As Filed with the Securities and Exchange Commission on March 9, 2000
Registration No. 333-83255
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 6
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STRATUS SERVICES GROUP, INC.
(Name of small business issuer in its charter)
Delaware 7363 223499261
(State or jurisdiction
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
500 Craig Road
Manalapan, New Jersey 07726
(732) 866-0300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Joseph J. Raymond
Chairman and Chief Executive Officer
Stratus Services Group, Inc.
500 Craig Road
Manalapan, New Jersey 07726
(732) 866-0300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications to:
John A. Aiello, Esq. Hank Gracin, Esq.
Giordano, Halleran & Ciesla, P.C. Lehman & Eilen, LLP
125 Half Mile Road, P.O. Box 190 50 Charles Lindbergh Blvd., Suite 505
Middletown, New Jersey 07748 Uniondale, New York 11553
(732) 741-3900 (516) 222-0888
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
<PAGE>
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_| ___________
If this Form is a post-effective amendment filed pursuant to Rule
462 (c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ______________
If this Form is a post-effective amendment filed pursuant to Rule
462 (d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ______________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
The information in this Prospectus is not complete and may be changed. These
securities may not be sold until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Preliminary Prospectus is
not an offer to sell nor does it seek an offer to buy these securities, in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion, Dated March 9, 2000
PROSPECTUS
1,300,000 SHARES
STRATUS SERVICES GROUP, INC.
COMMON STOCK
----------------------------------------
This is an initial public offering of shares of common stock of
Stratus Services Group, Inc. All of the 1,300,000 shares of common stock are
being sold by Stratus Services Group, Inc.
Prior to this offering, there has been no public market for the
common stock. Stratus currently estimates that the initial public offering price
will be $6.00 per share. We have applied for quotation of our common stock on
the Nasdaq Smallcap Market under the symbol "SERV."
----------------------------------------
Investing in the Common Stock involves a high degree of risk. You should
purchase shares only if you can afford a complete loss. See "Risk Factors"
beginning on page 3 to read about factors you should consider before buying
shares of common stock.
----------------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved these securities, or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<TABLE>
<CAPTION>
===========================================================================================================================
Underwriting Discounts and Proceeds, before expenses, to
Price to Public Commissions Stratus Services Group, Inc.
<S> <C> <C> <C>
Per Share............ $ $ $
Total................ $ $ $
===========================================================================================================================
</TABLE>
The underwriters may, subject to the terms of the underwriting
agreement, purchase up to an additional 195,000 shares from Stratus at the
initial public offering price, less the underwriting discount.
----------------------------------------
The underwriters expect to deliver the shares against payment in New York
on _______, 2000.
HORNBLOWER & WEEKS, INC. DIRKS & COMPANY, INC.
The date of this Prospectus is ________ ___, 2000.
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. In this prospectus, references to
"Stratus," "Stratus Services Group," "we," "us" and "our" refer to Stratus
Services Group, Inc.
----------------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 4
Use of Proceeds............................................................. 7
Dividend Policy............................................................. 7
Capitalization Table........................................................ 8
Dilution.................................................................... 9
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 10
Business.................................................................... 15
Management.................................................................. 24
Certain Relationships and Related Party Transactions........................ 30
Principal Stockholders...................................................... 31
Description of Securities................................................... 33
Shares Eligible for Future Sale............................................. 35
Underwriting................................................................ 37
Legal Matters............................................................... 38
Experts..................................................................... 38
Additional Information...................................................... 39
Index to Financial Statements............................................... F-1
To California Residents
Offers and sales of the securities described in the prospectus may only be
made to investors in California:
o who have a net worth of $250,000, exclusive of home, home
furnishings and automobiles, and who had net income of at
least $65,000 in the last tax year and who will have net
income, based on a good faith estimate, of at least $65,000
during the current year; or
o who have a net worth of $500,000, exclusive of home, home
furnishings and automobiles.
<PAGE>
PROSPECTUS SUMMARY
The Company
Stratus Services Group, Inc. is a New Jersey based provider of
temporary staffing and engineering services. We currently operate through a
network of thirteen offices in seven states. We provide a wide range of
commercial staffing services including light industrial, clerical, distribution,
technical, specialty and other professional services. We also have a dedicated
engineering services staff providing a broad range of staffing, project
consulting and outsourcing services. Our SMARTSolutions(TM) service provides a
structured program to monitor and enhance the productivity of a customer's labor
resources. As of December 31, 1999, we were providing approximately 1,150
staffing employees to more than 170 businesses.
Our strategy is to continue to expand operations through internal
growth and strategic acquisitions.
Our executive offices are located at 500 Craig Road, Manalapan, New
Jersey. Our phone number is (732) 866-0300.
The Offering
Shares of Common Stock Offered.................................1,300,000 shares.
Shares to be Outstanding After this Offering...................5,800,469 shares.
Use of Proceeds................................................For repurchase of
receivables,
repayment of
debt, recruitment
of personnel,
capital
expenditures,
working capital,
including
possible
acquisitions of
complementary
businesses and
general corporate
purposes.
Proposed Nasdaq Smallcap Market Symbol.........................SERV.
The above information is based on shares outstanding as of January
31, 2000 and excludes 1,620,333 shares issuable upon the exercise of options and
warrants to acquire our common stock that were outstanding as of January 31,
2000 and 130,000 shares issuable pursuant to warrants to be issued to the
underwriter in connection with this offering. The information also assumes that
the underwriter will not exercise its option to purchase additional shares of
common stock in the offering.
Unless otherwise indicated, all information contained in this
prospectus, including per share data and information relating to the number of
shares authorized and outstanding, has been adjusted to reflect a proposed two
for three reverse split of our common stock and certain proposed amendments to
our certificate of incorporation and bylaws.
2
<PAGE>
Summary Financial Information
<TABLE>
<CAPTION>
Year Ended Three Months Ended
September 30, December 31,
------------- ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operations Data: (unaudited) (unaudited)
Revenues ............................... $ 30,042,751 $ 24,919,639 $ 7,723,887 $ 5,912,643
Gross profit ........................... 6,365,658 4,589,921 1,995,564 1,233,524
Operating income (loss) ................ (517,952) (1,873,055) 431,326 (779,951)
Other income (loss) .................... (1,009,091) (539,090) (275,390) (217,898)
Net earnings (loss) .................... (1,527,043) (2,412,145) 155,936 (997,849)
Net earnings (loss) per common share --
Basic ................................ $ (.40) $ (.67) $ .04 $ (.27)
Net earnings (loss) per common share --
Diluted .............................. $ (.40) $ (.67) $ .03 $ (.27)
Weighted average shares
outstanding per common share -
Basic ................................ 3,828,530 3,602,086 $ 4,308,131 $ 3,719,733
Diluted .............................. 3,828,530 3,602,086 $ 4,492,024 $ 3,719,733
<CAPTION>
Fiscal 1999 Fiscal 2000
-------------------------------------------------------------------------------- -----------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended Quarter Ended
December 31, 1998 March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
----------------- -------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Quarterly Operations Data
(Unaudited)
Revenues ................. $ 5,912,643 $ 7,007,582 $ 8,343,592 $ 8,778,934 $7,723,887
Gross profit ............. 1,233,524 1,378,991 1,807,976 1,945,167 1,995,564
Operating income (loss) .. (779,951) (494,690) 326,823 429,866 431,326
Other income (loss) ...... (217,898) (261,315) (251,774) (278,104) (275,390)
Net earnings (loss) ...... (997,849) (756,005) 75,049 151,762 155,936
</TABLE>
The selected balance sheet data, as adjusted, gives effect to the sale of the
1,300,000 shares of common stock being offered hereby and anticipated
application of the estimated net proceeds therefrom, including the repayment of
debt upon completion of the offering. Also gives effect to the conversion of
$700,000 of debt to equity which will occur upon the consummation of this
offering.
