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 September 3, 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. Stratus currently estimates that the initial public offering price
will be between $6.00 and $9.00 per share. We have applied for quotation of our
common stock on the Nasdaq Smallcap Market under the symbol "SMSL."
----------------------------------------
See "Risk Factors" beginning on page 4 to read about factors you should
consider before buying shares of common stock.
----------------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved these securities, or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<TABLE>
<CAPTION>
===========================================================================================================================
Underwriting Discounts and Proceeds, before expenses, to
Price to Public Commissions Stratus Services Group, Inc.
<S> <C> <C> <C>
Per Share............ $ $ $
Total................ $ $ $
===========================================================================================================================
</TABLE>
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>
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.
----------------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 4
Use of Proceeds............................................................. 9
Dividend Policy............................................................. 9
Dilution.................................................................... 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 11
Business.................................................................... 16
Management.................................................................. 25
Certain Relationships and Related Party Transactions........................ 31
Principal Stockholders...................................................... 32
Description of Securities................................................... 34
Shares Eligible for Future Sale............................................. 36
Underwriting................................................................ 38
Legal Matters............................................................... 39
Experts..................................................................... 39
Available Information....................................................... 40
Index to Financial Statements............................................... F-1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors," before investing
in our common stock.
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 August 31, 1999, we were providing approximately 1300 staffing employees
to more than 200 businesses.
Our strategy is to continue to expand operations through internal
growth and strategic acquisitions.
Our executive offices are located at 500 Craig Road, Manalapan, New
Jersey. Our phone number is (732) 866-0300.
The Offering
Shares of Common Stock Offered.................................1,500,000 shares.
Shares to be Outstanding After this Offering...................5,602,470 shares.
Use of Proceeds................................................For repayment of
debt, capital
expenditures,
working capital,
including
possible
acquisitions of
complementary
businesses and
general corporate
purposes. See
"Use of
Proceeds."
Proposed Nasdaq National Market Symbol.........................SMSL.
The above information is based on shares outstanding as of August
31, 1999 and excludes 600,667 shares issuable upon the exercise of options and
warrants to acquire our common stock that were outstanding as of August 31, 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.
Unless otherwise indicated, 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 two
(2) for three (3) reverse split of our common stock and certain proposed
amendments to our certificate of incorporation and bylaws.
2
<PAGE>
Summary Financial Information
The following tables summarize the financial data for our business.
You should read this information with the discussion in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes to those statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
August 11, 1997 June 30,
Inception to Year Ended -----------------------------------
September 30, 1997 September 30, 1998 1998 1999
------------------ ------------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .......................... $ 2,442,191 $ 24,919,639 $ 18,062,534 $ 21,263,817
Gross profit ...................... 436,344 4,589,921 3,303,293 4,420,491
Operating income (loss) ........... (355,072) (1,041,099) 41,765 (710,654)
Other income (loss) (54,322) (1,438,696) (1,141,657) (968,151)
Net income (loss) ................. (409,394) (2,479,795) (1,099,892) (1,678,805)
Net loss per common Share - Basic . $ (.20) $ (.69) $ (.31) $ (.44)
Net loss per common share - Diluted $ (.20) $ (.69) $ (.31) $ (.44)
Weighted average shares outstanding
per common share -
Basic 2,027,124 3,602,086 3,562,439 3,783,714
Diluted 2,027,124 3,602,086 3,562,439 3,841,181
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended
December 31, 1998 March 31, 1999 June 30, 1999
----------------- -------------- -------------
<S> <C> <C> <C>
Quarterly Operations Data
(Unaudited)
Revenues....................... $5,912,643 $7,007,582 $8,343,592
Gross Profit................... 1,233,524 1,378,991 1,807,976
Operating income (loss)........ (779,951) (257,526) 326,823
Other income (loss)............ (217,898) (498,479) (251,774)
Net income (loss).............. (997,849) (756,005) 75,049
</TABLE>
As of June 30,
1999
--------------
(Unaudited)
Selected Balance Sheet Data:
Cash ..................................................... $ 41,441
Accounts receivable ...................................... 707,559
Other assets ............................................. 3,321,363
Total assets ............................................. 4,070,363
Notes and loans payable .................................. 2,434,375
Accrued payroll and taxes ................................ 906,562
Due to factor ............................................ 495,482
Accounts payable, accrued expenses and other ............. 1,979,700
Total liabilities ........................................ 5,816,119
Temporary equity ......................................... 520,000
Stockholders' equity (deficit) ........................... (2,265,756)
3
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations or financial condition would likely suffer.
In this case, the market price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
Financial Risks
We have a history of net losses and if we do not become profitable
in the future, our financial condition and our stock price could suffer.
We cannot assure investors that we will become profitable in the
future. We have incurred net losses in recent periods, including net losses of
$409,394 in our inception period from August 11, 1997 through September 30,
1997, $2,479,795 in the year ended September 30, 1998 and $1,678,805 in the nine
months ended June 30, 1999. As a result of our losses we have a stockholders
deficit of $2,265,756 as of June 30, 1999. We can provide no assurances that our
operations will be profitable in the future.
Our technical default under a factoring agreement will affect our
growth and our financial viability 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.
There are doubts as to our ability to continue in business.
Our auditors have qualified our Financial Statements for the year
ended 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 and reduce debt in order to reduce
the demand on working capital, there can be no assurance as to when these plans
will be implemented and if implemented, whether they will be successful.
If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue in business.
To date, we have been unable to fund our operations with the cash
generated from our business and have funded operations from the sale of equity
securities and the incurrence of debt. If our cash flows continue to be
insufficient to fund operations, we may need to fund our growth through
additional debt or equity funding. 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.
4
<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. We are unable to estimate at this time the extent of
any possible costs.
We may have sold securities in violation of applicable securities
laws, which could give purchasers of these securities the right to seek refunds
or damages, which could reduce the proceeds available from this offering.
In issuing securities prior to this offering, we relied upon certain
provisions of federal and state securities laws which provide "private placement
exemptions" from the registration requirements of the securities laws. Because
we may not have complied with all of the applicable exemption requirements,
certain investors who acquired our securities may have a right to obtain a
recovery of the consideration paid in connection with their purchase of our
securities or, if they have already sold the securities, to recover damages
against us. We estimate that these refunds or damages could total up to
approximately $500,000. In addition, we could be subject to additional
liabilities if state or federal authorities were to assert violations of the
securities laws against us.
Business Model Risks
Delays implementing our internal growth strategy may reduce anticipated cash
flow and place a strain on our management resources, which could adversely
affect our operating performance.
Any significant delay in the opening of new offices or the failure
of new offices to achieve anticipated performance levels could adversely impact
our operations and expansion plans and have a material adverse effect on our
business. We have grown in recent years by opening new offices and increasing
the volume of services provided through existing offices. We cannot assure you
that we will continue to be able to maintain or expand our market presence in
current locations or to successfully enter other markets.
Future acquisitions could increase the risk of our business.
As part of our business strategy, we expect to review acquisition
prospects that would complement our existing business. We anticipate that we
will acquire other businesses or assets meeting our strategic goals that can be
purchased on terms acceptable to us. We may not locate suitable acquisition
opportunities. Any future acquisitions would expose us to increased risks,
including:
o issuances of equity securities that may dilute existing
stockholders;
o increased debt obligations or contingent liabilities;
o risks associated with the assimilation of new operations;
o the diversion of resources from our existing operations;
o the inability to retain the customers of acquired businesses
and generate sufficient revenues from new operations to offset
associated acquisition costs;
o the maintenance of uniform standards, controls, procedures and
policies; and
o the impairment of relationships with employees and customers
as a result of any integration of new management personnel.
If these risks materialize, future acquisitions could require
additional capital investment or result in additional operating losses,
amortization of goodwill and other intangible assets or other charges against
earnings.
5
<PAGE>
Risks Relating to Operations
If we are not able to hire and retain a sufficient number of
qualified temporary employees, our business may suffer.
Since our "product" is the temporary employees we provide to our
clients, our future success will depend on our ability to attract, train, retain
and motivate suitably qualified personnel. Competition for such personnel in the
staffing services industry is particularly intense. We compete with other
temporary staffing companies, as well as our customers and other employers for
qualified personnel. If we are unable to continue to recruit additional
qualified personnel our business and planned growth could suffer.
We are directly liable for worksite employee payroll regardless of
whether we are paid by our customers, potentially reducing available working
capital.
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 to us. 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, potentially exposing us to monetary damages.
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.
Malpractice claims against us could increase our operating costs.
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 that future claims will not exceed the coverage amounts or that the
insurance policies will indemnify us in any particular circumstance.
Because a small number of customers account for a substantial
portion of our revenues, our revenues could suffer if we lose a major customer.
For the year ended September 30, 1998 and the nine months ended June
30, 1999, our five largest clients accounted for approximately 49% and 42% 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.
6
<PAGE>
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, exposing us to
potential liability.
The Year 2O00 problem could cause us to suffer business interruptions, or
shutdown, reputational harm or legal liability, and as a result, material
financial jobs.
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. The Year 2000 problem could cause us
to suffer business interruptions, or shutdown, reputational harm or legal
liability, and as a result, material financial loss.
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 our own
systems will be Year 2000 compliant, that any of our third party suppliers and
vendors will be Year 2000 compliant in a timely manner, or that there will not
be significant interrelated operational problems among information technology
systems.
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.
Risks Related to Our Structure
Our officers, directors and senior management employees own a large
percentage of our common stock and could significantly influence the outcome of
actions requiring stockholder approval.
Upon consummation of this offering, directors, officers and senior
management employees of Stratus will control approximately 44% of our
outstanding voting stock. As a result, if they act together, they may have the
ability to significantly influence the outcome of all matters requiring
stockholder approval, including the election and removal of directors and any
merger, consolidation or sale of all or substantially all of our assets, and the
ability to control our management and affairs. 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.
Anti-takeover provisions affecting us could prevent or delay a
change of control and this could affect our stock price.
