to when these plans will be implemented and if implemented,
whether they will be successful.
We may be unable to meet our future capital requirements.
If adequate funds are not available on acceptable terms, we may not be
able to fund our expansion, develop our products and services or respond to
competitive pressures. We cannot be certain that additional financing will be
available when and to the extent required or that, if available, it will be on
acceptable terms. If we raise additional funds by issuing equity or convertible
debt securities, the percentage ownership of our stockholders will be diluted.
Furthermore, any new securities could have rights, preferences and privileges
senior to those of the Common Stock. We currently do not have any commitments
for additional financing. Based on our current operating plan, we anticipate
that the net proceeds of this offering, together with our available funds, will
be sufficient to satisfy our anticipated needs for working capital, capital
expenditures and business expansion for at least the next 12 months. After that
time, we may need additional capital. Alternatively, we may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new
products or services or to respond to competitive pressures.
Comparisons of our past operating results may not be indicative of future
performances.
Comparisons of our revenues and operating results may not provide an
accurate indication of future performance on which to base an investment
decision. Results of any quarterly period may not be indicative of results to be
expected for a full year as our results of operations may fluctuate
significantly from quarter to quarter or year to year. Results may fluctuate due
to a number of factors, including the timing of future acquisitions and branch
office openings, seasonal fluctuations in the businesses of our clients,
seasonal fluctuations in the demand for staffing services and other competitive
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
5
<PAGE>
Potential 401(k) benefit plan compliance costs could reduce the proceeds
available from this offering.
To correct the potential non-compliance of our 401(k) benefit plan
identified in our audit, we may be required to make a contribution to the
benefit plan on behalf of all qualifying employees and to satisfy any penalties
that may be imposed by the Internal Revenue Service, thereby reducing our
available working capital.
Business Model Risks
Our operating performance may suffer if we experience delays in
implementing our internal growth strategies.
Any significant delay in the opening of new offices or the failure of new
offices to achieve anticipated performance levels could adversely impact our
operations and expansion plans and have a material adverse effect on our
business. We have grown in recent years by opening new offices and increasing
the volume of services provided through existing offices. We cannot assure you
that we will continue to be able to maintain or expand our market presence in
current locations or to successfully enter other markets. See "Business -
Strategy".
Our operating performance may suffer if we experience delays in
implementing our acquisition strategy.
Any significant delay in identifying, completing and integrating
acquisitions could adversely impact our operations and expansion plans and have
a material adverse effect on our business. Competition for acquisitions has
become increasingly intense and accordingly, we can give no assurance that we
will be able to acquire targeted businesses on terms favorable to us or at all.
Pursuing and integrating acquisitions could result in significant costs and
expenses being incurred and could interrupt our daily operations. In addition,
difficult acquisitions could place burdens on our management, systems and
controls and divert the attention of management from the ongoing operations
particularly in the fiscal quarters immediately following the transactions. We
cannot assure you that any particular acquisition will be successfully
integrated into our operations or will achieve profitability.
Our operating performance may suffer if we do not integrate and manage the
acquired companies effectively.
We cannot assure you that our management group will be able to manage
effectively the combined company, additional acquisitions or to implement
effectively our acquisition strategy. Any inability to integrate the acquired
companies successfully or to manage the expanded company will have a material
adverse effect on our business, financial condition and results of operations
and will make it unlikely that our acquisition program will be successful. In
addition, acquisitions could involve the occurrence of additional debt, future
amortization of goodwill and intangible assets or the issuance of equity
securities which may have a dilutive effect, all of which could adversely affect
our operating results. See "Business - Strategy".
6
<PAGE>
Our growth will be limited if our Common Stock cannot be used to finance
acquisitions.
If potential acquisition candidates are unwilling to accept Common Stock
as part of the consideration for the sale of their businesses, our growth could
be limited unless we are able to obtain additional capital through debt or
equity financing. However, there can be no assurance that we will be able to
obtain a line of credit or other financing we will need for our acquisition
program on terms that we deem acceptable. See "Business - Strategy".
Unsuccessful acquisitions will affect our results.
Acquisitions that are either not successfully completed or integrated may
damage our results of operations by affecting relationships with potential
customers, potential sales staff and potential temporary staff within that
geographical area. A failed acquisition or unsuccessful integration may also
damage our relationship with other potential acquisition candidates making it
difficult to negotiate acquisition agreements such that we can either not enter
into an agreement or are required to pay a higher price for the acquisition than
would otherwise have been the case. See "Legal and Administrative Proceedings".
Risks Relating to Operations
Adverse economic conditions could reduce demand for our services.
Adverse national and local economic conditions could materially adversely
affect our business, financial condition and results of operations. During
periods of slowing economic activity or high unemployment, many companies reduce
their use of temporary staffing employees. See "Business-Staffing Services
Industry Overview".
If we lose our key management personnel or cannot recruit additional
management personnel, our business may suffer.
The loss of key management or the inability to attract and retain
qualified management could have a material adverse effect on our operations. We
have been and will continue to be highly dependent on the experience and skills
of our senior management. In addition, we are highly dependent on our ability to
hire, develop and retain qualified regional office managers and on the
productivity of our managers. We have no key man life insurance on any member of
the management team, nor are we considering taking out such insurance in the
future. See "Management."
Intense competition could reduce our market share and harm our financial
performance.
We face intense competition which could limit our ability to maintain or
increase our market share and margins and could have a material adverse effect
on our business, financial
7
<PAGE>
condition or results of operations. The temporary staffing industry is highly
competitive and we compete with national, regional and local full-service and
specialized temporary staffing services, some of whom, such as Accustaff,
Norrell and Staffmark, have significantly greater marketing and financial
resources than we do. See "Business - Competition."
If we are not able to hire and retain a sufficient number of qualified
employees, our business may suffer.
Our future success will depend on our ability to attract, train, retain
and motivate suitably qualified personnel. Competition for such personnel is
intense. We compete with other temporary staffing companies, as well as our
customers and other employers for qualified personnel. If we are unable to
continue to recruit additional qualified personnel our growth could suffer.
Increases in employee-related costs could affect our economic performance.
An increase in employee-related costs could have a material adverse effect
on our results. We are responsible for employee-related expenses for our
temporary staff employees, including workers' compensation, health and
unemployment insurance and retirement plans.
We are directly liable for worksite employee payroll regardless of whether
we are paid.
As the direct employer we are obligated to pay the salaries, wages and
related benefit costs and payroll taxes of worksite employees and must pay the
costs even if the customer does not make timely payment. A failure to recover
employee payroll and benefits costs from the customer could have a material
adverse effect on our financial condition or results of operations. This may
result in a significant drain on available working capital and cash reserves.
We are liable for relationships between our customer and our employees.
8
<PAGE>
The failure of our employees to follow policies and guidelines may result
in negative publicity, monetary damages or fines. We may be exposed to potential
liability to our customers with respect to any claims arising out of the
services performed by our temporary staffing employees, such as misuse of client
information or theft of client property. We are also exposed to potential claims
by our temporary staffing employees for discrimination and harassment in the
customer's workplace and violations of other employment-related laws and
regulations.
We face potential malpractice liability.
In the event that we experience a large claim, frequent claims or some
other event occurs that causes the rates for the professional malpractice
insurance to increase, there could be a material adverse effect on our business,
operating results and financial condition. Providing Engineering and other
professional services entails a risk of claims of professional malpractice and
similar claims which could have a material adverse effect on our business,
operating results and financial condition. Although we do and will continue to
maintain insurance that we believe is adequate as to risks and amount, we cannot
assure you future claims will not exceed the coverage amounts or that the
insurance policies will indemnify us in any particular circumstance.
We are dependent on several major customers.
For the year ended September 30, 1998 and the six months ended March 31,
1999, our five largest clients accounted for approximately 49% and 47% of our
revenues. The loss of or a material reduction in revenues from one or more large
clients could have a material adverse effect on our business. Our contracts to
perform services may be canceled or modified by clients at will without penalty.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Breaches or failure of our Internet based management information system
could harm our operations.
Security breaches of our management information system or an extensive
failure of the system could significantly harm our business by affecting our
monitoring of the financial and operating performance of the business. As our
management information system connecting all our offices and operations is an
Internet based system, any failure of the Internet or any security measures we
employ could affect our ability to monitor and control our operations and could
also result in our confidential information or our clients' confidential
information being accessed by unauthorized viewers.
Year 2000 risks may harm our business.
The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. We rely on information technology supplied by
third parties, and our third party suppliers and vendors also are dependent on
information technology systems and on their own third party vendors' systems.
Year 2000 problems experienced by us or any third parties could materially
adversely affect our business.
We have evaluated our internal information technology systems and
contacted our information technology suppliers and third party suppliers and
vendors to ascertain their year 2000 status. However, we cannot guarantee that
any of our third party suppliers and venders will be Year 2000 compliant in a
timely manner, or that there will not be significant interrelated operational
problems among information technology systems.
9
<PAGE>
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations-Year 2000 Readiness Disclosure".
Risks Related to Government Regulation
Regulatory and legal uncertainties could harm our business.
The implementation of unfavorable governmental regulations or
unfavorable interpretations of existing regulations by courts or regulatory
bodies, could require us to incur significant compliance costs, cause the
development of the affected markets to become impractical or otherwise
adversely affect our financial performance.
If we are determined to be a "Professional Employer Organization", we
cannot assure you that we will be able to satisfy licensing requirements or
other applicable regulations. Certain states have enacted laws which govern the
activities of Professional Employer Organizations, which generally provide
payroll administration, risk management and benefits administration to client
companies. These laws vary from state to state and generally impose licensing or
registration requirements for Professional Employer Organizations and provide
for monitoring of the fiscal responsibility of these organizations. We believe
that Stratus is not a Professional Employer Organization and not subject to the
laws which govern such organizations; however, the definition of Professional
Employer Organization varies from state to state and in some states the term is
broadly defined. In addition, we can give no assurance that the states in which
we operate will not adopt licensing or other regulations affecting companies
which provide commercial and professional staffing services. See "Business -
Regulation".
Risks Related to the Offering
Concentrated control could adversely affect stockholders.
Upon consummation of this offering, Directors, Officers and Senior
Management of Stratus will control approximately 33.62 % of our outstanding
voting stock. As a result, if they act together, they may have the ability to
influence the outcome on all matters requiring stockholder approval, including
the election and removal of directors and any merger, consolidation or sale of
all or substantially all of our assets, and the ability to control our
management and affairs. Such control could discourage others from initiating
potential merger, takeover or other change of control transactions. As a result,
the market price of our Common Stock could be adversely affected. See
"Management" and "Description of Securities".
10
<PAGE>
Anti-takeover provisions affecting us could prevent or delay a change of
control and this could affect our stock price.
Prior to this offering our Certificate of Incorporation and Bylaws will be
amended to include provisions that may discourage, delay or prevent a change in
control that some stockholders may consider favorable. As a result, these
provisions could limit the price that investors are willing to pay in the future
for shares of Common Stock. See " Description of Securities - Anti Takeover
Effects of the Charter Documents and Delaware Law".
You will experience immediate and substantial dilution.
The initial public offering price is expected to be substantially higher
than the net tangible book value of each outstanding share of Common Stock.
Purchasers of Common Stock in this offering will suffer immediate and
substantial dilution. The dilution will be $6.75 per share in the net tangible
book value of the Common Stock from the expected initial public offering price.
If the warrants offered hereby and the other outstanding options and warrants to
purchase shares of Common Stock are exercised, there would be further dilution.
See "Dilution".
74.5% of our total outstanding shares are restricted from immediate resale
but may be sold in the future which could cause the market price of our Common
Stock to drop significantly even if our business is doing well.
Sales of a substantial number of shares of Common Stock in the public
market following this offering could cause the market price of our Common Stock
to decline. After this offering, we will have outstanding 5,299,400 shares of
Common Stock assuming no exercise of warrants and options. The 1,500,000 shares
offered for sale through the underwriters will be freely tradable. Of the
remaining 3,799,400 shares of Common Stock outstanding after this offering,
1,027,533 will be eligible for sale in the public market beginning 12 months
after the effective date of this prospectus. The remaining 2,771,867 shares will
become eligible for sale 24 months after the effective date of this prospectus.
See "Shares Eligible for Future Sale."
11
<PAGE>
Management's failure to apply the offering proceeds effectively could
result in unfavorable returns.
The failure of our management to apply the offering proceeds effectively
could result in unfavorable returns. This could have significant adverse effects
on our financial condition and could cause the price of our common stock to
decline. Most of the net proceeds of this offering are not allocated for
specific uses. Our management has broad discretion to spend the proceeds from
this offering in ways with which stockholders may not agree. See "Use of
Proceeds".
Special note regarding forward-looking statements.
Some of the statements under the "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels or activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "could", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential", or "continue" or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we, nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of 1,500,000 shares of Common Stock
being offered by us are estimated to be approximately $9,417,779. This estimate
is based on an assumed public offering price of $7.50 per share, after deducting
the estimated underwriting discounts and commissions and the estimated offering
expenses.
The principal purposes of this offering are to:
o repay approximately $2,000,000 of outstanding debt incurred to
support our operations which bears interest at rates which range
from 12% per annum to 24% per annum and which becomes due upon
completion of this offering.
o Pay $1,210,000, in satisfaction of the balance of the purchase price
for the acquisition of B&R Employment, Inc., a staffing company
acquired in January 1999, which bears interest at a rate of 10% per
annum and which becomes due on March 1, 2000 or 30 days after the
completion of this offering.
The balance of the funds will be used for working capital and general
corporate purposes. We may also use a portion of the net proceeds to acquire
additional businesses that we believe will complement our current or future
business. However, we have no specific plans, agreements or commitments to do so
and although we are in frequent discussion with potential acquisition targets,
at this time there are no discussions that we believe can be considered likely
to result in a transaction. The amounts that we actually expend for general
corporate purposes will vary significantly depending on a number of factors,
including future revenue growth, if any, and the amount of cash we generate from
operations. As a result, we will retain broad discretion in the allocation of a
portion of the net proceeds of this offering. Pending these uses, we will invest
the net proceeds in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock. We
currently intend to retain any future earnings for financing growth and do not
expect to pay any dividends in the foreseeable future.
13
<PAGE>
DILUTION
At March 31, 1999 we had a negative net tangible book value of $5,800,000
or approximately ($1.56) per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities and divided by the total number of shares of Common Stock.
Dilution in pro forma net tangible book value per share represents the
differences between the amount per share paid by purchasers of shares of Common
Stock in this offering and the pro forma net tangible book value per share of
Common Stock immediately after the completion of this offering. After giving
effect to the sale of the 1,500,000 shares of Common Stock offered by us at an
assumed initial public offering price of $7.50 per share, and after deducting
the underwriting discount and estimated offering expenses payable by us, our pro
forma net tangible book value at March 31, 1999 would have been approximately
$3.9 million or $0.75 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $2.31 per share to existing
stockholders and an immediate dilution of $6.75 per share to new investors of
Common Stock. The following table illustrates this dilution on a per share
basis:
Assumed initial public offering price per share.. $ 7.50
Pro forma net tangible book value per
share as of March 31, 1999.................. $(1.56)
Increase per share attributable to
new investors............................... $ 2.31
Pro forma net tangible book value per
share after this offering..................... 0.75
Dilution per share to new investors.... $ 6.75
The following table summarizes on a pro forma basis after giving effect to
the offering (based on an assumed initial public offering price of $7.50 per
share), as of March 31, 1999, the differences between the existing stockholders
and new investors with respect to the number of shares of Common Stock purchased
from us, the total consideration paid to us and the average price per share
paid:
Average
Price Per
Shares Purchased Total Consideration Share
------------------- ------------------- ---------
Number Percent Amount Percent
------ ------- ------- --------
Existing stockholders .. 3,754,000 71.4 2,190,000 16.3 .58
New Investors .......... 1,500,000 28.6 11,250,000 83.7 7.50
--------- ---- ---------- ----- ----
Total ............... 5,254,000 100.0% 13,440,000 100.0%
------ -----
The foregoing discussions and tables are based upon the number of shares
actually issued and outstanding on March 31, 1999 and assume no exercise of any
of the options and warrants outstanding as of March 31, 1999. To the extent
these options and warrants are exercised, there will be further dilution to
investors.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Prospectus.
Introduction
We provide a wide range of staffing and engineering services nationally
through a network of fifteen offices in ten states. Although we were
incorporated on March 11, 1997, operations effectively commenced on August
11, 1997 with the acquisition of certain operating assets of Royalpar
Industries, Inc. and its subsidiaries. Since August 1997, through internal
growth and two acquisitions (in January 1999 and April 1999) we have grown from
the original five Royalpar offices in five states.
We recognize revenues based on hours worked by assigned personnel.
Generally, we bill our customers a pre-negotiated fixed rate per hour for the
hours worked by our temporary employees. We are responsible for workers'
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and other general payroll related expenses for all of the temporary
employees we place. These expenses are included in the cost of revenue. Because
we pay our temporary employees only for the hours they actually work, wages for
our temporary personnel are a variable cost that increases or decreases in
proportion to revenues. Gross profit margin varies depending on the type of
services offered. Our Engineering Services typically generate higher margins
while staffing services typically generates lower margins. In some instances,
temporary employees placed by us may decide to accept an offer of permanent
employment from the customer and thereby "convert" the temporary position to a
permanent position. Fees received from such conversions are included in our
revenues. Selling, general and administrative expenses include payroll for
management and administrative employees, office occupancy costs, sales and
marketing expenses and other general and administrative costs.
Results of Operations
The following table sets forth certain selected operating results for the
period from inception of operations (August 11, 1997) through September 30,
1997, for the fiscal year ended September 30, 1998 and for the six months ended
March 31, 1998 and 1999.