As of December 31,
1999
----------------------------
Actual As Adjusted
-------------- -----------
Selected Balance Sheet Data:
Cash .......................................... $ 11,192 $ 3,709,348
Due from factor ............................... 256,468 256,468
Accounts receivable ........................... 1,158,384 1,158,384
Other assets .................................. 3,373,044 3,231,067
Total assets .................................. 4,799,088 8,355,267
Notes and loans payable ....................... 2,602,955 666,000
Accrued payroll and taxes ..................... 503,990 503,990
Accounts payable, accrued expenses and other .. 2,098,112 591,246
Total liabilities ............................. 5,205,057 1,761,236
Temporary equity .............................. 520,000 --
Stockholders' equity (deficiency) ............. (925,969) 6,594,031
3
<PAGE>
RISK FACTORS
We have a history of net losses and if we do not become profitable
in the future, our financial condition and our stock price could suffer.
We cannot assure investors that we will become profitable in the
future. We have incurred net losses in recent periods, including net losses of
$477,044 in our inception period from August 11, 1997 through September 30,
1997, $2,412,145 in the year ended September 30, 1998 and $1,527,043 in the year
ended September 30, 1999. As a result of our losses we have a stockholders'
deficiency of $925,969 as of December 31, 1999. We can provide no assurances
that our operations will be profitable in the future.
There are doubts as to our ability to continue in business.
Our auditors have qualified our Financial Statements for the year
ended September 30, 1999 with a qualification which raises doubts as to our
ability to continue as a going concern. While we have plans to use the funds
raised from this offering to increase sales and reduce debt in order to reduce
the demand on working capital, there can be no assurance as to when these plans
will be implemented and if implemented, whether they will be successful.
4
<PAGE>
We may have sold securities in violation of applicable securities
laws, which could give purchasers of these securities the right to seek refunds
or damages, which could reduce the proceeds available from this offering.
In issuing securities prior to this offering, we relied upon certain
provisions of federal and state securities laws which provide "private placement
exemptions" from the registration requirements of the securities laws. Because
we may not have complied with all of the applicable exemption requirements,
certain investors who acquired our securities may have a right to obtain a
recovery of the consideration paid in connection with their purchase of our
securities or, if they have already sold the securities, to recover damages
against us. We estimate that these refunds or damages could total up to
approximately $1,700,000. In addition, we could be subject to additional
liabilities if state or federal authorities were to assert violations of the
securities laws against us. In order to limit our liability and to cure the
potential violations, our plan, after the completion of this offering, is to
make a rescission offer to investors who may have acquired shares in
transactions that were not exempt from federal and state registration
requirements. In accordance with state securities laws, we expect that the
rescission offer will offer the investors the right to receive the value of the
consideration paid to us for the securities, plus interest. In view of the
proposed offering price of the common stock offered by this prospectus, we do
not anticipate that any significant number of investors will accept the
rescission offer or that the rescission offer will have any material adverse
effect on our financial condition.
Delays implementing our internal growth strategy may reduce
anticipated cash flow and place a strain on our management resources, which
could adversely affect our operating performance.
Any significant delay in the opening of new offices or the failure
of new offices to achieve anticipated performance levels could adversely impact
our operations and expansion plans and have a material adverse effect on our
business. We have grown in recent years by opening new offices and increasing
the volume of services provided through existing offices. We cannot assure you
that we will continue to be able to maintain or expand our market presence in
current locations or to successfully enter other markets.
Future acquisitions could increase the risk of our business.
As part of our business strategy, we expect to review acquisition
prospects that would complement our existing business. We anticipate that we
will acquire other businesses or assets meeting our strategic goals that can be
purchased on terms acceptable to us. We may not locate suitable acquisition
opportunities. Any future acquisitions would expose us to increased risks,
including:
o issuances of equity securities that may dilute existing
stockholders;
o increased debt obligations or contingent liabilities;
o risks associated with the assimilation of new operations;
o the diversion of resources from our existing operations;
o the inability to retain the customers of acquired businesses
and generate sufficient revenues from new operations to offset
associated acquisition costs;
o the maintenance of uniform standards, controls, procedures and
policies; and
o the impairment of relationships with employees and customers
as a result of any integration of new management personnel.
If these risks materialize, future acquisitions could require
additional capital investment or result in additional operating losses,
amortization of goodwill and other intangible assets or other charges against
earnings.
5
<PAGE>
If we are not able to hire and retain a sufficient number of
qualified temporary employees, our business may suffer.
Since our "product" is the temporary employees we provide to our
clients, our future success will depend on our ability to attract, train, retain
and motivate suitably qualified personnel. Competition for such personnel in the
staffing services industry is particularly intense and frequently we are
required to hire a substantial number of employees within a short time frame in
order to begin servicing a client. We compete with other temporary staffing
companies, as well as our customers and other employers for qualified personnel.
If we are unable to continue to recruit additional qualified personnel our
business and planned growth could suffer.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Some of the statements under the "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business" and elsewhere in this
prospectus constitute forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels or activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "could", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", or "continue"
or the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither we, nor any
other person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
6
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of 1,300,000 shares of common
stock being offered by us are estimated to be approximately $6,300,000. This
estimate is based on an assumed public offering price of $6.00 per share, after
deducting the estimated underwriting discounts and commissions and the estimated
offering expenses.
We intend to use the net proceeds of this offering as follows:
<TABLE>
<CAPTION>
$ %
---------- ----
<S> <C> <C>
o repay outstanding debt incurred to support our operations
which bears interest at a rate of 18% per annum and which
becomes due upon completion of this offering: $1,250,000 19.8
o recruit, hire and retain qualified management-level personnel: $ 700,000 11.1
o reduce outstanding trade payables: $ 700,000 11.1
o repay acquisition debt: $ 666,000 10.6
o pay outstanding indebtedness to attorneys incurred in
connection with various litigation: $ 472,000 7.5
o purchase computers and other equipment: $ 250,000 4.0
o pay accrued compensation to three of our executives: $ 143,000 2.3
o for marketing and promotion: $ 125,000 2.0
o to develop our website and expand our internet presence: $ 125,000 2.0
---------- ----
$4,431,000 70.4
</TABLE>
The balance of the funds, representing approximately 29.7% of the
net proceeds will be used for working capital and general corporate purposes. We
may also use a portion of the net proceeds to acquire additional businesses that
we believe will complement our current or future business. However, we have no
specific plans, agreements or commitments to do so and although we are in
frequent discussion with potential acquisition targets, at this time there are
no discussions that we believe can be considered likely to result in a
transaction. The amounts that we actually expend for general corporate purposes
will vary significantly depending on a number of factors, including future
revenue growth, if any, and the amount of cash we generate from operations. As a
result, we will retain broad discretion in the allocation of a portion of the
net proceeds of this offering. Pending these uses, we will invest the net
proceeds in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for financing growth
and do not expect to pay any dividends in the foreseeable future.
7
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
o on an actual basis;
o on a pro forma basis to reflect our sale of common stock at an
assumed initial public offering price of $6.00 per share, after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us, and the anticipated application of
the net proceeds therefrom, including the repayment of debt upon
completion of the offering, and the conversion of $700,000 notes
payable -- acquisition into 116,666 shares of common stock and the
transfer of $520,000 of temporary equity into stockholders' equity
which will occur upon completion of this offering.