Our certificate of incorporation and bylaws 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.
You will experience immediate and substantial dilution in the net
tangible book value of the shares you purchase.
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 $6.68 per share in the net tangible
book value of the common stock from the expected initial public offering price.
If the outstanding options and warrants to purchase shares of common stock are
exercised, there would be further dilution.
7
<PAGE>
Future sales of our common stock could cause the market price 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 5,602,470 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 4,102,470 shares of common stock outstanding after this offering,
approximately 1,189,200 (or 21%) will be eligible for sale in the public market
beginning 12 months after the effective date of this prospectus and
approximately 2,913,270 (or 52%) shares will become eligible for sale 24 months
after the effective date of this prospectus.
No public market for our common stock currently exists and our stock price may
fluctuate after this offering. As a result, investors in our common stock may
not be able to resell their shares at or above the initial public offering
price.
The market price for our common stock will vary from the initial public
offering price. The market price of our common stock may fluctuate significantly
in response to a number of factors, some of which are beyond our control,
including:
o variations in quarterly operating results;
o changes in financial estimates by securities analysts;
o changes in market valuations of staffing companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o loss of a major customer;
o additions or departures of key personnel;
o sales of common stock in the future; and
As a result, investors in our common stock may not be able to resell their
shares at or above the initial public offering price. In the past, securities
class action litigation has often been brought against a company following
periods of volatility in the market price of its securities. We may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert our management's attention and resources, which
could negatively impact our business, operating results and financial condition.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Some of the statements under the "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business" and elsewhere in this
prospectus constitute forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels or activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "could", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", or "continue"
or the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither we, nor any
other person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
8
<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 $9,200,000. 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 $1,050,000 of outstanding debt incurred to
support our operations which bears the interest rate of 18%
per annum and which becomes due upon completion of this
offering.
o Pay $1,326,000, 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 the earlier of
March 1, 2000 or 30 days after the completion of this
offering.
o Pay outstanding indebtedness to attorneys of $249,000 incurred
in connection with various litigation;
o Pay $839,000 to the factor for settlement of recourse
obligation;
o Purchase $150,000 of computers and other equipment;
o Pay $170,000 of accrued compensation to three of our
executives;
o Pay $100,000 for marketing and promotion;
o Pay $75,000 to expand our internet presence.
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.
9
<PAGE>
DILUTION
At June 30, 1999 we had a negative net tangible book value of
$(4,700,000) or approximately ($1.14) 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 June 30, 1999 would have been
approximately $4.6 million or $.82 per share of common stock. This represents an
immediate increase in pro forma net tangible book value of $1.96 per share to
existing stockholders and an immediate dilution of $6.68 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
Net tangible book value per share as
of June 30, 1999 ............................. (1.14)
Increase per share attributable to new
investors .................................... 1.96
Pro forma net tangible book value per share after
this offering .................................... .82
Dilution per share to new investors ................ $6.68
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 June 30, 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:
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration Per Share
--------------------- ----------------------- -------------
Number Percent Amount Percent
--------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders 4,080,804 73.1% $ 3,414,000 23.3% $ .84
New Investors ....... 1,500,000 26.9% 11,250,000 76.7% 7.50
--------- ----- ---------- -----
Total ............. 5,580,804 100.0% 14,664,000 100.0%
========= ===== ========== =====
</TABLE>
The foregoing discussions and tables are based upon the number of
shares actually issued and outstanding on June 30, 1999 and assumes no exercise
of any of the options and warrants outstanding as of June 30, 1999. To the
extent these options and warrants are exercised, there will be further dilution
to investors.
10
<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, which were completed in August 1998 and January 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 on August 11, 1997 through September
30, 1997, for the fiscal year ended September 30, 1998 and for the nine months
ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
August 11, 1997 to Year ended Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 June 30, 1998 June 30, 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............... $ 2,442,191 100.0% $ 24,919,639 100.0% $18,062,534 100.0% $21,263,817 100%
Cost of Revenues ....... 2,005,847 82.1% 20,329,718 81.6% 14,759,241 81.7% 16,843,326 79.3%
Gross Profit ........... 436,344 17.9% 4,589,921 18.4% 3,303,293 18.3% 4,420,491 20.7%
Selling, general and
administrative
expenses ............. (739,431) 30.3% (4,852,269) -19.5% (3,201,538) -17.7% (4,404,428) 20.7%
Depreciation and
amortization ......... (1,985) -0.1% (108,306) -0.4% (30,139) -0.2% (131,717) -0.6%
Provision for recourse
obligation ........... (50,000) -2.0% (670,445) -2.7% (29,851) -0.2% (595,000) -2.8%
Earnings (Loss) from
operations ........... (355,072) -14.5% (1,041,099) -4.2% 41,765 0.2 (710,654) -3.4%
Other income (expenses):
Finance charges ........ (39,078) -1.6% (524,649) -2.1% (342,614) -1.9% (539,463) -2.5%
Interest expense ....... (15,244) -0.6% (48,170) -0.2% (32,629) -0.2% (209,679) -1.0%
Other income ........... -- 0.0% 33,729 0.1% 31,586 0.2% 18,155 0.1%
Other (expenses) ....... -- 0.0% (899,606) -3.6% (798,000) -4.4% (237,164) -1.1%
----------- ----- ------------ ----- ------------ ---- ------------ ----
Net (loss) ............. ($ 409,394) -16.7% ($ 2,479,795) -10.0% ($ 1,099,892) -6.1% ($ 1,678,805) -7.9%
=========== ====== ============ ====== ============ ===== ============ =====
</TABLE>
11
<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, 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 higher-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
$4,852,569 or 19.5% 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 a substantial portion of 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 management's 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 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 the factor may obligate us to repurchase. 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
were $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
Leased equipment abandonment 73,894
Office closing costs 27,712
--------
Total $899,606
========
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<PAGE>
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30,
1998
Revenues. Revenues increased 17.7% to $21,263,817 for the nine
months ended June 30, 1999 from $18,062,534 for the nine months ended June 30,
1998. Revenues increased primarily due to the commencement of the Engineering
Services Division in January 1998. As a result, results for the nine months
ended June 30, 1999 reflect nine months of operations of the Engineering
Services Division compared to six months for the nine months ended June 30,
1998. The increase in revenues was also due to the implementation of our first
SMARTSolutions programs in December 1998.
Gross Profit. Gross profit increased 33.8% to $4,420,491 for the
nine months ended June 30, 1999 from $3,303,293 for the nine months ended June
30, 1998. Gross profit as a percentage of revenues increased to 20.7% for the
nine months ended June 30, 1999 from 18.3% for the nine months ended June 30,
1998. This increase was due to the commencement of the Engineering Services
Division in January 1998, which services had higher gross margins than the other
services we provided.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, not including depreciation and amortization, increased
37.6% to $4,404,428 for the nine months ended June 30, 1999 from $3,201,538 for
the nine months ended June 30, 1998. Selling, general and administrative
expenses as a percentage of revenues increased to 20.7% for the nine months
ended June 30, 1999 from 17.7% for the nine months ended June 30, 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 337.0% to $131,717 for the nine months ended June 30, 1999
from $30,139 for the nine months ended June 30, 1998. Depreciation and
amortization expenses as a percentage of revenues increased to 0.6% for the nine
months ended June 30, 1999 from 0.2% for the nine months ended June 30, 1998.
This increase was primarily due to the amortization of goodwill associated with
the acquisition of certain assets of B&R and certain accounts of Adapta Services
Group, Inc. ("Adapta") in January 1999 and April 1999, respectively.
Provision for recourse obligation. Provision for recourse obligation
increased to $595,000 for the nine months ended June 30, 1999 from $29,851 for
the nine months ended June 30, 1998. Provision for recourse obligation as a
percentage of revenues increased to 2.8% for the nine months ended June 30, 1999
from 0.2% for the nine months ended June 30, 1998. The amount for the nine
months ended June 30, 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 57.5% to $539,463 for the
nine months ended June 30, 1999 from $342,614 for the nine months ended June 30,
1998. As a percentage of revenues, finance charges increased to 2.5% for the
nine months ended June 30, 1999 from 1.9% for the nine months ended June 30,
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 1.1% of revenues for
the nine months ended June 30, 1999 and $798,000 or 4.4% of revenues for the
nine months ended June 30, 1998. Other expenses for the nine months ended June
30, 1999 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. Other
expenses for the nine months ended June 30, 1998 is comprised of costs
associated with the settlement of litigation.
Interest expense. Interest expense increased 542.6% to $209,679 for
the nine months ended June 30, 1999 from $32,629 for the nine months ended June
30, 1998. As a percentage of revenues, interest expense increased to 1.0% for
the nine months ended June 30, 1999 from 0.2% for the nine months ended June 30,
1998. This increase was due to increased borrowings necessary to satisfy a
litigation settlement and a working capital shortfall.
Net loss. As a result of the foregoing, the net loss increased 52.6%
to $1,678,805 for the nine months ended June 30, 1999 from $1,099,892 for the
nine months ended June 30, 1998. The net loss as a percentage of revenues
increased to 7.9% for the nine months ended June 30, 1999 from 6.1% for the nine
months ended June 30, 1998. We have a net loss carryforward for Federal income
tax purposes of $1,709,000 at September 30, 1998.
13
<PAGE>
Liquidity and Capital Resources
Net cash used in operating activities was $43,373 in the period from
the commencement of operations on August 11, 1997 to September 30, 1997,
$639,488 in the year ended September 30, 1998 and $950,313 and $1,046,105 in the
nine months ended June 30, 1998 and 1999, respectively. Approximately $527,000
and $122,000 of the cash used in operating activities in the year ended
September 30, 1998 and the nine months ended June 30, 1999, respectively, was
for the settlement of litigation and related costs.
