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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-15789
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STRATUS SERVICES GROUP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 22-3499261
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 CRAIG ROAD, SUITE 201, MANALAPAN, NEW JERSEY 07726
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(Address of principal executive offices)
(732) 866-0300
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended September 30, 2000
were: $41,676,587
The aggregate market value of the voting stock held by non-affiliates, computed
by reference to the last sale price of such stock as reported by the Nasdaq
SmallCap Market, as of December 26, 2000, was $4.9375, based upon ________
shares held by non-affiliates.
The number of shares of Common Stock, $.01 par value, outstanding as of December
26, 2000 was 5,712,037.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9 through 12 of Part III are incorporated by reference to portions of the
definitive proxy statement for the 2001 Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
FORM 10-KSB
STRATUS SERVICES GROUP, INC.
FORM 10-KSB FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE OF REPORT
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 7. FINANCIAL STATEMENTS 12
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS 12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT 13
ITEM 10. EXECUTIVE COMPENSATION 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 13
INDEX TO FINANCIAL STATEMENTS F-1
</TABLE>
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS RELATE
TO FUTURE ECONOMIC PERFORMANCE, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE
OPERATIONS AND PROJECTIONS OF REVENUE AND OTHER FINANCIAL ITEMS THAT ARE BASED
ON THE BELIEFS OF OUR MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY, AND
INFORMATION CURRENTLY AVAILABLE TO, OUR MANAGEMENT. THE WORDS "EXPECT",
"ESTIMATE", "ANTICIPATE", "BELIEVE", "INTEND", AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INVOLVE
ASSUMPTIONS, UNCERTAINTIES AND RISKS. IF ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE OR UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
OUTCOMES MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR EXPECTED.
AMONG THE KEY FACTORS THAT MAY HAVE A DIRECT BEARING ON OUR EXPECTED OPERATING
RESULTS, PERFORMANCE OR FINANCIAL CONDITION ARE ECONOMIC CONDITIONS FACING THE
STAFFING INDUSTRY GENERALLY; UNCERTAINTIES RELATED TO THE JOB MARKET AND OUR
ABILITY TO ATTRACT QUALIFIED CANDIDATES; UNCERTAINTIES ASSOCIATED WITH OUR BRIEF
OPERATING HISTORY; OUR ABILITY TO RAISE ADDITIONAL CAPITAL; OUR ABILITY TO
ACHIEVE AND MANAGE GROWTH; OUR ABILITY TO SUCCESSFULLY IDENTIFY SUITABLE
ACQUISITION CANDIDATES, COMPLETE ACQUISITIONS OR INTEGRATE THE ACQUIRED BUSINESS
INTO OUR OPERATIONS; OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; OUR
ABILITY TO DEVELOP NEW SERVICES; OUR ABILITY TO CROSS-SELL OUR SERVICES TO
EXISTING CLIENTS; OUR ABILITY TO ENHANCE AND EXPAND EXISTING OFFICES; OUR
ABILITY TO OPEN NEW OFFICES; GENERAL ECONOMIC CONDITIONS; AND OTHER FACTORS
DISCUSSED FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. THESE FACTORS ARE NOT INTENDED TO REPRESENT A COMPLETE LIST OF ALL
RISKS AND UNCERTAINTIES INHERENT IN OUR BUSINESS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES
APPEARING ELSEWHERE IN THIS ANNUAL REPORT.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT
We are a national business services company engaged in providing outsourced
labor and operational resources on a long-term, contractual basis. We were
incorporated in Delaware in March 1997 and began operations in August 1997 with
the purchase of certain assets of Royalpar Industries, Inc. and it subsidiaries.
This purchase provided us with a foundation to become a national provider of
comprehensive staffing services. 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. Therefore, we are functionally divided into three
"service lines": SMARTSolutions(TM), Engineering Services and Staffing Services.
Through our SMARTSolutions(TM) Division, we provide a comprehensive, customized
staffing program designed to reduce labor and management costs and increase
workforce efficiency. Our Engineering Services Division provides a full range of
technical engineering services including on-site staff augmentation and in-house
project work. Finally, our Staffing Services Division provides temporary workers
for short-term needs, extended-term temporary employees, temporary-to-permanent
placements, recruiting, permanent placements, payroll processing, on-site
supervising and human resource consulting. All three service groups seek to act
as business partners to our clients rather than just a vendor, and in doing so,
seek to systematically enhance productivity and positively impact financial
results. We are headquartered at 500 Craig Road, Suite 201, Manalapan, New
Jersey 07726 and our telephone number is (800) 777-1557. As of December 26, 2000
we were providing services from thirty-two locations in eleven states. We also
maintain a presence on the Internet with our website at WWW.STRATUSSERVICES.COM,
an informational site designed to give prospective customers and employees
additional information regarding our operations.
Between September 1997 and December 2000 we completed six acquisitions of
primarily staffing companies or divisions of staffing companies. These
acquisitions included twenty offices located in six states and collectively
generated $42 million in revenue for the twelve months preceding such
acquisitions. Pursuant to our acquisition strategy we made the following asset
purchases:
o In August 1998, we acquired the assets of J.P. Industrial, LLC, a $1
million (in annual revenues) Canby, Oregon based 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.
o In January 1999, we completed the acquisition of the assets of B & R
Employment, Inc. ("B & R"), a $4 million (in annual revenues)
Wilmington, Delaware based provider of traditional temporary staffing
services. This acquisition gave us an immediate presence in the
industrial and banking center of Delaware.
o In April 1999, we acquired certain assets of Adapta Services Group,
Inc., a single location, $2 million (in annual revenues) New Castle,
Delaware based provider of traditional staffing services. This
acquisition was an excellent complement to our acquisition of B&R
Employment, Inc., gave us full coverage of all of the major Delaware
metropolitan areas and provided us with additional quality customers.
o In June 2000, we acquired the assets of the eight New Jersey and
Pennsylvania branches of Tandem, a $25 million (in annual revenues)
division of Outsource International, Inc. This acquisition greatly
expanded our presence in our home state of New Jersey and continued our
Mid-Atlantic regional expansion.
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o In July 2000, we acquired certain assets of Apoxiforce, Inc., a $1
million (in annual revenues) Elizabeth, New Jersey based provider of
traditional staffing services. This acquisition provided us with a
strong presence in the commercial food service industry and an
excellent customer list. These operations were incorporated into our
existing Elizabeth, New Jersey office and the personnel assimilated
throughout our New Jersey operations.
o In October 2000 we acquired the assets of seven New Hampshire and
Massachusetts branches of Tandem, a $9 million (in annual revenues)
division of Outsource International, Inc. This acquisition further
continued our East Coast expansion plan and provided us with a platform
to further expand our New England presence.
Due to these acquisitions, as well as new offices we opened, the number of our
offices increased from five in five states after the Royalpar, Inc. acquisition
in August 1997 to thirty-two in eleven states at December 15, 2000.
(B) BUSINESS OF ISSUER
PRINCIPAL SERVICES & MARKETS
Our business operations are classified into SMARTSolutions(TM), Engineering
Services and Staffing Services, each reporting to a Division President who
reports directly to the Chief Executive Officer and each with its own target
market.
SMARTSOLUTIONS(TM). SMARTSolutions(TM) 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(TM) 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.
While SMARTSolutions(TM) is designed to be most effective in manufacturing,
distribution and telemarketing operations, it is marketed to all companies
that have at least 50 people dedicated to specific work functions that
involve repetitive tasks measurable through worker output and could benefit
from proactive workforce management. Since SMARTSolutions(TM) differs greatly
from traditional staffing services, we have developed a national marketing
team dedicated strictly to marketing these programs. However, the team
utilizes our Staffing Services branch staff to identify companies within
their geographic regions that could potentially benefit from a
SMARTSolutions(TM) program. Once identified, the team assumes full
responsibility for the sales process. A significant portion of our
SMARTSolutions(TM) clients have been obtained through this process or from
"word of mouth" recommendations from current SMARTSolutions(TM) customers.
ENGINEERING SERVICES require 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 our 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
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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 and 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" qualifying 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.
The marketing of engineering services is focused primarily on addressing the
requirements typical of specific customers. In marketing to potential
customers, the engineering sales team identifies the requirements of the
customer and promotes services offerings designed to meet those requirements.