You should read this information together with our financial statements and the
notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Actual Pro forma
------ ---------
<S> <C> <C>
Loans payable ........................................ $ 1,236,844 $ --
Notes payable - acquisition .......................... 1,366,000 666,000
Temporary equity - put options 520,000 --
Stockholders' equity (deficiency):
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,349,137, shares issued and
outstanding (actual), 5,800,469 shares issued
and outstanding (pro forma)....................... 43,492 58,005
Additional paid-in capital ......................... 3,393,835 10,899,322
Deferred compensation .............................. (103,000) (103,000)
Accumulated deficit ................................ (4,260,296) (4,260,296)
------------ ------------
Total stockholders' equity (deficiency) .............. (925,969) 6,594,031
------------ ------------
Total capitalization ................................. $ 2,196,875 $ 7,260,031
============ ============
</TABLE>
8
<PAGE>
DILUTION
At December 31, 1999 we had a pro forma negative net tangible book value
of $(2,010,000) or approximately $(.45) per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities and divided by the total number of shares of
common stock outstanding after giving effect to the conversion of $700,000 of
indebtedness into 116,666 shares of common stock which will occur upon
completion of this offering. Dilution in pro forma net tangible book value per
share represents the differences between the amount per share paid by purchasers
of shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to the sale of the 1,300,000 shares of common
stock offered by us at an assumed initial public offering price of $6.00 per
share, and after deducting the underwriting discount and estimated offering
expenses payable by us, our pro forma net tangible book value at December 31,
1999 would have been approximately $4.3 million or $0.74 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $1.19 per share to existing stockholders and an immediate dilution of
$5.26 per share or 87.7% to new investors of common stock. The following table
illustrates this dilution on a per share basis:
Assumed initial public offering price per share .... $6.00
Pro forma net negative tangible book value per
share as of December 31, 1999 ................ (.45)
Increase per share attributable to new
investors .................................... 1.19
Pro forma net tangible book value per share after
this offering .................................... .74
Dilution per share to new investors ................ $5.26
The following table summarizes on a pro forma basis after giving
effect to the offering (based on an assumed initial public offering price of
$6.00 per share). The differences between the existing stockholders and new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid:
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration Per Share
--------------------- ----------------------- -------------
Number Percent Amount Percent
--------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders 4,500,469 77.6% $ 5,652,000 42.0% $1.26
New Investors ....... 1,300,000 22.4% 7,800,000 58.0% 6.00
--------- ----- ---------- -----
Total ............. 5,800,469 100.0% 13,452,000 100.0%
========= ===== ========== =====
</TABLE>
The foregoing discussions and tables assume no exercise of any of
the options and warrants outstanding as of December 31, 1999. To the extent
these options and warrants are exercised, there will be further dilution to
investors.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
Introduction
We provide a wide range of staffing and engineering services
nationally through a network of thirteen offices in seven states. Although we
were incorporated on March 11, 1997, operations effectively commenced on August
11, 1997 with the acquisition of certain operating assets of Royalpar
Industries, Inc. and its subsidiaries. Since August 1997, through internal
growth and two acquisitions, which were completed in August 1998 and January
1999, we have grown from the original five Royalpar offices in five states.
We recognize revenues based on hours worked by assigned personnel.
Generally, we bill our customers a pre-negotiated fixed rate per hour for the
hours worked by our temporary employees. We are responsible for workers'
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and other general payroll related expenses for all of the temporary
employees we place. These expenses are included in the cost of revenue. Because
we pay our temporary employees only for the hours they actually work, wages for
our temporary personnel are a variable cost that increases or decreases in
proportion to revenues. Gross profit margin varies depending on the type of
services offered. Our Engineering Services typically generate higher margins
while Staffing Services typically generates lower margins. In some instances,
temporary employees placed by us may decide to accept an offer of permanent
employment from the customer and thereby "convert" the temporary position to a
permanent position. Fees received from such conversions are included in our
revenues. Selling, general and administrative expenses include payroll for
management and administrative employees, office occupancy costs, sales and
marketing expenses and other general and administrative costs.
10
<PAGE>
Results of Operations
The following table sets forth certain selected operating results
for the fiscal years ended September 30, 1999 and 1998 and the three months
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Year ended Year ended Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998 December 31, 1999 December 31, 1998
====================== ====================== ====================== ======================
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............. $ 30,042,751 100.0% $ 24,919,639 100.0% $ 7,723,887 100.0% $ 5,912,643 100.0%
Cost of Revenues ..... 23,677,093 78.8% 20,329,718 81.6% 5,728,323 74.2% 4,679,119 79.1%
Gross Profit ......... 6,365,658 21.2% 4,589,921 18.4% 1,995,564 25.8% 1,233,524 20.9%
Selling, general and
administrative
expenses ........... (6,091,792) -20.3% (5,751,875) -23.1% (1,473,795) -19.1% (1,406,998) -23.8%
Depreciation and
amortization ....... (196,818) -0.6% (40,656) -0.1% (70,443) -0.9% (11,477) -0.2%
Provision for recourse
obligation ......... (595,000) -2.0% (670,445) -2.7% (20,000) -0.2% (595,000) -10.1%
Earnings (loss) from
operations ......... (517,952) -1.7% (1,873,055) -7.5% 431,326 5.6% (779,951) -13.2%
Other income
(expenses):
Finance charges ...... (722,020) -2.4% (524,649) -2.1% (173,115) -2.2% (199,448) -3.4%
Interest expense ..... (309,257) -1.1% (48,170) -0.2% (104,172) -1.4% (31,600) -0.5%
Other income ......... 22,186 0.1% 33,729 0.1% 1,897 -- 13,150 0.2%
------------ ----- ------------ ----- ------------ ----- ------------ -----
Net Earnings (loss) .. ($ 1,527,043) -5.1% ($ 2,412,145) -9.7% $ 155,936 2.0% $ (997,849) -16.9%
============ ===== ============ ===== ============ ===== ============ =====
</TABLE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Revenues. Revenues increased 20.6% to $30,042,751 for the year ended
September 30, 1999 from $24,919,639 for the year ended September 30, 1998.
Revenues increased primarily as a result of acquisitions in 1999 and the
implementation of our first SMARTSolutions(TM) program in December 1998.
Gross profit. Gross profit increased 38.7% to $6,365,658 for the
year ended September 30, 1999 from $4,589,921 for the year ended September 30,
1998. Gross profit as a percentage of revenues increased to 21.2% for the year
ended September 30, 1999 from 18.4% for the year ended September 30, 1998. This
increase was due to successfully implementing our plan to seek higher gross
margin business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, not including depreciation and amortization, increased
5.9% to $6,091,792 for the year ended September 30, 1999 from $5,751,875 for the
year ended September 30, 1998. Selling, general and administrative expenses as a
percentage of revenues decreased to 20.3% for the year ended September 30, 1999
from 23.1% for the year ended September 30, 1998. Selling, general and
administrative expenses in the year ended September 30, 1998 includes $798,000
for the settlement of litigation and associated legal and other costs. Selling,
general and administrative expenses in the year ended September 30, 1999
includes $173,000 for legal fees in connection with our administrative actions
pertaining to the attempted unionization of a customer facility. Also, in
anticipation of making acquisitions and introducing
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our SMARTSolutions program, we incurred significant costs without a
corresponding increase in revenues. We believe that revenues can increase
significantly without incurring a proportionate increase in selling, general and
administrative expenses.
Depreciation and Amortization. Depreciation and amortization
expenses increased 384.1% to $196,818 for the year ended September 30, 1999 from
$40,656 for the year ended September 30, 1998. Depreciation and amortization
expenses as a percentage of revenues increased to 0.6% for the year ended
September 30, 1999 from 0.1% for the year ended September 30, 1998. This
increase was primarily due to the amortization of goodwill associated with the
acquisition of certain assets of B&R Employment, Inc. in January 1999.
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 11.3% to
$595,000 for the year ended September 30, 1999 from $670,445 for the year ended
September 30, 1998. Provision for recourse obligation as a percentage or
revenues decreased to 2.0% for the year ended September 30, 1999 from 2.7% for
the year ended September 30, 1998. Almost all of this amount was due to the
uncertainty of recoverability of one account and a group of affiliated
psychiatric clinics.
Finance charges. Finance charges increased 37.6% to $722,020 for the
year ended September 30, 1999 from $524,649 for the year ended September 30,
1998. As a percentage of revenues, finance charges increased to 2.4% for the
year ended September 30, 1999 from 2.1% for the year ended September 30, 1998.
This increase was due to a small increase in the average days' outstanding of
the accounts receivable sold.
Interest expense. Interest expense increased 542.0% to $309,257 for
the year ended September 30, 1999 from $48,170 for the year ended September 30,
1998. As a percentage of revenues, interest expense increased to 1.1% for the
year ended September 30, 1999 from 0.2% for the year ended September 30, 1998.
This increase was due to increased borrowings necessary to satisfy a litigation
settlement and a working capital shortfall.
Net Loss. As a result of the foregoing, the net loss decreased 36.7%
to $1,527,043 for the year ended September 30, 1999 from $2,412,145 for the year
ended September 30, 1998. The net loss as a percentage of revenues decreased to
5.1% for the year ended September 30, 1999 from 9.7% for the year ended
September 30, 1998. We have a net loss carryforward for Federal income tax
purposes of $2,109,000 at September 30, 1999.