Net cash used in investing activities was $151,689 in the period
from the commencement of operations on August 11, 1997 to September 30 1997,
$186,477 in the year ended September 30, 1998 and $37,722 and $387,191 in the
nine months ended June 30, 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 and J.P. Industrial LLC
resulted in a use of cash of $150,000 and $89,688 in the period ended September
30, 1997 and the year ended September 30, 1998, respectively. The acquisition of
certain assets of B & R and certain accounts of Adapta resulted in a use of cash
of $169,931 in the nine months ended June 30, 1999.
Net cash provided by financing activities was $287,934 in the period
ending September 30, 1997, $983,080 in the year ended September 30, 1998 and
$900,730 and $1,224,750 in the nine months ended June 30, 1998 and 1999,
respectively. The sources of cash provided by financing activities for the
periods presented were from the net proceeds of borrowings and private
placements of our common stock and debt.
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. 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.
14
<PAGE>
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.
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.
We believe that the most significant 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.
15
<PAGE>
BUSINESS
General
We were incorporated in March 1997 and purchased certain assets of
Royalpar Industries, Inc. and subsidiaries, corporations that were 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
August 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.
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:
o the increased demands of companies for a single supplier of a full
range of staffing and human resource services,
o increased competition from larger, better capitalized competitors
and
o owners' desires for liquidity.
Although some consolidation activity has already occurred, we believe that
consolidation in the U.S. staffing
16
<PAGE>
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, such as, workers' compensation and medical
and unemployment insurance, that a temporary personnel provider can spread over
a much larger pool of employees.
Since 1990, the staffing industry has seen an evolution of services
move away from "temp help" or supplemental staffing, to more permanent staffing
relationships. The industry has developed specialization among various sectors
and can be classified into four categories: integrated staffing service
providers, professional services providers, information technology providers and
commodity providers.
Integrated staffing services provide a vendor-on-premise acting as
the general contractor managing the workforce and maintaining the payroll.
Through this arrangement, providers are able to establish long-term
relationships with their customers, reduce cyclicality of employees, and
maintain relationships with customers that are less price sensitive.
The professional services provider supplies employees in the fields
of engineering, finance, legal, accounting, and other professions. In general,
these services are less cyclical than the light industrial and clerical segments
and carry higher margins. Information technology companies offer technical
employees to maintain and implement all forms of information systems.
The commodity segment of the staffing industry is the traditional
temporary employer business in which an employee of the service is placed at the
customer for a short period. It is characterized by intense competition and low
margins. This sector is most exposed to economic cycles and price competition to
win market share. Growth in this segment has been constrained over the past
three years due to a competitive labor market for low-end workers.
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 provided by Stratus. 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 measurable through worker output.
17
<PAGE>
SMARTSolutions is designed to be most effective in manufacturing, distribution
and telemarketing 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 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 that 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:
o 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.
o 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.
18
<PAGE>
o 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.
o Cross-Selling Services. We actively seek to cross-sell Staffing
Services, Engineering Services, and SMARTSolutions to existing
customers.
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:
o to enter new geographic markets;
o to expand our presence in our current markets;
o to expand our presence in existing niche markets, and
o 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 parent company
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., 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. Pro forma financial
19
<PAGE>
information giving effect to our acquisition of B & R is included on pages F-31
through F-33 of this prospectus.
Operations
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 five employees and two external consulting groups 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.
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.
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<PAGE>
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. During the nine months ended June 30, 1999 our top 5 customers
accounted for 42% of our revenue and only two customers accounted for more than
10% each of our revenue.
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 ninety days of employment. 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 length of assignment for employees generally
ranges from six months to five years depending on the client requirements.
At August 31, 1999, we were providing over 1,300 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
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<PAGE>
voted in favor of union representation; however, our client subsequently
determined to cease operations at the facility at which the union certification
was being pursued.
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.
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 a
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 our 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 have terms of various lengths. 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 that 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 have greater
marketing, financial and other resources than Stratus. We believe that the
primary competitive factors in obtaining and retaining clients are the number
and location of offices, an understanding of clients' specific job requirements,
the ability to provide temporary personnel in a timely manner, the monitoring of
the quality of job performance and the price of services. The primary
competitive factors in obtaining qualified candidates for temporary employment
assignments are wages, responsiveness to work schedules and number of hours of
work available.
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<PAGE>
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.
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
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 another party 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. Many 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 which was filed in
the Superior Court of the State of California for the County of Los Angeles in
June, 1998. We are one of 112 named
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<PAGE>
defendants and 188 unnamed defendants in Dewayne Cargill Et al v. Metropolitan
Water District of Southern California, Et al, where the plaintiffs are seeking
general damages. This case was brought against Stratus as successor in interest
to Mainstream Engineering, Inc., one of the Royalpar subsidiaries. We are
prepared to file a motion if plaintiff's do not agree to voluntary dismissal as
according to the Royalpar Asset Purchase Agreement we did not assume this
liability and do not believe we are 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 not be significant as we have never done business
with Metropolitan and Mainstream did minimal business with Metropolitan.
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, in the Circuit Court for the State
of Oregon, Clackamas County, in April 1999, against the former owners of JP
Industrial, LLC, an engineering 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 approximately
$220,000, which represents the balance of the purchase price of the acquired
business and certain other alleged damages, including unpaid wages, violation of
right of privacy, damage to reputation, loss of property, lost revenues and
punitive damages. 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 November 1999.
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<PAGE>
MANAGEMENT
Our directors and executive officers as of August 31, 1999 are as
follows:
Name Age Position
- --------------------- --- -------------------------------------------------
Joseph J. Raymond 62 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. He is the nephew of Joseph J. Raymond. 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. Mr. Sahyoun is a cousin of Joseph J. Raymond.
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
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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. Since November 1998, Mr Rutkin has served as General Manager/Chief
Executive Officer of Battleground Country Club. From 1996 to 1998, Mr. Rutkin
served as Vice President of Transworld Management Services, Inc. From February
1993 to October 1996, he served as Chief Operating Officer of HealthCare Imaging
Services, Inc. Prior thereto, Mr. Rutkin was the Executive Vice President of
Advanced Diagnostic Imaging from February 1987 to February 1993. From March 1981
to September 1984, he served as Director of New Business Development for the
United States Pharmaceutical Division of CIBA-Geigy. Mr. Rutkin is the
brother-in-law of Joseph J. Raymond.
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.
Sanford I. Feld has served as a Director of the Company since
November 1997. Mr. Feld is currently president of Leafland Associates, Inc., an
advisor to Feld Investment and Realty Management, a real estate development and
management company. He also serves as Chairman of Flavor and Food Ingredients, a
private savory and flavor company. From 1973 to 1979, he served as Director of
the Chelsea National Bank of New York City.
Board Committees
The Board of Directors has 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").
26
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
----------------
Annual Compensation
-------------------------------------
Number of Shares
Underlying Stock
Name and Principal Position Fiscal Year Salary(s) Bonus($) Options(#)
- --------------------------- ----------- --------- -------- ----------------
<S> <C> <C> <C> <C>
Joseph J. Raymond 1998 $ 45,308 $ 10,000 --
Chairman 1997 -- -- 166,667
Michael A. Maltzman
Treasurer and Chief Financial 1998 133,704 7,500 --
Officer 1997 14,131 -- 83,333
Charles Sahyoun
President, Engineering Services 1998 107,284 35,000 83,333
Division 1997 -- -- --
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 Division 1997 -- -- --
</TABLE>
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 we complete this offering. During the term of the
agreement, if Stratus is profitable, Mr. Raymond is entitled to a bonus/profit
sharing award equal to .4% of Stratus' gross margin, but not in excess of 100%
of his base salary. If Stratus is not profitable, he is entitled to a $10,000
bonus. Mr. Raymond is eligible for all benefits made available to senior
executive employees, and is entitled to the use of an automobile. 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:
o willfully or repeatedly fails in any material respect to perform his
obligations under the Agreement subject to certain opportunities to
cure such failure;
o is convicted of a crime which constitutes a felony or misdemeanor or
has entered a plea of guilty or no contest with respect to a felony
or misdemeanor during his term of employment;
o has committed any act which constitutes fraud or gross negligence;
o is determined by the Board of Directors to be dependent upon alcohol
or drugs; or
o breaches confidentiality or non-competition provisions of the
employment agreement.
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<PAGE>
Mr. Raymond is also entitled to severance compensation in the event
that he terminates the agreement for "Good Reason" which includes:
o 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;
o a reduction in his base salary unless his base salary is, at the
time of the reduction, in excess of $200,000 and the percentage
reduction does not exceed the percentage reduction of gross sales of
Stratus over the prior twelve month period;
o Stratus requires Mr. Raymond to be based at any location other than
within 50 miles of Stratus' current executive office location; and
o a Change in Control of Stratus, which includes the acquisition by
any person or persons acting as a group of beneficial ownership of
more than 20% of the outstanding voting stock of Stratus, mergers or
consolidations of Stratus which result in the holders of Stratus'
voting stock immediately before the transaction holding less than
80% of the voting stock of the surviving or resulting corporation,
the sale of all or substantially all of the assets of Stratus, and
certain changes in the Stratus Board of Directors.
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 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 are also required to 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
28
<PAGE>
under the caption "Executive Compensation."
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal
Name Granted Year Exercise Price Expiration Date
- --------------- -------------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C>
George Komer 83,333 24.5% $ 3.00 5/7/02
Mark Levine 83,333 24.5% $ 3.00 4/17/02
Charles Sayhoun 83,333 24.5% $ 3.00 12/1/01
</TABLE>
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. The value of unexercised options has been determined by
using the price per share of common stock ($3.75) paid by investors in our
private offering that was completed in September 1998.
<TABLE>
<CAPTION>
Number of Underlying Value of Unexercised
Unexercised In-the-Money Options at
Options at September 30, 1998 September 30, 1998
--------------------------------- -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph J. Raymond 33,333 133,334 $ 74,999 $166,667
George Komer -- 83,333 -- 62,500
Mark Levine -- 83,333 -- 62,500
Charles Sayhoun 20,833 62,500 15,625 46,875
Michael A. Maltzman 20,833 62,500 15,625 46,875
</TABLE>
No options were exercised by the Named Executive Officers during the fiscal year
ended September 30, 1998.