<TABLE>
<CAPTION>
August 11, 1997 to Year Ended Six Months Ended Six Months Ended
September 30, 1997 September 30, 1998 March 31, 1998 March 31, 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $2,442,191 100.0% $24,919,639 100.0% 10,474,459 100.0% 12,920,225 100.0%
Cost of Revenues 2,005,847 82.1% 20,329,718 81.6% 8,642,170 82.5% 10,307,710 79.8%
Gross Profit 436,344 17.9% 4,589,921 18.4% 1,832,289 17.5% 2,612,515 20.2%
Selling, general and
administrative expenses (739,431) -30.3% (4,677,581) -18.8% (1,938,222) -18.5% (2,979,960) -23.1%
Depreciation and
amortization (1,985) -0.1% (108,306) -0.4% (18,844) -0.2% (75,032) -0.6%
Provision for recourse
obligation (50,000) -2.0% (670,445) -2.7% (8,851) -0.1% (595,000) -4.6%
Loss from operations (355,072) -14.5% (866,411) -3.5% (133,628) -1.2% (1,037,477) -8.1%
Other income (expenses):
Finance charges (39,078) -1.6% (524,649) -2.1% (173,630) -1.7% (369,307) -2.9%
Interest expense (15,244) -0.6% (48,170) -0.2% (28,888) -0.3% (121,289) -0.9%
Other income -- 0.0% 33,729 0.1% 11,506 0.1% 11,383 0.1%
Other (expenses) -- 0.0% (1,074,294) -4.3% -- 0.0% (237,164) -1.8%
--------------------------------------------------------------------------------------------------------
Net (loss) ($409,394) -16.7% ($2,479,795) -10.0% ($324,640) -3.1% ($1,753,854) -13.6%
========================================================================================================
</TABLE>
15
<PAGE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1998
Revenues. We effectively commenced operations with the acquisition of
certain operating assets of Royalpar on August 11, 1997. Revenues for the fiscal
period beginning October 1, 1996 (i.e., predating our acquisition of Royalpar)
and ending on September 30, 1997, were $18,947,269 (representing revenues of
$16,505,078 prior to the acquisition and $2,442,191 subsequent to the
acquisition). Revenues for the fiscal period beginning on October 1, 1997 and
ending on September 30, 1998 were $24,919,639. Revenues increased by $5,972,370
or 31.5% from 1997. Revenues increased primarily due to the commencement of the
Engineering Services Division in January 1998.
Gross Profit. Gross profit increased 54.9% to $4,589,921 in 1998 from
$2,963,428 in 1997. Gross profit as a percentage of revenues increased to 18.4%
in 1998 from 15.6% in 1997. This increase was due to the elimination of some
customers with low gross margins and the start-up of the high-margin Engineering
Services Division.
Selling, General and Administrative Expenses. We incurred nonrecurring and
pre-operating and startup costs in connection with our acquisition of certain
operating assets of Royalpar. These costs amounted to $94,063 and represented
3.9% of revenues for the period from August 11, 1997 through September 30, 1997.
This amount included costs such as legal costs and state application fees. These
costs for the year ended September 30, 1998 were not significant. Our selling,
general and administrative expenses, not including depreciation and
amortization, for the fiscal year ended September 30, 1998 were $4,677,581 or
18.8% of revenues. In anticipation of making acquisitions and introducing our
SMARTSolutions program, we incurred significant costs beginning in the third
quarter of 1998, without a corresponding increase in revenues. These costs
included salaries of certain key employees retained in anticipation of these
projects. We believe that revenues can increase significantly without incurring
a proportionate increase in selling, general and administrative expenses.
We believe that the selling, general and administrative expenses included
in the year ended September 30, 1997 for the period October 1, 1996 through
August 10, 1997 for Royalpar are unique to Royalpar and, in managements' opinion
are not reflective of those costs necessary to operate and manage our business.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $108,306 in the year ended September 30, 1998. This amount includes
$67,650 of amortization of goodwill in connection with the acquisition of
certain operating assets of Royalpar. During
16
<PAGE>
the year ended September 30, 1998, we determined that the recoverability of the
goodwill was impaired and accordingly, charged the remaining balance of
approximately $64,000 of goodwill to operations.
Provision for recourse obligation. Provision for recourse obligation in
the year ended September 30, 1998 was $670,445, or 2.7% of revenues. This cost
is the estimated amount of uncollectible accounts receivable sold to a factor
which we are required to repurchase under the agreement with the factor. Almost
all of this amount was due to the uncertainty of recoverability of one account
and a group of psychiatric clinics.
Finance charges. Finance charges is comprised of the discount fees and
other costs associated with our accounts receivable that are sold to a factor.
This agreement, which expires August 10, 2000, provides that we sell
substantially all of our accounts receivable to the factor. The factor purchases
the accounts receivable at a discount of 1.3% and further discounts the amount
purchased by .43% for each day the accounts receivable purchased remain
outstanding after 30 days. Finance charges in the year ended September 30, 1998
was $524,649. As a percentage of revenues, finance charges increased to 2.1% in
the year ended September 30, 1998 from 1.6% for the period August 11, 1997
through September 30, 1997. This increase was due to the increase in the average
days' outstanding of the accounts receivable sold.
Other Expenses. Other expenses in the year ended September 30, 1998 is
comprised of the following:
Settlement of litigation and associated legal and other
costs $798,000
Legal and other costs in connection with impairment
of JPI assets 174,688
Leased equipment abandonment 73,894
Office closing costs 27,712
----------
Total $1,074,294
Six Months Ended March 31, 1999 Compared to Six Months Ended March 31,
1998
Revenues. Revenues increased 23.3% to $12,920,225 for the six months ended
March 31, 1999 from $10,474,459 for the six months ended March 31, 1998.
Revenues increased primarily due to the commencement of the Engineering Services
Division in January 1998 (i.e., three months of operations in the six months
ended March 31, 1998 versus a full six months of operations in the six months
ended March 31, 1999) and the implementation of our first SMARTSolutions
programs in December 1998.
Gross Profit. Gross profit increased 42.6% to $2,612,515 for the six
months ended March 31, 1999 from $1,832,289 for the six months ended March 31,
1998. Gross profit as a percentage of revenues increased to 20.2% for the six
months ended March 31, 1999 from 17.5% for the six months ended March 31, 1998.
This increase was due to the commencement of the Engineering Services Division
in January 1998, which services have higher gross margins than the other
services we provided.
17
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, not including depreciation and amortization, increased
53.70% to $2,979,960 for the six months ended March 31, 1999 from $1,938,222 for
the six months ended March 31, 1998. Selling, general and administrative
expenses as a percentage of revenues increased to 23.1% for the six months ended
March 31, 1999 from 18.5% for the six months ended March 31, 1998. The primary
reason for this increase was that, in anticipation of making acquisitions and
introducing our SMARTSolutions program, we incurred significant costs without a
corresponding increase in revenues.
Depreciation and Amortization. Depreciation and amortization expenses
increased 295.20% to $75,032 for the six months ended March 31, 1999 from
$18,844 for the six months ended March 31, 1998. Depreciation and amortization
expenses as a percentage of revenues increased to 0.5% for the six months ended
March 31, 1999 from 0.6% for the six months ended March 31, 1998. This increase
was primarily due to the amortization of goodwill associated with the
acquisition of B&R in January 1999.
Provision for recourse obligation. Provision for recourse obligation
increased to $595,000 for the six months ended March 31, 1999 from $8,851 for
the six months ended March 31, 1998. Provision for recourse obligation as a
percentage of revenues increased to 4.6% for the six months ended March 31, 1999
from 0.1% for the six months ended March 31, 1998. The amount for the six months
ended March 31, 1999 was attributable to additional sales of accounts receivable
to the factor, generated during this period, from the accounts previously
discussed under this caption in the year ended September 30, 1998 analysis.
Finance charges. Finance charges increased 112.7% to $369,307 for the six
months ended March 31, 1999 from $173,630 for the six months ended March 31,
1998. As a percentage of revenues, finance charges increased to 2.9% for the six
months ended March 31, 1999 from 1.7% for the six months ended March 31, 1998.
This increase was due to the increase in average days' outstanding of the
accounts receivable sold, primarily caused by the accounts discussed under
"Provision for recourse obligation".
Other Expenses. Other expenses were $237,164 or 1.8% of revenues for the
six months ended March 31, 1999. There were no "other expenses" for the six
months ended March 31, 1998. Other expenses are comprised of $173,112 for legal
fees in connection with our administrative actions pertaining to the attempted
unionization of a customer facility, $27,000 for legal fees for collection
matters and $37,052 for additional costs associated with the impairment of the
JPI assets.
Interest expense. Interest expense increased 319.9% to $121,289 for the
six months ended March 31, 1999 from $28,888 for the six months ended March 31,
1998. As a percentage of revenues, interest expense increased to 0.9% for the
six months ended March 31, 1999 from 0.3% for the six months ended March 31,
1998. This increase was due to increased borrowings of $400,000 necessary to
satisfy a litigation settlement and a working capital shortfall.
Net loss. As a result of the foregoing, the net loss increased 440.2% to
$1,753,854 for the six months ended March 31, 1999 from $324,640 for the six
months ended March 31, 1998. The net loss as a percentage of revenues increased
to 13.6% for the six months ended March 31, 1999 from 3.1% for the six months
ended March 31, 1998. We have a net loss carryforward for Federal income tax
purposes of $1,709,000 at September 30, 1998.
Liquidity and Capital Resources
Net cash used in operating activities was $43,373 in the period from
August 11, 1997 (commencement of operations) to September 30, 1997, $639,488 in
the year ended September 30, 1998 and $546,375 and $304,208 in the six months
ended March 31, 1998 and 1999, respectively. Approximately $527,000 of the cash
used in operating activities in the year ended
18
<PAGE>
September 30, 1998 was for the settlement of litigation and related costs. The
decrease in cash used in operating activities in the six months ended March 31,
1999 as compared to the six months ended March 31, 1998 was due to the increase
in revenues and therefore, an increase in sales of accounts receivable to the
factor.
Net cash used in investing activities was $151,689 in the period from
August 11, 1997 (commencement of operations) to September 30 1997, $186,477 in
the year ended September 30, 1998 and $19,595 and $341,732 in the six months
ended March 31, 1998 and 1999, respectively. Cash used in investing activities
for the periods presented was attributable to the acquisitions and capital
expenditures. The acquisition of Royalpar, J.P. Idustrial LLC and B&R resulted
in a use of cash of $150,000, $89,688 and $142,431 in the period ended September
30, 1997, the year ended September 30, 1998 and the six months ended March 31,
1999, respectively.
Net cash provided by financing activities was $287,934 in the period
ending September 30, 1997, $983,080 in the year ended September 30, 1999 and
$545,180 and $800,000 in the six months ended March 31, 1999 and 1998,
respectively. The sources of cash provided by financing activities for the
periods presented were from the net proceeds of borrowings and two private
placements of our Common Stock. Subsequent to March 31, 1999, we raised $825,000
through June 30, 1999 from our third private placement.
Our principal uses of cash are to fund temporary employee payroll expense
and employer related payroll taxes; investment in capital equipment; start-up
expenses of new offices; expansion of services offered; and costs relating to
other transactions such as acquisitions and legal expenses. Temporary employees
are paid weekly. Although, we sell substantially all of our accounts receivable
to a factor, the factor initially only remits to us 90% of the face amount of
the accounts receivable purchased. The net balance after the purchase fee and
other costs of the factor are remitted to us after the factor receives the
customer remittance which is generally 45 days from the time work was performed
by the temporary employees. Due to the failure of certain customers to pay
amounts owed to us, we are currently in default of our agreement with the factor
to whom we sell our receivables. At this time, the factor has not elected to
exercise its remedies against us.
Expansion of our services requires expenditures for marketing and
personnel costs at varied levels up to six months in advance of generating any
revenues.
19
<PAGE>
While there can be no assurance, we believe that the proceeds of
this offering, funds currently on hand and funds to be provided by operations
will be sufficient to meet our need for working capital for the next 12 months.
Our estimate of the time that the proceeds of this offering, funds currently on
hand and funds provided by operations will be sufficient to meet our working
capital needs is a forward-looking statement that is subject to risks and
uncertainties. Actual results and working capital needs could differ materially
from those estimated due to a number of factors.
Year 2000 Readiness Disclosure
We have tested all of our desktop computers and computers used in our
centralized network for Year 2000 compliance with Year 2000 compliance testing
software. All units are Year 2000 compliant. There are a number of
non-information embedded systems impacting on our operations over which we have
no control, including building security and telephone. We have surveyed the
system providers or those responsible for the maintenance of the systems who
have indicated that the systems are Year 2000 compliant. All software programs
on which we rely are warranted by the manufacturer or vendor to be Year 2000
compliant.
We have surveyed our vendors and customers to assess their Year 2000
compliance status. If our customers are not Year 2000 compliant, they may
experience disruptions to operations, material costs to remedy problems and
litigation costs. In addition, these customers may delay payment of outstanding
accounts, which would affect our operations. We are also subject to external
forces that might generally affect industry and commerce, such as utility,
transportation company or Internet interruptions caused by Year 2000 compliance
failures. As a result, our business, financial condition and results of
operations could be seriously impacted. See " Risk Factors - Year 2000 risks may
harm our business" and "Risk Factors - Breaches or Failure of our Internet
based Management Information System could harm our Operations".
We have funded our Year 2000 plan from cash balances. It is not possible
to identify the costs expended to address the Year 2000 problem as the review
was conducted as part of our installation and usual maintenance program. We do
not expect to expend further funds in addressing the Year 2000 problem except
where additional assets are acquired that could be affected by the Year 2000
problem. In such a case, a Year 2000 review will be conducted on that asset.
As all of our hardware systems have been tested to be Year 2000 compliant
and all software on which our operations are dependent is warranted to be Year
2000 compliant, a Year 2000 contingency plan was not considered to be necessary.
The only Year 2000 problems which could affect us are those relating to our
customers or to external forces that might generally affect industry and
commerce, such as utility or transportation company interruptions.
20
<PAGE>
BUSINESS
General
We were incorporated in March 1997 and purchased assets of Royalpar
Industries, Inc. and subsidiaries, a corporation that was the subject of a
bankruptcy proceeding, in August 1997. The purchase provided a foundation to
become a national provider of comprehensive staffing services through five
offices in Arizona, California, Colorado, New Jersey, and Texas. Subsequently we
opened or purchased additional offices in Florida, Oregon and Delaware. As of
March 31, 1999, we were operating through a network of fifteen offices in ten
states including Staffing Services offices in Arizona, California, Colorado,
Delaware, Florida, New Jersey and Texas; Engineering Services offices in
California, New Jersey, and Oregon and SMARTSolutions programs at client
facilities in New Jersey, Michigan and Missouri.
We believe that as businesses increasingly outsource a wider range of
human resource functions in order to focus on their core operations, they will
require more sophisticated and diverse services from their staffing providers.
We have structured Stratus to endeavor to service these needs. In addition to
supplying temporary workers for short-term needs, our Staffing Services Division
also provides extended-term temporary employees, temporary-to-permanent
placements, recruiting, permanent placements, payroll processing, on-site
supervising and human resource consulting. Our Engineering Services Division
provides a full range of services including staff augmentation and in-house
design work. Through our SMARTSolutions Division, we provide a comprehensive,
customized staffing program designed to reduce labor and management costs and
increase workforce efficiency.
Our emphasis on providing comprehensive staffing solutions is intended to
appeal to a broad range of potential clients, including regional and national
companies. It is our intent to provide companies with a single-source solution
to their staffing needs by combining, integrating and cross-selling services
already provided by our three divisions. It is anticipated that cross-marketing
will enable us to reduce our business development costs and serve larger
companies seeking comprehensive staffing services on a regional or national
basis. We believe that a comprehensive service offering approach will assist us
in establishing multiple contacts within existing and new clients that should
contribute to more extensive and longer-term relationships.
Staffing Services Industry Overview
The staffing industry encompasses a wide range of services to businesses,
professional and service organizations and government agencies. The U.S.
staffing industry has grown rapidly in recent years as organizations have sought
to reduce costs and improve operating efficiency by outsourcing human resource
functions. Staffing Industry Analysts, Inc. estimates that gross revenues across
the entire U.S. staffing industry have grown since 1991 at a compound annual
growth rate of 18.8%, from approximately $31.4 billion in 1991 to approximately
$75 billion in 1998. The National Association of Temporary Staffing Services
reports that more than 90% of all businesses used temporary staffing employees
in 1998.
21
<PAGE>
The U.S. staffing industry is highly fragmented and has begun to
experience consolidation, particularly with respect to temporary staffing
companies. Recent industry reports indicate that over 9,300 companies provide
temporary staffing services in the United States. Many of these companies are
small, owner-operated businesses with limited access to capital for development
and expansion. We believe that the industry is consolidating in response to (i)
the increased demands of companies for a single supplier of a full range of
staffing and human resource services, (ii) increased competition from larger,
better capitalized competitors and (iii) owners' desires for liquidity. Although
some consolidation activity has already occurred, we believe that consolidation
in the U.S. staffing industry will continue and that there will be numerous
available acquisition candidates.
Historically, the demand for temporary staffing employees has been driven
by a need to temporarily replace regular employees. More recently, competitive
pressures have forced businesses to focus on reducing costs, including
converting fixed labor costs to variable and flexible costs. Increasingly, the
use of temporary staffing employees has become widely accepted as a valuable
tool for managing personnel costs and for meeting specialized or fluctuating
employment requirements. Organizations have also begun using temporary staffing
to reduce administrative overhead by outsourcing operations that are not part of
their core business operations, such as recruiting, training and benefits
administration. By utilizing staffing services companies, businesses are able to
avoid the management and administrative costs that would be incurred if full
time employees were employed. An ancillary benefit, particularly for smaller
businesses, is that use of temporary personnel reduces certain employment costs
and risks (for example, workers' compensation and medical and unemployment
insurance) that a temporary personnel provider can spread over a much larger
pool of employees.
Since 1990, the staffing industry has seen an evolution of services move
away from "temp help" or supplemental staffing, to more permanent staffing
relationships. The industry has developed specialization among various sectors
and can be classified into four categories: integrated staffing service
providers, professional services providers, information technology providers and
commodity providers.
Integrated staffing services provide a vendor-on-premise acting as the
general contractor managing the workforce and maintaining the payroll. Through
this arrangement, providers are able to establish long-term relationships with
their customers, reduce cyclicality of employees, and maintain relationships
with customers that are less price sensitive.
The professional services provider supplies employees in the fields of
engineering, finance, legal, accounting, and other professions. In general,
these services are less cyclical than the light industrial and clerical segments
and carry higher margins. Information technology companies offer technical
employees to maintain and implement all forms of information systems.