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Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Revenues. Revenues increased 30.6% to $7,723,887 for the three months
ended December 31, 1999 from $5,912,643 for the three months ended December 31,
1998. Revenues increased primarily as a result of the growth of our
SMARTSolutions division which began its first programs in December 1998.
Gross Profit. Gross profit increased 61.8% to $1,995,564 for the three
months ended December 31, 1999 from $1,233,524 for the three months ended
December 31, 1998. Gross profit as a percentage of revenues increased to 25.8%
for the three months ended December 31, 1999 from 20.9% for the three months
ended December 31, 1998. This increase was due to successfully implementing our
plan to seek higher gross margin business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, not including depreciation and amortization, increased
4.7% to $1,473,795 for the three months ended December 31, 1999 from $1,406,998
for the three months ended December 31, 1998. Selling, general and
administrative expenses as a percentage of revenues decreased to 19.l% for the
three months ended December 31, 1999 from 23.8% for the three months ended
December 31, 1998. In anticipation of making acquisitions and introducing our
SMARTSolutions program, we incurred significant costs without a corresponding
increase in revenues for the three months ended December 31, 1998. We believe
that revenues can increase significantly without incurring a proportionate
increase in selling, general and administrative expenses.
Depreciation and Amortization. Depreciation and amortization expenses
increased 513.8% to $70,443 for the three months ended December 31, 1999 from
$11,477 for the three months ended December 31,1998. Depreciation and
amortization expenses as a percentage of revenues increased to 0.9% for the
three months ended December 31, 1999 from 0.2% for the three months ended
December 31, 1998. This increase was primarily due to the amortization of
goodwill associated with the acquisition of certain assets of B&R Employment,
Inc. in January 1999.
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 96.6% to $20,000
for the three months ended December 31, 1999 from $595,000 for the three months
ended December 31, 1998. Provision for recourse obligation as a percentage of
revenues decreased to 0.2% for the three months ended December 31, 1999 from
10.1% for the three months ended December 31, 1998. Almost all of the amount for
the three months ended December 31, 1998 was due to the uncertainty of
recoverability of accounts with which we ceased doing business with during that
same time period. We believe that the $20,000 provision for recourse obligation
for the three months ended December 31, 1999 is sufficient.
Finance Charges. Finance charges decreased 13.2% to $173,115 for the three
months ended December 31, 1999 from $199,448 for the three months ended December
31, 1998. As a percentage of revenues, finance charges decreased to 2.2% for the
three months ended December 31, 1999 from 3.4% for the three months ended
December 31, 1998. This decrease was due to improved collections which reduced
the average days' outstanding of the accounts receivable sold.
Interest Expense. Interest expense increased 229.7% to $104,172 for the
three months ended December 31, 1999 from $31,600 for the three months ended
December 31, 1998. As a percentage of revenues, interest expense increased to
1.4% for the three months ended December 31, 1999 from 0.5% for the three months
ended December 31, 1998. This increase was due to increased borrowings necessary
to fund a working capital shortfall.
Net Earnings (Loss). As a result of the foregoing, we had net earnings of
$155,936 for the three months ended December 31, 1999 compared to a net loss of
$997,849 for the three months ended December 31, 1998. The net earnings as a
percentage of revenues was 2.0% for the three months ended December 31, 1999.
The net loss for the three months ended December 31,1998 as a percentage of
revenues was (16.9)%.
Liquidity and Capital Resources
Net cash used in operating activities was $994,445 and $639,448 in the
year ended September 30, 1999 and 1998, respectively and $979,842 and $918,878
in the three months ended December 31, 1999 and 1998, respectively.
Approximately $138,000 and $527,000 of the cash used in operating activities in
the year ended September 30, 1999 and 1998, respectively, was for the settlement
of litigation and related costs. Approximately $940,000 was used to reduce the
balance due to the factor in the three months ended December 31, 1999.
Net cash used in investing activities was $478,396 and $186,477 in the
year ended September 30, 1999 and 1998, respectively and $73,326 and $70,824 in
the three months ended December 31, 1999 and 1998, respectively. Cash used in
investing activities for the years ended September 30, 1999 and 1998 was
attributable to the acquisitions and capital expenditures. The acquisition of
J.P. Industrial LLC resulted in a use of cash of $85,000 and $89,688 in the year
ended September 30, 1999 and 1998, respectively. The acquisition of certain
assets of B&R and certain accounts of Adapta resulted in a use of cash of
$194,930 in the year ended September 30, 1999. Cash used in investing activities
in the three months ended December 31, 1999 and 1998 was attributable to capital
expenditures.
Net cash provided by financing activities was $1,645,926 and $983,080 in
the year ended September 30, 1999 and 1998, respectively and $641,288 and
$775,000 in the three months ended December 31, 1999 and 1998, respectively. The
sources of cash provided by financing activities were from the net proceeds of
borrowings and private placements of our common stock and debt. During the year
ended September 30, 1999, $1,092,762 of indebtedness was converted into 291,403
shares of our common stock. During the three months ended December 31, 1999,
$300,000 of indebtedness was converted into 76,667 shares of our common stock.
Our principal uses of cash are to fund temporary employee payroll expense
and employer related payroll taxes; investment in capital equipment; start-up
expenses of new offices; expansion of services offered; and costs relating to
other transactions such as acquisitions and legal expenses. Temporary employees
are paid weekly. Although we sell substantially all of our accounts receivable
to a factor, the factor initially only remits to us 90% of the face amount of
the accounts receivable purchased. The net balance after the purchase fee and
other costs of the factor are remitted to us after the factor receives the
customer remittance which is generally 45 days from the time work was performed
by the temporary employees.
Expansion of our services requires expenditures for marketing and
personnel costs at varied levels up to six months in advance of generating any
revenues. While there can be no assurance, we believe that the proceeds of this
offering, funds currently on hand and funds to be provided by operations will be
sufficient to meet our need for working capital for the next 12 months. Our
estimate of the time that the proceeds of this offering, funds currently on hand
and funds provided by operations will be sufficient to meet our working capital
needs is a forward-looking statement that is subject to risks and uncertainties.
Actual results and working capital needs could differ materially from those
estimated due to a number of factors.
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Year 2000 Readiness Disclosure
We have not experienced any material adverse consequences as the
result of the impact of Year 2000 issues on our computuer based systems and
applications or the computer based systems of our vendors and customers. We have
tested all of our desktop computers and computers used in our centralized
network for Year 2000 compliance with Year 2000 compliance testing software. All
units are Year 2000 compliant. There are a number of non-information embedded
systems impacting on our operations over which we have no control, including
building security and telephone. We have surveyed the system providers or those
responsible for the maintenance of the systems who have indicated that the
systems are Year 2000 compliant. All software programs on which we rely are
warranted by the manufacturer or vendor to be Year 2000 compliant.
We have surveyed our vendors and customers to assess their Year 2000
compliance status. If our customers are not Year 2000 compliant, they may
experience disruptions to operations, material costs to remedy problems and
litigation costs. In addition, these customers may delay payment of outstanding
accounts, which would affect our operations. We are also subject to external
forces that might generally affect industry and commerce, such as utility,
transportation company or Internet interruptions caused by Year 2000 compliance
failures. As a result, our business, financial condition and results of
operations could be seriously impacted.
We have funded our Year 2000 plan from cash balances. It is not
possible to identify the costs expended to address the Year 2000 problem as the
review was conducted as part of our installation and usual maintenance program.
We do not expect to expend further funds in addressing the Year 2000 problem
except where additional assets are acquired that could be affected by the Year
2000 problem. In such a case, a Year 2000 review will be conducted on that
asset.
As all of our hardware systems have been tested to be Year 2000 compliant
and all software on which our operations are dependent is warranted to be Year
2000 compliant, a Year 2000 contingency plan was not considered to be necessary.
We believe that the most significant Year 2000 problems which could affect us
are those relating to our customers or to external forces that might generally
affect industry and commerce, such as utility or transportation company
interruptions. However, no such problems have been encountered to date.