In addition to personal sales calls, targeted mailings and telephone
solicitations, the entire management team promotes our services through
cross-selling complementary services to existing customers, submitting bids
on "competitive bid" projects and networking through industry trade
associations. As is the case with SMARTSolutions(TM), we anticipate that with
the extensive experience of the Engineering Services management team, word of
mouth and personal contacts will provide the majority of sales leads.
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 involve the placement
of a Company 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 the Company's customers include cognitive, personality
and psychological evaluation and drug testing that is 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.
Staffing services are marketed through our on-site sales professionals
throughout our nationwide network of offices. Generally, new customers are
obtained through customer referrals, telemarketing, advertising and
participating in numerous community and trade organizations.
COMPETITIVE BUSINESS CONDITIONS
Staffing companies provide one or more of four basic services to clients: (i)
flexible staffing; (ii) Professional Employer Organization ("PEO") services;
(iii) placement and search; and (iv) outplacement. Based on information provided
by the American Staffing Association (formerly the National Association of
Temporary and Staffing Services), the National Association of Professional
Employer Organizations and Staffing Industry Analysts, Inc., 1999 staffing
industry revenues were approximately $117 billion. Over the last five years, the
staffing industry has experienced significant growth, due largely to the
utilization of temporary help across a broader range of industries, as well as
the emergence of the PEO sector. Staffing industry revenues grew from
approximately $102 billion in 1998 to approximately $117 billion in 1999, or
14.7%.
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The U.S. staffing industry is highly fragmented and has begun to experience
consolidation, particularly with respect to temporary staffing companies. Recent
industry statistics indicate that approximately 7,000 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 Owner's desires for liquidity.
Although some consolidation activity has already occurred, we believe that
consolidation in the U.S. staffing industry will continue and that there will be
numerous available acquisition candidates.
Historically, the demand for temporary staffing employees has been driven by a
need to temporarily replace regular employees. More recently, competitive
pressures have forced businesses to focus on reducing costs, including
converting fixed labor costs to variable and flexible costs. Increasingly, the
use of temporary staffing employees has become widely accepted as a valuable
tool for managing personnel costs and for meeting specialized or fluctuating
employment requirements. Organizations have also begun using temporary staffing
to reduce administrative overhead by outsourcing operations that are not part of
their core business operations, such as recruiting, training and benefits
administration. By utilizing staffing services companies, businesses are able to
avoid the management and administrative costs that would be incurred if full
time employees were employed. An ancillary benefit, particularly for smaller
business, is that the 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.
We compete with other companies in the recruitment of qualified personnel, the
development of client relationships and the acquisition of other staffing and
professional service companies. A large percentage of temporary staffing and
consulting companies are local operators with fewer than five offices and have
developed strong local customer relationships within local markets. These
operators actively compete with us for business and, in most of these markets,
no single company has a dominant share of the market. We also compete with
larger, full-service and specialized competitors in national, regional and local
markets. The principal national competitors include AccuStaff, Inc., Manpower,
Inc., Kelly Services, Inc., The Olsten Corporation, Interim Services, Inc., and
Norrell Corporation, all of which may have greater marketing, financial and
other resources than Stratus. We believe that the primary competitive factors in
obtaining and retaining
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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. We believe our long-term client relationships
and strong emphasis on providing service and value to our clients and temporary
staffing employees makes us highly competitive.
CUSTOMERS
For the year ended September 30, 2000 we provided services to 1,025
customers in 30 states. Our five largest customers represented 35% of our
revenue but no one customer exceeded 12%. We do not believe that a loss or a
material reduction of any one customer would have a material adverse effect on
our business. At December 15, 2000 we were providing services to 635 customers
in 16 states, with the five largest customers representing 33% and no one
customer exceeding 8%.
GOVERNMENTAL 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,
laws regulating the employer/employee relationship, such as tax withholding and
reporting, social security or retirement, anti-discrimination and workers'
compensation, govern these firms. 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 that 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 that 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 that provide commercial and professional
staffing services.
TRADEMARKS
We have filed for Federal Trademark registration of SMARTSolutions,
SMARTReport, SMARTTraining, our slogan, name and logo. No assurance can be given
that this registration will be obtained or if obtained, will be effective to
prevent others from using the mark concurrently or in certain locations.
Currently, we are asserting Common Law protection by holding the marks out to
the public as the property of Stratus. However, no assurance can be given that
this Common Law assertion will be effective to prevent others from using the
mark concurrently or in other locations. In the event someone asserts ownership
to a mark, we may incur legal costs to enforce any unauthorized use of the marks
or defend ourselves against any claims.
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EMPLOYEES
As of September 30, 2000 we were employing 2,795 total employees. Of that
amount 115 were classified as Staff employees and 2,680 were classified as field
or "temp" employees, those employees placed at client facilities. As of December
15, 2000 those numbers had increased to 3,685, 165 and 3,520 respectively.
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
Management Personnel are targeted and recruited for specific engagements. We
usually advertise for professionals who possess specialized education, training
or work experience. Engineering Services recruiting efforts also rely upon
industry contacts, personal networks and referrals from existing and former
Engineering Services personnel.
To promote loyalty and improve retention among our employees and to
differentiate ourselves from competing staffing firms, we offer a comprehensive
benefits package after only ninety days of employment instead of the industry
standard of one hundred eighty days. The benefits package includes paid time
off, holiday and vacation time, medical coverage, dental, vision, prescription,
mental health, life insurance, disability coverage and a 401(k) defined
contribution plan. The average length of assignment for employees ranges from
six months to five years depending on the client requirements.
ITEM 2. PROPERTY
We own no real property. We lease approximately 6,300 square feet in a
professional office building in Manalapan, New Jersey as our corporate
headquarters. That facility houses all of our centralized corporate functions,
including the Executive management team, payroll processing, accounting, human
resources and legal departments. Our lease expires on May 31, 2001 and we have
begun discussions with the landlord to increase our space at that location. As
of September 30, 2000 we leased 31 additional facilities, primarily flexible
staffing offices, in 11 states. With the exception of the corporate
headquarters, we believe that our facilities are generally adequate for our
needs and we do not anticipate any difficulty in replacing such facilities or
locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, in routine litigation arising in the
ordinary course of business. We do not believe that any currently pending
litigation will have a material adverse effect on our financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On April 11, 2000 our registration statement on Form SB-2 (Commission
File No. 333-83255) for our initial public offering (the "IPO") of common
stock, $.01 par value, became effective and our shares commenced trading on
the Nasdaq SmallCap Market under the symbol "SERV" on April 26, 2000. There
were approximately 216 holders of record of Common Stock as of December 26,
2000. This number does not include the number of shareholders whose shares
were held in "nominee" or "street name", which we cannot determine until
after we have held our first annual meeting. The table below sets forth, for
the periods indicated, the high and low sales prices of our Common Stock as
reported by the Nasdaq Stock Market. <TABLE><CAPTION>
SALES PRICES
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FISCAL YEAR 2000 HIGH LOW
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Quarter Ended June 30, 2000 (from April 26, 2000) $ 9.00 $ 5.875
Quarter Ended September 30, 2000 7.00 4.25
</TABLE>
On December 26, 2000, the closing price of our Common Stock as reported by
the Nasdaq stock market, was $4.9375 per share. We have never paid dividends
on our Common Stock and we intend to retain earnings, if any, to finance future
operations and expansion. In addition, our credit agreement restricts the
payment of dividends. Therefore, we do not anticipate paying any cash dividends
in the foreseeable future. Any future payment of dividends will depend upon the
financial condition, capital requirements and our earnings as well as other
factors that the Board of Directors deem relevant.
On May 5, 2000, we completed the IPO of 1,300,000 shares of common stock
at a price of $6.00 per share, realizing net cash proceeds of approximately
$6,034,000 after deducting underwriting discounts and offering costs of
approximately $780,000 and $986,000, respectively. The use of net proceeds of
the offering were as follows:
o $1,810,000 for acquisitions.
o $1,225,000 to repay outstanding indebtedness.
o $964,000 to repay acquisition debt.
o $583,000 to reduce outstanding trade payables.
o $448,000 to pay indebtedness to attorneys incurred in connection with
various litigation.
o $350,000 to purchase treasury stock.
o $319,000 for working capital and general corporate purposes.
o $191,000 to purchase computers and other equipment.
o $144,000 to pay accrued compensation to officers.