The commodity segment of the staffing industry is the traditional
temporary employer business in which an employee of the service is placed at the
customer for a short period. It is characterized by intense competition and low
margins. This sector is most exposed to economic cycles and price competition to
win market share. Growth in this segment has been constrained over the past
three years due to a competitive labor market for low-end workers.
22
<PAGE>
The staffing industry has been significantly impacted over the past three
years by a limited supply of workers. Low unemployment rates nationally and
regionally have resulted in companies being unable to access a sufficient supply
of workers. The labor shortage at the low end of the labor market could
constrain staffing industry growth in the traditional staffing segments of
clerical and light industrial.
Services
SMARTSolutions. SMARTSolutions is a customized staffing program designed
to reduce labor and management costs and increase workforce efficiency. The
programs typically require an eight-week implementation process beginning with
an operational assessment of the client's tasks and processes conducted by the
SMARTSolutions implementation team. The team compiles and analyzes the data and
then presents its recommendations to the client's senior management. Together
they establish an implementation timeline with target dates and responsibility
checklists. Once the timeline is approved, a workforce training curriculum or
SMARTTraining Program is developed and implemented by a team of associates
headed by the On-site Manager. Monthly performance is reported to the client
through SMARTReports that track workforce performance, analyze that performance
against the pre-determined goals and adjust programs to meet evolving customer
needs.
The typical SMARTSolutions client is a large-scale employer with a
workforce of greater than 50 people dedicated to specific work functions that
involve repetitive tasks that are measurable through worker output.
SMARTSolutions is designed to be most effective in manufacturing, distribution
and call center operations.
Engineering Services. Engineering Services requires highly specialized and
technically skilled employees that demand significantly higher hourly rates than
traditional temporary staffing services. Engineering Services augments
customers' in-house engineering capability by supplying Stratus engineers as
contract labor. We will also take the lead role as the project manager on
specific engagements and provide a full range of services that include design
requirements, scheduling, drawing and specification management, field
supervision and quality assurance. On large engagements, we may take
responsibility for specific areas of the engagement only, or supply staff to the
project manager.
In addition to staff augmentation, we provide a broad range of project
support to Fortune 100 companies, government agencies and educational
institutions in electrical engineering, instrumentation and controls, mechanical
engineering, piping & pipe support analysis, civil, structural and architectural
engineering. We have developed an expertise providing services to utilities and
cogeneration facility operators, and are one of a small number of engineering
staffing firms in the United States with a "Class A Nuclear Certification"
qualifing us to provide staffing services to nuclear power plants. Projects
typically last six months to one year and may require the services of several
specialized professionals.
Staffing Services. Staffing Services includes both personnel placement and
employer services such as payrolling, outsourcing, on-site management and
administrative services. Payrolling, which is also referred to as employee
leasing, typically involves the transfer of a customer's employees to our
payroll. Outsourcing represents a growing trend among businesses to contract
with third parties to provide a particular function or business department
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for an agreed price over a designated period. On-site services involves locating
a Stratus employee at the customer's place of business to manage all of the
customer's temporary staffing requirements. Administrative services include
skills testing, drug testing and risk management services. Skills testing
available to Stratus customers includes cognitive, personality and psychological
evaluation and drug tests are confirmed through an independent certified
laboratory.
Staffing Services can also be segmented by assignment types into
supplemental staffing, long-term staffing and project staffing. Supplemental
staffing provides workers to meet variability in employee cycles, and
assignments typically range from days to months. Long-term staffing provides
employees for assignments that typically last three to six months but can
sometimes last for years. Project staffing provides companies with workers for a
time specific project and may include providing management, training and
benefits.
Strategy
We intend to expand operations by internal growth and through acquisition.
Internal Growth Strategy. Internal growth is expected to be generated from
implementation of the following strategies:
(i) Increasing Penetration of Existing Markets. We continually seek to
add new customers and offices in existing geographic markets through
increased marketing and, where appropriate, the introduction of
complimentary or specialty services. We recently implemented an
incentive program for local managers and sales staff that focuses on
new business development within existing markets. However, we also
focus on creating and developing the long-term client relationships
that we believe are essential to growth and the successful
implementation of our cross-selling strategy.
(ii) Entering New Markets. We intend to open new branches in markets not
currently served by existing offices. Initially new offices will be
established when demand warrants, such as where a number of
SMARTSolutions programs have been implemented in a defined
geographical area. However, where we believe an area has either
economic or strategic importance, an office may be established even
though we have no existing presence in the area.
(iii) Expanding Service Offerings. We offer a wide range of staffing
services to our clients, all of which are available on a stand alone
basis or as part of a more comprehensive staffing solution. This
gives us the flexibility to provide customized service based on the
client's individual requirements. As part of this process, we will
seek to expand the range of services available to our clients
through the development of additional services as client needs
warrant.
(iv) Cross-Selling Services. We actively seek to cross-sell Staffing
Services, Engineering Services, and SMARTSolutions to existing
customers.
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Acquisition Strategy. The staffing services industry in the United States
is highly fragmented, thereby offering significant opportunities for us to
complement our internal growth by pursuing strategic acquisitions. The key
objectives of our acquisition program are (i) to enter new geographic markets;
(ii) to expand our presence in our current markets; (iii) to expand our presence
in existing niche markets, and (iv) to further broaden our range of staffing
services.
We have developed a comprehensive acquisition and integration strategy to
develop both existing and new markets. The strategy will be implemented and
supported by a team with previous experience in sourcing, negotiating,
structuring and integrating acquisitions of diverse sizes and multiple
geographic locations. Our focus will be to target companies that have a history
of growth and profitability, strong first and second tier management, a
reputation for quality services and the infrastructure necessary to be a core
business into which other operations may be consolidated.
Ideal acquisitions will be immediately accretive to earnings, with
revenues between $5 million and $25 million and earnings before interest and
taxes of 4.5% to 7% of revenues. In addition to traditional staffing services
companies, we will focus on acquiring Information Technology services firms with
the goal of eventually creating an Information Technology Division once business
levels warrant. As consideration for future acquisitions, we intend to use
various combinations of stock, cash and debt. The consideration for each future
acquisition will vary on a case-by-case basis, with the major factors in
establishing the purchase price being historical operating results, future
prospects of the business to be acquired and the ability of that business to
complement the services we offer and to implement additional service offerings.
We believe we can achieve significant cost savings and operating efficiencies by
combining a number of general and administrative functions at the corporate
level.
As part of the integration process, we provide immediate support to the
acquired company through sales and operations training, risk management,
compliance support and access to management information systems. In addition, we
are currently in the process of developing a revised Policies and Procedures
manual through Quality Assurance Teams, that takes advantage of the industry
knowledge of many of the people who have joined us over the past year. The goal
of these Teams is to review, revise, and implement an effective set of policies
and procedures designed to standarize our operations across the country, thereby
gaining additional operating efficiencies. We also view this process as the
first step towards gaining ISO9000 certification.
Pursuant to our acquisition strategy, in August 1998, we acquired the
assets of J.P. Industrial, LLC, an Oregon Engineering Services firm. We made
this acquisition to expand our presence in the engineering services intensive
power generation and paper/wood product industries in the Pacific Northwest. In
January 1999, we completed the acquisition of the assets of B & R Employment,
Inc. ("B & R"), a Wilmington, Delaware based provider of traditional staffing
services, giving us an immediate presence in the industrial and banking center
of Delaware. Although smaller in size than the target acquisitions, these
acquisitions enabled us to enter industrial and geographic markets targeted by
our management team as attractive areas for expansion.
Operations
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Operations are classified into SMARTSolutions. Engineering Services and
Staffing Services, each reporting to a Division President who reports directly
to the Chief Executive Officer.
We believe acquisitions will contribute significantly to our growth. To
maximize the likelihood of successful acquisitions and their integration into
the existing operations, we have formed a dedicated acquisitions team consisting
of employees and external consultants reporting directly to the Chief Executive
Officer.
The Chief Financial Officer oversees the traditional financial fiduciary
functions, manages general administrative duties, human resources, risk
management and the legal department. As all administrative functions report to
the Chief Financial Officer, the administrative obligations of the Chief
Executive Officer and Division Presidents are minimized, enabling them to focus
on the generation of revenue. The Chief Marketing Officer is responsible for
overseeing national sales training and development, developing large corporate
accounts, selling the SMARTSolutions programs and overseeing all of the sales
and marketing activities of the branch offices.
The Staffing Services branches all report to the President of the Staffing
Services Division. Typically each individual branch has a Branch Manager
responsible for the daily operating activity of the branch, maintaining customer
relationships and generating new sales in the region with the support of branch
salespeople. The placement and recruiting of personnel in the branch offices is
handled by recruiting coordinators and supported by administrative assistants.
Branch offices are supported through centralized functions at corporate
headquarters that include marketing, recruiting, training and retention
programs, workers' compensation and other insurance services, accounts payable,
purchasing, credit, legal review and other administrative support services. Each
branch office is networked to our centralized computer system and utilizes
industry-specific software that provides information on customer requirements,
available applicants, staffing employees on assignment and other information
which facilitates efficient response to customer job orders.
Although many of the support functions are centralized, local managers
have the flexibility and limited authority to price services and respond to
specific customer requirements. Regular manager meetings are held with regional
managers where goals are set, progress is checked and follow through on
corporate initiatives is reviewed.
Sales And Marketing
General.
Our marketing professionals have developed a marketing plan which
establishes minimum numbers of targeted customer sales visits, customer service
visits, and minimum sales volume to be achieved on a weekly basis.
Implementation of the plan is monitored by the Chief Marketing Officer who
reviews information provided in weekly sales activity reports. Branch sales
professionals and Branch Managers are responsible for weekly and monthly sales
management reporting and participate in periodic sales and customer retention
training programs.
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We have developed individual marketing programs and objectives for each
Division.
SMARTSolutions.
SMARTSolutions is marketed to companies that have a workforce devoted to
repetitive tasks and can benefit from proactive workforce management. As such,
it requires a significantly different marketing strategy than traditional
staffing services. A dedicated team has been established to market
SMARTSolutions nationally. That team, headed by the Chief Marketing Officer,
develops quarterly marketing plans complete with quantifiable goals and
objectives, that it presents to the Chief Executive Officer. Once the Chief
Marketing Officer obtains approval, he and the team immediately implement the
plan. We maintain a database of prospective customers that the national
marketing team will solicit through direct mailings to senior corporate
management, personal sales calls, cross-selling to existing customers and
networking through professional organizations.
Although the marketing team will approach clients directly, it primarily
utilizes Branch staff to identify companies within their geographic regions that
could benefit from the implementation of a SMARTSolutions program. After a
potential client has been identified, the team assumes responsibility for the
SMARTSolutions sale process. A significant portion of the leads for
SMARTSolutions sales have come from "word of mouth" recommendations from current
SMARTSolutions customers.
Engineering Services.
Marketing of Engineering Services is focused on addressing the engineering
needs typical of specific customers. In marketing to potential customers, the
Engineering Services staff identifies the requirements of its customers and
promotes service offerings designed to meet those requirements. In addition to
personal sales visits, targeted mailings and telephone solicitations, our
Engineering Services personnel actively promote our services by cross-selling
complementary services to existing customers and participating in industry trade
associations. As is the case with SMARTSolutions, we anticipate that with the
extensive experience of the Engineering Services Division management team, word
of mouth and personal contacts will provide the majority of the sales leads.
Staffing Services.
Staffing Services are marketed through our network of offices whose
managers, supported by the national marketing staff, make regular personal sales
visits to existing accounts and prospects. New customers are obtained through
customer referrals, telemarketing and advertising in a variety of local and
regional media, including radio, direct mail, the Yellow Pages, newspapers,
magazines and trade publications and sponsoring of job fairs and other community
events.
Customers
At March 31, 1999 our top 5 customers accounted for 47% of our revenue and
two customers only accounted for more than 10% each of our revenue.
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Personnel
A key factor contributing to future growth and profitability will be the
ability to recruit and retain qualified personnel. To attract personnel, we
employ recruiters, called "Staffing Specialists" who regularly visit schools,
churches and professional associations and present career development programs
to various organizations. In addition, applicants are obtained from referrals by
existing staffing employees and from advertising on radio, television, in the
Yellow Pages, newspapers and through the Internet. Each applicant for a Staffing
Services position is interviewed with emphasis on past work experience, personal
characteristics and individual skills. We maintain software-testing and training
programs at our offices for applicants and employees who may be trained and
tested at no cost to the applicant or customer.
Engineering Services and consulting personnel are targeted and recruited
for specific engagements. We usually advertise for professionals who possess
specialized education, training or work experience. Engineering Services
recruiting efforts also rely upon industry contacts, personal networks and
referrals from existing and former Engineering Services personnel.
To promote loyalty and improve retention among our employees and to
differentiate ourselves from competing staffing firms, we offer a comprehensive
benefits package after only ninety days of employment instead of the industry
standard of one hundred eighty days. The benefits package includes paid time
off, holiday and vacation time, medical coverage, dental, vision, prescription,
mental health, life insurance, disability coverage and a 401(k) defined
contribution plan. The average length of assignment for employees ranges from
six months to five years depending on the client requirements.
At March 31, 1999, we were providing over 1,000 temporary staffing
employees and professionals to more than 200 clients and employed approximately
65 internal staff.
None of our employees, including our temporary staffing employees and
consultants are represented by a collective bargaining agreement. However, in
January 1999, we received notice that the workforce of one of our customer
facilities had petitioned the National Labor Relations Board to certify a vote
for representation by the United Auto Workers. Despite our efforts to conduct an
anti-union campaign, the vote was held and the workforce voted in favor of union
representation. We are currently appealing the vote and demanding a revote as
certain activities occurred shortly before the vote that affected the conditions
required for a vote to be certified. We anticipate a decision on the appeal in
July 1999 and should the Board rule in our favor, a revote in September 1999.
Should the Board rule against us and all of our other potential appeals are
exhausted, we will be required to meet with the union and negotiate a collective
bargaining agreement.
Infrastructure
Over the past two years, we have expended significant financial resources
and devoted a substantial amount of time developing and implementing systems and
infrastructure, introducing reporting lines of responsibility and recruiting
management to enable us to manage operations and growth in an efficient manner.
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We have installed a variety of management information systems to enable
the different levels of the Management team to monitor economic performance and
business operations on a continuous basis.
Branch offices are supported through centralized functions at corporate
headquarters that include marketing, recruiting, training and retention
programs, workers' compensation and other insurance services, accounts payable,
purchasing, credit, legal review and other administrative support services. Each
branch office is networked to our computer system and industry-specific software
that provides information on customer requirements, available applicants,
staffing employees on assignment and other information which facilitates
efficient response to customer job orders.
By developing an efficient platform from which to operate and expand our
operations, we anticipate gaining economies of scale as we grow.
Workers' Compensation and Payroll
The maintenance of workers' compensation and health insurance plans that
cover worksite employees is a significant aspect of our business. We have
retained the services of an insurance consultant to assist us in obtaining the
most cost-effective workers' compensation program and have created a dedicated
workers' compensation team that analyzes the claims and makes recommendations
regarding reducing our exposure. In addition, the team provides safety programs
to each of the locations. Furthermore, as a value-added service to our clients,
we provide safety inspections at client locations to help determine potential
risks for employee injury and to assist clients in making their workplace safer.
Facilities
We own no real property, but lease space for corporate headquarters and
all of our branch offices. Our corporate headquarters, which is comprised of
6,300 square feet of office space located in Manalapan, New Jersey, is leased
pursuant to an agreement which expires on May 31, 2001. Branch office leases
generally have terms of three to five years. All facilities are adequate for our
existing needs and we do not expect any difficulty in identifying and leasing
additional office space as we expand in existing and new markets.
Competition
We compete with other companies in the recruitment of qualified personnel,
the development of client relationships and the acquisition of other staffing
and professional service companies. A large percentage of temporary staffing and
consulting companies are local operators with fewer than five offices and have
developed strong local customer relationships within local markets. These
operators actively compete with us for business and, in most of these markets,
no single company has a dominant share of the market. We also compete with
larger, full-service and specialized competitors in national, regional and local
markets. The principal national competitors include AccuStaff, Inc., Manpower,
Inc., Kelly Services, Inc., The Olsten Corporation, Interim Services, Inc., and
Norrell Corporation, all of which may have greater marketing, financial and
other resources than Stratus. We believe that the primary competitive factors in
obtaining and retaining clients are the number and location of offices, an
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understanding of clients' specific job requirements, the ability to provide
temporary personnel in a timely manner, the monitoring of the quality of job
performance and the price of services. The primary competitive factors in
obtaining qualified candidates for temporary employment assignments are wages,
responsiveness to work schedules and number of hours of work available. We
believe our long-term client relationships and strong emphasis on providing
service and value to our clients and temporary staffing employees makes us
highly competative. See "Risk Factors - Significant Industry Competition" and
"Risk Factors - Competition for Personnel".
We also compete for acquisition candidates. We believe that further
industry consolidation will continue during the next several years. However,
there is likely to be significant competition that could lead to higher prices
being paid for such businesses. See "Risk Factors - Growth and Acquisition
Strategies".
Regulation
Staffing services firms are generally subject to one or more of the
following types of government regulation: (1) regulation of the
employer/employee relationship between a firm and its temporary employees; and
(2) registration, licensing, record keeping and reporting requirements. Staffing
services firms are the legal employers of their temporary workers. Therefore,
these firms are governed by laws regulating the employer/employee relationship,
such as tax withholding and reporting, social security or retirement,
anti-discrimination and workers' compensation. State mandated workers'
compensation and unemployment insurance premiums have increased in recent years
and have directly increased our cost of services. In addition, the extent and
type of health insurance benefits that employers are required to provide
employees have been the subject of intense scrutiny and debate in recent years
at both the national and state level. Proposals have been made to mandate that
employers provide health insurance benefits to staffing employees, and some
states could impose sales tax, or raise sales tax rates on staffing services.
Further increases in such premiums or rates, or the introduction of new
regulatory provisions, could substantially raise the costs associated with
hiring and employing staffing employees.