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BUSINESS
General
We were incorporated in March 1997 and purchased certain assets of
Royalpar Industries, Inc. and subsidiaries, corporations that were the subject
of a bankruptcy proceeding, in August 1997. The purchase provided a foundation
to become a national provider of comprehensive staffing services through five
offices in Arizona, California, Colorado, New Jersey, and Texas. Subsequently we
opened or purchased additional offices in Florida, Oregon and Delaware. As of
December 31, 1999, we were operating through a network of eighteen offices in
nine states including Staffing Services offices in Arizona, California,
Colorado, Delaware, Florida, New Jersey and Texas; Engineering Services offices
in California and New Jersey and SMARTSolutions programs at client facilities
in New Jersey (3), California (1), Michigan (2) and Ohio (1).
We believe that as businesses increasingly outsource a wider range
of human resource functions in order to focus on their core operations, they
will require more sophisticated and diverse services from their staffing
providers. We have structured Stratus to endeavor to service these needs. In
addition to supplying temporary workers for short-term needs, our Staffing
Services Division also provides extended-term temporary employees,
temporary-to-permanent placements, recruiting, permanent placements, payroll
processing, on-site supervising and human resource consulting. Our Engineering
Services Division provides a full range of services including staff augmentation
and in-house design work. Through our SMARTSolutions Division, we provide a
comprehensive, customized staffing program designed to reduce labor and
management costs and increase workforce efficiency.
Our emphasis on providing comprehensive staffing solutions is
intended to appeal to a broad range of potential clients, including regional and
national companies. It is our intent to provide companies with a single-source
solution to their staffing needs by combining, integrating and cross-selling
services already provided by our three divisions. It is anticipated that
cross-marketing will enable us to reduce our business development costs and
serve larger companies seeking comprehensive staffing services on a regional or
national basis. We believe that a comprehensive service offering approach will
assist us in establishing multiple contacts within existing and new clients that
should contribute to more extensive and longer-term relationships.
Staffing Services Industry Overview
The staffing industry encompasses a wide range of services to
businesses, professional and service organizations and government agencies. The
U.S. staffing industry has grown rapidly in recent years as organizations have
sought to reduce costs and improve operating efficiency by outsourcing human
resource functions. Staffing Industry Analysts, Inc. estimates that gross
revenues across the entire U.S. staffing industry have grown since 1991 at a
compound annual growth rate of 18.8%, from approximately $31.4 billion in 1991
to approximately $75 billion in 1998. The National Association of Temporary
Staffing Services reports that more than 90% of all businesses used temporary
staffing employees in 1998.
The U.S. staffing industry is highly fragmented and has begun to
experience consolidation, particularly with respect to temporary staffing
companies. Recent industry reports indicate that over 9,300 companies provide
temporary staffing services in the United States. Many of these companies are
small, owner-operated businesses with limited access to capital for development
and expansion. We believe that the industry is consolidating in response to:
o the increased demands of companies for a single supplier of a full
range of staffing and human resource services,
o increased competition from larger, better capitalized competitors
and
o owners' desires for liquidity.
Although some consolidation activity has already occurred, we believe that
consolidation in the U.S. staffing
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industry will continue and that there will be numerous available acquisition
candidates.
Historically, the demand for temporary staffing employees has been
driven by a need to temporarily replace regular employees. More recently,
competitive pressures have forced businesses to focus on reducing costs,
including converting fixed labor costs to variable and flexible costs.
Increasingly, the use of temporary staffing employees has become widely accepted
as a valuable tool for managing personnel costs and for meeting specialized or
fluctuating employment requirements. Organizations have also begun using
temporary staffing to reduce administrative overhead by outsourcing operations
that are not part of their core business operations, such as recruiting,
training and benefits administration. By utilizing staffing services companies,
businesses are able to avoid the management and administrative costs that would
be incurred if full time employees were employed. An ancillary benefit,
particularly for smaller businesses, is that use of temporary personnel reduces
certain employment costs and risks, such as, workers' compensation and medical
and unemployment insurance, that a temporary personnel provider can spread over
a much larger pool of employees.
Since 1990, the staffing industry has seen an evolution of services
move away from "temp help" or supplemental staffing, to more permanent staffing
relationships. The industry has developed specialization among various sectors
and can be classified into four categories: integrated staffing service
providers, professional services providers, information technology providers and
commodity providers.
Integrated staffing services provide a vendor-on-premise acting as
the general contractor managing the workforce and maintaining the payroll.
Through this arrangement, providers are able to establish long-term
relationships with their customers, reduce cyclicality of employees, and
maintain relationships with customers that are less price sensitive.
The professional services provider supplies employees in the fields
of engineering, finance, legal, accounting, and other professions. In general,
these services are less cyclical than the light industrial and clerical segments
and carry higher margins. Information technology companies offer technical
employees to maintain and implement all forms of information systems.
The commodity segment of the staffing industry is the traditional
temporary employer business in which an employee of the service is placed at the
customer for a short period. It is characterized by intense competition and low
margins. This sector is most exposed to economic cycles and price competition to
win market share. Growth in this segment has been constrained over the past
three years due to a competitive labor market for low-end workers.
The staffing industry has been significantly impacted over the past
three years by a limited supply of workers. Low unemployment rates nationally
and regionally have resulted in companies being unable to access a sufficient
supply of workers. The labor shortage at the low end of the labor market could
constrain staffing industry growth in the traditional staffing segments of
clerical and light industrial.
Services
SMARTSolutions. SMARTSolutions is a customized staffing program
designed to reduce labor and management costs and increase workforce efficiency.
The programs typically require an eight-week implementation process beginning
with an operational assessment of the client's tasks and processes conducted by
the SMARTSolutions implementation team. The team compiles and analyzes the data
and then presents its recommendations to the client's senior management.
Together they establish an implementation timeline with target dates and
responsibility checklists. Once the timeline is approved, a workforce training
curriculum or SMARTTraining Program is developed and implemented by a team of
associates headed by the On-site Manager provided by Stratus. Monthly
performance is reported to the client through SMARTReports that track workforce
performance, analyze that performance against the pre-determined goals and
adjust programs to meet evolving customer needs.
The typical SMARTSolutions client is a large-scale employer with a
workforce of greater than 50 people dedicated to specific work functions that
involve repetitive tasks measurable through worker output.
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SMARTSolutions is designed to be most effective in manufacturing, distribution
and telemarketing operations.
Engineering Services. Engineering Services requires highly
specialized and technically skilled employees that demand significantly higher
hourly rates than traditional temporary staffing services. Engineering Services
augments customers' in-house engineering capability by supplying Stratus
engineers as contract labor. We will also take the lead role as the project
manager on specific engagements and provide a full range of services that
include design requirements, scheduling, drawing and specification management,
field supervision and quality assurance. On large engagements, we may take
responsibility for specific areas of the engagement only, or supply staff to the
project manager.
In addition to staff augmentation, we provide a broad range of
project support to Fortune 100 companies, government agencies and educational
institutions in electrical engineering, instrumentation and controls, mechanical
engineering, piping & pipe support analysis, civil, structural and architectural
engineering. We have developed an expertise providing services to utilities and
cogeneration facility operators, and are one of a small number of engineering
staffing firms in the United States with a "Class A Nuclear Certification"
qualifing us to provide staffing services to nuclear power plants. Projects
typically last six months to one year and may require the services of several
specialized professionals.
Staffing Services. Staffing Services includes both personnel
placement and employer services such as payrolling, outsourcing, on-site
management and administrative services. Payrolling, which is also referred to as
employee leasing, typically involves the transfer of a customer's employees to
our payroll. Outsourcing represents a growing trend among businesses to contract
with third parties to provide a particular function or business department for
an agreed price over a designated period. On-site services involves locating a
Stratus employee at the customer's place of business to manage all of the
customer's temporary staffing requirements. Administrative services include
skills testing, drug testing and risk management services. Skills testing
available to Stratus customers includes cognitive, personality and psychological
evaluation and drug tests that are confirmed through an independent certified
laboratory.
Staffing Services can also be segmented by assignment types into
supplemental staffing, long-term staffing and project staffing. Supplemental
staffing provides workers to meet variability in employee cycles, and
assignments typically range from days to months. Long-term staffing provides
employees for assignments that typically last three to six months but can
sometimes last for years. Project staffing provides companies with workers for a
time specific project and may include providing management, training and
benefits.