In December 2000, we sold $1,987,400 of 6% Convertible Debentures (the
"Debentures") in a private offering to accredited investors conducted under
Rule 506 of Regulation D. The Debentures mature in December 2005 and are
convertible commencing in April 2001 into a number of shares of Common Stock
which is determined by dividing the principal amount by the lesser of (a)
120% of the closing bid price of Common Stock on the trading day immediately
preceding the initial issue date of the Debentures or (b) 75% of the average
closing bid price of the Common Stock for the five trading days immediately
preceding the conversion. Interest on the Debentures is payable, at the
option of the Company, in Common Stock. A five-year warrant to acquire 25,000
shares of Common Stock at an exercise price of $7.50 per share was issued to
one of the investors in the offering.
Until such time as the Company obtains stockholder approval pursuant to the
rules of the Nasdaq Stock Market of the issuance of the full amount of shares
issuable upon conversion, the Company may not issue more than 1,145,112 shares
of Common Stock upon conversion of the Debentures.
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The Company may prepay the indebtedness represented by the Debentures in
an amount equal to 115% of the principal amount if the prepayment occurs within
120 days of the original issue date, 120% of the principal amount if the
prepayment occurs after 120 days but before 180 days after the original issue
date and 125% of the principal amount thereafter.
The Company has agreed to register the shares issuable upon conversion of
the Debentures for public resale under the Securities Act of 1933. If the
registration statement is not effective within 120 days of the initial issue
date of the Debentures, the Company will be in default under the Debentures and
will also be required to pay the holders of the Debentures an amount equal to 2%
of the principal amount for each 30 day period thereafter that the registration
statement is not effective.
The Company paid the placement agents for the private offering of the
Debentures aggregate commissions of $134,568 and agreed to issue to the
placement agents five year warrants to acquire 75,000 shares of Common Stock
at an exercise price of $7.50 per share and 5 year warrants to acquire 50,000
shares of Common Stock at a per share exercise price equal to the greater of
$5.00 or the average closing bid price of the Common Stock for the 5 trading
days preceding the original issue date of the Debentures.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Annual Report on Form 10-KSB contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. These statements relate
to future economic performance, plans and objectives of management for future
operations and projections of revenue and other financial items that are based
on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. The words "expect",
"estimate", "anticipate", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements involve
assumptions, uncertainties and risks. If one or more of these risks or
uncertainties materialize or underlying assumptions prove incorrect, actual
outcomes may vary materially from those anticipated, estimated or expected.
Among the key factors that may have a direct bearing on our expected operating
results, performance or financial condition are economic conditions facing the
staffing industry generally; uncertainties related to the job market and our
ability to attract qualified candidates; uncertainties associated with our brief
operating history; our ability to raise additional capital; our ability to
achieve and manage growth; our ability to successfully identify suitable
acquisition candidates, complete acquisitions or integrate the acquired business
into our operations; our ability to attract and retain qualified personnel; our
ability to develop new services; our ability to cross-sell our services to
existing clients; our ability to enhance and expand existing offices; our
ability to open new offices; general economic conditions; and other factors
discussed from time to time in our filings with the Securities and Exchange
Commission. These factors are not intended to represent a complete list of all
risks and uncertainties inherent in our business. The following discussion and
analysis should be read in conjunction with the Financial Statements and notes
appearing elsewhere in this Annual Report.
INTRODUCTION
We provide a wide range of staffing, engineering and productivity consulting
services nationally through a network of offices located throughout the United
States. We recognize revenues based on hours worked by assigned personnel.
Generally, we bill our customers a pre-negotiated fixed rate per hour for the
hours worked by our temporary employees. We are responsible for workers'
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and other general payroll related expenses for all of the temporary
employees we place. These expenses are included in the cost of revenue. Because
we pay our temporary employees only for the hours they actually work, wages for
our temporary personnel are a variable cost that increases or decreases in
proportion to revenues. Gross profit margin varies depending on the type of
services offered. Our Engineering Services division typically generates higher
margins while the Staffing Services division typically generates lower margins.
In some instances, temporary employees placed by us may decide to
9
<PAGE>
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
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999
REVENUES. Revenues increased 38.7% to $41,676,587 for the year ended September
30, 2000 from $30,042,751 for the year ended September 30, 1999. A significant
portion of the increase was attributable to the growth of our SMARTSolutions(TM)
division where revenues increased 108.1% to $14,443,057 for the year ended
September 30, 2000 from $6,938,887 for the year ended September 30, 1999.
GROSS PROFIT. Gross profit increased 55.8% to $10,493,909 for the year ended
September 30, 2000 from $6,736,497 for the year ended September 30, 1999. Gross
profit as a percentage of revenues increased to 25.2% for the year ended
September 30, 2000 from 22.4% for the year ended September 30, 1999. This
increase was due to continuing our plan to seek higher gross margin business and
the higher margins generated by our SMARTSolutions(TM) and Engineering
divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses not including depreciation and amortization increased
30.4% to $8,425,288 for the year ended September 30, 2000 from $6,462,631 for
the year ended September 30, 1999. Selling, general and administrative expenses
as a percentage of revenues decreased to 20.2% for the year ended September 30,
2000 from 21.5% for the year ended September 30, 1999. The increased dollar
amount is due to the increase in costs, primarily for personnel, to support the
increase in revenues. We believe that we can continue to increase revenues
without incurring a proportionate increase in selling, general and
administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
86.5% to $367,129 for the year ended September 30, 2000 from $196,818 for the
year ended September 30, 1999. Depreciation and amortization expenses as a
percentage of revenues increased to 0.9% for the year ended September 30, 2000
from 0.7% for the year ended September 30, 1999. This increase was primarily due
to the amortization of goodwill associated with the acquisition of certain
assets of Outsource International, Inc. in June 2000 and the impact of increased
capital expenditures.
PROVISION FOR RECOURSE OBLIGATION. Provision for recourse obligation is the
estimated amount of uncollectible accounts receivable sold to a factor, which
the factor may obligate us to repurchase. This amount decreased 79.4% to
$122,500 for the year ended September 30, 2000 from $595,000 for the year ended
September 30, 1999. Provision for recourse obligation as a percentage of
revenues decreased to 0.3% for the year ended September 30, 2000 from 2.0% for
the year ended September 30, 1999. Almost the entire amount for the year ended
September 30, 1999 was due to the uncertainty of recoverability of accounts with
which we ceased doing business during that same time period.
FINANCE CHARGES. Finance charges decreased 14.4% to $618,134 for the year ended
September 30, 2000 from $722,020 for the year ended September 30, 1999. As a
percentage of revenues, finance charges decreased to 1.5% for the year ended
September 30, 2000 from 2.4% for the year ended September 30, 1999. This
decrease was due to improved collections, which reduced the average days
outstanding of the accounts receivable sold.
INCOME TAX BENEFIT. Income tax benefit of $340,000 for the year ended September
30, 2000 is the result of the utilization of a portion of the net operating loss
carryforwards. As a percentage of revenue, income tax benefit was 0.8%.
10
<PAGE>
NET EARNINGS (LOSS). As a result of the foregoing, we had net earnings of
$1,045,910 for the year ended September 30, 2000 compared to a net loss of
($1,527,043) for the year ended September 30, 1999. The net earnings as a
percentage of revenues was 2.5% for the year ended September 30, 2000. The net
loss for the year ended September 30, 1999 as a percentage of revenues was
(5.1%).
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
securities, borrowings and sales of accounts receivable to a factor. In
addition, on May 5, 2000, we completed our IPO of 1,300,000 shares of common
stock at a price of $6.00 per share, realizing net cash proceeds of
approximately $6,000,000 after deducting underwriting discounts and offering
expenses.
Net cash used in operating activities was $1,624,452 and $994,445 in the year
ended September 30, 2000 and 1999, respectively. Approximately $1,200,000 of the
net proceeds from the IPO was used to reduce trade and other payables in the
year ended September 30, 2000.
Net cash used in investing activities was $1,955,343 and $478,396 in the year
ended September 30, 2000 and 1999, respectively. Cash used for acquisitions for
the year ended September 30, 2000 and 1999 was $1,053,868 and $194,930,
respectively. The balance in both periods was primarily for capital
expenditures.