The Equity Incentive Plan
General. The Stratus Equity Incentive Plan is administered by the
Compensation Committee, which is authorized to grant (i) "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code, (ii)
nonqualified stock options, (iii) stock appreciation rights, (iv) restricted
stock grants, (v) deferred stock awards, and (vi) other stock based awards to
employees of Stratus and its subsidiaries and other persons and entities who, in
the opinion of the Compensation Committee, are in a position to make a
significant contribution to the success of Stratus and its subsidiaries. The
Compensation Committee determines (i) the recipients of awards, (ii) the times
at which awards will be made, (iii) the size and type of awards, and (iv) the
terms, conditions, limitations and restrictions of awards. Awards may be made
singly, in combination or in tandem. We have reserved 500,000 shares for
issuance under the Equity Incentive Plan. The maximum number of shares of common
stock which can be issued to Stratus' Chief Executive Officer under the Equity
Incentive Plan pursuant to various awards shall not exceed 35% of the total
number of shares of common stock reserved for issuance, and the maximum number
of shares which can be issued to any other employee or participant under the
Equity Incentive Plan shall not exceed 20% of the total number of shares of
common stock reserved for issuance. The Equity Incentive Plan will terminate on
September 1, 2009, unless earlier terminated by the Board of Directors. No
awards have been made under the Equity Incentive Plan.
Stock Options. The Compensation Committee can grant either incentive
stock options or nonqualified stock options. Only employees of Stratus and its
subsidiaries may be granted incentive stock options. The exercise price of an
incentive stock option shall not be less than the fair market value, or, in the
case of an incentive stock option granted to a 10% or greater shareholder of
Stratus, 110% of the fair market value of Stratus' common stock on the date of
grant. For purposes of the exercise price of an option, "fair market value"
shall mean the arithmetic
29
<PAGE>
average of the closing bid and asked prices of the common stock reported on the
Nasdaq Smallcap Market on a particular date. The term of an option and the time
or times at which such option is exercisable shall be set by the Compensation
Committee; provided, however, that no option shall be exercisable more than 10
years (5 years for an incentive stock option granted to a 10% or greater
shareholder of Stratus) from the date of grant, and with respect to an incentive
stock option, the fair market value on the date of grant of the shares of common
stock which are exercisable by a participant for the first time during any
calendar year shall not exceed $100,000. Payment of the exercise price shall be
made in any form permitted by the Compensation Committee, including cash and
shares of Stratus' common stock.
Stock Appreciation Rights. The Compensation Committee may grant
stock appreciation rights either alone or in combination with an underlying
stock option. The term of an SAR and the time or times at which an SAR shall be
exercisable shall be set by the Compensation Committee; provided, that an SAR
granted in tandem with an option will be exercisable only at such times and to
the extent that the related option is exercisable. SARs entitle the grantees to
receive an amount in cash or shares of common stock with a value equal to the
excess of the fair market value of a share of common stock on the date of
exercise over the fair market value of a share of common stock on the date the
SAR was granted, which represents the same economic value that would have been
derived from the exercise of an option. Payment may be made in cash, or shares
of common stock or a combination of both at the discretion of the Compensation
Committee. If an SAR granted in combination with an underlying stock option is
exercised, the right under the underlying option to purchase shares of common
stock is terminated.
Restricted Stock Grants. The Compensation Committee may grant shares
of common stock under a restricted stock grant which sets forth the applicable
restrictions, conditions and forfeiture provisions which shall be determined by
the Compensation Committee and which can include restrictions on transfer,
continuous service with Stratus or any of its subsidiaries, achievement of
business objectives, and individual, subsidiary and Company performance. Shares
of common stock may be granted pursuant to a restricted stock grant for no
consideration or for any consideration as determined by the Compensation
Committee. A grantee is entitled to vote the shares of common stock and receive
any dividends thereon prior to the termination of any applicable restrictions,
conditions or forfeiture provisions.
Deferred Stock Awards. The Compensation Committee may grant shares
of common stock under a deferred stock award, with the delivery of such shares
of common stock to take place at such time or times and on such conditions as
the Compensation Committee may specify. Shares of common stock may be granted
pursuant to deferred stock awards for no consideration or for any consideration
as determined by the Compensation Committee.
Other Stock Based Awards. The Compensation Committee may grant
shares of common stock to employees of Stratus or its subsidiaries as bonus
compensation, or if agreed to by an employee, in lieu of such employee's cash
compensation.
Other Information. If there is a stock split, stock dividend or
other relevant change affecting Stratus' common stock, appropriate adjustments
will be made in the number of shares of common stock or in the type of
securities to be issued pursuant to any award granted before such event. In the
event of a merger, consolidation, combination or other similar transaction
involving Stratus in which Stratus is not the surviving entity, either all
outstanding stock options and SARs shall become exercisable immediately and all
restricted stock grants and deferred stock awards shall immediately become free
of all restrictions and conditions, or the Compensation Committee may arrange to
have the surviving entity grant replacement awards for all outstanding awards.
Upon termination of service prior to age 65 for any reason other than death or
disability, or upon involuntary termination after age 65, stock options and SARs
which are exercisable as of the date of such termination may be exercised within
three months of the date of termination, and any restricted stock grants and
deferred stock awards which are still subject to any restriction shall be
forfeited to Stratus. Upon death or disability or voluntary termination of
service after age 65, all stock options and SARs become immediately exercisable
and may be exercised for a period of six months after the date of termination
(three months in the case of voluntary termination after age 65), and all
restricted stock grants and deferred stock awards shall become immediately free
of all restrictions and conditions. The Compensation Committee has the
discretionary authority to alter or establish the terms and conditions of an
award in connection with termination of service. The Board of Directors may
amend, suspend or terminate the Equity Incentive Plan, subject to shareholder
approval if required pursuant to Section 162(m) of the Internal Revenue Code or
Section 16 of the Securities Exchange Act of 1934 or the rules of the Nasdaq
Stock Market.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In August 1997, we purchased certain assets of Royalpar Industries,
Inc. and its subsidiaries, corporations that were 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. The purchase price of the acquired assets was
$150,000. In addition, we agreed to pay to Royalpar, or its designated
disbursing agent, during each of the five fiscal years commencing in 1997, an
amount equal to 2% of our pre-tax income that exceeds $2 million and 3% of our
pre-tax income that exceeds $5 million; provided, however, that in no event will
we be required to pay more than $250,000 pursuant to this arrangement. We also
assumed certain liabilities, including leases of operating offices, certain
obligations to Royalpar's accounts receivable factor and vacation pay and issued
370,444 shares of common stock to certain creditors of Royalpar.
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 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. As of August 31, 1999, Jeffrey J. Raymond's wife, Joan Raymond,
owned approximately 10% of our common stock.
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 June 30, 1999, Complete Wellness Centers,
Inc. owed 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.
At various times throughout our history we have borrowed funds from
Joseph J. Raymond, our Chairman and CEO. This variable indebtedness bore
interest at the rate of 12% per annum. In June 1999, the $50,000 (plus accrued
interest) owed to Mr. Raymond was converted into 14,870 shares of our common
stock.
In June 1998, we borrowed $400,000 from Joseph J. Raymond, Jr. The
remaining balance of this indebtedness, which bore interest at the rate of 12%
per annum, plus accrued interest was converted into 116,533 shares of our common
stock in June 1999.
In November and December 1998, we borrowed $50,000 from Sanford I.
Feld, a director of Stratus. This loan was represented by a promissory note
which bore interest at the rate of 1.5% per month and was originally due in July
1999. In consideration for making the loan, 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.
In addition, in October 1998, we borrowed $250,000 from the estate
of Irene Lynch. J. Todd Raymond, General Counsel and Secretary, is the grandson
of Irene Lynch and the trustee of the Irene Lynch estate. This loan 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 to the estate.
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 $120,000 during the year ended September 30, 1997, $1,277,000 during
the year ended September 30, 1998 and $304,000 during the six months ended March
31, 1999. At June 30, 1999 there remained an outstanding balance of $27,600.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock, as at August 31, 1999 by:
o persons who are known by us to own beneficially more than 5%
of our shares;
o by each of the persons named in the table under the caption
"Executive Compensation";
o each of our directors; and
o by all of our directors and executive officers as a group.
The calculations in the table are based on an aggregate of 4,102,470 shares
calculated as outstanding as of August 31, 1999 after adjusting for the 2-for-3
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.
<TABLE>
<CAPTION>
Name and Address of Percentage of Class Percentage of Class
Beneficial Owner Number of Shares Before Offering After Offering
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joseph J. Raymond(b) 977,788 23.83% 17.45%
Joan Raymond(c) 638,665 15.57 11.40
Michael J. Rutkin 334,000 8.14 5.96
Charles A. Sahyoun(d) 270,611 6.60 4.83
Michael A. Maltzman(e) 88,333 2.15 1.58
H. Robert Kingston 33,333 * *
Sanford Feld(f) 21,667 * *
Mark Levine(g) 20,833 * *
A. George Komer(g) 20,833 * *
Donald W. Feidt 20,000 * *
All Directors and
Officers as a Group 1,805,731 44.02 32.23
(b),(d),(e),(f),(g),(h)
</TABLE>
- ----------
(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 August
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31, 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 111,111 shares subject to options to purchase that are currently
exercisable or may become exercisable within 60 days of August 31, 1999.
Excludes 55,555 shares subject to options that are not vested or
exercisable within 60 days of August 31, 1999.
(c) Includes 250,000 shares held by the children of Joan Raymond residing in
her household.
(d) Includes 20,833 shares subject to options that are currently exercisable.
Excludes 62,500 shares subject to options that are not vested or
exercisable within 60 days of August 31, 1999.
(e) Includes 41,666 shares subject to options that are currently exercisable
or may become exercisable within 60 days of August 31, 1999. Excludes
41,666 shares subject to options that are not vested or exercisable within
60 days of August 31, 1999.