Strategy
We intend to expand operations by internal growth and through acquisition.
Internal Growth Strategy. Internal growth is expected to be generated from
implementation of the following strategies:
o Increasing Penetration of Existing Markets. We continually seek to
add new customers and offices in existing geographic markets through
increased marketing and, where appropriate, the introduction of
complimentary or specialty services. We recently implemented an
incentive program for local managers and sales staff that focuses on
new business development within existing markets. However, we also
focus on creating and developing the long-term client relationships
that we believe are essential to growth and the successful
implementation of our cross-selling strategy.
o Entering New Markets. We intend to open new branches in markets not
currently served by existing offices. Initially new offices will be
established when demand warrants, such as where a number of
SMARTSolutions programs have been implemented in a defined
geographical area. However, where we believe an area has either
economic or strategic importance, an office may be established even
though we have no existing presence in the area.
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o Expanding Service Offerings. We offer a wide range of staffing
services to our clients, all of which are available on a stand alone
basis or as part of a more comprehensive staffing solution. This
gives us the flexibility to provide customized service based on the
client's individual requirements. As part of this process, we will
seek to expand the range of services available to our clients
through the development of additional services as client needs
warrant.
o Cross-Selling Services. We actively seek to cross-sell Staffing
Services, Engineering Services, and SMARTSolutions to existing
customers.
Acquisition Strategy. The staffing services industry in the United States is
highly fragmented, thereby offering significant opportunities for us to
complement our internal growth by pursuing strategic acquisitions. The key
objectives of our acquisition program are:
o to enter new geographic markets;
o to expand our presence in our current markets;
o to expand our presence in existing niche markets, and
o to further broaden our range of staffing services.
We have developed a comprehensive acquisition and integration
strategy to develop both existing and new markets. The strategy will be
implemented and supported by a team with previous experience in sourcing,
negotiating, structuring and integrating acquisitions of diverse sizes and
multiple geographic locations. Our focus will be to target companies that have a
history of growth and profitability, strong first and second tier management, a
reputation for quality services and the infrastructure necessary to be a core
business into which other operations may be consolidated.
Ideal acquisitions will be immediately accretive to earnings, with
revenues between $5 million and $25 million and earnings before interest and
taxes of 4.5% to 7% of revenues. In addition to traditional staffing services
companies, we will focus on acquiring Information Technology services firms with
the goal of eventually creating an Information Technology Division once business
levels warrant. As consideration for future acquisitions, we intend to use
various combinations of stock, cash and debt. The consideration for each future
acquisition will vary on a case-by-case basis, with the major factors in
establishing the purchase price being historical operating results, future
prospects of the business to be acquired and the ability of that business to
complement the services we offer and to implement additional service offerings.
We believe we can achieve significant cost savings and operating efficiencies by
combining a number of general and administrative functions at the parent company
level.
As part of the integration process, we provide immediate support to
the acquired company through sales and operations training, risk management,
compliance support and access to management information systems. In addition, we
are currently in the process of developing a revised Policies and Procedures
manual through Quality Assurance Teams, that takes advantage of the industry
knowledge of many of the people who have joined us over the past year. The goal
of these Teams is to review, revise, and implement an effective set of policies
and procedures designed to standarize our operations across the country, thereby
gaining additional operating efficiencies. We also view this process as the
first step towards gaining ISO9000 certification.
Pursuant to our acquisition strategy, in August 1998, we acquired
the assets of J.P. Industrial, LLC, an Oregon Engineering Services firm. We made
this acquisition to expand our presence in the engineering services intensive
power generation and paper/wood product industries in the Pacific Northwest. In
January 1999, we completed the acquisition of the assets of B & R Employment,
Inc., a Wilmington, Delaware based provider of traditional staffing services,
giving us an immediate presence in the industrial and banking center of
Delaware. Although smaller in size than the target acquisitions, these
acquisitions enabled us to enter industrial and geographic markets targeted by
our management team as attractive areas for expansion. Pro forma financial
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information giving effect to our acquisition of B & R is included on pages F-20
through F-27 of this prospectus.
Operations
Operations are classified into SMARTSolutions. Engineering Services
and Staffing Services, each reporting to a Division President who reports
directly to the Chief Executive Officer.
We believe acquisitions will contribute significantly to our growth.
To maximize the likelihood of successful acquisitions and their integration into
the existing operations, we have formed a dedicated acquisitions team consisting
of five employees and two external consulting groups reporting directly to the
Chief Executive Officer.
The Chief Financial Officer oversees the traditional financial
fiduciary functions, manages general administrative duties, human resources,
risk management and the legal department. As all administrative functions report
to the Chief Financial Officer, the administrative obligations of the Chief
Executive Officer and Division Presidents are minimized, enabling them to focus
on the generation of revenue. The Chief Marketing Officer is responsible for
overseeing national sales training and development, developing large corporate
accounts, selling the SMARTSolutions programs and overseeing all of the sales
and marketing activities of the branch offices.
The Staffing Services branches all report to the President of the
Staffing Services Division. Typically each individual branch has a Branch
Manager responsible for the daily operating activity of the branch, maintaining
customer relationships and generating new sales in the region with the support
of branch salespeople. The placement and recruiting of personnel in the branch
offices is handled by recruiting coordinators and supported by administrative
assistants.
Branch offices are supported through centralized functions at
corporate headquarters that include marketing, recruiting, training and
retention programs, workers' compensation and other insurance services, accounts
payable, purchasing, credit, legal review and other administrative support
services. Each branch office is networked to our centralized computer system and
utilizes industry-specific software that provides information on customer
requirements, available applicants, staffing employees on assignment and other
information which facilitates efficient response to customer job orders.
Although many of the support functions are centralized, local
managers have the flexibility and limited authority to price services and
respond to specific customer requirements. Regular manager meetings are held
with regional managers where goals are set, progress is checked and follow
through on corporate initiatives is reviewed.
Sales And Marketing
General. Our marketing professionals have developed a marketing plan which
establishes minimum numbers of targeted customer sales visits, customer service
visits, and minimum sales volume to be achieved on a weekly basis.
Implementation of the plan is monitored by the Chief Marketing Officer who
reviews information provided in weekly sales activity reports. Branch sales
professionals and Branch Managers are responsible for weekly and monthly sales
management reporting and participate in periodic sales and customer retention
training programs.
We have developed individual marketing programs and objectives for
each Division.
SMARTSolutions. SMARTSolutions is marketed to companies that have a
workforce devoted to repetitive tasks and can benefit from proactive workforce
management. As such, it requires a significantly different marketing strategy
than traditional staffing services. A dedicated team has been established to
market SMARTSolutions nationally. That team, headed by the Chief Marketing
Officer, develops quarterly marketing plans complete with quantifiable goals and
objectives, that it presents to the Chief Executive Officer. Once the Chief
Marketing Officer obtains approval, he and the team immediately implement the
plan. We maintain a database of prospective customers that the national
marketing team will solicit through direct mailings to senior corporate
management, personal sales calls, cross-selling to existing customers and
networking through professional organizations.
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Although the marketing team will approach clients directly, it
primarily utilizes Branch staff to identify companies within their geographic
regions that could benefit from the implementation of a SMARTSolutions program.
After a potential client has been identified, the team assumes responsibility
for the SMARTSolutions sale process. A significant portion of the leads for
SMARTSolutions sales have come from "word of mouth" recommendations from current
SMARTSolutions customers.
Engineering Services. Marketing of Engineering Services is focused on
addressing the engineering needs typical of specific customers. In marketing to
potential customers, the Engineering Services staff identifies the requirements
of its customers and promotes service offerings designed to meet those
requirements. In addition to personal sales visits, targeted mailings and
telephone solicitations, our Engineering Services personnel actively promote our
services by cross-selling complementary services to existing customers and
participating in industry trade associations. As is the case with
SMARTSolutions, we anticipate that with the extensive experience of the
Engineering Services Division management team, word of mouth and personal
contacts will provide the majority of the sales leads.
Staffing Services. Staffing Services are marketed through our network of
offices whose managers, supported by the national marketing staff, make regular
personal sales visits to existing accounts and prospects. New customers are
obtained through customer referrals, telemarketing and advertising in a variety
of local and regional media, including radio, direct mail, the Yellow Pages,
newspapers, magazines and trade publications and sponsoring of job fairs and
other community events.