Net cash provided by financing activities was $4,187,445 and $1,645,926 in the
year ended September 30, 2000 and 1999, respectively. Net proceeds of the IPO in
the year ended September 30, 2000 were $6,034,169, of which $1,225,000 was used
to repay notes and loans payable and $350,000 was used to purchase 53,766 shares
of our common stock which has been retired. The sources of cash provided by
financing activities in the year ended September 30, 1999 were 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, through December 12, 2000, we sold substantially all
of our accounts receivable to a factor, the factor initially only remitted 90%
of the face amount of the accounts receivable purchased. The net balance after
the purchase fee and other costs of the factor were remitted to us after the
factor receives the customer remittance, which was generally 45 days from the
time work was performed by the temporary employees.
In December 2000, we sold $1,987,400 of 6% Convertible Debentures in a
private offering. The Debentures mature in December 2005 and are convertible
commencing in April 2001 into a number of shares which is determined by
dividing the principal amount by the lesser of (a) 120% of the closing bid
price of the Common Stock on the trading day immediately preceding the
initial issue date of the Debentures or (b) 75% of the average closing bid
price of the common stock for the five trading days immediately preceding the
conversion.
On December 8, 2000, we entered into a loan and security agreement with a
lending institution which replaced our prior factoring arrangement and provides
for a line of credit up to 85% of eligible accounts receivable, as defined, not
to exceed $12,000,000. Advances under the credit agreement bear interest at a
rate of prime plus one and one-half percent (1 1/2%). The credit agreement
restricts our ability to incur other indebtedness, pay dividends and repurchase
stock. Borrowings under the agreement are collateralized by substantially all of
our assets.
We believe that the new credit facility, together with cash reserves, proceeds
from the Debenture offering and cash flow from operations will be sufficient to
fund our operations and capital expenditure requirements for at least the next
twelve months. However, if we were to expand our operations significantly,
especially through acquisitions, additional capital may be required. There can
be no assurance that we will be able to obtain additional capital at acceptable
rates.
11
<PAGE>
SEASONALITY
Our business follows the seasonal trends of our customers business.
Historically, Staffing Services has experienced lower revenues in the first
calendar quarter with revenues accelerating during the second and third calendar
quarters and then staring to slow again during the fourth calendar quarter.
SMARTSolutions(TM) and Engineering Services does not experience the same level
of seasonality associated with Staffing Services.
IMPACT OF INFLATION
We believe that since our inception, inflation has not had a significant impact
on our results of operations.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is submitted in a separate section of this
report commencing on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No change in accountants or disagreement requiring disclosure pursuant to
applicable regulations took place within the reporting period or in any
subsequent interim period.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTIONS 16(c) OF THE EXCHANGE ACT.
The material contained in "Election of Directors" and "The Board of
Directors and Officers" of our definitive proxy statement (to be filed pursuant
to the Securities Exchange Act of 1934, as amended) for the 2001 annual meeting
of stockholders of the Company is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The material contained in "Executive Compensation" of our definitive proxy
statement (to be filed pursuant to the Securities Exchange Act of 1934, as
amended) for the 2001 annual meeting of stockholders of the Company is hereby
incorporated by reference.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The material contained in "Securities Ownership of Certain Beneficial
Owners", "Election of Directors" and "The Board of Directors and Executive
Officers" of our definitive proxy statement (to be filed pursuant to the
Securities Exchange Act of 1934, as amended) for the 2001 annual meeting of
stockholders of the Company is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
The material contained in "Certain Relationships and Related Party
Transactions" of our definitive proxy statement (to be filed pursuant to the
Securities Exchange Act of 1934, as amended) for the 2001 annual meeting of
stockholders of the Company is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement, dated July 9, 1997, among Stratus Services
Group, Inc. and Royalpar Industries, Inc., Ewing Technical Design,
Inc., LPL Technical Services, Inc. and Mainstream Engineering
Company, Inc., as amended by Amendment No.1 to the Asset Purchase
Agreement, dated as of July 29, 1997.(1)
2.2 Asset Purchase Agreement, effective January 1, 1999, by and between
Stratus Services Group, Inc. and B&R Employment Inc.(1)
2.3 Asset Purchase Agreement, dated June 16, 2000, by and between
Stratus Services Group, Inc. and OutSource International of America,
Inc.(5)
13
<PAGE>
2.4 Asset Purchase Agreement, dated October 13, 2000, by and between
Stratus Service Group, Inc. and OutSource International of America,
Inc.(6)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(1)
3.2 By-Laws of the Registrant.(2)
4.1.1 Specimen Common Stock Certificate of the Registrant.(1)
4.1.2 Form of 6% Convertible Debenture
4.2.1 Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Alan Zelinsky
and Stratus Services Group, Inc., and supplemental letter thereto
dated December 2, 1998.(1)
4.2.2 Warrant for the Purchase of 40,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 23, 1998, between David
Spearman and Stratus Services Group, Inc.(1)
4.2.3 Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Sanford Feld
and Stratus Services Group, Inc., and supplemental letter thereto
dated December 2, 1998.(1)
4.2.4 Warrant for the Purchase of 20,000 Shares of Common Stock of Stratus
Services Group, Inc., dated November 30, 1998, between Peter
DiPasqua, Jr. and Stratus Services Group, Inc.(1)
4.2.5 Warrant for the Purchase of 20,000 Shares of Common Stock of Stratus
Services Group, Inc., dated December 2, 1998, between Shlomo Appel
and Stratus Services Group, Inc.(1)
4.2.6 Form of Underwriter's Warrant Agreement, including form of warrant
certificate.(7)
10.1.1 Employment Agreement dated September 1, 1997, between Stratus
Services Group, Inc. and Joseph J. Raymond.(1)
10.1.2 Executive Employment Agreement dated September 1, 1997, between
Stratus Services Group, Inc. and J. Todd Raymond, Esq.(1)
10.1.3 Executive Employment Agreement dated December 1, 1997, between
Stratus Services Group, Inc. and Charles A. Sahyoun.(1)
10.1.4 Executive Employment Agreement dated April 17, 1998, between Stratus
Services Group, Inc. and Mark S. Levine.(1)
10.1.5 Executive Employment Agreement dated May 7, 1998, between Stratus
Services Group, Inc. and A. George Komer.(1)
10.1.6 Executive Employment Agreement dated September 1, 1997 between
Stratus Services Group, Inc. and Michael A. Maltzman.(1)
10.1.7 Consulting Agreement, dated as of August 11, 1997, between Stratus
Services Group, Inc. and Jeffrey J. Raymond.(1)
10.1.8 Non-Competition Agreement, dated June 19, 2000 between Stratus
Services Group, Inc. and OutSource International of America, Inc.(5)
14
<PAGE>
10.1.9 Non-Competition Agreement, dated October 27, 2000 between Stratus
Services Group, Inc. and OutSource International of America, Inc.(6)
10.1.10 Option to purchase 1,000,000 shares of Stratus Services Group, Inc.
Common Stock issued to Joseph J. Raymond.
10.2 Lease, effective June 1, 1998, for offices located at 500 Craig
Road, Manalapan, New Jersey 07726.(1)
10.3.1 Sale and Purchase Agreement, dated August 11, 1997, between AGR
Financial, LLC and Stratus Services Group, Inc., with supplemental
letter thereto dated January 8, 1999.(1)
10.3.2 Loan and Security Agreement, dated December 8, 2000, between Capital
Tempfunds, Inc. and Stratus Services Group, Inc.
10.4.1 Promissory Note in the amount of $250,000, dated October 14, 1998,
between Stratus Services Group, Inc. and J. Todd Raymond, Esq.,
Trustee with Powers of Attorney.(1)
10.4.2 Promissory Note and Security Agreement in the amount of $400,000,
dated as of June 19, 2000, issued by Stratus Services Group, Inc. to
OutSource International of America, Inc.(5)
10.4.3 Promissory Note in the amount of $100,000, dated as of June19, 2000,
issued by Stratus Services Group, Inc. to OutSource International of
America, Inc.(5)
10.4.4 Promissory Note and Security Agreement in the amount of $75,000,
dated as of October 27, 2000, issued by Stratus Services Group, Inc.
to OutSource International of America, Inc.(6)
10.5.1 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and AGR Financial, L.L.C.(1)
10.5.2 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and Congress Financial Corporation
(Western).(1)
10.5.3 Form of Registration Rights Agreement, dated December 4, 2000 by and
among Stratus Services Group, Inc. and purchasers of the Stratus
Services Group, Inc. 6% Convertible Debenture.