(f) Includes 6,667 shares subject to warrants that are currently exercisable.
(g) Includes 20,833 shares subject to options that are currently exercisable.
Excludes 62,500 shares subject to options that are not vested or
exercisable within 60 days of August 31, 1999.
(h) Includes 40,000 shares that are beneficially owned by J. Todd Raymond our
General Counsel and Corporate Secretary, including 13,333 shares subject
to options and 26,666 shares owned by the estate of Irene Lynch, for which
Mr. Raymond serves as trustee.
Potential Change in Control
Joseph J. Raymond and Joan Raymond have pledged 1,055,334 shares of
Stratus common stock that they own to secure obligations under their guarantee
of the agreement pursuant to which we sell accounts receivable to a factor. We
are currently in default of the agreement with the factor; however, the factor
has not at this juncture elected to exercise remedies against us or to pursue
its rights under the guarantee and pledge agreement. The shares subject to the
pledge agreement will represent approximately 17% of our outstanding common
stock after completion of this offering. If the factor were to exercise remedies
and obtain title to the pledged stock, the factor, which currently owns 133,333
shares of our common stock, would have the ability to significantly influence
the outcome of any matter submitted to a vote of our stockholders.
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DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 25,000,000 shares of common
stock, par value $0.01 per share and 5,000,000 shares of preferred stock, par
value $0.01 per share. As of the date of this prospectus, there were 4,102,470
shares of common stock and no shares of preferred stock outstanding. The
following description of the material features of our capital stock is intended
as a summary only and is qualified in its entirety by reference to our
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 August 31, 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 Stratus with a view to imposing a merger or sale of all or any part of
Stratus' assets, even though a majority of shareholders may deem such
acquisition attempts to be desirable.
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
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underwriters' warrants also grant the holders thereof certain rights of
registration of the shares of common stock issuable upon exercise of such
warrants. Stratus 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:
o the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the
Board of Directors of the corporation before the person
becomes an interested stockholder;
o the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same
transaction that 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
o on or after the date the person becomes an interested
stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at
least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the
interested stockholder.
Under Section 203, an "interested stockholder" is defined as any person who is
the owner of 15% or more of the outstanding voting stock of the corporation, or
an affiliate or associate of the corporation and who was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage
of Section 203 by amending its certificate of incorporation or bylaws, through
action of its stockholders, to exempt itself from coverage, provided that such
bylaw or certificate of incorporation amendment shall not become effective until
12 months after the date it is adopted. We have not adopted such an amendment to
our Certificate of Incorporation or Bylaws.
Limitation on Liabilities and Indemnification Matters
Pursuant to our certificate of incorporation and bylaws and as
permitted by Delaware law, directors are not liable to 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.
Our 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.
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
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<PAGE>
the special meeting may be considered or acted upon at that special meeting.
Our 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:
o authorizing our Board of Directors to issue preferred stock;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent;
o establishing advance notice requirements for nominations for
election of our board of directors or for proposing matters that can
be acted on by stockholders at stockholder meetings and
o prohibiting cumulative voting in the election of directors.
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 5,602,470 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 2,913,270 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
1,182,534 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
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<PAGE>
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 55,958 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.
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.
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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, 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 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:
o options to acquire up to 150,000 shares of common stock which
may be issued to officers, directors, employees and
consultants;
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o as consideration payable in connection with potential mergers
and acquisitions;
o 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
o 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 Stratus and the Securities and Exchange
Commission.
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 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
Certain financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Amper, Politziner &
Mattia, PA independent auditors, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of the firm as experts
in giving such reports. Reference is made to such reports which include
explanatory paragraphs that state substantial doubts about our ability to
continue as a going concern.
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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.
40
<PAGE>
STRATUS SERVICES GROUP, INC.
For the Period August 11, 1997 (Inception) to
September 30, 1997, the Year Ended September 30, 1998
and the nine months ended June 30, 1999 and 1998 (unaudited)
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 - 17
ROYALPAR INDUSTRIES, INC. AND SUBSIDIARIES
For the Year Ended March 31, 1997 and
For the Period April 1, 1997 to August 11, 1997
Independent Auditors' Report F-18
Consolidated Statements of Operations F-19
Notes to Consolidated Statements of Operations F-20 - 22
B & R EMPLOYMENT, INC.
For the Years Ended December 31, 1998 and 1997
Independent Auditors' Report F-23
Balance Sheets F-24
Statements of Operations F-25
Statement of Stockholders' Deficiency F-26
Statements of Cash Flows F-27
Notes to Financial Statements F-28 - 30
UNAUDITED PROFORMA FINANCIAL STATEMENTS
Unaudited Proforma Condensed Statements of Operations:
For the Year Ended September 30, 1998 F-31
For the Nine Months Ended June 30, 1999 F-32
Notes to Unaudited Proforma Condensed Statements of Operations F-33
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 except for Note 18(e) which is dated August 30, 1999.
Edison, New Jersey
F-2
<PAGE>
STRATUS SERVICES GROUP, INC.
Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, September 30, June 30,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 92,872 $ 249,987 $ 41,441
Due from factor - less allowance for recourse
obligation of $50,000, $-0-, $-0- 435,061 -- --
Accounts receivable - less allowance for
doubtful accounts of $-0- $37,000 and $696,000 2,052 65,536 247,907
Unbilled receivables 147,320 282,485 452,052
Unbilled receivables - related parties 11,880 22,445 7,600
Prepaid insurance 561,208 222,291 468,634
Prepaid expenses and other current assets 13,592 5,130 26,307
----------- ----------- -----------
1,263,985 847,874 1,243,941
Property and equipment, net of
accumulated depreciation 39,429 95,562 268,830
Goodwill 67,650 -- 2,386,678
Other assets 6,856 151,213 170,914
----------- ----------- -----------
$ 1,377,920 $ 1,094,649 $ 4,070,363
=========== =========== ===========
Liabilities and Stockholders' Deficiency
Current liabilities
Loans payable $ -- $ -- $ 861,931
Loans payable - related parties 158,500 406,350 --
Notes payable - acquisition (current portion) -- -- 1,326,000
Insurance obligation payable 365,175 211,708 450,546
Due to factor including allowance for recourse
obligation of $-0-, $795,000 and $839,000 -- 2,602 495,482
Accounts payable and accrued expenses 228,223 927,743 1,145,782
Accrued payroll and taxes 476,924 869,823 906,562
Payroll taxes payable 238,783 143,312 234,383
Litigation fees payable -- 271,361 148,989
----------- ----------- -----------
1,467,605 2,832,899 5,569,675
Notes payable - acquisition (net of current portion) -- -- 246,444
----------- ----------- -----------
1,467,605 2,832,899 5,816,119
Temporary equity - put options -- -- 520,000
Commitments and contingencies
Stockholders' deficiency
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,371,334, 3,719,734 and 4,080,804
shares issued and outstanding 33,714 37,198 40,809
Additional paid-in capital 285,995 1,275,241 2,387,829
Accumulated other comprehensive loss
Deferred compensation -- (161,500) (126,400)
Accumulated deficit (409,394) (2,889,189) (4,567,994)
----------- ----------- -----------
(89,685) (1,738,250) (2,265,756)
----------- ----------- -----------
$ 1,377,920 $ 1,094,649 $ 4,070,363
=========== =========== ===========
</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 Nine Months Ended
June 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
August 11, 1997
(inception) to For the Year Ended For the Nine Months
September 30, September 30, Ended June 30,
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues (including $120,000
$3,598,000, $2,515,000 and
$1,490,000 from related parties) $ 2,442,191 $ 24,919,639 $ 18,062,534 $ 21,263,817
Cost of revenue (including
$97,000, $3,228,000, $2,218,000
and $1,345,000 from related parties) 2,005,847 20,329,718 14,759,241 16,843,326
------------ ------------ ------------ ------------
Gross profit 436,344 4,589,921 3,303,293 4,420,491
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative
expenses 741,416 4,785,887 3,231,677 4,536,145
Provision for recourse obligation 50,000 670,445 29,851 595,000
Impairment of JPI Assets -- 174,688 -- --
------------ ------------ ------------ ------------
791,416 5,631,020 3,261,528 5,131,145
------------ ------------ ------------ ------------
Earnings (Loss) from operations (355,072) (1,041,099) 41,765 (710,654)
------------ ------------ ------------ ------------
Other income (expenses)
Finance charges (39,078) (524,649) (342,614) (539,463)
Interest expense (15,244) (48,170) (32,629) (209,679)
Other income -- 33,729 31,586 18,155
Other (expenses) -- (899,606) (798,000) (237,164)
------------ ------------ ------------ ------------
(54,322) (1,438,696) (1,141,657) (968,151)
------------ ------------ ------------ ------------
Net loss $ (409,394) $ (2,479,795) $ (1,099,892) $ (1,678,805)
============ ============ ============ ============
Net loss per common share -
Basic $ (.20) $ (.69) $ (.31) $ (.44)
Diluted (.20) (.69) (.31) (.44)
Weighted average shares
outstanding per common share -
Basic 2,027,124 3,602,086 3,562,439 3,783,714
Diluted 2,027,124 3,602,086 3,562,439 3,841,181
</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 Nine Months Ended June 30, 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 $ -- $ -- $ -- $ 3
Issuance of common stock
in connection Royalpar
acquisition - August 11, 1997 20,000 -- -- -- 17,333
Issuance of common stock to
related parties (compensation