Certain states have enacted laws which govern the activities of
"Professional Employer Organizations," which generally provide payroll
administration, risk management and benefits administration to client companies.
These laws vary from state to state and generally impose licensing or
registration requirements for Professional Employer Organizations and provide
for monitoring of the fiscal responsibility of these organizations. We believe
that Stratus is not a Professional Employer Organization and not subject to the
laws which govern such organizations; however, the definition of "Professional
Employer Organization" varies from state to state and in some states the term is
broadly defined. If we are determined to be a Professional Employer
Organization, we can give no assurance that we will be able to satisfy licensing
requirements or other applicable regulations. In addition, we can give no
assurance that the states in which we operate will not adopt licensing or other
regulations affecting companies which provide commercial and professional
staffing services.
Intellectual Property
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We have filed for Federal Trademark registration of SMARTSolutions,
SMARTReport, SMARTTraining, our slogan, name and logo. No assurance can be given
that this registration will be obtained or if obtained, will be effective to
prevent others from using the mark concurrently or in certain locations.
Currently, we are asserting Common Law protection by holding the marks out to
the public as the property of Stratus. However, no assurance can be given that
this Common Law assertion will be effective to prevent others from using the
mark concurrently or in other locations. In the event someone asserts ownership
to a mark, we may incur legal costs to enforce any unauthorized use of the marks
or defend ourselves against any claims.
Legal and Administrative Proceedings
We are always subject to the risk that we may be a party to legal
proceedings. The temporary staffing industry is subject, in particular, to
potential liability to customers arising in connection with the services
performed by our temporary staffing employees and claims of temporary staffing
employees relating to the customers' workplace. In addition, over the past few
years there has been an increase in the number of lawsuits brought by temporary
workers against staffing companies and their clients. Most of these suits seek
payments for the difference in benefits received from the staffing company as
compared to those which they would have received had they worked directly for
the customer. While we believe we are sufficiently insulated from such suits and
that we have adequate coverage under our insurance policies, we can give no
assurance that the actual liability and costs will not exceed the insurance
coverage. Currently, we are a named party to one such suit. We are a defendant
in Cargill v. Metropolitan Water District of Southern California where the
Plaintiff is seeking general damages. This case was brought against Stratus as
successor in interest to Mainstream Engineering, Inc., one of the Royalpar
subsidiaries. We are preparing to file a motion if a voluntary dismissal is not
an option to have us dismissed from this case as according to the Royalpar Asset
Purchase Agreement we are not a successor in interest. In the event that we are
unsuccessful with that argument and ultimately end up with liability, we believe
our exposure should be limited as Mainstream did minimal business with
Metropolitan Water District.
We are currently a party to the following other litigation:
Stratus Services Group, Inc. v. J.P. Industrial, LLC, John Pearson, and
Manfred Goedecke. We brought this action against the former owners of JP
Industrial, LLC, a staffing company we acquired in 1998, after we discovered
that they were conducting business in violation of their employment agreements
and in the case of Mr. Pearson, in violation of the Asset Purchase Agreement.
Mr. Person and Mr. Godeke have asserted a counterclaim for $115,000, which
represents the balance of the purchase price of the acquired business. Although
we can give no assurance, we believe that recoveries for damages we have
suffered as a result of breaches of the acquisition agreement will exceed any
liability we may suffer in the counterclaims. This case is scheduled for
mediation and/or arbitration in July 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a review of the
financial impact of this case.
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MANAGEMENT
Our directors and executive officers as of July 15, 1999 are as follows:
MANAGEMENT AND DIRECTORS
Name Age Position
- --------------------- --- -------------------------------------------------
Joseph J. Raymond 64 Chairman of the Board and Chief Executive Officer
Michael A. Maltzman 51 Chief Financial Officer and Treasurer
J. Todd Raymond, Esq. 30 General Counsel and Corporate Secretary
Charles Sahyoun 47 President, Engineering Services Division
Mark S. Levine 37 Chief Marketing Officer
A. George Komer 47 President, Staffing Services Division
Michael J. Rutkin 47 Director
H. Robert Kingston 75 Director
Donald W. Feidt 63 Director
Sanford Feld 69 Director
Joseph J. Raymond has served as Chairman of the Board and Chief Executive
Officer of Stratus since its inception in 1997. Prior thereto, he served as
Chairman of the Board, President and Chief Executive Officer of Transworld Home
Healthcare, Inc. (NASDAQ:TWHH), a provider of healthcare services and products,
from 1992 to 1996. From 1987 through 1997, he served as Chairman of the Board
and President of Transworld Nurses, Inc., a provider of nursing and
paraprofessional services, which was acquired by Transworld Home Healthcare,
Inc. in 1992.
Michael A. Maltzman has served as Treasurer and Chief Financial Officer of
Stratus since September 1997 when it acquired the assets of Royalpar Industries,
Inc. Mr. Maltzman served as Chief Financial Officer of Royalpar, which filed for
protection under United States Bankruptcy Code in 1997 from April 1994 to August
1997. From June 1988 to July 1993, he served as Vice President and Chief
Financial Officer of Pomerantz Staffing Services, Inc., a national staffing
company. Prior thereto, he was a Partner with Eisner & Lubin, a New York
accounting firm. Mr. Maltzman is a Certified Public Accountant.
J. Todd Raymond has served as General Counsel and Secretary of the Company
since September 1997. From December 1994 to January 1996, Mr. Raymond was an
associate and managing attorney for Pascarella & Oxley, a New Jersey general
practice law firm. Prior thereto, Mr. Raymond acted as in-house counsel for
Raymond & Perri, an accounting firm. From September 1993 to September 1994, Mr.
Raymond was an American Trade Policy Consultant for Sekhar-Tunku Imran Holdings
Sdn Berhad, a Malaysian multi-national firm.
Charles Sahyoun has served as President of Stratus' Engineering Services
Division since December 1997. From September 1988 to December 1997, he was
employed in various capacities with Day & Zimmerman Utilities Services Group,
Inc., an engineering and design services company, including Vice President of
Business Development.
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Mark Levine has served as the Chief Marketing Officer of Stratus since
April 1998. From April 1996 to April 1998, he served as Regional Vice President
of Corestaff, Inc., a staffing services company. Prior thereto, he served as
Regional Manager for Norrell Services, Inc., an international staffing firm from
1993 to 1996. From 1983 to 1993, Mr. Levine was Assistant Vice President of
United States Sales for Dunn & Bradstreet.
A. George Komer has served as President of Stratus' Staffing Services
Division since May 1998. Prior thereto, Mr. Komer was a Regional Vice President
for Corestaff, Inc. from October 1996 to April 1998. From 1993 to 1996, Mr.
Komer served as the MIS Director of Norrell Corporation, an international
staffing firm. Prior thereto, he served as Vice President and Chief Operating
Officer of Duck Head Apparel Company. From 1982 to 1986, he served as a
Management Consultant with Touche Ross & Co. Mr. Komer served as Director of
Internal Consulting for Rolands, Inc. an Atlanta based conglomerate, from
February 1987 to February 1993. From March 1981 to September 1984, he was
employed as an industrial engineer with Eli Lilly & Company.
Michael J. Rutkin has served as a Director of Stratus since November 1997
and was Chief Operating Officer and President from March 1997 to October 1998.
From 1996 to 1998, Mr. Rutkin served as Vice President of Transworld Management
Services, Inc. From February 1993 to October 1996, he served as Chief Operating
Officer of HealthCare Imaging Services, Inc. Prior thereto, Mr. Rutkin was the
Executive Vice President of Advanced Diagnostic Imaging from February 1987 to
February 1993. From March 1981 to September 1984, he served as Director of New
Business Development for the United States Pharmaceutical Division of
CIBA-Geigy.
Harry Robert Kingston has served as a Director of Stratus since November
1997. From 1977 to 1989, he served as the President and Chief Executive Officer
of MainStream Engineering Company, Inc., an engineering staffing firm located in
California. From 1965 to 1968, he served as President and Partner of VIP
Engineering Company, a subsidiary of CDI Corporation, a staffing and engineering
services business. Prior thereto, Mr. Kingston served as Vice President for CDI
Corporation.
Donald W. Feidt has served as a Director of Stratus since November 1997.
From 1987 to December 1998, Mr. Feidt was a Managing Partner of Resource
Management Associates, an information technology consulting company. Since
December 1998, Mr. Feidt has served as a Vice President to the Chief Executive
Officer of Skila Inc., a global web-based business intelligence platform company
providing services to the medical industry. From 1970 to 1971 he served as
Executive Vice President and Chief Operating Officer of AW Brands, a food and
beverage company.
Sanford I. Feld has served as a Director of the Company since November
1997. Mr. Feld is an associate of Leafland Associates, Inc., an advisor to Feld
Investment and Realty Management, a real estate development and management
company. From 1973 to 1979, he served as Director of the Chelsea National Bank
of New York City.
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Board Committees
The Board of Directors established a Compensation Committee and an Audit
Committee to assist it in the discharge of its duties. The Compensation
Committee's principal function is to establish the compensation for the
executive officers of the Company and to establish and administer the Company's
compensation programs. H. Robert Kingston, Donald W. Feidt and Sanford Feld
currently serve on the Compensation Committee. The Audit Committee's principal
functions include making recommendations to the Board regarding the annual
selection of independent public accountants, reviewing the proposed scope of
each annual audit and reviewing the recommendations of the independent public
accountants as a result of their audits of our financial statements. H. Robert
Kingston, Donald W. Feidt and Sanford Feld currently serve as members of the
Audit Committee. The Board of Directors may from time to time establish other
committees to facilitate the management of Stratus.
Executive Compensation
The following table provides certain summary information regarding
compensation paid by us during the period from our inception in March 1997
through September 30, 1997 and during the fiscal year ended September 30, 1998
to our Chief Executive Officer and to each of our other four most highly paid
executive officers (together with the Chief Executive Officer, the "Named
Executive Officers").
Long Term
Compensation
Awards
------------
Annual Compensation
-------------------------------------
Number of
Shares
Underlying
Name and Principal Stock
Position Fiscal Year Salary(s) Bonus($) Options(#)(1)
- -------- ----------- --------- -------- -------------
Joseph J. Raymond 1998 $45,308 $10,000 ---
Chairman 1997 --- --- 166,667
Michael A. Maltzman 1998 133,704 7,500 ---
Treasurer and Chief 1997 14,131 --- 83,333
Financial Officer
Charles Sahyoun 1998 107,284 35,000 83,333
President, Engineering 1997 --- --- ---
Services Division
Mark Levine 1998 66,635 50,000 83,333
Chief Marketing Officer 1997 --- --- ---
A. George Komer 1998 63,462 50,000 83,333
President, Staffing Services 1997 --- --- ---
Division
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Employment Agreements
In September 1997, we entered into an employment agreement with Joseph J.
Raymond, our Chairman and Chief Executive Officer, which has an initial term
that expires in September 2000. Pursuant to the agreement, Mr. Raymond is
entitled to a minimum annual base salary of $275,000 which is reviewed
periodically and subject to such increases as the Board of Directors, in its
sole discretion, may determine. Mr. Raymond has waived the payment of salary
until such time as Mr. Raymond believes we have sufficient funds such that his
drawing of salary will not be detrimental to us. During the term of the
Agreement, Mr. Raymond is eligible for all benefits made available to senior
executive employees, and is entitled to the use of an automobile. Mr. Raymond is
entitled to severance compensation equal to 2.9 times his base salary then in
effect, plus any accrued and unpaid bonuses and unreimbursed expenses, in the
event that Stratus terminates his employment without "Good Cause". As defined in
the Agreement "Good Cause" shall exist only if Mr. Raymond (i) willfully or
repeatedly fails in any material respect to perform his obligations under the
Agreement subject to certain opportunities to cure such failure, (ii) is
convicted of a crime which constitutes a felony or misdemeanor or has entered a
plea of guilty or no contest with respect to a felony or misdemeanor during his
term of employment, (iii) has committed any act which constitutes fraud or gross
negligence, (iv) is determined by the Board of Directors to be dependent upon
alcohol or drugs or (v) breaches confidentiality or non-competition provisions
of the employment agreement.
Mr. Raymond is also entitled to severance compensation in the event that
he terminates the Agreement for "Good Reason" which includes (i) the assignment
to him of any duties inconsistent in any material respect with his position or
any action which results in a significant diminution in his position, authority,
duties or responsibilities, (ii) a reduction in his base salary unless his base
salary is, at the time of the reduction, in excess of $200,000 and the
percentage reduction does not exceed the percentage reduction of gross sales of
Stratus over the prior twelve month period, (iii) Stratus requires Mr. Raymond
to be based at any location other than within 50 miles of Stratus' current
executive office location and (iv) a Change in Control of Stratus, which
includes the acquisition by any person or persons acting as a group of
beneficial ownership of more than 20% of the outstanding voting stock of
Stratus, mergers or consolidations of Stratus which result in the holders of
Stratus' voting stock immediately before the transaction holding less than 80%
of the voting stock of the surviving or resulting corporation, the sale of all
or substantially all of the assets of Stratus, and certain changes in the
Stratus Board of Directors. In the event that the aggregate amount of
compensation payable to Mr. Raymond would constitute an "excess parachute
payment" under the Internal Revenue Code, then the amount payable to Mr. Raymond
will be reduced so as not to constitute an "excess parachute payment." All
severance payments are payable within 60 days after the termination of
employment.
Mr. Raymond has agreed that during the term of the Agreement and for a
period of one year following the termination of his employment, he will not
engage in or have any financial interest in any business enterprise in
competition with Stratus that operates anywhere within a radius of 25 miles of
any offices we maintain as of the date of the termination of employment.
We have entered into employment agreements with each of the other officers
named in the Executive Compensation table set forth above. These agreements
provide for an annual base salary as follows: Mr. Sahyoun - $165,000; Mr. Levine
- - $165,000; Mr. Komer - $165,000; and Mr. Maltzman - $146,000. As part of their
employment agreements, Mr. Levine and Mr. Komer
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were each granted signing bonuses of $50,000. The agreement with Mr. Sahyoun
entitles him to a profit sharing award equal to 10% of the Engineering Services
Division's pre-tax income, but not in excess of his base salary. Mr. Levine and
Mr. Komer are entitled to profit sharing awards based upon a percentage of the
gross margin of the accounts under their responsibility. Mr. Maltzman is
entitled to profit sharing awards based upon our overall profitability. In the
event that any of the agreements are terminated by Stratus without cause or by
the executive with good reason, the executive will be entitled to a severance
payment equal to the greater of one month's salary for each year worked or three
months salary. In addition, Stratus will pay the executive any earned but unused
vacation time and any accrued but unpaid profit sharing. We also maintain
insurance and benefits for the executive during the severance period.
Compensation of Directors
Except for the reimbursement of out-of-pocket expenses, our directors are
not currently compensated for serving on the Stratus Board of Directors or any
committee of the Board. It is anticipated that non-management Directors will be
paid a fee of $500 per Board and Committee meeting attended when we become
profitable.
Option Grants in the Last Fiscal Year
Shown below is further information with respect to grants of stock options
in the fiscal year ended September 30, 1998 to the Named Executive Officers
which are reflected in the Summary Compensation Table under the caption
"Executive Compensation."
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise Expiration
Name Options Granted Fiscal Year Price Date
---- --------------- ----------- ----- ----
George Komer 83,333 24.5% $3.00 5/7/02
Mark Levine 83,333 24.5% $3.00 4/17/02
Charles Sahyoun 83,333 24.5% $3.00 12/1/01
Aggregate Option Exercises in Twelve Months Ended September 30, 1998 and Year
End Option Values
The following table provides certain information with respect to options
to purchase Common Stock held by the Named Executive Officers at September 30,
1998.
Number of Underlying
Unexercised Value of Unexercised
Options at September 30, In-the-Money Options at
1998 (#) September 30, 1998 ($) (1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- -------------------------- --------------------------
Joseph J. Raymond 33,333 133,334 $74,999 $166,667
George Komer --- 83,333 --- 62,500
Mark Levine --- 83,333 --- 62,500
Charles Sahyoun 20,833 62,500 15,625 46,875
Michael A. Maltzman 20,833 62,500 15,625 46,875
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- ----------
(1) Based on the fair market value of the Common Stock as of September 30,
1998 ($3.75 per share), as determined by the Board of Directors, minus the
exercise price, multiplied by the number of shares underlying the option,
after adjustment for the 3 for 2 reverse split.
No options were exercised by the Named Executive Officers during the
fiscal year ended September 30, 1998.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In August 1997, we purchased certain assets of Royalpar Industries, Inc.,
a corporation that was the subject of a proceeding under Chapter 11 of the
United States Bankruptcy Code. The assets acquired included customer lists,
furniture, office and computer equipment and workers compensation insurance
agreements, all acquired for $150,000 and the issuance of 400,000 shares of our
Common Stock. In addition, we assumed certain liabilities including leases of
operating offices and vacation pay.
At the time of the acquisition of the Royalpar assets, Jeffrey J. Raymond,
the son of Joseph J. Raymond, our Chairman and Chief Executive Officer was the
President of Royalpar. Following the acquisition of Royalpar, we engaged Jeffrey
J. Raymond as a consultant to Stratus pursuant to an agreement which had an
initial term of six months, subject to automatic six month extensions unless
terminated by either party under the terms of the agreement. The agreement
originally provided for payments of $9,583.33 per month to Jeffrey J. Raymond
and required him to supervise the collection of certain accounts receivable, to
use his efforts to maintain relationships with certain clients and to assist in
due diligence investigations of acquisitions of other companies. Beginning in
January 1999, the consulting fee payable to Jeffrey J. Raymond was reduced to
$2,200 per week.
During fiscal 1998, we paid consulting fees of $17,000 to RVR Consulting,
Inc. a corporation of which Joseph J. Raymond, Jr., (the son of Joseph J.
Raymond, our Chairman and Chief Executive Officer), is an officer and 50%
shareholder. In addition, as of March 31, 1999, Complete Wellness Centers, Inc.
owes us $780,000 for services rendered in 1998 and 1999, all of which is past
due. Joseph J. Raymond, Jr. became the Chief Executive Officer of Complete
Wellness, Inc. in March 1999. Substantially all of the indebtedness owed to us
by Complete Wellness, Inc. was incurred prior to Joseph J. Raymond Jr. becoming
an officer of Complete Wellness, Inc.