10.6.1 Stock Purchase and Investor Agreement, dated August, 1997, by and
between Stratus Services Group, Inc. and Congress Financial
Corporation (Western).(1)
10.6.2 Stock Purchase and Investor Agreement, dated August, 1997, by and
among Stratus Services Group, Inc. and AGR Financial, L.L.C.(1)
10.6.3 Form of Securities Purchase Agreement, dated December 4, 2000 by and
between Stratus Services Group, Inc. and purchasers of the Stratus
Services Group, Inc. 6% Convertible Debenture.
10.7.1 1999 Equity Incentive Plan.(1)
10.7.2 2000 Equity Incentive Plan
10.7.3 Form of Option issued under 2000 Equity Incentive Plan
10.8 Debt to Equity Conversion Agreement by and between Stratus Services
Group, Inc. and B&R Employment, Inc.(3)
15
<PAGE>
10.8.1 Amendment to Debt to Equity Conversion Agreements by and between
Stratus Services Group and B&R Employment, Inc.(2)
10.9 Undertaking Letter from Joseph J. Raymond, Chairman & CEO to the
Board of Directors.(4)
27 Financial Data Schedule for the 12 months ended September 30, 2000.
(b) Reports on Form 8-K
On June 30, 2000 we filed a Form 8-K announcing the purchase of certain
assets of the New Jersey and Pennsylvania Tandem Division of Outsource
International of America, Inc.
On October 27, 2000 we filed a Form 8-K announcing the purchase of certain
assets of the New England Tandem Division of Outsource International of
America, Inc.
---------------------------------------------------------------------------
Footnote 1 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No. 1 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on September 3, 1999.
Footnote 2 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No. 6 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on February 1, 2000.
Footnote 3 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No 3 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on December 17, 1999.
Footnote 4 Incorporated by reference to similarly numbered Exhibits filed
with Amendment No 7 to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-83255) as filed with the
Securities and Exchange Commission on March 17, 2000.
Footnote 5 Incorporated by reference to the Exhibits to the Company's Form
8-K, as filed with the Securities and Exchange Commission on June
30, 2000
Footnote 6 Incorporated by reference to the Exhibits to the Company's Form
8-K, as filed with the Securities and Exchange Commission on
November 3, 2000
Footnote 7 Incorporated by reference to Exhibit 1.2 filed with Amendment
No.5 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-83255) as filed with the Securities
and Exchange Commission on February 11, 2000.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
STRATUS SERVICES GROUP, INC.
By: /s/ Joseph J. Raymond
---------------------------------
Joseph J. Raymond
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: December 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joseph J. Raymond Chairman, Chief Executive Officer December 29, 2000
------------------------ (Principal Executive Officer)
Joseph J. Raymond
/s/ Michael A. Maltzman Vice President and Chief Financial December 29, 2000
------------------------ Officer (Principal Financing and
Michael A. Maltzman Accounting Officer)
/s/ Michael J. Rutkin Director December 29, 2000
------------------------
Michael J. Rutkin
/s/ H. Robert Kingston Director December 29, 2000
------------------------
H. Robert Kingston
/s/ Sanford I. Feld Director December 29, 2000
------------------------
Sanford I. Feld
/s/ Donald W. Feidt Director December 29, 2000
------------------------
Donald W. Feidt
</TABLE>
17
<PAGE>
STRATUS SERVICES GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Page(s) No.
<S> <C>
Report of Independent Certified Public Accountants ............. F-2
Financial Statements
Balance Sheet ............................................. F-3
Statements of Operations .................................. F-4
Statements of Cash Flows .................................. F-5
Statement of Stockholders' Equity ......................... F-6
Notes to Financial Statements ............................. F-7 - F-17
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders of
Stratus Services Group, Inc.
We have audited the accompanying balance sheet of Stratus Services Group, Inc.
as of September 30, 2000, and the related statements of operations,
stockholders' equity, and cash flows for the two 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 Stratus Services Group, Inc. as
of September 30, 2000, and the results of its operations and its cash flows for
the two years then ended, in conformity with generally accepted accounting
principles.
/s/ AMPER, POLITZINER & MATTIA, P.A.
AMPER, POLITZINER & MATTIA, P.A.
December 14, 2000
Edison, New Jersey
F-2
<PAGE>
STRATUS SERVICES GROUP, INC.
Balance Sheet
Assets
<TABLE>
<CAPTION>
September 30,
2000
----
<S> <C>
Current assets
Cash and cash equivalents $ 1,030,722
Due from factor - less allowance for recourse
obligation of $30,000 1,154,012
Accounts receivable - less allowance for doubtful
accounts of $255,000 852,876
Unbilled receivables 1,236,002
Loans to related parties 64,500
Loans receivable 56,000
Prepaid insurance 432,674
Prepaid expenses and other current assets 278,169
Deferred taxes 340,000
----------------
5,444,955
Property and equipment, net of accumulated depreciation 1,118,625
Goodwill, net of accumulated amortization 3,716,538
Investment in marketable securities --
Other assets 38,163
----------------
$ 10,318,281
================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable (current portion) $ 27,012
Notes payable - acquisition (current portion) 275,000
Insurance obligation payable 367,100
Accounts payable and accrued expenses 1,172,148
Accrued payroll and taxes 1,105,363
Payroll taxes payable 412,513
----------------
3,359,136
Loans payable (net of current portion) 134,700
Notes payable - acquisition (net of current portion) 25,000
----------------
3,518,836
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding --
Common stock, $.01 par value, 25,000,000 shares
authorized, 5,712,037 shares issued and outstanding 57,120
Additional paid-in capital 10,554,782
Deferred compensation (67,900)
Accumulated deficit (3,744,557)
----------------
Total stockholders' equity 6,799,445
----------------
$ 10,318,281
================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
STRATUS SERVICES GROUP, INC.
Statements of Operations
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
For the Year Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Revenues (including $364,000 and $1,696,000 from related parties) $ 41,676,587 $ 30,042,751
Cost of revenue (including $326,000 and $1,521,000
from related parties) 31,182,678 23,306,254
Gross Profit 10,493,909 6,736,497
Operating expenses
Selling, general and administrative expenses 8,792,417 6,659,449
Provision for recourse obligation 122,500 595,000
8,914,917 7,254,449
Earnings (loss) from operations 1,578,992 (517,952)
Other income (expenses)
Finance charges (618,134) (722,020)
Interest expense (300,892) (309,257)
Other income 45,944 22,186
(873,082) (1,009,091)
Earnings (loss) before benefit from income taxes 705,910 (1,527,043)
Income tax benefit 340,000 --
Net earnings (loss) $ 1,045,910 $ (1,527,043)
Net earnings (loss) per common share -
Basic $ .21 $ (.40)
Diluted .20 (.40)
Weighted average shares, outstanding per common share
Basic 4,931,914 3,828,530
Diluted 5,223,508 3,828,530
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
STRATUS SERVICES GROUP, INC.