Customers. For the year ended September 30, 1998 and the year ended
September 30, 1999, our five largest clients accounted for approximately 49% and
46% of our revenue, with two of the five representing more than 10% for the year
ended September 30, 1999. The loss of or a material reduction in revenues from
one or more large clients could have a material adverse effect on our business.
Most contracts to perform services may be cancelled upon 30 days notice.
Personnel
A key factor contributing to future growth and profitability will be
the ability to recruit and retain qualified personnel. To attract personnel, we
employ recruiters, called "Staffing Specialists" who regularly visit schools,
churches and professional associations and present career development programs
to various organizations. In addition, applicants are obtained from referrals by
existing staffing employees and from advertising on radio, television, in the
Yellow Pages, newspapers and through the Internet. Each applicant for a Staffing
Services position is interviewed with emphasis on past work experience, personal
characteristics and individual skills. We maintain software-testing and training
programs at our offices for applicants and employees who may be trained and
tested at no cost to the applicant or customer.
Engineering Services and consulting personnel are targeted and
recruited for specific engagements. We usually advertise for professionals who
possess specialized education, training or work experience. Engineering Services
recruiting efforts also rely upon industry contacts, personal networks and
referrals from existing and former Engineering Services personnel.
To promote loyalty and improve retention among our employees and to
differentiate ourselves from competing staffing firms, we offer a comprehensive
benefits package after ninety days of employment. The benefits package includes
paid time off, holiday and vacation time, medical coverage, dental, vision,
prescription, mental health, life insurance, disability coverage and a 401(k)
defined contribution plan. The length of assignment for employees generally
ranges from six months to five years depending on the client requirements.
At December 31, 1999, we were providing over 1,150 temporary
staffing employees and professionals to more than 170 clients and employed
approximately 65 internal staff.
None of our employees, including our temporary staffing employees
and consultants are represented by a collective bargaining agreement. However,
in January 1999, we received notice that the workforce of one of our customer
facilities had petitioned the National Labor Relations Board to certify a vote
for representation by the United Auto Workers. Despite our efforts to conduct an
anti-union campaign, the vote was held and the workforce
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voted in favor of union representation; however, our client subsequently decided
to cease operations at the facility at which the union certification was being
pursued.
Infrastructure
Over the past two years, we have expended significant financial
resources and devoted a substantial amount of time developing and implementing
systems and infrastructure, introducing reporting lines of responsibility and
recruiting management to enable us to manage operations and growth in an
efficient manner.
We have installed a variety of management information systems to
enable the different levels of the Management team to monitor economic
performance and business operations on a continuous basis. We have evaluated our
MIS systems and have surveyed our suppliers regarding Year 2000 compliance.
While our system has been verified compliant, we can not make any guarantees
that we will not experience any Y2K related business interruptions.
Branch offices are supported through centralized functions at
corporate headquarters that include marketing, recruiting, training and
retention programs, workers' compensation and other insurance services, accounts
payable, purchasing, credit, legal review and other administrative support
services. Each branch office is networked to our computer system and
industry-specific software that provides information on customer requirements,
available applicants, staffing employees on assignment and other information
which facilitates efficient response to customer job orders.
By developing an efficient platform from which to operate and expand
our operations, we anticipate gaining economies of scale as we grow.
Workers' Compensation and Payroll
The maintenance of workers' compensation and health insurance plans
that cover worksite employees is a significant aspect of our business. We have
retained the services of an insurance consultant to assist us in obtaining a
cost-effective workers' compensation program and have created a dedicated
workers' compensation team that analyzes the claims and makes recommendations
regarding reducing our exposure. In addition, the team provides safety programs
to each of the locations. Furthermore, as a value-added service to our clients,
we provide safety inspections at client locations to help determine potential
risks for employee injury and to assist clients in making their workplace safer.
Facilities
We own no real property, but lease space for our corporate
headquarters and all of our branch offices. Our corporate headquarters, which is
comprised of 6,300 square feet of office space located in Manalapan, New Jersey,
is leased pursuant to an agreement which expires on May 31, 2001. Branch office
leases have terms of various lengths. All facilities are adequate for our
existing needs and we do not expect any difficulty in identifying and leasing
additional office space as we expand in existing and new markets.
Competition
We compete with other companies in the recruitment of qualified
personnel, the development of client relationships and the acquisition of other
staffing and professional service companies. A large percentage of temporary
staffing and consulting companies are local operators with fewer than five
offices that have developed strong local customer relationships within local
markets. These operators actively compete with us for business and, in most of
these markets, no single company has a dominant share of the market. We also
compete with larger, full-service and specialized competitors in national,
regional and local markets. The principal national competitors include
AccuStaff, Inc., Manpower, Inc., Kelly Services, Inc., The Olsten Corporation,
Interim Services, Inc., and Norrell Corporation, all of which have greater
marketing, financial and other resources than Stratus. We believe that the
primary competitive factors in obtaining and retaining clients are the number
and location of offices, an understanding of clients' specific job requirements,
the ability to provide temporary personnel in a timely manner, the monitoring of
the quality of job performance and the price of services. The primary
competitive factors in obtaining qualified candidates for temporary employment
assignments are wages, responsiveness to work schedules and number of hours of
work available.
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<PAGE>
We also compete for acquisition candidates. We believe that further
industry consolidation will continue during the next several years. However,
there is likely to be significant competition that could lead to higher prices
being paid for such businesses.
Regulation
Staffing services firms are generally subject to one or more of the
following types of government regulation: (1) regulation of the
employer/employee relationship between a firm and its temporary employees; and
(2) registration, licensing, record keeping and reporting requirements. Staffing
services firms are the legal employers of their temporary workers. Therefore,
these firms are governed by laws regulating the employer/employee relationship,
such as tax withholding and reporting, social security or retirement,
anti-discrimination and workers' compensation. State mandated workers'
compensation and unemployment insurance premiums have increased in recent years
and have directly increased our cost of services. In addition, the extent and
type of health insurance benefits that employers are required to provide
employees have been the subject of intense scrutiny and debate in recent years
at both the national and state level. Proposals have been made to mandate that
employers provide health insurance benefits to staffing employees, and some
states could impose sales tax, or raise sales tax rates on staffing services.
Further increases in such premiums or rates, or the introduction of new
regulatory provisions, could substantially raise the costs associated with
hiring and employing staffing employees.
Certain states have enacted laws which govern the activities of
"Professional Employer Organizations," and "employee leasing" companies 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/employee leasing companies and provide for monitoring of
the fiscal responsibility of these organizations. We believe that Stratus is not
a Professional Employer Organization or employee leasing company and not subject
to the laws which govern such organizations; however, the definition of
"Professional Employer Organization" and "employee leasing" varies from state to
state and in some states the term is broadly defined. If we are determined to be
a Professional Employer Organization or an employee leasing company, we can give
no assurance that we will be able to satisfy licensing requirements or other
applicable regulations. In addition, we can give no assurance that the states in
which we operate will not adopt licensing or other regulations affecting
companies which provide commercial and professional staffing services.
Intellectual Property
We have filed for Federal Trademark registration of SMARTSolutions,
SMARTReport, SMARTTraining, our slogan, name and logo. No assurance can be given
that this registration will be obtained or if obtained, will be effective to
prevent others from using the mark concurrently or in certain locations.
Currently, we are asserting common law protection by holding the marks out to
the public as the property of Stratus. However, no assurance can be given that
this common law assertion will be effective to prevent others from using the
mark concurrently or in other locations. In the event another party asserts
ownership to a mark, we may incur legal costs to enforce any unauthorized use of
the marks or defend ourselves against any claims.