In November and December 1998, we borrowed $50,000 from Sanford I. Feld, a
Director of Stratus. This loan is represented by a promissory note which bears
interest at the rate of 1.5% per month and was originally due in July 1999. Mr.
Feld has verbally agreed to an extension of the due date of the note until we
complete this offering. In consideration for making the loan, we issued Mr. Feld
warrants to acquire 6,666 shares of our Common Stock at an exercise price of
$7.50 per share. The warrants have a five year term.
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In addition, in October 1998, we borrowed $250,000 from J. Todd Raymond,
General Counsel and Secretary, as the trustee of the Irene Lynch Estate. This
loan is represented by a promissory note bearing interest at the rate of 2% per
month and was due on April 14, 1999. The note has been verbally extended until
the completion of this offering. In consideration for making the loan, we issued
26,666 shares of our Common Stock.
Payroll services have also been provided to Sarahe, Inc., a privately held
company of which Joseph J. Raymond, our Chairman and Chief Executive Officer, is
an Officer and 50% stockholder. Invoices were issued to Sarahe for $1,277,000
during the year ended September 30, 1998 and $304,000 during the six months
ended March 31, 1999. At March 31, 1999 there remained an outstanding balance of
$27,000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our Common Stock, as at March 31, 1999 (i) by persons who are known
by us to own beneficially more than 5% of our shares, (ii) by each of the
persons named in the table under the caption "Executive Compensation" and (iii)
by all of our directors and executive officers as a group. The calculations in
the table are based on an aggregate of 5,299,400 shares calculated as
outstanding as of June 30, 1999 after adjusting for the 3-for-2 reverse stock
split. Unless otherwise noted all addresses of the beneficial owners are 500
Craig Road, Manalapan, New Jersey. The percentage listed under the "After
Offering" column is based on an assumed offering of an aggregate of 1,500,000
shares. The symbol "*" indicates that the amount shown is less than 1% of the
outstanding shares.
Percentage of Percentage of
Name and Address of Class Before Class After
Beneficial Owner(a) Number of Shares Offering Offering
- --------------------------------------------------------------------------------
Joseph J. Raymond(b) 977,788 25.00% 18.07%
Joan Raymond(c) 638,665 16.81 12.05
Michael J. Rutkin 334,000 8.79 6.30
Charles A. Sahyoun(d) 270,611 7.08 5.08
Michael A. Maltzman(e) 88,333 2.30 1.65
Mark Levine(f) 20,833 .55 .39
A. George Komer(g) 20,833 .55 .39
All Directors and
Officers as a Group 1,742,398 43.71 31.76
(b),(d),(e),(f),(g),(h)
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
options or warrants that are currently exercisable or exercisable within
60 days of July 20, 1999 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(b) Includes options to purchase 111,111 shares of Common Stock that are
currently exercisable or may become exercisable within 60 days of July 20,
1999. Excludes 55,555 shares subject to options that are not vested or
exercisable within 60 days of July 20, 1999.
(c) Includes 250,000 shares held by the children of Joan Raymond residing in
her household.
(d) Includes options to purchase 20,833 shares of Common Stock that are
currently exercisable. Excludes 62,500 shares subject to options that are
not vested or exercisable within 60 days of July 20, 1999.
(e) Includes options to purchase 41,666 shares of Common Stock that are
currently exercisable or may become exercisable within 60 days of July 20,
1999. Excludes 41,666 shares subject to options that are not vested or
exercisable within 60 days of July 20, 1999.
(f) & (g) Includes options to purchase 20,833 shares of Common Stock that are
currently exercisable. Excludes 62,500 shares subject to options that are
not vested or exercisable within 60 days of July 20, 1999.
(h) Includes 16,667 shares and 13,333 options to purchase Common Stock that
are currently exercisable or may become exercisable within 60 days of July
20, 1999, that are beneficially owned by J. Todd Raymond our General
Counsel and Corporate Secretary.
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DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 25 million shares of Common
Stock, par value $0.01 per share and 5 million shares of Preferred Stock, par
value $0.01 per share. As of the date of this Prospectus, there were 3,799,400
shares of Common Stock and no shares of Preferred Stock outstanding. The
following description of the material features of the capital stock of the
Company is intended as a summary only and is qualified in its entirety by
reference to the Certificate of Incorporation and the Bylaws, a copy of each of
which is filed as an exhibit to the Registration Statement of which this
prospectus is a part.
Common Stock
Each share of Common Stock entitles the holder thereof to one vote on all
matters submitted to the shareholders. Since the Common Stock does not have
cumulative voting rights, holders of more than 50% of the outstanding shares can
elect all of the directors and holders of the remaining shares could not elect
any directors. The shares are not subject to redemption and there are no
preemptive rights. All outstanding shares of Common Stock are fully paid and
non-assessable. Holders of Common Stock are entitled to receive dividends out of
funds legally available for distribution when, as and if declared by the Board
of Directors. The payment of cash dividends on the Common Stock is unlikely for
the foreseeable future. Upon any liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share pro rata in any
distribution to the holders of Common Stock.
As of July 15, 1999, there were 185 record holders of the Company's
Common Stock.
Preferred Stock
Our Certificate of Incorporation authorizes the Board of Directors to
issue shares of Preferred Stock in one or more series with such dividend,
liquidation, conversion, redemption and other rights as the Board establishes at
the time. Shareholder approval is not required to issue Preferred Stock. To the
extent that we issue any shares of Preferred Stock, the ownership interest and
voting power of existing shareholders could be diluted.
The Preferred Stock could be issued in one or more series with such
voting, conversion and other rights as would discourage possible acquirers from
making a tender offer or other attempt to gain control of Stratus, even if such
transaction were generally favorable to our stockholders. In the event of a
proposed merger, tender offer or other attempt to gain control of Stratus which
the Board does not approve, it might be possible for the Board to authorize the
issuance of a series of Preferred Stock with rights and preferences which could
impede the completion of such a transaction. The Board could authorize holders
of the Preferred Stock to vote, either separately as a class or with the holders
of Common Stock, on any merger, sale or exchange of assets or other
extraordinary corporate transaction. Preferred Stock may be used to discourage
possible acquirors from making a tender offer or other attempt to gain control
of the Company with a view to imposing a merger or sale of all or any part of
the Company's assets, even though a majority of shareholders may deem such
acquisition attempts to be desirable. See
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<PAGE>
"Risk Factors - Anti-Takeover Provisions Affecting Us Could Prevent Or Delay A
Change Of Control And This Could Affect Our Stock Price".
Preferred Stock may also be used as consideration for any acquisitions
that we undertake, either alone or in combination with shares, notes or other
assets including cash or other liquid securities.
Underwriter Warrants
In connection with the completion of this offering, for nominal
consideration, we will grant to the Underwriters, Underwriters' Warrants to
purchase 150,000 shares of Common Stock at an initial exercise price of 110% of
the initial public offering price of the shares sold in this offering. The
Underwriters' Warrants are exercisable for a period of four years commencing one
year from the date of this Prospectus. The shares of Common Stock issuable upon
exercise of the Underwriters' Warrants are identical to the shares being sold in
this offering. The Underwriters' Warrants also grant the holders thereof certain
rights of registration of the shares of Common Stock issuable upon exercise of
such Warrants. The Company is registering the Underwriters' Warrants, as well as
the underlying Common Stock, pursuant to the Registration Statement of which
this Prospectus forms a part.
Statutory Business Combination Provision
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans), or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3%
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation; or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, through
action of its stockholders, to exempt itself from coverage, provided that such
bylaw or certificate of incorporation amendment shall not become effective until
12 months after the date it is adopted. We have not adopted such an amendment to
our Certificate of Incorporation or Bylaws.
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Limitation on Liabilities and Indemnification Matters
Pursuant to our Certificate of Incorporation and Bylaws and as permitted
by Delaware law, directors are not liable to Stratus or its stockholders for
monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has received an improper personal benefit.
The Certificate of Incorporation and Bylaws also provide that directors
and officers shall be indemnified to the fullest extent authorized by Delaware
law against all expenses and liabilities actually and reasonably incurred in
undertaking their duties. Nonofficer employees and agents may be similarly
indemnified at the Board of Directors discretion and further permits the
advancing of expenses incurred in defense of claims.
The indemnification provisions do not permit indemnification for
liabilities arising under the Securities Act, as such indemnification may be
against public policy and is therefore unenforceable.
Certain provisions of the Certificate of Incorporation and Bylaws
Our Bylaws provide that a special meeting of stockholders can only be
called by the Chief Executive Officer or by a majority of the Board of
Directors. The Bylaws provide that only matters set forth in the notice of the
special meeting may be considered or acted upon at that special meeting. Our
Bylaws may be amended or repealed or new Bylaws may be adopted by the Board of
Directors. Stockholders may vote to amend or repeal such Bylaws as adopted or
amended by the Board of Directors; however, such a right requires approval from
at least two thirds of the stockholders voting.
The Certificate of Incorporation and Bylaws also provide that any action
required or permitted to be taken by the stockholders of the company at an
annual or special general meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
Anti Takeover Effects of the Charter Documents and Delaware Law.
Our Certificate and Bylaws include certain provisions that may have anti
takeover effects. These provisions may delay, defer or prevent a tender offer or
takeover attempt that shareholders may consider to be in their best interests
including attempts that might result in a premium over the market price for the
shares held by the shareholders. These provisions may also make it more
difficult to remove incumbent management.
These provisions, include (i) authorizing our Board of Directors to issue
preferred stock; (ii) limiting the persons who may call special meetings of
stockholders; (iii) prohibiting stockholder action by written consent; (iv)
establishing advance notice requirements for nominations for election of our
board of directors or for proposing matters that can be acted on by stockholders
at stockholder meetings and (v) prohibiting cumulative voting the election of
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directors. See " Risk Factors - Anti-Takeover Provisions Affecting Us Could
Prevent Or Delay A Change Of Control And This Could Affect Our Stock Price."
Listing
We expect to apply for quotation of the Common Stock on the Nasdaq
Smallcap Market under the trading symbol SMSL.
Transfer Agent and Registrar
The Company's transfer agent is _______________________________________.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that a significant public market for the
stock will develop or be sustained after this offering. Future sales of Common
Stock, including shares issued upon exercise of outstanding options and
warrants, in the public market after this offering could adversely affect market
prices prevailing from time to time and could impair our future ability to raise
capital through the sale of equity securities.
Upon closing of the offering, there will be 5,299,400 shares of Common
Stock outstanding, assuming no exercise of warrants and options outstanding. Of
these shares, the 1,500,000 shares of Common Stock sold pursuant to this
offering will be freely tradable without restriction under the Securities Act
unless purchased by "affiliates" of Stratus as that term is defined in Rule 144
under the Securities Act.
Holders of 2,771,867 shares of Common Stock, including our directors and
officers, have agreed not to sell, offer to sell or otherwise dispose of any of
their shares for a period of 24 months from the date of this Prospectus without
the prior written consent of the Underwriter. Holders of an additional 1,027,533
shares of Common Stock have agreed not to sell, offer or to otherwise dispose of
any of their shares for a period of 12 months from the date of this Prospectus
without the written consent of the Underwriter. After the expiration of these
restrictions, the holders of the shares which are the subject of the
restrictions may sell the shares under Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year (including
the holding period of any prior owner, except an affiliate) is entitled to sell
in "broker's transactions" or to market makers, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of:
o One percent of the number of common shares then outstanding
(approximately 52,994 shares immediately after this offering); or
o The average weekly trading volume of the common shares during the
four calendar weeks preceding the required filing of a Form 144 with
respect to such sale.
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Sales under Rule 144 are generally subject to manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
No predictions can be made on the effect, if any, that sales of shares or
the availability of shares for sale will have on the market price preceding from
time to time. Moreover, we cannot predict the number of shares of Common Stock
which may be sold in the future pursuant to Rule 144 since such sales will
depend on the market price of the Common Stock, the individual circumstances of
the holders thereof and other factors. Nevertheless, any sales of substantial
amounts of Common Stock could have a significant adverse effect on the market
price of our Common Stock. See "Risk Factors - You will experience immediate and
substantial dilution."
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UNDERWRITING
Hornblower & Weeks Inc. has agreed, subject to the terms and conditions of
the Underwriting Agreement between Stratus and Hornblower & Weeks, Inc., to
purchase from Stratus 1,500,000 shares of Common Stock.
The Underwriter is committed to purchase and pay for all of the shares
offered hereby if any are purchased. The Common Stock is being offered by the
Underwriter subject to prior sale, when, as and if delivered to and accepted by
the Underwriter and subject to approval of certain legal matters by counsel and
to certain other conditions, such as no adverse changes in Stratus and market
conditions.
The Underwriter has advised Stratus that they propose to offer the Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus. The Underwriter may allow to certain dealers who are
members of the NASD concessions, not in excess of $0.__ per share, of which not
in excess of $0.__ per share may be reallowed to other dealers who are members
of the NASD. After the initial public distribution of the shares is completed,
the public offering price, concession and reallowance may be changed by the
Underwriter.
We have granted the Underwriter an over-allotment option, exercisable
during the 30-day period commencing with the date of the Underwriting Agreement,
to purchase from Stratus at the initial offering price less underwriting
discounts, up to an aggregate of 225,000 additional shares of Common Stock from
Stratus for the sole purpose of covering over-allotments, if any. Stratus will
be obligated, pursuant to this over-allotment option, to sell such additional
shares to the Underwriter.
We have agreed to pay to the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, of which $40,000 has been
paid as of the date of this Prospectus. Stratus has also agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriter.
In connection with the offering, we have agreed to sell to the
Underwriter, for $100.00, the Underwriter's Warrants to acquire 150,000 shares
of our Common Stock. The Underwriter's Warrants initially are exercisable at a
price of 110% of the per share initial public offering price of the shares
offered hereby, for a period of four years commencing one year from the date of
this Prospectus. The shares of Common Stock issuable upon exercise of the
Underwriter's Warrants are identical to the shares being sold in this Offering.
The Underwriter's Warrants also grant the holders thereof certain rights of
registration of the shares of Common Stock issuable
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upon exercise of such Warrants. Stratus is registering the Underwriter's
Warrants, as well as the underlying Common Stock, pursuant to the Registration
Statement of which this Prospectus forms a part. The Underwriter's Warrants may
not be sold, transferred, assigned, pledged or hypothecated for a period of one
year following the Offering, except to NASD members participating in the
Offering and the bona fide officers or partners thereof.
The Underwriter has the right to designate one member of the Board of
Directors for a period of 5 years commencing with the closing of this Offering.
Stratus has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
The Underwriter has informed us that it will not sell any shares of
the Common Stock to any accounts over which they exercise discretionary
authority.
We have agreed with the Underwriter that for a period of 12 months from
the date of this Prospectus, we will not issue any securities or grant options
or warrants to purchase any securities of Stratus without the consent of the
Underwriter except (i) options to acquire up to 150,000 shares of Common Stock
which may be issued to officers, directors, employees and consultants, (ii) in
connection with certain mergers and acquisitions, (iii) in a public offering at
a price less than 90% of the average closing bid prices of the Common Stock as
reported on the Nasdaq Stock Market for the 21 consecutive trading day period
immediately preceding the date of sale and (iv) in a private sale at not less
than 70% of the average closing bid prices of the Common Stock as reported on
the Nasdaq Stock Market for the 21 consecutive trading day period immediately
preceding the date of sale.
The Underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriter to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
affected on Nasdaq or otherwise and, if commenced, may be discontinued at any
time and will, in any event, be discontinued thirty (30) days after settlement
of this offering.
The foregoing does not purport to be a complete statement of the terms
and conditions of the Underwriting Agreement and related documents, copies of
which are on file at the offices of the Company and the Commission. See
"Additional Information."
Prior to this offering there has been no public market for the Common
Stock. The initial public offering price for the shares of Common Stock offered
will be determined by negotiation between Stratus and the Underwriter. The
factors to be considered in
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determining the initial public offering price include the history of and the
prospects for the industry in which we compete, our past and present operation,
our historical financial results, our prospects for future earnings, the recent
market prices of securities of generally comparable companies and the general
conditions of the securities market at the time of the offering.
LEGAL MATTERS
The legality of the shares offered by this Prospectus will be passed upon
for us by Giordano, Halleran & Ciesla, a Professional Corporation, Middletown,
New Jersey. Certain legal matters will be passed on for the Underwriters by
Lehman & Eilen LLP, Uniondale, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
registration statement have been audited by Amper, Politziner & Mattia, PA
independent auditors, as indicated in their reports with respect thereto, and
are included in reliance upon the authority of the firm as experts in giving
such reports. Reference is made to such reports which include explanatory
paragraphs that state substantial doubts about our ability to continue as a
going concern.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form SB-2 under the
Securities Act with respect to the offered Common Stock. We have not included in
this Prospectus additional information contained in the Registration Statement
and you should refer to the Registration Statement and its exhibits for further
information. The Registration Statement and exhibits and schedules filed as a
part thereof, which may be inspected, without charge, at the Public Reference
Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices at the SEC located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60611-2511. The
SEC maintains a worldwide web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements regarding registrants that
file electronically with the SEC. Copies of all or any portion of the
Registration Statement may be obtained from the public reference section of the
SEC upon payment of the prescribed fees.
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STRATUS SERVICES GROUP, INC.
For the Period August 11, 1997 (Inception) to
September 30, 1997 and the Year Ended
September 30, 1998
Page
----
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statement of Stockholders' Deficiency F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - 18
ROYALPAR INDUSTRIES, INC.
AND SUBSIDIARIES
For the Year Ended March 31, 1997 and
For the Period April 1, 1997 to August 11, 1997
Page
----
Independent Auditors' Report F-19
Consolidated Statements of Operations F-20
Notes to Consolidated Statements of Operations F-21 - 23
F-1
<PAGE>
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, 1998 and 1997, and the related statements of operations,
stockholders' deficiency, and cash flows for the year ended September 30, 1998
and the period August 11, 1997 (Inception) to September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratus Services Group, Inc. as
of September 30, 1998 and 1997 and the results of its operations and its cash
flows for the year ended September 30, 1998 and the period August 11, 1997
(Inception) to September 30, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit, which raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
AMPER, POLITZINER & MATTIA P.A.