Statements of Cash Flows
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
For the Years Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 1,045,910 $ (1,527,043)
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation 175,419 74,970
Amortization 191,710 121,848
Deferred taxes - benefit (340,000) --
Imputed interest 57,652 25,645
Accrued interest 41,522 91,996
Compensation - stock options 46,800 46,800
Changes in operating assets and liabilities
Due to/from factor (1,837,936) 465,532
Accounts receivable (978,454) (702,959)
Prepaid insurance (175,461) (34,922)
Prepaid expenses and other current assets (262,261) (10,778)
Other assets 19,593 6,582
Insurance obligation payable 114,214 41,178
Accrued payroll and taxes 171,028 64,512
Payroll taxes payable 186,281 82,920
Accounts payable and accrued expenses (80,469) 259,274
Total adjustments (2,670,362) 532,598
$ (1,624,452) $ (994,445)
Cash flows (used in) investing activities
Purchase of property and equipment (780,975) (283,466)
Payments for business acquisitions (1,053,868) (194,930)
Loans receivable (120,500) --
(1,955,343) (478,396)
Cash flows from financing activities
Proceeds from initial public offering 6,034,169 --
Proceeds from sale of common stock -- 732,126
Proceeds from loans payable 1,125,000 1,388,375
Payments of loans payable (1,457,624) (370,746)
Payments of notes payable - acquisitions (1,164,100) --
Purchase of treasury stock (350,000) --
Payments of registration costs -- (103,829)
4,187,445 1,645,926
Net change in cash and cash equivalents 607,650 173,085
Cash and cash equivalents - beginning 423,072 249,987
Cash and cash equivalents - ending $ 1,030,722 $ 423,072
Supplemental disclosure of cash paid
Interest $ 201,718 $ 174,175
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 1,548,097 $ 2,421,903
Less: cash paid (1,048,097) (57,430)
Less: common stock and put options issued -- (520,000)
Liabilities assumed $ 500,000 $ 1,844,473
Issuance of common stock in exchange for notes payable $ 1,000,000 $ 1,092,762
Accrued and imputed interest $ 99,174 $ 117,641
Purchase of property and equipment for notes $ 163,836 $ --
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Equity
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Common Stock
Total Amount Shares
------------ ------------ ------------
<S> <C> <C> <C>
Balance - October 1, 1998 $ (3,356,310) $ 37,198 3,719,734
Net (loss) (1,527,043) -- --
Compensation expense in connection with stock
options granted (no tax effect) 46,800 -- --
Issuance of common stock in connection with
acquisition -- 347 34,667
Issuance of common stock in exchange for
notes payable 1,092,762 2,914 291,403
Proceeds from the private placement of
common stock (net of costs of $117,874)
for cash 732,126 2,266 226,666
------------ ------------ ------------
Balance - September 30, 1999 $ (3,011,665) $ 42,725 4,272,470
Net earnings 1,045,910 -- --
Compensation expense in connection with stock
options granted (no tax effect) 46,800 -- --
Issuance of common stock in exchange for
notes payable 1,000,000 1,933 193,333
Proceeds from the Initial Public Offering
of common stock (net of costs of $1,869,660) 5,930,340 13,000 1,300,000
Transfer from Temporary Equity 2,138,060 -- --
Purchase and retirement of Treasury Stock (350,000) (538) (53,766)
------------ ------------ ------------
Balance - September 30, 2000 $ 6,799,445 $ 57,120 5,712,037
============ ============ ============
<CAPTION>
Additional
Paid-In Deferred Accumulated
Capital Compensation Deficit
------------ ------------ ------------
<S> <C> <C> <C>
Balance - October 1, 1998 $ 31,416 $ (161,500) $ (3,263,424)
Net (loss) -- -- (1,527,043)
Compensation expense in connection with stock
options granted (no tax effect) -- 46,800 --
Issuance of common stock in connection with
acquisition (347) -- --
Issuance of common stock in exchange for
notes payable 1,089,848 -- --
Proceeds from the private placement of
common stock (net of costs of $117,874)
for cash 729,860 -- --
------------ ------------ ------------
Balance - September 30, 1999 $ 1,850,777 $ (114,700) $ (4,790,467)
Net earnings -- -- 1,045,910
Compensation expense in connection with stock
options granted (no tax effect) -- 46,800 --
Issuance of common stock in exchange for
notes payable 998,067 -- --
Proceeds from the Initial Public Offering
of common stock (net of costs of $1,869,660) 5,917,340 -- --
Transfer from Temporary Equity 2,138,060 -- --
Purchase and retirement of Treasury Stock (349,462) -- --
------------ ------------ ------------
Balance - September 30, 2000 $ 10,554,782 $ (67,900) $ (3,744,557)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Stratus Services Group, Inc. (the "Company") is a national provider of
staffing and productivity consulting services. As of December 14, 2000,
the Company operated a network of thirty-two offices in eleven states.
The Company operates as one business segment. The one business segment
consists of its traditional staffing services, engineering staffing
services, and SMARTSolutions(TM), a structured program to monitor and
enhance the production of a client's labor resources. The Company's
customers are in various industries and are located throughout the
United States. Credit is granted to substantially all customers. No
collateral is maintained.
REVENUE RECOGNITION
The Company recognizes revenue as the services 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 report amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS AND CONCENTRATION OF CASH
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts, which, at times may exceed
federally insured limits. The Company has not experienced any losses in
such accounts.
RECLASSIFICATION
Certain items in the Statement of Operations for the year ended
September 30, 1999 have been reclassified to conform to the year ended
September 30, 2000 presentation.
COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-owner
changes in equity and is not material.
EARNINGS/LOSS PER SHARE
The Company utilizes Statement of Financial Accounting Standards No.
128 "Earnings Per Share", (SFAS 128), whereby basic earnings per share
("EPS") excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted EPS assumes
conversion of dilutive options and warrants, and the issuance of common
stock for all other potentially dilutive equivalent shares outstanding.
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:
<TABLE>
<CAPTION>
ESTIMATED
METHOD USEFUL LIFE
------ -----------
<S> <C> <C>
Furniture and fixtures Declining balance 5 years
Office equipment Declining balance 5 years
Computer equipment Straight-line 5 years
Computer software Straight-line 3 years
Vans Straight-line 5 years
</TABLE>
F-7
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
GOODWILL
Goodwill is amortized on a straight-line basis 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". ("SFAS" No. 125)
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, accounts receivable, due from
factor, accounts payable and short-term borrowings approximate cost due
to the short period of time to maturity. Fair values of long-term debt,
which have been determined based on borrowing rates currently available
to the Company for loans with similar terms or maturity, approximate
the carrying amounts in the financial statements.
STOCK - BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock Based Compensation" ("SFAS" 123") allows a company to adopt a
fair value based method of accounting for its stock-based compensation
plans or continue to follow the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees". The Company accounts for
stock-based compensation in accordance with the provisions of APB No.
25, and complies with the disclosure provisions of SFAS No. 123. Under
APB No. 25, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire
the stock.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to
be in effect when the differences are expected to be recovered. The
Company provides a valuation allowance for deferred tax assets for
which it does not consider realization of such assets to be more likely
than not.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The expenses for the years
ended September 30, 2000 and 1999 were $185,000 and $133,000,
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 No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities
which is a replacement of SFAS No. 125. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001. The Company does not
anticipate that this statement will have a material impact on its
financial position and results of operations.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. The
Company believes their revenue recognition policies do not
significantly differ from SAB 101.
F-8
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. As
amended by SFAS 138, SFAS No. 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement does not have a
material impact on the Company's financial position and results of
operations.
NOTE 2 - INITIAL PUBLIC OFFERING
On May 5, 2000, the Company completed its initial public offering
("IPO") of 1,300,000 shares of common stock at a price of $6.00 per
share, generating net proceeds of approximately $5,930,000 after
deducting underwriters discounts and offering costs of approximately
$1,870,000.
NOTE 3 - ACQUISITIONS
TANDEM
On June 26, 2000, the Company purchased substantially all of the
tangible and intangible assets, excluding accounts receivable, of
eight offices of Tandem, a division of Outsource International, Inc.
("Outsource"). The purchase price was $1,300,000, of which $800,000
was paid in cash at the closing and the remaining $500,000 was
represented by two promissory notes. The first note, representing
$400,000 is payable in two installments of $200,000 plus accrued
interest at 8.5% a year, within 90 days and 180 days after closing.
Accordingly, $200,000 was paid in September 2000. The second note,
representing $100,000 bears interest at 8.5% a year and is payable
in twelve equal monthly installments beginning January 1, 2001.
The excess of cost paid over net assets acquired resulted in
goodwill of $1,562,693, computed as follows:
<TABLE>
<S> <C>
Net assets acquired
Furniture and equipment $ 38,175
Accrued holiday and vacation pay (47,000)
Amounts paid (8,825)
Cash 800,000
Notes payable 500,000
Finder's fees and other costs 253,868
1,553,868
Excess of amounts paid over net assets acquired - goodwill $ 1,562,693
</TABLE>
B&R EMPLOYMENT, INC.
On January 4, 1999, the Company entered into an asset purchase
agreement with B&R Employment, Inc. ("B&R"). The Company purchased
certain assets including office equipment, furniture and fixtures,
sales and operating records, customer contracts and agreements,
vendor lists, and seller's licenses and certificates. The purchase
price was $2,400,000, consisting of notes for $1,880,000 and the
issuance of 34,667 shares of the Company's common stock. B&R had a
put option to sell these shares back to the Company at $15 per
share, provided that the Company did not conduct an initial public
offering within twenty-four months. As a result of the IPO, $520,000
of "Temporary equity - put options" representing 34,667 shares in
connection with the acquisition was transferred to additional
paid-in capital. In February 2000, the Company entered into a
debt-equity conversion agreement with B&R whereby, B&R agreed to
convert, except for $666,000, the amounts due under the notes
payable-acquisition, including accrued interest, into shares of the
Company's common stock upon the Company's initial public offering of
securities. The number of shares to be issued was based on the
offering price in the initial public offering. In April 2000, the
agreement was amended to provide that B&R would convert $500,000
into shares of the Company's common stock. Accordingly, upon the
completion of the IPO, B&R was issued 83,333 shares of the Company's
common stock and the notes were paid in full.