expense of $186,450) 186,450 -- -- -- 161,590
Other issuance of common stock
(compensation expense of $21,675) 21,675 -- -- -- 18,785
Proceeds from sale of private
placement of common stock (net of
costs of $43,351) for cash 91,574 -- -- -- 88,284
Net loss (409,394) -- -- (409,394) --
----------- ----------- ----------- -----------
Balance September 30, 1997 (89,685) -- -- (409,394) 285,995
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 -- -- 770,330
Issuance of common stock to employees
(compensation expense of $31,500) 31,500 -- -- 31,416
----------- ----------- ----------- -----------
Balance September 30, 1998 (1,738,250) (161,500) (2,889,189) 1,275,241
Net loss for the nine months ended
June 30, 1999 (unaudited) (1,678,805) (1,678,805) -- (1,678,805) --
Compensation expense in connection
with stock option granted
(no tax effect) (unaudited) 35,100 35,100 35,100 -- --
-----------
Comprehensive loss (unaudited) -- $(1,643,705) -- -- --
===========
Issuance in connection with
acquisition (unaudited) -- -- -- (347)
Issuance of common stock in exchange for
notes payable (unaudited) 492,762 491,448
Proceeds from the sale of private
placements of common stock (net
of costs of $107,813) for cash
(unaudited) 623,437 621,487
----------- ----------- ----------- -----------
Balance June 30, 1999 (unaudited) $(2,265,756) $ (126,400) $(4,567,994) $ 2,387,829
=========== =========== =========== ===========
</TABLE>
Common Stock
Amount Shares
----------- -----------
Original issuance for cash $ 7 667
Issuance of common stock
in connection Royalpar
acquisition - August 11, 1997 2,667 266,667
Issuance of common stock to
related parties (compensation
expense of $186,450) 24,860 2,486,000
Other issuance of common stock
(compensation expense of $21,675) 2,890 289,000
Proceeds from sale of private
placement of common stock (net of
costs of $43,351) for cash 3,290 329,000
Net loss -- --
----------- -----------
Balance September 30, 1997 33,714 3,371,334
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 Nine Months Ended June 30, 1999 (Unaudited)
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) 3,400 340,000
Issuance of common stock to employees
(compensation expense of $31,500) 84 8,400
----------- -----------
Balance September 30, 1998 37,198 3,719,734
Net loss for the nine months ended
June 30, 1999 (unaudited) -- --
Compensation expense in connection
with stock option granted
(no tax effect) (unaudited) -- --
Comprehensive loss (unaudited) -- --
Issuance in connection with
acquisition (unaudited) 347 34,667
Issuance of common stock in exchange for
notes payable (unaudited) 1,314 131,403
Proceeds from the sale of private
placements of common stock (net
of costs of $107,813) for cash (unaudited) 1,950 195,000
----------- ---------
Balance June 30, 1999 (unaudited) $ 40,809 4,080,804
=========== =========
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 Nine Months Ended June 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
For the Period Ended For the Nine Months Ended
September 30, June 30, June 30,
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (409,394) $(2,479,795) $(1,099,892) $(1,678,805)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation 1,660 40,656 28,190 50,992
Amortization 325 67,650 1,949 80,725
Loan discounts -- -- -- 13,803
Compensation for issuance of common stock 208,125 31,500 31,500 --
Impairment of JPI assets -- 174,688 -- --
Compensation - stock options -- 26,000 14,300 35,100
Changes in operating assets and liabilities
Due to/from factor (435,061) 437,663 (421,660) 492,880
Accounts receivable (161,252) (209,214) (311,814) (337,093)
Prepaid insurance 51,358 338,917 561,208 (246,343)
Prepaid expenses and other current assets (12,942) 8,462 (263,102) (21,177)
Other assets (2,950) (29,357) (68,394) (11,264)
Insurance financing obligation (118,426) (153,467) (365,175) 238,838
Accrued payroll and taxes 476,924 392,899 300,532 36,739
Payroll taxes payable 238,783 (95,471) (41,987) 91,071
Litigation fees payable -- 271,361 344,143 (122,372)
Accounts payable and accrued expenses 119,477 538,020 339,889 330,801
----------- ----------- ----------- -----------
Total adjustments 366,021 1,840,307 149,579 632,700
----------- ----------- ----------- -----------
(43,373) (639,488) (950,313) (1,046,105)
----------- ----------- ----------- -----------
Cash flows (used in) investing activities
Purchase of property and equipment (1,689) (96,789) (37,722) (217,260)
Payments for business acquisitions (150,000) (89,688) -- (169,931)
----------- ----------- ----------- -----------
(151,689) (186,477) (37,722) (387,191)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from sale of common stock 129,434 735,230 598,230 708,750
Proceeds from loans payable 166,000 550,000 550,000 800,000
Payments of loans payable (7,500) (302,150) (247,500) (284,000)
----------- ----------- ----------- -----------
287,934 983,080 900,730 1,224,750
----------- ----------- ----------- -----------
Net change in cash and cash equivalents 92,872 157,115 (87,305) (208,546)
Cash and cash equivalents - beginning -- 92,872 92,872 249,987
----------- ----------- ----------- -----------
Cash and cash equivalents - ending $ 92,872 $ 249,987 $ 5,567 $ 41,441
=========== =========== =========== ===========
Supplemental disclosure of cash paid
Interest $ 8,244 $ 37,872 $ 38,946 $ 143,702
=========== =========== =========== ===========
Schedule of Noncash Investing and
Financing Activities
Fair value of assets acquired $ 723,847 $ 289,688 $ -- $ 2,474,403
Less: cash paid (150,000) (89,688) -- (84,930)
Less: common stock and put options issued (20,000) -- -- (520,000)
----------- ----------- ----------- -----------
Liabilities assumed $ 553,847 $ 200,000 $ -- $ 1,869,473
=========== =========== =========== ===========
Issuance of common stock in exchange for debt $ 492,762
===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 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 667
shares of common stock. The Company commenced operations on August
11, 1997 when it acquired certain assets and assumed certain
liabilities of Royalpar Industries, Inc. ("Royalpar") and its
subsidiaries (an entity in bankruptcy). This acquisition enabled the
Company to immediately commence its temporary staffing business by
providing customers, qualified staff and accounting and payroll
support services from offices in New Jersey, Colorado, Texas,
California and Arizona.
The Company operates as one business segment. The one business
segment consists of its traditional staffing services, engineering
staffing services and SMARTSolutions (TM), a structured program to
monitor and enhance the production of a client's labor resources.
The Company's customers are in various industries and are located
throughout the United States. Credit is granted to substantially all
customers. No collateral is maintained.
Revenue Recognition
The Company recognizes revenue as the services are performed by its
workforce. The Company's customers are billed weekly. At balance
sheet dates, there are accruals for unbilled receivables and related
compensation costs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Interim Financial Statements
The financial statements as of June 30, 1999 and for the nine months
ended June 30, 1998 and 1999 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
F-7
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
Note 2 - Nature of Operations and Summary of Significant Accounting Policies -
(continued)
include only normal recurring adjustments) necessary to present
fairly the financial position as of June 30, 1999 and the results of
operations and cash flows for the nine months ended June 30, 1998
and 1999 have been made. The results of operations for the nine
months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the year ending September 30, 1999.
Earnings/Loss Per Share
Effective for the Company's financial statements for the period
ended September 30, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share," (SFAS 128). SFAS
replaces the presentation of primary earnings per share ("EPS") and
fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding during the
period. Diluted EPS assumes conversion of dilutive options and
warrants, and the issuance of common stock for all other potentially
dilutive equivalent shares outstanding.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
Estimated
Method Useful Life
------ -----------
Computer equipment Straight-line 3 years
Office equipment Declining balance 5 years
Furniture and fixtures Declining balance 5 years
Goodwill
Goodwill 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.
F-8
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
Note 2 - Nature of Operations and Summary of Significant Accounting Policies -
(continued)
Advertising Costs
Advertising costs are expensed as incurred. The expense for the
periods ended September 30, 1997 and 1998 and June 30, 1998 and 1999
was $6,500, $110,000, $68,000 and $92,000, 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.
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. We do not
anticipate that SFAS No. 133 will have an impact on the financial
statements.
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 266,667 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
F-9
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
Note 3 - Acquisitions - (continued)
Accrued holiday and vacation pay (70,246)
--------
Net assets acquired 102,025
Amounts paid
Cash paid 150,000
Issuance of common stock
(266,667 shares @ $.075 per share) 20,000
--------
Net amounts paid 170,000
Excess of amounts paid over
net assets acquired - goodwill $ 67,975
Even though certain stockholders of Royalpar are personally related
to certain stockholders of the Company, there was a change in
control of more than 50%, necessitating the use of fair value
accounting.
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 June 30, 1998 and 1999, gross
proceeds from the sale of receivables were $1,870,459, $23,146,923,
$16,449,765 and $19,460,038, respectively. The provision for
recourse obligation includes the estimated recourse obligations on
the sale of receivables. As of September 30, 1997 and 1998 and June
30, 1999, $1,572,000, $2,943,000 and $4,155,000, respectively, of
the receivables sold to the factor had not been collected.
F-10
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
Note 4 - Factoring Agreement - (continued)
As of September 30, 1997 and 1998, and June 30, 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 1,055,334 shares of the Company as
collateral.
Note 5 - Property and Equipment
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures $ 3,000 $ 10,700 $ 25,764
Office equipment 8,489 26,223 33,223
Computer equipment 25,300 78,362 267,536
Computer software 4,300 22,593 35,616
--------- --------- ---------
41,089 137,878 362,139
Accumulated depreciation (1,660) (42,316) (93,309)
--------- --------- ---------
Net property and equipment $ 39,429 $ 95,562 $ 268,830
========= ========= =========
</TABLE>
Note 6 - Goodwill
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Goodwill (see Notes 3 and 18) $ 67,975 $ 67,975 $ 2,519,378
Less: accumulated amortization (325) (67,975) (132,700)
----------- ----------- -----------
$ 67,650 $ -- $ 2,386,678
=========== =========== ===========
</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
a. Related Parties
As of September 30, 1997 and 1998 and June 30, 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 June
30, 1998 and 1999 was $4,000, $40,863, $-0- and $28,000,
respectively.
In August 1999, the Chief Executive Officer of the Company and his
son agreed to exchange, effective June 30, 1999, $440,000 of notes
payable by the Company to them plus accrued interest of $52,763 for
131,403 shares of the Company's common stock. The stock was valued
at $3.75 per share and no gain or loss was recorded on the
transaction.