July 16, 1999
Edison, New Jersey
F-2
<PAGE>
STRATUS SERVICES GROUP, INC.
Balance Sheets
<TABLE>
<CAPTION>
Assets
September 30, September 30, March 31,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 92,872 $ 249,987 $ 404,047
Due from factor 435,061 -- --
Accounts receivable - less allowance for
doubtful accounts of $-0- $37,000 and $182,000 2,052 65,536 298,931
Unbilled receivables 147,320 282,485 274,713
Unbilled receivables - related parties 11,880 22,445 --
Prepaid insurance 561,208 222,291 747,931
Prepaid expenses and other current assets 13,592 5,130 8,996
----------- ----------- -----------
1,263,985 847,874 1,734,618
Property and equipment, net of
accumulated depreciation 39,429 95,562 272,636
Goodwill 67,650 -- 2,375,010
Other assets 6,856 151,213 153,562
----------- ----------- -----------
$ 1,377,920 $ 1,094,649 $ 4,535,826
=========== =========== ===========
Liabilities and Stockholders' Deficiency
Current liabilities
Loans payable $ -- $ -- $ 766,350
Loans payable - related parties 158,500 406,350 440,000
Notes payable - acquisition (current portion) -- -- 1,610,000
Insurance obligation payable 365,175 211,708 685,000
Due to factor -- 2,602 1,107,126
Accounts payable and accrued expenses 228,223 927,743 1,362,425
Accrued payroll and taxes 476,924 869,823 856,148
Payroll taxes payable 238,783 143,312 221,728
Litigation fees payable -- 271,361 195,369
----------- ----------- -----------
1,467,605 2,832,899 7,244,146
Notes payable - acquisition (net of current portion) -- -- 240,384
----------- ----------- -----------
1,467,605 2,832,899 7,484,530
Temporary equity - put options -- -- 520,000
Commitments and contingencies
Stockholders' deficiency
Common stock, $.01 par value, 10,000,000 shares
authorized, 5,057,000, 5,579,600 and 5,631,600
shares issued and outstanding 50,570 55,796 56,316
Additional paid in capital 269,139 1,256,643 1,256,123
Accumulated other comprehensive loss
Deferred compensation -- (161,500) (138,100)
Accumulated deficit (409,394) (2,889,189) (4,643,043)
----------- ----------- -----------
(89,685) (1,738,250) (3,468,704)
----------- ----------- -----------
$ 1,377,920 $ 1,094,649 $ 4,535,826
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
STRATUS SERVICES GROUP, INC.
Statements of Operations
For the Year Ended September 30, 1998 and the Period August 11, 1997 (Inception)
to September 30, 1997 and for the Six Months Ended
March 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
August 11, 1997 For the Period
(inception) to For the Year Ended For the Six Months
September 30, September 30, Ended March 31,
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues (including $120,000
$3,598,000, $1,232,000 and
$1,239,000 from related parties) $ 2,442,191 $ 24,919,639 $ 10,474,459 $ 12,920,225
Cost of revenue (including
$97,000, $3,228,000, $1,165,000
and $1,148,000 from related parties) 2,005,847 20,329,718 8,642,170 10,307,710
------------ ------------ ------------ ------------
Gross profit 436,344 4,589,921 1,832,289 2,612,515
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative
expenses 741,416 4,785,887 1,957,066 3,054,992
Provision for recourse obligation 50,000 670,445 8,851 595,000
------------ ------------ ------------ ------------
791,416 5,456,332 1,965,917 3,649,992
------------ ------------ ------------ ------------
Loss from operations (355,072) (866,411) (133,628) (1,037,477)
------------ ------------ ------------ ------------
Other income (expenses)
Finance charges (39,078) (524,649) (173,630) (369,307)
Interest expense (15,244) (48,170) (28,888) (121,289)
Other income -- 33,729 11,506 11,383
Other (expenses) -- (1,074,294) -- (237,164)
------------ ------------ ------------ ------------
(54,322) (1,613,384) (191,012) (716,377)
------------ ------------ ------------ ------------
Net loss $ (409,394) $ (2,479,795) $ (324,640) $ (1,753,854)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Deficiency
For the Year Ended September 30, 1998 and
the Period August 11, 1997 (inception) to September 30, 1997
and For the Six Months Ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Additional
Comprehensive Comprehensive Accumulated Paid-In
Total Loss Loss Deficit Capital
----- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Original issuance for cash $ 10 $ -- $ -- $ -- $ --
Issuance of common stock
in connection Royalpar
acquisition - August 11, 1997 20,000 -- -- -- 16,000
Issuance of common stock to
related parties (compensation
expense of $186,450) 186,450 -- -- -- 149,160
Other issuance of common stock
(compensation expense of $21,675) 21,675 -- -- -- 17,340
Proceeds from sale of private
placement of common stock (net of
costs of $43,351) for cash 91,574 -- -- -- 86,639
Net loss (409,394) -- -- (409,394) --
----------- ----------- ----------- ----------
Balance September 30, 1997 (89,685) -- -- (409,394) 269,139
Net loss (2,479,795) (2,479,795) -- (2,479,795) --
Other comprehensive income
Deferred compensation in
connection with stock options
granted (no tax effect) 26,000 (161,500) (161,500) -- 187,500
-----------
Comprehensive loss $(2,641,295)
===========
Issuance of common stock from
proceeds from sale of placement
of common stock (net of cost of $501,370) 773,730 -- -- 768,630
Issuance of common stock to employees
(compensation expense of $31,500) 31,500 -- -- 31,374
----------- ----------- ----------- ----------
Balance September 30, 1998 (1,738,250) (161,500) (2,889,189) 1,256,643
Net loss for the six months ended
March 31, 1999 (unaudited) (1,753,854) (1,753,854) -- (1,753,854) --
Compensation expense in connection
with stock option granted
(no tax effect) (unaudited) 23,400 23,400 23,400 -- --
-----------
Comprehensive loss (unaudited) -- $(1,730,454) -- -- --
===========
Issuance in connection with
acquisition (unaudited) -- -- -- (520)
----------- ----------- ----------- ----------
Balance March 31, 1999 (unaudited) $(3,468,704) $ (138,100) $(4,643,043) $1,256,123
=========== =========== =========== ==========
<CAPTION>
Common Stock
Amount Shares
------ ------
<S> <C> <C>
Original issuance for cash $ 10 1,000
Issuance of common stock
in connection Royalpar
acquisition - August 11, 1997 4,000 400,000
Issuance of common stock to
related parties (compensation
expense of $186,450) 37,290 3,729,000
Other issuance of common stock
(compensation expense of $21,675) 4,335 433,500
Proceeds from sale of private
placement of common stock (net of
costs of $43,351) for cash 4,935 493,500
Net loss -- --
----------- ---------
Balance September 30, 1997 50,570 5,057,000
Net loss -- --
Other comprehensive income
Deferred compensation in
connection with stock options
granted (no tax effect) -- --
Comprehensive loss
Issuance of common stock from
proceeds from sale of placement
of common stock (net of cost of $501,370) 5,100 510,000
Issuance of common stock to employees
(compensation expense of $31,500) 126 12,600
----------- ---------
Balance September 30, 1998 55,796 5,579,600
Net loss for the six months ended
March 31, 1999 (unaudited) -- --
Compensation expense in connection
with stock option granted
(no tax effect) (unaudited) -- --
Comprehensive loss (unaudited) -- --
Issuance in connection with
acquisition (unaudited) 520 52,000
----------- ---------
Balance March 31, 1999 (unaudited) $ 56,316 5,631,600
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
STRATUS SERVICES GROUP, INC.
Statements of Cash Flows
For the Year Ended September 30, 1998 and
the Period August 11, 1997 (inception) to September 30, 1997
and For the Six Months Ended March 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
For the Period Ended For the Six Months Ended
September 30, March 31, March 31,
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (409,394) $(2,479,795) $ (324,640) $(1,753,854)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation 1,660 40,656 17,544 29,227
Amortization 325 67,650 1,300 45,805
Compensation for issuance of common stock 208,125 31,500 31,500 --
Impairment of JPI assets -- 174,688 -- --
Compensation - stock options -- 26,000 5,200 23,400
Changes in operating assets and liabilities
Due to/from factor (435,061) 437,663 (325,917) 1,104,524
Accounts receivable (161,252) (209,214) (235,785) (203,178)
Prepaid insurance 51,358 338,917 171,027 (525,640)
Prepaid expenses and other current assets (12,942) 8,462 (15,230) (3,866)
Other assets (2,950) (29,357) (22,965) (2,349)
Insurance financing obligation (118,426) (153,467) (240,504) 473,292
Accrued payroll and taxes 476,924 392,899 278,725 (13,675)
Payroll taxes payable 238,783 (95,471) (58,466) 78,416
Litigation fees payable -- 271,361 -- (75,992)
Accounts payable and accrued expenses 119,477 538,020 171,836 519,682
----------- ----------- ----------- -----------
Total adjustments 366,021 1,840,307 (221,735) 1,449,646
----------- ----------- ----------- -----------
(43,373) (639,488) (546,375) (304,208)
----------- ----------- ----------- -----------
Cash flows (used in) investing activities
Purchase of property and equipment (1,689) (96,789) (19,595) (199,301)
Payments for business acquisitions (150,000) (89,688) -- (142,431)
----------- ----------- ----------- -----------
(151,689) (186,477) (19,595) (341,732)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from sale of common stock 129,434 735,230 570,480 --
Proceeds from loans payable 166,000 550,000 -- 800,000
Payments of loans payable (7,500) (302,150) (25,300) --
----------- ----------- ----------- -----------
287,934 983,080 545,180 800,000
----------- ----------- ----------- -----------
Net change in cash and cash equivalents 92,872 157,115 (20,790) 154,060
Cash and cash equivalents - beginning -- 92,872 92,872 249,987
----------- ----------- ----------- -----------
Cash and cash equivalents - ending $ 92,872 $ 249,987 $ 72,082 $ 404,047
=========== =========== =========== ===========
Supplemental disclosure of cash paid
Interest $ 8,244 $ 37,872 $ 35,205 $ 42,871
=========== =========== =========== ===========
Schedule of Noncash Investing and
Financing Activities
Fair value of assets acquired $ 723,847 $ 289,688 $ -- $ 2,470,000
Less: cash paid (150,000) (89,688) -- (70,000)
Less: common stock and put options issued (20,000) -- -- (520,000)
----------- ----------- ----------- -----------
Liabilities assumed $ 553,847 $ 200,000 $ -- $ 1,880,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 1 - Liquidity
Stratus Services Group, Inc. ("Company") has been experiencing
significant losses from operations due to increasing overhead in
anticipation of additional future revenues, litigation fees, and
unusual reserves for estimated recourse obligations. The
accompanying financial statements have been prepared assuming the
Company will continue as a going concern.
Management's plans consist of reducing overhead by eliminating and
consolidating locations and applicable staff, and implementing cost
reduction measures such as decreasing salaries. The Company
completed a private placement of its common stock and notes in June
1999 raising approximately $825,000 for working capital purposes.
Thirdly, the Company anticipates registering with the Securities and
Exchange Commission to raise additional capital in 1999.
Note 2 - Nature of Operations and Summary of Significant Accounting Policies
Operations
The Company was incorporated on March 11, 1997 for the purpose of
providing contract labor and staffing services. The only activity
between March 11, 1997 and August 11, 1997 was the issuance of 1,000
shares of common stock. The Company commenced operations on August
11, 1997 when it acquired certain assets and assumed certain
liabilities of Royalpar Industries, Inc. ("Royalpar") and its
subsidiaries (an entity in bankruptcy). This acquisition enabled the
Company to immediately commence its temporary staffing business by
providing customers, qualified staff and accounting and payroll
support services from offices in New Jersey, Colorado, Texas,
California and Arizona.
The Company operates as one business segment. The one business
segment consists of its traditional staffing services, engineering
staffing services and SMARTSolutions (TM), a structured program to
monitor and enhance the production of a client's labor resources.
The Company's customers are in various industries and are located
throughout the United States. Credit is granted to substantially all
customers. No collateral is maintained.
Revenue Recognition
The Company recognizes revenue as the services are performed by its
workforce. The Company's customers are billed weekly. At balance
sheet dates, there are accruals for unbilled receivables and related
compensation costs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
F-7
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 2 - Nature of Operations and Summary of Significant Accounting
Policies - (continued)
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
Estimated
Method Useful Life
------ -----------
Computer equipment Straight-line 3 years
Office equipment Declining balance 5 years
Furniture and fixtures Declining balance 5 years
Goodwill
Goodwill was being amortized on a straight-line basis over twenty
years for the Royalpar acquisition. For acquisitions subsequent to
September 30, 1998, goodwill is amortized over fifteen years.
Factoring
The Company's factoring agreement (see Note 4) with a financing
institution ("factor") has been accounted for as a sale of
receivables under Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Services of Financial Assets and
Extinguishment of Liabilities."
Stock Options
The Company has elected to follow Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its employee
stock options. Under this method, compensation cost is measured as
the amount by which the market price of the underlying stock exceeds
the exercise price of the stock option at the date at which both the
number of options granted and the exercise price are known.
Start-Up Costs
Start-up costs are expensed. $94,000 was charged to operations
during the period ended September 30, 1997 and is included in
selling, general and administrative expenses.
Advertising Costs
Advertising costs are expensed as incurred. The expense for the
periods ended September 30, 1997 and 1998 and March 31, 1998 and
1999 was $6,500, $110,000, $43,000 and $62,000, respectively, and is
included in selling, general and administrative expenses.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.
F-8
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 2 - Nature of Operations and Summary of Significant Accounting
Policies - (continued)
Comprehensive Income
Effective October 1, 1997, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Under SFAS No. 130, changes in net
assets of an entity resulting from transactions and other events and
circumstances from non-owner sources are reported in a financial
statement for the period in which they are recognized.
Segment Reporting
Effective October 1, 1997, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information." The Company operates as a single segment and will
evaluate additional segment disclosure requirements as it expands
its operations.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities and
measure them at fair value. Under certain circumstances, the gains
or losses from derivatives may be offset against those from the
items the derivatives hedge against. The Company will adopt SFAS No.
133 in the fiscal year ending September 30, 2001.
Note 3 - Acquisitions
Royalpar Industries, Inc.
In August 1997, the Company purchased assets including customer
lists, furniture, office and computer equipment, and workers'
compensation insurance agreements, and assumed certain liabilities
including leases of operating offices, and holiday and vacation pay,
in exchange for $150,000 and the issuance of 400,000 shares of the
Company's common stock. The excess of cost paid over net assets
acquired resulted in goodwill of $67,975, computed as follows:
Prepaid insurance $ 612,566
Insurance obligation payable (483,601)
Office equipment 39,400
Security deposits 3,906
Accrued holiday and vacation pay (70,246)
---------
Net assets acquired 102,025
---------
Amounts paid
Cash paid 150,000
Issuance of common stock
(400,000 shares @ $.05 per share) 20,000
---------
170,000
---------
Excess of amounts paid over
net assets acquired - goodwill $ 67,975
=========
Certain stockholders of Royalpar are personally related to certain
stockholders of the Company. The acquisition was recorded as an
arm's length transaction due to the oversight of the bankruptcy
court.
F-9
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 3 - Acquisitions - (continued)
Royalpar Industries, Inc. - (continued)
Simultaneous with this transaction, the Company entered into a
factoring agreement (Note 4) and a consulting agreement (Note 9).
An amendment to the above purchase was an earn out provision whereby
the Company is obligated to pay to Royalpar creditors or disbursing
agents an amount equal to 2% or 3% of the Company's income before
taxes over a five year period commencing with the short financial
year ending September 30, 1997. No amounts are currently due under
this provision.
JP Industrial, LLC
On August 10, 1998 the Company acquired certain assets of JP
Industrial, LLC, ("JPI") an engineering services company in Oregon
for $289,688 of which $89,688 was paid at closing and the remainder
payable in monthly installments through May 1999. The assets
acquired consisted of equipment, customer and vendor lists and any
open and pending contracts and purchase orders. The Company did not
assume any liabilities or obligations unless expressly agreed to.
Shortly after the acquisition and before assigning values to the
assets, the Company filed a lawsuit alleging breach of contract by
the former owners of JPI. The former owners of JPI have filed a
counter claim. Arbitration is to commence in the summer of 1999.
Management believes that the breach of contract has impaired the
value of assets purchased and has consequently charged operations
for $174,688 during the year ended September 30, 1998.
Note 4 - Factoring Agreement
The Company has a factoring agreement under which it may sell up to
$3,000,000 of qualified trade accounts receivable, with limited
recourse provisions. The agreement expires August 10, 2000 and is
renewed automatically for one year periods unless either party is
notified of termination sixty days prior to renewal. The Company is
required to repurchase or replace any receivable remaining
uncollected for more than 90 days. During the periods ended
September 30, 1997 and 1998 and March 31, 1998 and 1999, gross
proceeds from the sale of receivables were $1,870,459, $23,146,923,
$9,359,785 and $9,027,574, respectively. The provision for recourse
obligation receivables includes the estimated recourse obligations
on the sale of receivables. As of September 30, 1997 and 1998 and
March 31, 1999, $1,572,000, $2,943,000 and $3,532,000, respectively,
of the receivables sold to the factor had not been collected.
As of September 30, 1997 and 1998, and March 31, 1999, $90,000,
$1,105,000 and $807,000, respectively, of related-party receivables
sold to the factor had not been collected. Reserves for recourse
obligations of $0, $500,000 and $780,000, respectively, have been
provided against these receivables.
The Company is an impaired seller under the terms of the factoring
agreement. Although in technical violation for not repurchasing
outstanding receivables over 90 days, the factor is not exercising
any of the remedies available to them. However, two stockholders of
the Company have pledged 1,583,000 shares of the Company as
collateral.