F-9
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS - (CONTINUED)
B&R EMPLOYMENT, INC.
In connection with this acquisition, the Company entered into an
employment and a non-compete agreement for a three-year period
with the sole stockholder of B&R. The excess of cost paid over
net assets acquired resulted in goodwill of $2,414,903, computed
as follows:
<TABLE>
<S> <C>
Net assets acquired
Office equipment $ 7,000
Amounts paid
Notes payable (net of $35,527 discount) 1,844,473
Issuance of common stock and put options 520,000
Finder's fees 57,430
2,421,903
Excess of amounts paid over net assets acquired - goodwill $ 2,414,903
</TABLE>
The above acquisitions have been accounted for as purchases. The
results of operations are included in the Company's statements of
operations from the effective date of acquisition.
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, which was scheduled to expire
August 10, 2000, has been renewed on a month-to-month basis. The
Company is required to repurchase or replace any receivable
remaining uncollected for more than 90 days. During the years ended
September 30, 2000 and 1999, gross proceeds from the sale of
receivables was $34,179,692 and $25,227,640, respectively. The
provision for recourse obligation includes the estimated recourse
obligations on the sale of receivables. As of September 30, 2000,
$5,623,817 of the receivables sold to the factor had not been
collected.
On December 12, 2000, the Company terminated its agreement with the
factor and repurchased all accounts receivable from the factor with
proceeds from a new line of credit (See note 18).
NOTE 5 - PROPERTY AND EQUIPMENT
Furniture and fixtures $ 206,307
Office equipment 72,729
Computer equipment 810,226
Computer software 113,500
Vans 208,570
1,411,332
Accumulated depreciation (292,707)
Net property and equipment $ 1,118,625
NOTE 6 - GOODWILL
Goodwill $ 4,030,096
Less: accumulated amortization (313,558)
$ 3,716,538
NOTE 7 - LOANS PAYABLE
a. RELATED PARTIES
During the years ended September 30, 2000 and 1999, various
stockholders advanced funds to the Company for working capital.
These loans bore interest at the rate of 12% per year and were
payable upon demand. Interest expense on these loans for the
years ended September 30, 2000 and 1999 was $15,000 and $43,544,
respectively. All outstanding loans were repaid from proceeds of
the IPO.
F-10
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LOANS PAYABLE - (CONTINUED)
a. RELATED PARTIES
In August 1999, the Chief Executive Officer of the Company and
his son agreed to exchange, effective June 30, 1999, $440,000 of
notes payable by the Company to them, plus accrued interest of
$52,762 for 131,403 shares of the Company's common stock. The
stock was valued at $3.75 per share, which represents fair value
based on the latest stock transactions and no gain or loss was
recorded on the transaction.
b. OTHER
Loans payable is comprised of the following:
(i) $75,847 comprised of three notes bearing
interest at approximately 10% a year, payable
$1,637 per month for sixty months beginning
September 2000. These notes are secured by vans
with a book value of $79,905 at September 30,
2000.
(ii) $85,865 representing an unsecured note bearing
interest at 9.25% a year, payable $1,816 a month
for sixty months beginning September 2000.
The above loans are due as follows:
For the Year Ending
September 30,
2001 $ 27,012
2002 29,727
2003 32,730
2004 36,027
2005 36,216
$ 161,712
Other loans aggregating $600,000 were settled by the issuance of
160,000 shares of the Company's common stock at $3.75 per share
during the year ended September 30, 1999. Others loans during the
year ended September 30, 2000, aggregating $100,000, $200,000 and
$200,000 were settled by the issuance of 26,667 shares at $3.75 per
share and 50,000 shares at $4.00 per share and 33,333 shares at
$6.00 per share, respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT
The son of the Chief Executive Officer of the Company provides
consulting services to the Company. Consulting expense was $156,000
and $107,000 for the years ended September 30, 2000 and 1999,
respectively. As at September 30, 2000, $64,500 of advances were
made to a company controlled by this related party.
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 $9,000 and $23,000 for the years ended
September 30, 2000 and 1999, respectively.
REVENUES
The Company provided payroll services to an entity whose Chief
Executive Officer is the son of the Chief Executive Officer of the
Company. Revenues related thereto for the years ended September 30,
2000 and 1999, were $364,000 and $1,392,000, respectively. In August
1999, $663,000 of accounts receivable from this related party was
converted into a note of $1,017,000. The difference was attributable
to interest, which has not been accrued by the Company since all of
the receivable had previously been reserved for as a doubtful
account. All of the doubtful accounts receivable arose prior to the
entity becoming a related party. The accounts receivable were
generated through December 1998 and the entity became a related
party in March 1999. In September 1999, the Company had agreed to
accept 500,000 shares of the related party's common stock as full
payment for the note. Although the shares of the related party's
common stock are publicly traded, the 500,000 shares held by the
Company were
F-11
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - RELATED PARTY TRANSACTIONS - CONTINUED
REVENUES
restricted at the time of issuance. Accordingly, the investment was
valued at $-0-. The shares are no longer restricted at September 30,
2000 and although the market price of unrestricted common shares of
the related party at September 30, 2000 was $.84 per common share,
the Company believes that the investment should still be valued at
$-0-. As of December 14, 2000, the market price of those shares was
$.04 per share. A realized gain will be recognized in the statement
of operations upon the sale or exchange of these freely traded
shares.
The Company also provided payroll services to a non-public entity
whose common stock is owned 50% by the Chief Executive Officer of
the Company. For the years ended September 30, 2000 and 1999,
revenues were $-0- and $304,000, respectively.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable $ 980,880
Accrued compensation 94,457
Accrued other 96,811
$ 1,172,148
NOTE 10 - INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities follow:
<TABLE>
<S> <C>
Current assets and liabilities
Allowance for recourse obligation $ 12,000
Allowance for doubtful accounts 102,000
Net operating loss carryforward 340,000
Valuation allowance (114,000)
Net current deferred tax asset $ 340,000
Non-current assets and liabilities
Net operating loss carryforward $ 462,000
Stock compensation 27,000
Depreciation (5,000)
Valuation allowance (484,000)
Net non-current deferred tax asset (liability) $ --
</TABLE>
The change in valuation allowances was a decrease of $560,000 and an
increase of $143,000 for the years ended September 30, 2000 and
1999, respectively.
<TABLE>
<CAPTION>
For the Years Ended
September 30
2000 1999
<S> <C> <C>
Income tax benefit is comprised of:
Current $ -- $ --
Deferred 220,000 --
Change in valuation allowance (560,000) --
$ (340,000) $ --
</TABLE>
F-12
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES - (CONTINUED)
At September 30, 2000, the Company has available the following
federal net operating loss carryforwards for tax purposes:
Expiration Date
Year Ending
September 30,
------------------------------------
2012 $ 124,000
2018 1,491,000
2019 391,000
The effective tax rate on net earnings (loss) varies from the
statutory federal income tax rate for periods ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
<S> <C>
Statutory rate 34.0% (34.0)%
State taxes net 6.0 (6.0)
Other differences, net 1.4 1.3
Valuation allowance (79.4) 38.7
Benefit from net operating loss carryforwards (10.2) --
(48.2)% --%
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
OFFICE LEASES
The Company leases offices and equipment under various leases
expiring through 2005. Monthly payments under these leases are
$39,000.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year, as of
September 30, 2000.
<TABLE>
<CAPTION>
For the Years Ending
September 30,
------------------------------------
<S> <C>
2001 $ 444,000
2002 326,000
2003 219,000
2004 99,000
2005 18,000
</TABLE>
Rent expense was $356,000 and $342,000 for the years ended September
30, 2000 and 1999, respectively.
ROYALPAR INDUSTRIES, INC. ("ROYALPAR")
In connection with the acquisition of certain assets and assumption
of certain liabilities of Royalpar in 1997, there 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 ending
September 30, 2001. No amounts are currently due under this
provision.