F-11
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
b. Other
Loans payable consists of loans from various unrelated parties
amounting to $766,000, bearing interest at the rates of 18% to 24%
per annum, payable at the IPO. The remaining amount of $95,931
represents the discounted notes from the private placement in June
1999. These notes bear interest at the rate of 13% and are due upon
IPO (See Note 18(b)).
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 $148,989 at September
30, 1998 and June 30, 1999 and is making periodic payments.
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
$132,000 and $56,427 for the nine months ended June 30, 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, June 30, 1998 and 1999 were $2,321,000,
$1,572,000 and $1,162,000, 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
June 30, 1998 and 1999, revenues were $120,000, $1,277,000, $943,000
and $328,000, respectively.
Note 10 - Accounts Payable and Accrued Expenses
September 30, June 30,
1997 1998 1999
---- ---- ----
(Unaudited)
Accounts payable $ 91,154 $ 220,370 $ 310,869
Accrued compensation 40,522 312,402 315,101
Accrued commissions 38,500 -- --
Accrued legal 29,264 -- 99,646
Accrued other 28,783 107,124 166,409
Accrued interest -- 71,242 65,977
Accrued lease -- 101,605 72,780
Due to JPI (Note 3) -- 115,000 115,000
F-12
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
---------- ---------- ----------
$ 228,223 $ 927,743 $1,145,782
========== ========== ==========
Note 11 - Other Expenses
<TABLE>
<CAPTION>
For the Periods Ended For the nine Months Ended
September 30, June 30,
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Litigation settlement
and related legal costs (Note 8) $ -- $798,000 $798,000 $237,164
Abandonment of equipment
and lease -- 101,606 -- --
-------- -------- -------- --------
$ -- $899,606 $798,000 $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, June 30,
1997 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 $ 1,295,000
Stock compensation -- 11,000 30,000
Depreciation -- (9,000) (10,000)
Valuation allowance (87,000) (685,000) (1,315,000)
----------- ----------- -----------
Net noncurrent deferred tax asset (liability) $ -- $ -- $ --
=========== =========== ===========
</TABLE>
There were no provisions for income taxes for the periods ended September 30,
1997 and 1998, and June 30, 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 June 30, 1999 and for the nine months ended
June 30, 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, (6.0) (6.0)
Other differences, net 0.6 0.9
Valuation allowance 39.4 39.1
------ ------
0.0% 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, $129,000 and $263,000 for the
periods ended September 30, 1997, 1998 and June 30, 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
500,000 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.
Other
Certain stockholders of the Company may have a right to pursue
claims against the Company as a result of possible technical
violations of the laws and regulations governing the private
placement and issuance of securities. Management believes that the
ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position.
Note 14 - Stock Options and Warrants
The Company has issued stock options to employees with terms of
three to four years. The options may be granted for 534,000 shares.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement
("FASB No. 123"), and has been determined as if the Company had
accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date
of grant using the minimum method option pricing model.
F-14
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
Note 14 - Stock Options and Warrants - (continued)
The minimum method option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following weighted-average assumptions were used:
September 30,
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.
A summary of the Company's stock option activity, and related
information for the years ended September 30, follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------- ----------------
<S> <C> <C>
Outstanding at September 30, 1997 -- $ --
Granted 534,000 2.55
Canceled -- --
Exercised -- --
------- -------
Outstanding at September 30, 1998 534,000 $ 2.55
======= =======
Exercisable at September 30, 1998 83,055 $ 2.00
======= =======
</TABLE>
The exercise prices range from $1.50 to $4.50 per share.
The Company has also issued 66,667 warrants to purchase shares at
$7.50 per share, expiring in 2003.
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>
$ 1.00 166,667 2.0 years $ 1.50 55,555 $ 1.50
2.00 360,000 3.3 years 3.00 27,500 3.00
3.00 7,333 3.8 years 4.50 -- 4.50
</TABLE>
F-15
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
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 nine months ended June 30, 1998 and 1999, the Company had
two customers who accounted for 30% and 24% of total revenues,
respectively.
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,
June 30, 1998 and 1999 were $16,000, $6,000 and $20,000,
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
(a) 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 34,667 shares of the Company's common stock. B&R
has a put option to sell these shares back to the Company at $15 per
share, provided that the Company does not conduct an initial public
offering within twenty-four months. 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 quarterly principal and interest
F-16
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of June 30, 1999 and for the nine months ended
June 30, 1999 and 1998 is unaudited)
Note 18 - Subsequent Events - (continued)
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.
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.
(b) Private Placement
The Company raised $825,000 through a private placement during the
nine months ended June 30, 1999. Each private placement "unit" was a
combination of debt and equity. For each $50,000 unit, the investor
received a $50,000 promissory note from the Company and 3,333 shares
of the Company's common stock valued at $3.75 per share. The note
bears interest at 13% per annum from the original note date until
the successful completion of the Company's initial public offering
of common stock ("IPO"). Upon the successful completion of the IPO,
accrued interest and principal are due in full.
In August 1999, each private placement participant was offered an
additional 10,000 shares of the Company's common stock in exchange
for the recission of the original debt portion of the unit, thereby
converting each unit acquired by an investor accepting the offer
into 13,333 shares of common stock at $3.75 per share. In connection
with this offer, participants representing $700,000 of the $825,000
of proceeds received agreed to the recission offer.
As each private placement investor representing the remaining
$125,000 received both debt (in the form of a promissory note
payable by the Company) and equity (in the form of the Company's
common stock), a portion of the $125,000 face value of the debt was
allocated to equity based on the value of $3.75 per share of common
stock. As such the company has allocated $83 and $8,250 to common
stock and additional paid-in capital respectively. The remainder was
allocated to short-term debt. The difference between the face value
of $125,000 and the amount recorded in short-term debt will be
accreted to interest expense over the expected life of the debt.
(c) Acquisition
In April 1999, the Company purchased the rights, title and interest
of certain accounts of Adapta Services Group, Inc. for $50,000.
(d) Registration
The Company is in the registration process to register shares of
common stock for public sale.
(e) Reverse Stock Split
On August 30, 1999 the Company's Board of Directors authorized
management to file an amended registration statement with the
Securities and Exchange Commission to permit the Company to sell
shares of its common stock to the public. The Company's Board of
Directors has approved a two for three reverse stock split of common
stock to be effective immediately prior to the effective date of the
Company's IPO. All common stock and per share information has been
adjusted to reflect the reverse stock split as if such split had
taken place at the inception of the Company.
F-17
<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-18
<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-19
<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.
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.
F-20
<PAGE>
ROYALPAR INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Statements of Operations
Note 2 - Nature of Operations and Summary of Significant Accounting Policies
(continued)
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-21
<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
=========
Even though certain stockholders of the Company are personally
related to certain stockholders of Stratus, there was a change in
control of more than 50%, necessitating the use of fair value
accounting.
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-22
<PAGE>
Independent Auditors' Report
To the Stockholder of
B&R Employment, Inc.
We have audited the accompanying balance sheets of B&R Employment, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholder's deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B&R Employment, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
AMPER, POLITZINER & MATTIA, P.A.
August 20, 1999
Edison, New Jersey
F-23
<PAGE>
B&R EMPLOYMENT, INC.
Balance Sheets
December 31,
Assets
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets
Cash $ 1,173 $ 936
Due from factor 81,548 170,108
Accounts receivable - in house, net of allowance
for doubtful accounts of $42,113 and $-0- -- 4,598
Unbilled receivables -- 25,516
Due from affiliate - net of allowance for doubtful
accounts of $329,724 and $-0- -- 122,411
--------- ---------
82,721 323,569
Property and equipment, net of
accumulated depreciation 8,039 14,039
--------- ---------
$ 90,760 $ 337,608
========= =========
Liabilities and Stockholder's Equity
Current liabilities
Accounts payable $ 79,280 $ 79,230
Accrued payroll and payroll taxes payable 42,467 16,964
Due to insurance company 70,000 115,000
--------- ---------
191,747 211,194
Stockholder's (deficiency) equity
Common stock, no par value, 1,000 shares
authorized, 100 shares issued and outstanding 1,000 1,000
(Accumulated deficit) retained earnings (101,987) 125,414
--------- ---------
Total stockholder's (deficiency) equity (100,987) 126,414
--------- ---------
$ 90,760 $ 337,608
========= =========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
B&R EMPLOYMENT, INC.
Statements of Operations
For the Years Ended December 31,
1998 1997
---- ----
Revenues $ 4,668,089 $ 4,367,050
Cost of revenue 3,246,769 3,002,725
----------- -----------
Gross profit 1,421,320 1,364,325
Selling, general, and administrative
expenses 1,503,645 1,074,168
----------- -----------
Earnings (loss) from operations (82,325) 290,157
----------- -----------
Other income (expense)
Interest expense (5,995) --
Other income 45,541 --
Finance charges (174,800) (164,829)
----------- -----------
(135,254) (164,829)
----------- -----------
Net (loss) income $ (217,579) $ 125,328
=========== ===========
See accompanying notes to financial statements.
F-25
<PAGE>
B&R Employment, Inc.
Statement of Stockholder's Deficiency
For the Years Ended December 31,
<TABLE>
<CAPTION>
Common Retained Earnings
Stock (Accumulated Deficit) Total
----- --------------------- -----
<S> <C> <C> <C>
Balance - December 31, 1996 $ 1,000 $ 86 $ 1,086
Net income -- 125,328 125,328
--------- --------- ---------
Balance - December 31, 1997 1,000 125,414 126,414
Net (loss) -- (217,579) (217,579)
Stockholder's distributions -- (9,822) (9,822)
--------- --------- ---------
Balance - December 31, 1998 $ 1,000 $(101,987) $(100,987)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
B&R EMPLOYMENT, INC.