F-10
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 5 - Property and Equipment
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures $ 3,000 $ 10,700 $ 23,444
Office equipment 8,489 26,223 33,223
Computer equipment 25,300 78,362 252,197
Computer software 4,300 22,593 35,316
----------- ----------- -----------
41,089 137,878 344,180
Accumulated depreciation (1,660) (42,316) (71,544)
----------- ----------- -----------
Net property and equipment $ 39,429 $ 95,562 $ 272,636
=========== =========== ===========
</TABLE>
Note 6 - Goodwill
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Goodwill (see Notes 3 and 18) $ 67,975 $ 67,975 $ 2,482,878
Less: accumulated amortization (325) (67,975) (107,868)
----------- ----------- -----------
$ 67,650 $ -- $ 2,375,010
=========== =========== ===========
</TABLE>
During the year ended September 30, 1998, the Company reevaluated
the recoverability of the goodwill and recorded an impairment of the
remaining balance of approximately $64,000.
Note 7 - Loans Payable - Related Parties
As of September 30, 1997 and 1998 and March 31, 1999 various
stockholders advanced funds to the Company for working capital and
payment of litigation expenses (Note 8). These loans bear interest
at the rate of 12% per annum and are payable upon demand. Interest
expense for the periods ended September 30, 1997 and 1998 and March
31, 1998 and 1999 was $4,000, $40,863, $-0- and $24,000,
respectively.
Note 8 - Litigation Fees Payable
The Company and four individuals were defendants in a legal action
alleging breach of various agreements. The action was settled in
June 1998 as a result of which the Company paid $408,000 (for
plaintiff's attorneys fees) and incurred $390,000 for its own legal
fees (Note 11). The Company owed $271,361 and $195,369 at September
30, 1998 and March 31, 1999 and is making periodic payments.
F-11
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 9 - Related Party Transaction
Consulting Agreement
The Company has a consulting agreement with the former president of
Rolyalpar who is the son of the Chief Executive Officer of the
Company, to provide services, payable in semi monthly installments.
The total payments were $175,000 for the year ended September 30,
1998 which were included in selling, general and administrative
expenses. Beginning in January 1999, the payments were reduced to
$2,200 payable weekly through January 2001. Consulting expense was
$32,000 and $43,427 for the six months ended March 31, 1998 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 $17,000 for the year ended September 30,
1998.
Revenues
The Company provides payroll services to an entity whose publicly
traded common stock is owned by the son of the Chief Executive
Officer of the Company. Revenues related thereafter for the period
ended September 30, 1998, March 31, 1998 and 1999 were $2,321,000,
$750,000 and $935,000, respectively.
The Company also provides payroll services to a non public entity
whose common stock is owned 50% by the Chief Executive Officer of
the Company. For the periods ended September 30, 1997, and 1998, and
March 31, 1998 and 1999, revenues were $120,000, $1,277,000,
$482,000 and $304,000, respectively.
Note 10 - Accounts Payable and Accrued Expenses
September 30, March 31,
1997 1998 1999
---- ---- ----
(Unaudited)
Accounts payable $ 91,154 $ 220,370 $ 298,598
Accrued compensation 40,522 312,402 356,019
Accrued commissions 38,500 -- --
Accrued legal 29,264 -- 180,829
Accrued other 28,783 107,124 253,246
Accrued interest -- 71,242 76,541
Accrued lease -- 101,605 82,192
Due to JPI (Note 2) -- 115,000 115,000
---------- ---------- ----------
$ 228,223 $ 927,743 $1,362,425
========== ========== ==========
F-12
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 11 - Other Expenses
<TABLE>
<CAPTION>
For the Periods Ended For the Six Months Ended
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Litigation settlement
and related legal costs (Note 8) $ -- $ 798,000 $ -- $ 237,164
Abandonment of equipment
and lease -- 101,606 -- --
Impairment of JPI assets (Note 3) -- 174,688 -- --
---------- ---------- ---------- ----------
$ -- $1,074,294 $ -- $ 237,164
========== ========== ========== ==========
</TABLE>
Note 12 - Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities follow:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets and liabilities
Loss on sale of receivables $ 20,000 $ 330,000 $ 238,000
Valuation allowance (20,000) (330,000) (238,000)
---------- ---------- ----------
Net current deferred tax asset (liability) $ -- $ -- $ --
========== ========== ==========
Noncurrent assets and liabilities
Net operating loss carryforward $ 87,000 $ 683,000 $ 985,000
Stock compensation -- 11,000 20,000
Depreciation -- (9,000) (9,000)
Valuation allowance (87,000) (685,000) (996,000)
---------- ---------- ----------
Net noncurrent deferred tax asset (liability) $ -- $ -- $ --
========== ========== ==========
</TABLE>
There were no provisions for income taxes for the periods ended
September 30, 1997 and 1998, and March 31, 1998 and 1999 because the
Company has net operating loss carryforwards with a corresponding
valuation allowance against them.
At September 30, 1998, the Company has available the following
federal net operating loss carryforwards for tax purposes:
Expiration Date
Year Ending
September 30,
-------------
2012 $ 218,000
2018 1,491,000
F-13
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 12 - Income Taxes - (continued)
The effective tax rate on net loss varies from the statutory federal
income tax rate for periods ended September 30, 1997 and 1998.
1997 1998
---- ----
Statutory rate (34.0)% (34.0)%
State taxes, net (6.0) (6.0)
Other differences, net 0.6 0.9
Valuation allowance 39.4 39.1
---- ----
0% 0%
==== ====
Note 13 - Commitments and Contingencies
Office Leases
The Company leases offices and equipment under various leases
expiring through September 30, 2002. Monthly payments under these
leases are $73,000.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year, as of
September 30, 1998.
For the Years Ending
September 30
------------
1999 $ 270,000
2000 210,000
2001 136,000
2002 81,000
Rent expense was $26,000, $187,000, $85,000 and $177,000 for the
periods ended September 30, 1997, 1998 and March 31, 1998 and 1999,
respectively.
Employment Agreements
The Company has entered into employment agreements with five
executives. The terms of the agreements stipulate annual salaries,
aggregating $916,000 plus additional bonuses with stock options of
750,000 shares granted and vested over three to four years. One
agreement with the Chief Executive Officer is for three years, while
the others continue until terminated by the Company. The agreement
with the Chief Executive Officer entitles him to severance
compensation equal to 2.9 times his base salary.
F-14
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 14 - Stock Options and Warrants
The Company has issued stock options to employees with terms of
three to four years. The options may be granted for 801,000 shares.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement
("FASB No. 123"), and has been determined as if the Company had
accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date
of grant using the minimum method option pricing model.
The minimum method option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following weighted-average assumptions were used:
September 30,
1997 1998
---- ----
Risk-free interest rate -- 6%
Dividend yield -- 0%
Expected life -- 4 years
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The Company's proforma information follows:
For the Periods Ended
September 30,
1997 1998
---- ----
Pro forma net loss $ (409,394) $(2,502,175)
Compensation expense under APB 25 was $26,000 for the year ended
September 30, 1998. Deferred compensation at September 30, 1998 was
$161,500 to be amortized over the remaining vesting period.
F-15
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 14 - Stock Options and Warrants - (continued)
A summary of the Company's stock option activity, and related
information for the years ended September 30, follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at September 30, 1997 -- $ --
Granted 801,000 1.70
Canceled -- --
Exercised -- --
------- --------
Outstanding at September 30, 1998 801,000 $ 1.70
======= ========
Exercisable at September 30, 1998 124,583 $ 1.33
======= ========
The exercise prices range from $1.00 to $3.00 per share
The Company has also issued 100,000 warrants to purchase shares at
$5 per share, expiring in 2003.
Following is a summary of the status of stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Life Exercise Price Number Exercise Price
----- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 250,000 2.0 years $ 1.00 83,333 $ 1.00
2.00 540,000 3.3 years 2.00 41,250 2.00
3.00 11,000 3.8 years 3.00 -- 3.00
</TABLE>
Note 15 - Major Customers
The Company had one customer and two customers who accounted for 21%
and 31% of total revenues for the period ended September 30, 1997
and for the year ended September 30, 1998, respectively. Major
customers are those who account for more than 10% of total revenues.
For the six months ended March 31, 1998 and 1999, the Company had
one customer and two customers who accounted for 20% and 29% of
total revenues, respectively.
F-16
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 16 - Retirement Plans
The Company maintains two 401(k) savings plans for its employees.
The terms of the plan define qualified participants as those with at
least three months of service. Employee contributions are
discretionary up to a maximum of 15% of compensation. The Company
can match up to 20% of the employees' first 5% contributions. The
Company's 401(k) expense for the periods ended September 30, 1998,
March 31, 1998 and 1999 were $16,000, $4,000 and $13,000,
respectively.
The Company has determined that its 401(k) plans may be disqualified
due to operational deficiencies. Management is attempting to remedy
the deficiencies. The effects on the Company's financial position
and results of operations are not determinable at this time.
Note 17 - Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's operational equipment or internal computer software
that have time sensitive programs may recognize a date using "00 as
the year 1900 rather that the year 2000. This could result in a
system failure or miscalculations causing disruption of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business.
The Company has assessed the implications on its operations of the
Year 2000 Issue. At September 30, 1998, the process of evaluating
the Company's internal systems was completed and are presently year
2000 compliant. At this time, the Company is satisfied that all of
its major vendors have or are in the process of verifying to the
Company their Year 2000 compliance. The Company's internal systems
have been updated, where appropriate to accommodate year 2000
compliance and actual impact of year 2000 compliance on the
Company's future results of operations, capital spending, and
business operations is not expected to be material.
Note 18 - Subsequent Events
Acquisition
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 two notes aggregating $1,880,000
and the issuance of 52,000 shares of the Company's common stock. B&R
has a put option to sell these shares back to the Company at $10 per
share, provided that the Company does not conduct an initial public
offering within twenty-four months. A payment of $269,000 was made
on the notes and an accounts receivable adjustment of $131,000
resulting in a balance of $1,210,000 to be paid thirty days after
successful completion of initial public offering or March 1, 2000,
whichever is sooner. The remaining note of $270,000 is payable in
eight monthly principal and interest installments of $37,656
commencing ninety days after payment of the first note. In addition,
the Company purchased existing accounts receivable of $600,000 from
B&R and sold them to the factor.
F-17
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of March 31, 1999 and for the six months ended
March 31, 1999 and 1998 is unaudited)
Note 18 - Subsequent Events - (continued)
Acquisition - (continued)
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 net assets acquired over the purchase price resulted
in goodwill of approximately $2,400,000.
Private Placement
In June 1999, the Company completed a private placement for
$825,000. Each $50,000 note consists of an interest bearing
instrument at 13% per annum and 5,000 shares of the Company's common
stock.
Acquisition
In April 1999, the Company purchased the rights, title and interest
of certain accounts of Adapta Services Group, Inc. for $50,000.
Registration
In July 1999, the Company anticipates filing a Form SB-2 to register
as a publicly traded company.
F-18
<PAGE>
Independent Auditors' Report
To the Former President of
Royalpar Industries, Inc.
We have audited the accompanying consolidated statements of operations of
Royalpar Industries, Inc. and Subsidiaries for the year ended March 31, 1997 and
for the period April 1, 1997 to August 11, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of Royalpar
Industries, Inc. and Subsidiaries for the year ended March 31, 1997 and for the
period April 1, 1997 to August 11, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 5, on February 20, 1998, the Company filed a Plan of
Reorganization with the U.S. Bankruptcy Court which detailed an orderly
liquidation of the Company.
AMPER, POLITZINER & MATTIA P.A.
July 16, 1999
Edison, New Jersey
F-19
<PAGE>
ROYALPAR INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended March 31, 1997 and
the Period April 1, 1997 to August 11, 1997
August 11, March 31,
1997 1997
---- ----
Revenues $ 6,241,479 $ 20,794,924
Cost of revenues 5,158,897 16,859,558
------------ ------------
Gross profit 1,082,582 3,935,366
Operating expenses
Selling, general and administrative expenses 1,251,348 5,549,004
Interest expense 327,145 1,471,269
------------ ------------
Total operating expenses 1,578,493 7,020,273
------------ ------------
Loss from operations (495,911) (3,084,907)
Other income -- 104,290
------------ ------------
Net loss $ (495,911) $ (2,980,617)
============ ============
See accompanying notes to consolidated statements of operations.
F-20
<PAGE>
ROYALPAR INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements of Operations
Note 1 - Going Concern
Royalpar Industries, Inc. and Subsidiaries (the "Company") financial
statements have been prepared assuming that the Company was a going
concern. The Company had been experiencing significant losses from
operations due to increased overhead and additional interest costs
from the factoring of receivables.
Note 2 - Nature of Operations and Summary of Significant Accounting
Policies
Operations
The Company was a subsidiary of Raycomm Transworld Industries, Inc.,
a publicly traded company. The consolidated statements of operations
include the accounts of the following companies (with dates of
incorporation) after elimination: Royalpar Industries, Inc.
(September 1990), LPL Technical Service, Inc. (April 1959), Ewing
Technical Design, Inc. (February 1975) and Mainstream Engineering
Co., Inc. (September 1975). The Company provided its customers,
qualified staff and accounting and payroll support from various
offices in New Jersey, Florida, Colorado, Texas, California and
Arizona. All intercompany transactions have been eliminated in
consolidation.
Due to the status of the Company's financial position, management
initiated a reorganization process on January 30, 1997. The Company
filed a Plan of Reorganization with the U.S. Bankruptcy Court in New
Jersey under Chapter 11 of the U.S. Bankruptcy Code. The following
assets and (liabilities) were included in the initial Bankruptcy
filing:
Personal Property $ 1,682,907
Creditors Holding Secured Claims (5,837,597)
Creditors Holding Unsecured Priority Claims (5,712,795)
Creditors Holding Unsecured Non-priority Claims (5,815,099)
------------
Net liabilities included in Bankruptcy filing $(15,682,584)
============
On July 29, 1997, the Company received an Order from the U.S.
Bankruptcy Court, approving a private sale of substantially all of
the Company's assets, ongoing businesses and personal property, free
and clear of all liens, claims and encumbrances, and authorizing the
assumption and assignment of certain unexpired leases and executory
contracts. Pursuant to this Order, the Company sold certain assets
and transferred certain liabilities of the Company to Stratus
Services Group, Inc. ("Stratus") on August 11, 1997 (Note 3).
Revenue Recognition
The Company recognized revenue as the services were performed by its
workforce. The Company's customers were billed weekly.
F-21
<PAGE>
ROYALPAR INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements of Operations
Note 2 - Nature of Operations and Summary of Significant Accounting
Policies - (continued)
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.
Depreciation
Depreciation was provided over the estimated useful lives of the
assets as follows:
Estimated
Method Useful Life
------ -----------
Computer equipment Straight-line 3 years
Machinery and equipment Declining balance 5 years
Furniture and fixtures Declining balance 5-7 years
Depreciation expense for the year ended March 31, 1997 and for the
period April 1, 1997 to August 11, 1997 was $158,000 and $47,000,
respectively.
Amortization
Amortization expense consisted of the amortization of goodwill and
other intangible assets which were amortized over a five year
period. Amortization expense for the year ended March 31, 1997 was
$74,000 and $-0- for the period ended August 11, 1997.
Advertising Costs
Advertising costs were expensed as incurred. Advertising expense for
the year ended March 31, 1997 and for the period April 1, 1997 to
August 11, 1997 was $37,000 and $15,000, respectively.
Income Taxes and Other Filings
The Company had not filed income tax returns for several periods.
The Company had experienced operating losses in these periods, and
had significant net operating losses. Therefore, there was no income
tax due and any deferred tax assets and liabilities have valuation
allowances against them. The Company did not file its 401(k)
retirement plans and has accrued $200,000 of penalties for the year
ended March 31, 1997. In addition, $95,000 and $214,000 was accrued
for interest and penalties on unpaid payroll taxes for the year
ending March 31, 1997 and the period April 1, 1997 to August 11,
1997.
Note 3 - Sale of Assets
As discussed in Note 2, the Company, on August 11, 1997, sold its
assets and was relieved of certain liabilities such as leases of
operating offices, and holiday and vacation pay in exchange for
$150,000 and the acquisition of 400,000 shares of Stratus common
stock. The excess of value received over the net assets sold
resulted in a gain on sale of $67,975.
F-22
<PAGE>
ROYALPAR INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements of Operations
Note 3 - Sale of Assets - (continued)
Prepaid insurance $ 612,566
Insurance obligation payable (483,601)
Office equipment 39,400
Security deposits 3,906
Accrued holiday and vacation pay (70,246)
---------
Net assets sold 102,025
---------
Amounts received
Cash received 150,000
Common stock received
(400,000 shares @ $.05 per share) 20,000
---------
170,000
---------
Excess of value received over
net assets sold - gain on sale $ 67,975
=========
Certain stockholders of Royalpar are personally related to certain
stockholders of Stratus. The sale of assets was recorded as an arm's
length transaction due to the oversight of the bankruptcy court.
Note 4 - Major Customers
The Company had one major customer that accounted for 24% of total
revenues during the period April 1, 1997 to August 11, 1997, and two
major customers that accounted for 32% of total revenues during the
year ended March 31, 1997.
Note 5 - Subsequent Event
The Company continued in existence, with no activity, until February
20, 1998 (the "Confirmation Date"), when the U.S. Bankruptcy Court
confirmed the Company's second amended Joint Plan of Reorganization
which detailed an orderly liquidation of the Company.
F-23
<PAGE>
Until , 1999 (25 days after the date of this Prospectus) all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
STRATUS SERVICES GROUP, INC.
1,500,000 Shares
Common Stock
PROSPECTUS
Hornblower & Weeks, Inc.
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Delaware General Corporation Law, Section 102(b)(7), authorizes a corporation to
eliminate or limit personal liability of members of its board of directors for
violations of a director's fiduciary duty of care. Such elimination or
limitation of personal liability is not permitted, however, where there has been
a breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or knowing violation of law, or payment of a dividend or approval of
a stock repurchase which was deemed illegal or where a director obtains an
improper personal benefit.
The Registrant's Certificate of Incorporation (filed as Exhibit 3.1 to this
Registration Statement) provides that a director of the Company shall, to the
maximum extent permitted by Section 102(b)(7) or any successor provision or
provisions, have no personal liability to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director.