OTHER
From time to time, the Company is involved in litigation incidental
to its business including employment practices claims. There is
currently no litigation that management believes will have a
material impact on the Company's financial portion.
F-13
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - TEMPORARY EQUITY - COMMON STOCK
Certain stockholders of the Company may have had a right to pursue
claims against the Company as a result of possible technical
violations of the laws and regulations governing the private
placement and issuance of securities. Accordingly, the Company had
recorded the original total proceeds of the sale of the shares to
these certain stockholders in the amount of $1,618,060 as temporary
equity - common shares in the balance sheet. The Company made a
recission offer to stockholders holding approximately 2.8 million
shares, pursuant to which the Company offered to repurchase the
shares at their original purchase price (plus applicable interest)
which ranged from $0.75 to $3.75 per share. As a result of no one
accepting the recission offer during the recission period and the
expiration, in certain cases, of applicable statutes of limitation,
the $1,618,060 of temporary equity - common shares was transferred
to additional paid-in capital during the year ended September 30,
2000.
NOTE 13 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees with terms of five
to ten years. The options may be granted for 987,205 shares.
In addition, the Company has issued to the Chief Executive Officer
of the Company, options to acquire 1,000,000 shares at $6.00 per
share. These options have a ten-year term and are exercisable at the
earlier of five years or when the Company achieves earnings of $1.00
per share in a fiscal year. These options will be forfeited if the
Chief Executive Officer leaves the employment of the Company.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement
("FASB No. 123"), and has been determined as if the Company had
accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date
of grant using the Black-Scholes option-pricing model.
The Black-Scholes method option-pricing model was developed for use
in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following weighted-average assumptions were used:
<TABLE>
<CAPTION>
September 30,
2000 1999
<S> <C> <C>
Risk- free interest rate 6% 5%
Dividend yield 0% 0%
Expected life 4-7 years 4 years
Volatility 54% --
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
For the Years Ended
September 30,
2000 1999
<S> <C> <C>
Pro forma net earnings (loss) $ 507,051 $ (1,583,829)
Pro forma earnings (loss) per common share -
Basic $ .10 $ (.41)
Diluted .10 (.41)
</TABLE>
F-14
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTIONS AND WARRANTS - (CONTINUED)
Compensation expense under APB 25 was $46,800 for each of the years
ended September 30, 2000 and 1999. Deferred compensation at
September 30, 2000, was $67,900 and is 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, 1998 534,000 $ 2.55
Granted -- --
Canceled -- --
Exercised -- --
Outstanding at September 30, 1999 534,000 2.55
Granted 1,453,205 5.91
Canceled -- --
Exercised -- --
Outstanding at September 30, 2000 1,987,205 $ 5.01
Exercisable at September 30, 2000 473,536 $ 3.45
</TABLE>
The exercise prices range from $1.50 to $6.00 per share.
In connection with the IPO, the Company has issued 130,000 warrants
to its underwriters to purchase shares at $8.70 per share, expiring
in 2004. The Company has also issued the following warrants:
<TABLE>
<CAPTION>
Number of
Warrants Price Per Share Expiring In
<S> <C> <C>
66,667 $ 7.50 2004
65,000 4.00 2005
10,000 5.00 2005
20,000 6.00 2005
</TABLE>
Following is a summary of the status of stock options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Exercise Number Exercise Price
Life Price
<S> <C> <C> <C> <C> <C>
$ 1.50 166,667 1.9 years $ 1.50 166,667 $ 1.50
3.00 360,000 7.3 years 3.00 207,498 3.00
4.50 7,333 7.7 years 4.50 3,666 4.50
5.625 357,500 9.8 years 5.625 -- --
6.00 1,095,705 9.6 years 6.00 95,705 6.00
1,987,205 473,536
</TABLE>
As of September 30, 2000, no stock options or warrants have been
exercised. Not included in the above table are options with respect
to 400,000 shares, exercisable at $5.625 per share, which were
granted in July 2000, subject to shareholder approval. On December
14, 2000, the options were amended to eliminate the requirement for
shareholder approval.
F-15
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - MAJOR CUSTOMERS
The Company had one customer who accounted for 12% of total revenues
for the year ended September 30, 2000 and two customers who
accounted for 30% of total revenues for the year ended September 30,
1999. Major customers are those who account for more than 10% of
total revenues.
NOTE 15 - RETIREMENT PLANS
The Company maintains two 401(k) savings plans for its employees.
The terms of the plan define qualified participants as those with at
least three months of service. Employee contributions are
discretionary up to a maximum of 15% of compensation. The Company
can match up to 20% of the employees' first 5% contributions. The
Company's 401(k) expense for the years ended September 30, 2000 and
1999 was $37,000 and $26,000, respectively.
NOTE 16 - PRIVATE PLACEMENT
The Company raised $1,000,000 in gross proceeds through a private
placement during the year ended September 30, 1999. Each private
placement "unit" was a combination of debt and equity. For each
$50,000 unit, the investor received a $50,000 promissory note from
the Company and 3,333 shares of the Company's common stock valued at
$3.75 per share (see Note 7).
In August 1999, each private placement participant was offered an
additional 10,000 shares of the Company's common stock in exchange
for the original debt portion of the unit, thereby exchanging each
unit acquired by an investor accepting the offer into 13,333 shares
of common stock at $3.75 per share. In connection with this offer,
participants representing sixteen units agreed to this offer.
As each private placement investor representing the remaining
$200,000 received both debt (in the form of a promissory note
payable by the Company) and equity (in the form of the Company's
common stock), a portion of the $200,000 face value of the debt was
allocated to equity based on the value of $3.75 per share of common
stock. As such, the Company had allocated $133 and $49,867 to common
stock and additional paid-in capital, respectively. The remainder of
$150,000 was allocated to short-term debt. The difference between
the face value and the amount recorded in short-term debt was
accrued to interest expense. All private placement debt was paid in
full from proceeds of the IPO.
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Year ended September 30, 2000:
Revenues $ 7,723,887 $ 9,201,351 $ 8,859,979 $ 15,891,370
Gross profit 2,113,870 2,273,985 2,352,357 3,753,697
Net earnings 155,936 161,603 177,896 550,475
Net earnings per common share:
Basic .04 .04 .03 .10
Diluted .03 .04 .03 .10
Year ended September 30, 1999:
Revenues 5,912,643 7,007,582 8,343,592 8,778,934
Gross profit 1,262,905 1,441,052 1,933,089 2,099,451
Net earnings (loss) (997,849) (756,005) 75,049 151,762
Net earnings per common share:
Basic (.27) (.20) .02 .05
Diluted (.27) (.20) .02 .05
</TABLE>
F-16
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 18 - SUBSEQUENT EVENTS
a. On October 26, 2000, the Board of Directors approved a private
placement offering for $1,000,000 to $3,000,000 of 6%
convertible debentures ("Debenture"). The Debentures have a
maturity date of five years from issuance. Each debenture is
convertible into the number of shares of common stock
determined by dividing the principal amount of the debenture
by the lesser of (a) 120% of the closing bid price of the
common stock on the date prior to initial issuance of the
debentures or (b) 75% of the average closing bid price of the
common stock for the five trading days immediately preceding
the date of the conversion. As of December 14, 2000,
$1,922,400 has been received.
b. On October 27, 2000, the Company purchased substantially all
of the tangible and intangible assets, excluding accounts
receivable, of an additional seven offices of Tandem, a
division of Outsource International, Inc. (see Note 3). The
initial purchase price for the assets was $125,000, of which
$50,000 was paid in cash at the closing and the remaining
$75,000 was represented by a promissory note secured by the
assets purchased by the Company. The note is payable in
twenty-four equal monthly installments of principal and
interest at a variable rate of prime plus two percent
beginning December 1, 2000. In addition, the Company will be
required, for a two-year period to make quarterly payments of
thirty percent of the quarterly Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") of the
acquired business.
c. On December 12, 2000, the Company entered into a loan and
security agreement with a lending institution whereby the
Company can borrow up to 85% of eligible accounts receivable,
as defined, not to exceed $12 million. Borrowings under the
agreement are collateralized by substantially all of the
Company's assets. Approximately $5,100,000 of the initial
borrowing under this agreement was used to repurchase accounts
receivable from the factor (Note 4).
F-17