Statements of Cash Flows
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(217,579) $ 125,328
--------- ---------
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 6,300 499
Changes in operating assets and liabilities
Accounts receivable - in house 4,598 357,724
Due from factor 88,560 (170,108)
Unbilled receivables 25,516 (25,516)
Due to/from affiliate 122,411 (134,612)
Accounts payable 50 (102,224)
Accrued payroll and payroll taxes 25,503 (150,671)
Due to insurance company (45,000) 115,000
--------- ---------
Total adjustments 227,938 (109,908)
--------- ---------
10,359 15,420
--------- ---------
Cash flows from investing activities
Purchase of property and equipment (300) (14,484)
--------- ---------
Cash flows from financing activities
Stockholders' distributions (9,822) --
--------- ---------
(9,822) --
--------- ---------
Net change in cash 237 936
Cash - beginning 936 --
--------- ---------
Cash - ending $ 1,173 $ 936
========= =========
Supplemental disclosure of cash paid
Interest $ 5,995 $ --
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
B&R EMPLOYMENT, INC.
Notes to Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Operations
The Company was incorporated in August 16, 1995 for the purpose of
providing temporary staffing services. The Company provides
qualified staff for customers from its three offices in Delaware.
The Company's customers are in various industries and are located in
Delaware, Maryland and Pennsylvania. 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 may be 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.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
Estimated
Method Useful Life
------ -----------
Furniture and fixtures Declining balance 5 - 7 years
Leasehold improvements Straight-line 3 years
Factoring
The Company's factoring agreement (see Note 2) 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."
Income Taxes
The Company has elected to be taxed as a S-Corporation for federal
and state tax purposes. Under this election, substantially all of
the profits, losses, credits and deductions of the Company are
passed through to the individual stockholder. There is no provision
for corporate income taxes.
Advertising Costs
Advertising costs are expensed as incurred. The expense for the
years ended December 31, 1998 and 1997 were $29,000 and $42,000,
respectively.
F-28
<PAGE>
B&R EMPLOYMENT, INC.
Notes to Financial Statements
Note 2 - Factoring Agreement
The Company has a factoring agreement with a financing institution
("factor") under which it may sell qualified trade accounts
receivable, with limited recourse provisions. The agreement, which
expired December 31, 1998, required the Company to repurchase or
replace any receivables remaining uncollected for more than 90 days.
During the years ended December 31, 1998 and 1997, the gross
proceeds resulting from the sale of receivables were $4,668,000 and
$2,035,000, respectively. As of December 31, 1998 and 1997, $658,000
and $622,000, respectively of the receivables sold to the factor had
not been collected.
Note 3 - Property and Equipment
December 31,
1998 1997
---- ----
Furniture and fixtures $ 7,359 $ 7,059
Leasehold improvements 7,500 7,500
------- -------
14,859 14,559
Accumulated depreciation 6,820 520
------- -------
Net property and equipment $ 8,039 $14,039
======= =======
Note 4 - Related Party Transaction
Rent
The Company rents on a month-to-month basis one of its office
facilities from its sole stockholder at an annual rental of $14,000.
Rent expense was $37,208 and $25,400 for the years ended December
31, 1998 and 1997, respectively.
Expenses
An affiliated company, also owned 100% by the Company's stockholder
paid certain expenses including salaries, payroll taxes, employee
benefits, rent, selling, advertising, utilities, professional and
other administrative expenses on behalf of the Company. For the
years ended December 31, 1998 and 1997 $1,217,000 and $1,600,000 was
advanced to the affiliate. As of December 31,1997 the amount was
expected to be collected in the normal course of business. For the
years ended December 31, 1998 and 1997, $1,009,000 and $1,457,000 of
expenses respectively were allocated to the Company from this
affiliate. At December 31, 1998, the amount due from the affiliate
was fully reserved and $329,724 was charged to operations.
Note 5 - Major Customer
The Company had one customer who accounted for 11% of total revenues
for the year ended December 31, 1998. Major customers are those who
account for more than 10% of total revenues. There were no major
customers for the year ended December 31, 1997.
Note 6 - Commitments and Contingencies
In June 1999, an insurance company filed a lawsuit against the
Company. The suit alleges that the insurance company is owed unpaid
workers' compensation premiums. In July 1999, the Company, through
its attorneys, negotiated a settlement of $70,000, which is
reflected as due to insurance company in current liabilities. The
payment terms of the settlement are currently under negotiations.
Management believes that the ultimate resolution of this matter will
not have a material adverse effect upon the Company's financial
position or results of operations.
F-29
<PAGE>
B&R EMPLOYMENT, INC.
Notes to Financial Statements
Note 7 - Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's operational equipment or internal computer software
that have time sensitive programs may recognize a date using "00 as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruption of operations
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business.
The Company has assessed the implications on its operations of the
Year 2000 Issue. At December 31, 1998, the process of evaluating the
Company's internal systems was completed. All systems 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. The 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 8 - Subsequent Events
On January 4, 1999, the Company entered into an asset purchase
agreement with Stratus Services Group, Inc. ("Stratus"). The Company
sold 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 sale price was $2,400,000, consisting of two notes aggregating
$1,800,000 and the issuance of 52,000 shares of Stratus' common
stock. The Company has a put option to sell these shares back to
Stratus at $10 per share, provided that Stratus does not conduct an
initial public offering within 24 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 30 days after the
successful completion of the 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 90 days after payment of the first note. In addition,
Stratus purchased outstanding accounts receivable from the Company's
factor of 658,000 (Note 2).
The Company will continue to exist in order to collect the proceeds
of the notes receivable and liquidate its debt.
F-30
<PAGE>
STRATUS SERVICES GROUP, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
<TABLE>
<CAPTION>
For the Year Ended Pro Forma
September 30, 1998 December 31, 1998 Adjustments Pro Forma
Stratus B & R
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 24,919,639 $ 4,668,089 $ -- $ 29,587,728
Cost of revenue 20,329,718 3,246,769 -- 23,576,487
------------ ------------ ------------ ------------
Gross Profit 4,589,921 1,421,320 -- 6,011,241
Operating Expenses 5,631,020 1,503,645 (293,731)(a)(b)(c) 6,840,934
------------ ------------ ------------ ------------
(Loss) from operations (1,041,099) (82,325) 293,731 (829,693)
Other income (expenses):
Finance charges (524,649) (174,800) -- (699,449)
Interest expense (48,170) (5,995) (154,788)(d) (208,953)
Other income 33,729 45,541 (45,541)(e) 33,729
Other (expenses) (899,606) -- -- (899,606)
------------ ------------ ------------ ------------
(1,438,696) (135,254) (200,329) (1,774,279)
Net (Loss) ($ 2,479,795) ($ 217,579) $ 93,402 ($ 2,603,972)
============ ============ ============ ============
Pro forma loss per common share -
Basic Diluted $ (.72)
Weighted average shares used in computing
Pro forma loss per common share -
Basic and Diluted 3,602,086
</TABLE>
See accompanying notes to unaudited pro forma condensed
statements of operations
F-31
<PAGE>
STRATUS SERVICES GROUP, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the nine months ended June 30, 1999
<TABLE>
<CAPTION>
For the nine months For the three months Pro Forma
ended June 30, 1999 ended December 31, 1998 Adjustments Pro Forma
Stratus B & R
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 21,263,817 $ 1,333,791 $ -- $ 22,597,608
Cost of revenue 16,843,326 1,007,407 -- 17,850,733
------------ ------------ ------------ ------------
Gross Profit 4,420,491 326,384 -- 4,746,875
Operating Expenses 5,131,145 302,216 40,428(c) 5,473,789
------------ ------------ ------------ ------------
Earnings (loss) from operations (710,654) 24,168 (40,428) (726,914)
Other income (expenses):
Finance charges (539,463) (39,297) -- (578,760)
Interest expense (209,679) (5,748) (39,043)(d) (254,470)
Other income 18,155 -- -- 18,155
Other (expenses) (237,164) -- -- (237,164)
------------ ------------ ------------ ------------
(968,151) (45,045) (39,043) (1,052,239)
Net (Loss) ($ 1,678,805) ($ 20,877) ($ 79,471) ($ 1,779,153)
============ ============ ============ ============
Pro forma loss per common share -
Basic and Diluted $ (.47)
Weighted average shares used in computing
Pro forma loss per common share -
Basic and Diluted 3,783,714
</TABLE>
See accompanying notes to unaudited pro forma condensed
statements of operations
F-32
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
NOTE 1 -- Basis of Presentation
The unaudited pro forma condensed statements of operations present
the accounts of Stratus Services Group, Inc. ("Stratus") and B&R
Employment, Inc. ("B&R") as if the acquisition of B&R by Stratus
occurred on October 1, 1997. The pro forma statements of operations
should be read in conjunction with the historical financial
statements of Stratus and B&R and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The results of operations of B&R have
been included in the results of operations of Stratus from January
4, 1999, the date of the acquisition.
For the year ended September 30, 1998 the unaudited pro forma
condensed statement of operations includes Stratus with year end of
September 30, 1998 and B&R with a December 31, 1998 year end.
For the nine months ended June 30, 1999 the unaudited pro forma
condensed statement of operations include B & R operations from
January 4, 1999 included in Stratus plus B & R unaudited three
months ended December 31, 1998.
The pro forma condensed statements of operations (unaudited) for the
year ended September 30, 1998 and for the nine month period ended
June 30, 1999 do not purport to be indicative of the results that
actually would have been obtained if operations were combined at the
beginning of the fiscal year ended October 1, 1997, and this
presentation is not intended to be a projection of future results or
trends.
NOTE 2 - Pro Forma Adjustments
The following adjustments would be required if the acquisition
occurred as indicated above:
(a) Reflects the elimination of the write-off of a $329,724
receivable from an affiliated company;
(b) Reflects the elimination of a non-recurring fee of
$125,000 paid to the factor;
(c) Reflects the amortization of goodwill of $160,993 and
$40,428 for the year ended September 30, 1998 and the
nine months ended June 30, 1999, respectively;
(d) Reflects interest expense on the notes payable to B&R in
incurred in connection with the acquisition;
(e) Reflects the elimination of non-recurring income.
F-33
<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