Delaware General Corporation Law, Section 145, permits a corporation organized
under Delaware law to indemnify directors and officers with respect to any
matter in which the director or officer acted in good faith and in a manner he
reasonably believed to be not opposed to the best interests of the corporation
and, with respect to any criminal action, had no reasonable cause to believe his
conduct was unlawful.
The Registrant's Certificate of Incorporation and Bylaws (filed as Exhibit 3.2
to this Registration Statement) provides that any director or officer of the
Company involved in any action, suit or proceeding, the basis of which is
alleged action or inaction by such director or officer while he was acting in an
official capacity as a director or officer of the Registrant or as a director,
trustee, officer, employee or agent of another entity at the request of the
Registrant, shall be indemnified and held harmless by the Registrant to the
fullest extent permitted by Section 145 against all expense, liability and loss
reasonably incurred or suffered by such person in connection therewith. Such
indemnification as to such alleged action or inaction continues as to an
indemnitee who has after such alleged action or inaction ceased to be a director
or officer of the Registrant or a director, officer, trustee, employee or agent
of such other entity and inures to the benefit of the indemnitee's heirs,
executors and administrators. The Certificate of Incorporation also provides
that the right to indemnification shall be a contract right which shall not be
affected adversely as to any indemnitee by any amendment to the Certificate of
Incorporation with respect to any action or inaction occurring prior to such
amendment and shall include, unless otherwise restricted or prohibited by law or
the Registrant's By-laws, the right to be paid by the Registrant for expenses
incurred in defending any such proceeding in advance of its final disposition.
The Registrant's Board of Directors may also grant these indemnification rights
to any employee or agent of the Registrant or to any person who is or was a
director, officer, employee or agent of the Registrant's affiliates,
predecessors or subsidiaries.
Reference is made to the Underwriting Agreement, the proposed form of which is
filed as Exhibit 1 to the Registration Statement, which contains certain
provisions for the indemnification by the Underwriter of the Registrant and the
director and officers of the Registrant who signed
II-1
<PAGE>
the Registration Statement against certain liabilities, including civil
liabilities, under the Securities Act of 1933. The Underwriting Agreement also
contains certain provisions for the indemnification by the Registrant of, among
others, persons who control the Underwriter against certain liabilities,
including civil liabilities under the Securities Act of 1933.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses, all of which are being paid by the
Registrant, in connection with this offering. All the fees are estimates except
the Securities and Exchange Commission Registration fee, the NASD filing fee and
the Nasdaq Smallcap fee.
Registration fee - Securities and Exchange Commission ........... $ 3,472
NASD filing fee ................................................. 1,249
Nasdaq Smallcap fee ............................................. 10,000
Accounting fees and expenses .................................... 80,000
Legal fees and expenses ......................................... 100,000
Blue sky fees and expenses, including legal fees ................ 35,000
Printing; stock certificates .................................... 125,000
Transfer agent and registrar fees ............................... 5,000
Non-accountable expense allowance ............................... 333,750
Miscellaneous ................................................... 10,000
--------
Total ........................................................ $703,471
========
II-2
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
All shares of Common Stock and the exercise price of warrants and options have
been adjusted to reflect a 3-for-2 reverse split to be effected prior to the
effective date of this Registration Statement.
Between April 4, 1997 and September 1, 1997, Joseph J. Raymond, Michael J.
Rutkin and other investors contributed capital amounting in aggregate to
approximately $125,000 to purchase the assets of Royalpar Industries, Inc. In
exchange for their investment, these initial investors, each of whom was an
executive or management level employee or a relative of an executive or
management employee of the Registrant, were issued 2,486,667 shares of Common
Stock of the Registrant resulting in a price per share of $0.075. The issuance
and sale of these securities was made in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") as a transaction not involving any public offering.
Below is a chart showing these initial investors, the number of shares issued to
them, and the date of issue.
Date Name/Entity Shares
- ---- ----------- ------
4/4/97 Rutkin, Michael J. 667
9/1/97 Raymond, Joseph J. 69,333
9/1/97 Kingston Family Revocable Trust 33,333
9/1/97 Sahyoun, Charles A. 220,000
9/1/97 Foley, Thomas 8,333
9/1/97 Abruzzese, Arthur 8,333
9/1/97 Porzio, Eugene Robert 8,333
9/1/97 Ribaudo, Alfonso 8,333
9/1/97 Raymond, Joseph J. 666,667
9/1/97 Feidt, Don W. 20,000
9/1/97 Raymond, Joseph J. 666,667
9/1/97 Raymond, Joseph J. 333,333
9/1/97 Rutkin, Michael J. 333,333
9/1/97 Schneider, Frank Jr. 16,667
9/1/97 Raymond, J. Todd as trustee for Irene Lynch 26,667
9/1/97 Raymond, J. Todd 16,667
9/1/97 Maltzman, Scott A. 667
9/1/97 Maltzman, Michael A. & Valerie M. 46,667
9/1/97 Townsend, Donna A. 667
9/1/97 Zomack, Beth S. 667
9/1/97 Sullivan, Rani L. 667
9/1/97 Barbara A. Donner-Miglio as
Custodian of Eugene J. Miglio IV UTMA/NJ 333
9/1/97 Barbara A. Donner-Miglio as Custodian of
Anna Marcella Miglio UTMA/NJ 333
On September 1, 1997, the Registrant issued to 33 purchasers, units ("Phase I
Units"), comprised of 8,667 shares of Common Stock of the Registrant at a price
of $.075 per share for a total price per unit of $650. Thirty-four and one-half
units were sold resulting in the sale of 299,000 shares of Common Stock and
gross proceeds of $22,425. In connection with the offering, (i) each of
II-3
<PAGE>
the stockholders represented to the Registrant that he was an "Accredited
Investor" (as that term is defined under Regulation D promulgated under the
Securities Act), (ii) each stockholder signed a written agreement that the Phase
I Units which he purchased would not be sold without registration under the
Securities Act, except in reliance upon an exemption therefrom, and (iii) the
Registrant did not engage in any general solicitation or general advertisement
for the issuance. The issuance and sale of these securities was made in reliance
on the exemption provided by Section 4(2) of the Securities Act as a transaction
not involving any public offering.
On August 11, 1997, the Registrant issued 133,333 shares of Common Stock to each
of Congress Financial Corporation and AGR Financial, L.L.C. (collectively,
"Congress and AGR") in consideration for Congress' and AGR's consent to the
acquisition of assets from Royalpar Industries, Inc. and its release of liens on
certain of the acquired assets. In connection with the Offering, (i) both
Congress and AGR represented to the Registrant that they were an Accredited
Investor (as that term is defined under Regulation D promulgated under the
Securities Act), (ii) both Congress and AGR represented that the securities
acquired could not be sold without registration under the Securities Act, except
in reliance upon an exemption therefrom, and (iii) the Registrant did not engage
in any general solicitation or advertisement for the issuance. The issuance and
sale of these securities were made in reliance on the exemption provided by
Section 4(2) of the Securities Act, as a transaction not involving any public
offering.
On September 1, 1997, the Registrant issued 289,000 shares of Common Stock to
8 creditors (the "Creditors") in consideration for their consent to the
acquisition of assets by the Registrant from Royalpar Industries, Inc. of the
acquired assets. The issuance and sale of these securities were made in reliance
on the exemption provided by Section 4(2) promulgated under the Securities Act
as a transaction not involving any public offering.
On January 1, 1998, the Registrant issued a cumulative total of 8,400 shares of
Common Stock to 20 employees as bonuses for efforts contributing to the
continuing success and growth of the Registrant in 1997. The issuance of these
securities was made without payment to the Registrant of any consideration and
therefore was not a "sale" within the meaning of, and not subject to, Section 5
of the Securities Act.
Between December 1, 1997 and September 1, 1998, the Registrant issued to 43
purchasers, units ("Phase II Units"), comprised of 13,333 shares of Common Stock
at a price of $3.75 per share for a total price per unit of $50,000. Twenty-two
and one half units were sold resulting in gross proceeds of $1,125,000. In
connection with the offering, (a) each of the stockholders represented to the
Registrant that he was an "Accredited Investor" (as that term is defined under
Regulation D promulgated under the Securities Act of 1933, as amended), (b) each
stockholder signed a written agreement stating that the Phase II Units which he
purchased would not be sold without registration under the Securities Act,
except in reliance upon an exemption therefrom, and (c) the Registrant did not
engage in any general solicitation or general advertisement for the issuance.
The issuance and sale of these securities was made in reliance on the exemption
provided by Rule 506 of Regulation D promulgated under the Securities Act.
In connection with the offering of Phase II Units, the Registrant issued a
cumulative total of 70,000 shares of Common Stock to nineteen individuals who
assisted the Registrant in locating
II-4
<PAGE>
investors for the offering. The issuance and sale of these securities was made
in reliance on Section 4(2)] of the Securities Act as a transaction not
involving any public offering.
On January 1, 1999, the Registrant issued 34,667 shares of Common Stock to B & R
Employment Inc. in partial consideration for substantially all of the assets of
B & R Employment Inc. In addition to these shares, the Registrant also granted
to B & R Employment Inc., in the event the Registrant does not conduct an
initial public offering of Common Stock within 24 months of the closing of the
Asset Purchase Agreement between the Registrant and B & R Employment Inc., an
option to sell its stock to the Registrant at $15 per share. The issuance and
sale of these securities was made in reliance on the exemption provided by
Section 4(2) of the Securities Act as a transaction not involving any public
offering.
During June 1999, the Registrant issued to 11 purchasers, units, each consisting
of a $50,000 Promissory Note and 3,333 shares of Common Stock of the Registrant.
The price per unit was $50,000. Seventeen and one-half (17-1/2) units were sold
resulting in gross proceeds of $875,000. The proceeds were used to meet the
working capital requirements and expenditures of the Registrant in preparing for
its initial public offering of Common Stock. The Registrant did not engage in
any general solicitation or general advertisement in conducting this offering.
The issuance and sale of these securities was made in reliance on the exemption
provided by Rule 506 of Regulation D promulgated under the Securities Act.
Between September 1, 1997 and December 2, 1998, the Registrant issued options to
purchase an aggregate of 367,333 shares of Common Stock to eight of its
employees. The issuance and sale of these securities was made in reliance on the
exception provided in Section 4(2) of the Securities Act as a transaction not
involving any public offering.
Between November 23, 1998 and December 2, 1998 the Registrant issued warrants to
acquire five individuals in consideration for their making loans to the
Registrant. The issuance of these securities was made in reliance upon Section
4(2) of the Securities Act as a transaction not involving any public offering.
II-5
<PAGE>
Item 27. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Exhibit Description
------- -------------------
1.1 Underwriting Agreement.*
1.2 Form of Underwriter's Warrant Agreement, including form of warrant
certificate.*
2.1 Asset Purchase Agreement, dated July 9, 1997, among Stratus Services
Group, Inc. and Royalpar Industries, Inc., Ewing Technical Design,
Inc., LPL Technical Services, Inc. and Mainstream Engineering
Company, Inc., as amended by Amendment No. 1 to the Asset Purchase
Agreement, dated as of July 29, 1997.*
2.2 Asset Purchase Agreement, effective January 1, 1999, by and between
Stratus Services Group, Inc. and B&R Employment Inc.*
3.1 Proposed Form of Amended and Restated Certificate of Incorporation
of the Registrant.*
3.2 By-Laws of the Registrant.*
4.1 Specimen Common Stock Certificate of the Registrant.*
4.2.1 Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Alan Zelinsky
and Stratus Services Group, Inc., and supplemental letter thereto
dated December 2, 1998.*
4.2.2 Warrant for the Purchase of 40,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 23, 1998, between David
Spearman and Stratus Services Group, Inc.*
4.2.3 Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Sanford I.
Feld and Stratus Services Group, Inc., and supplemental letter
thereto dated December 2, 1998. *
4.2.4 Warrant for the Purchase of 20,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Peter
DiPasqua, Jr. and Stratus Services Group, Inc.*
4.25 Warrant for the Purchase of 20,000 Shares of Common Stock of Stratus
Services Group, Inc., dated December 2, 1998, between Shlomo Appel
and Stratus Services Group, Inc. *
5.1 Opinion of Giordano, Halleran & Ciesla, a Professional Corporation,
including consent of such counsel (filed herewith).*
II-6
<PAGE>
10.1.1 Employment Agreement, dated September 1, 1997, between Stratus
Services Group, Inc. and Joseph J. Raymond. *
10.1.2 Executive Employment Agreement, dated September 1, 1997, between
Stratus Services Group, Inc. and J. Todd Raymond, Esq. *
10.1.3 Executive Employment Agreement, dated December 1, 1997, between
Stratus Services Group, Inc. and Charles A. Sahyoun. *
10.1.4 Executive Employment Agreement, dated April 17, 1998, between
Stratus Services Group, Inc. and Mark S. Levine. *
10.1.5 Executive Employment Agreement, dated May 7, 1998, between Stratus
Services Group, Inc. and A. George Komer. *
10.1.6 Executive Employment Agreement, dated September 1, 1997 between
Stratus Services Group, Inc. and Michael A. Maltzman.*
10.1.7 Consulting Agreement, dated as of August 11, 1997, between Stratus
Services Group, Inc. and Jeffrey Raymond. *
10.2 Lease, effective June 1, 1998, for offices located at 500 Craig
Road, Manalapan, New Jersey 08512.*
10.3 Sale and Purchase Agreement, dated August 11, 1997, between AGR
Financial, LLC and Stratus Services Group, Inc., with supplemental
letter thereto dated January 8, 1999. *
10.4.1 Promissory Note in the amount of $250,000, dated October 14, 1998,
between Stratus Services Group, Inc. and J. Todd Raymond, Esq.,
Trustee with Powers of Attorney. *
10.5.1 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and AGR Financial, L.L.C. *
10.5.2 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and Congress Financial Corporation
(Western).*
10.6.1 Stock Purchase and Investor Agreement, dated August, 1997, by and
between Stratus Services Group, Inc. and Congress Financial
Corporation (Western).*
10.6.2 Stock Purchase and Investor Agreement, dated August, 1997, by and
among Stratus Services Group, Inc. and AGR Financial, L.L.C. *
23.1 Consent of Amper, Politziner & Mattia, LLP. [filed herewith]
23.2 Consent of Giordano, Halleran & Ciesla, P.C.*
II-7
<PAGE>
24 Powers of Attorney of officers and directors of the Company
[included in the signature page to this Registration Statement].
27 Financial Data Schedule for the 6 months ended March 31, 1999
[filed herewith].
- ----------
*To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment of the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted
by such director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by the Registrant is against
public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form
of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Manalapan, the State of New Jersey, on July 20,
1999.
STRATUS SERVICES GROUP, INC.
By: /S/ Joseph J. Raymond
------------------------------------
Joseph J. Raymond
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below on this Registration Statement hereby constitutes and appoints Joseph J.
Raymond with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this Registration Statement (including post-effective
amendments and amendments thereto) and any registration statement relating to
the same offering as this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/S/ Joseph J. Raymond Chairman, Chief Executive July 20, 1999
- --------------------------------- Officer (Principal
Joseph J. Raymond Executive Officer)
Vice President and Chief July 20, 1999
/S/ Michael A Maltzman Financial Officer
- --------------------------------- (Principal Financing and
Michael A. Maltzman Accounting Officer)
II-9
<PAGE>
/S/ Michael J Rutkin Director July 20, 1999
- ---------------------------------
Michael J. Rutkin
/S/ H. Robert Kingston Director July 20, 1999
- ---------------------------------
H. Robert Kingston
/S/ Donald W. Feidt Director July 20, 1999
- ---------------------------------
Donald W. Feidt
/S/ Sandford Feld Director July 20, 1999
- ---------------------------------
Sanford I. Feld
II-10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form SB-2) and related Prospectus of Stratus Services
Group, Inc. for the registration of 1,500,000 shares of its Common Stock and to
the use in this Registration Statement (Form SB-2) of our reports dated July 16,
1999, with respect to the financial statements of Stratus Services Group, Inc.
and Royalpar Industries, Inc. and Subsidiaries for the periods ended September
30, 1998 and 1997 and August 11, 1997 and March 31, 1997.
/s/ AMPER, POLITZINER & MATTIA P.A
AMPER, POLITZINER & MATTIA P.A
July 20, 1999
Edison, New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Consolidated Balance Sheets as of September 30, 1998 and March 31,
1999 and the Registrant's Statement of Operations for the fiscal year ended
September 30, 1998 and the six months ended March 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 404,047
<SECURITIES> 0
<RECEIVABLES> 755,644
<ALLOWANCES> 182,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,734,618
<PP&E> 344,180
<DEPRECIATION> 71,544
<TOTAL-ASSETS> 4,535,826
<CURRENT-LIABILITIES> 7,244,146
<BONDS> 0
0
0
<COMMON> 56,316
<OTHER-SE> (3,525,020)
<TOTAL-LIABILITY-AND-EQUITY> 4,535,826
<SALES> 12,920,225
<TOTAL-REVENUES> 12,920,225
<CGS> 10,307,710
<TOTAL-COSTS> 10,307,710
<OTHER-EXPENSES> 3,650,080
<LOSS-PROVISION> 595,000
<INTEREST-EXPENSE> 121,289
<INCOME-PRETAX> (1,753,854)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,753,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,753,854)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Consolidated Balance Sheets as of September 30, 1998 and March 31,
1999 and the Registrant's Statement of Operations for the fiscal year ended
September 30, 1998 and the six months ended March 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 249,987
<SECURITIES> 0
<RECEIVABLES> 407,466
<ALLOWANCES> 37,000
<INVENTORY> 0
<CURRENT-ASSETS> 847,874
<PP&E> 137,878
<DEPRECIATION> 42,316
<TOTAL-ASSETS> 1,094,649
<CURRENT-LIABILITIES> 2,832,899
<BONDS> 0
0
0
<COMMON> 55,796
<OTHER-SE> (1,794,046)
<TOTAL-LIABILITY-AND-EQUITY> 1,094,649
<SALES> 24,919,639
<TOTAL-REVENUES> 24,919,639
<CGS> 20,329,718
<TOTAL-COSTS> 20,329,718
<OTHER-EXPENSES> 6,351,101
<LOSS-PROVISION> 670,445
<INTEREST-EXPENSE> 48,170
<INCOME-PRETAX> (2,479,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,479,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,479,795)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