Legal and Administrative Proceedings
We are always subject to the risk that we may be a party to legal
proceedings. The temporary staffing industry is subject, in particular, to
potential liability to customers arising in connection with the services
performed by our temporary staffing employees and claims of temporary staffing
employees relating to the customers' workplace. In addition, over the past few
years there has been an increase in the number of lawsuits brought by temporary
workers against staffing companies and their clients. Many of these suits seek
payments for the difference in benefits received from the staffing company as
compared to those which they would have received had they worked directly for
the customer. While we believe we are sufficiently insulated from such suits and
that we have adequate coverage under our insurance policies, we can give no
assurance that the actual liability and costs will not exceed the insurance
coverage. Currently, we are a named party to one such suit which was filed in
the Superior Court of the State of California for the County of Los Angeles in
June, 1998. We are one of 112 named
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defendants and 188 unnamed defendants in Dewayne Cargill Et al v. Metropolitan
Water District of Southern California, Et al, where the plaintiffs are seeking
general damages. This case was brought against Stratus as successor in interest
to Mainstream Engineering, Inc., one of the Royalpar subsidiaries. We are
prepared to file a motion if plaintiff's do not agree to voluntary dismissal as
according to the Royalpar Asset Purchase Agreement we did not assume this
liability and do not believe we are a successor in interest. In the event that
we are unsuccessful with that argument and ultimately end up with liability, we
believe our exposure should not be significant as we have never done business
with Metropolitan and Mainstream did minimal business with Metropolitan.
Although a determination has not yet been finalized, we may be in technical
non-compliance with the terms of our 401(k) benefit plan. As a result, we may be
required to make a financial contribution to the plan to correct the
non-compliance and may be liable for penalties imposed by the Internal Revenue
Service. We are unable to estimate at this time the extent of any possible
liability.
Furthermore, as a staffing and engineering services company, we are liable for
relationships between our customers and our employees. Therefore, we may be
exposed to potential liability to our customers with respect to any claims
arising out of the services performed by our employees, such as misuse of client
information, theft of client property or professional malpractice. We are also
exposed to potential claims by our employees for discrimination and harassment
in the customer's workplace and violations of other employment-related laws.
Although we do, and will continue to maintain insurance that we believe is
adequate as to the risks, we cannot assure you that future claims will not
exceed the coverage amounts or that the insurance will indemnify us in any
particular circumstance.
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<PAGE>
MANAGEMENT
Our directors and executive officers as of November 30, 1999 are as
follows:
Name Age Position
- --------------------- --- -------------------------------------------------
Joseph J. Raymond 64 Chairman of the Board and Chief Executive Officer
Michael A. Maltzman 52 Chief Financial Officer and Treasurer
J. Todd Raymond, Esq. 31 General Counsel and Corporate Secretary
Charles Sahyoun 48 President, Engineering Services Division
Mark S. Levine 39 Chief Marketing Officer
A. George Komer 48 President, Staffing Services Division
Michael J. Rutkin 48 Director
H. Robert Kingston 75 Director
Donald W. Feidt 68 Director
Sanford Feld 69 Director
Joseph J. Raymond has served as Chairman of the Board and Chief
Executive Officer of Stratus since its inception in 1997. Prior thereto, he
served as Chairman of the Board, President and Chief Executive Officer of
Transworld Home Healthcare, Inc. (NASDAQ:TWHH), a provider of healthcare
services and products, from 1992 to 1996. From 1987 through 1997, he served as
Chairman of the Board and President of Transworld Nurses, Inc., a provider of
nursing and paraprofessional services, which was acquired by Transworld Home
Healthcare, Inc. in 1992.
Michael A. Maltzman has served as Treasurer and Chief Financial
Officer of Stratus since September 1997 when it acquired the assets of Royalpar
Industries, Inc. Mr. Maltzman served as Chief Financial Officer of Royalpar,
which filed for protection under United States Bankruptcy Code in 1997, from
April 1994 to August 1997. From June 1988 to July 1993, he served as Vice
President and Chief Financial Officer of Pomerantz Staffing Services, Inc., a
national staffing company. Prior thereto, he was a Partner with Eisner & Lubin,
a New York accounting firm. Mr. Maltzman is a Certified Public Accountant.
J. Todd Raymond has served as General Counsel and Secretary of the
Company since September 1997. He is the nephew of Joseph J. Raymond. From
December 1994 to January 1996, Mr. Raymond was an associate and managing
attorney for Pascarella & Oxley, a New Jersey general practice law firm. Prior
thereto, Mr. Raymond acted as in-house counsel for Raymond & Perri, an
accounting firm. From September 1993 to September 1994, Mr. Raymond was an
American Trade Policy Consultant for Sekhar-Tunku Imran Holdings Sdn Berhad, a
Malaysian multi-national firm.
Charles Sahyoun has served as President of Stratus' Engineering
Services Division since December 1997. From September 1988 to December 1997, he
was employed in various capacities with Day & Zimmerman Utilities Services
Group, Inc., an engineering and design services company, including Vice
President of Business Development. Mr. Sahyoun is a cousin of Joseph J. Raymond.
Mark Levine has served as the Chief Marketing Officer of Stratus
since April 1998. From April 1996 to April 1998, he served as Regional Vice
President of Corestaff, Inc., a staffing services company. Prior thereto, he
served as Regional Manager for Norrell Services, Inc., an international staffing
firm, from 1993 to 1996. From 1983 to 1993, Mr. Levine was Assistant Vice
President of United States Sales for Dunn & Bradstreet.
A. George Komer has served as President of Stratus' Staffing
Services Division since May 1998. Prior thereto, Mr. Komer was a Regional
Operations Manager and Vice President for Transworld Services Group and its
corporate parent, Corestaff, Inc. from 1996 to April 1998. From 1993 to 1996 Mr.
Komer served as the Vice President of Operations of Duck Head Apparel Company,
Inc. From March 1991 to September 1993 he served as Information Systems Director
for Larson-Juhl, Inc. and from April 1989 to February 1991 as the Director of
Systems Development for Norrell Services, Inc., an international staffing firm.
Prior thereto, Mr. Komer served twice as an Independent Consultant from November
1988 to April 1989 and from October 1986 to August 1987. In between his
consulting engagements, he served as Director of Information Systems for Esprit
de Corp. from August 1987 to November 1988.
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<PAGE>
Michael J. Rutkin has served as a Director of Stratus since November
1997 and was Chief Operating Officer and President from March 1997 to October
1998. Since November 1998, Mr Rutkin has served as General Manager/Chief
Executive Officer of Battleground Country Club. From 1996 to 1998, Mr. Rutkin
served as Vice President of Transworld Management Services, Inc. From February
1993 to October 1996, he served as Chief Operating Officer of HealthCare Imaging
Services, Inc. Prior thereto, Mr. Rutkin was the Executive Vice President of
Advanced Diagnostic Imaging from February 1987 to February 1993. From March 1981
to September 1984, he served as Director of New Business Development for the
United States Pharmaceutical Division of CIBA-Geigy. Mr. Rutkin is the
brother-in-law of Joseph J. Raymond.
Harry Robert Kingston has served as a Director of Stratus since
November 1997. From 1977 until his retirement in 1989, he served as the
President and Chief Executive Officer of MainStream Engineering Company, Inc.,
an engineering staffing firm located in California. From 1965 to 1968, he served
as President and Partner of VIP Engineering Company, a subsidiary of CDI
Corporation, a staffing and engineering services business. From 1968 to 1977
Mr. Kingston served as Vice President for CDI Corporation.
Donald W. Feidt has served as a Director of Stratus since November
1997. From 1987 to December 1998, Mr. Feidt was a Managing Partner of Resource
Management Associates, an information technology consulting company. Since
December 1998, Mr. Feidt has served as a Vice President to the Chief Executive
Officer of Skila Inc., a global web-based business intelligence platform company
providing services to the medical industry.
Sanford I. Feld has served as a Director of the Company since
November 1997. Mr. Feld is currently president of Leafland Associates, Inc., an
advisor to Feld Investment and Realty Management, a real estate development and
management company. He also serves as Chairman of Flavor and Food Ingredients, a
private savory and flavor company. From 1973 to 1979, he served as Director of
the Chelsea National Bank of New York City.
Board Committees
The Board of Directors has established a Compensation Committee and
an Audit Committee to assist it in the discharge of its duties. The Compensation
Committee's principal function is to establish the compensation for the
executive officers of the Company and to establish and administer the Company's
compensation programs. H. Robert Kingston, Donald W. Feidt and Sanford Feld
currently serve on the Compensation Committee. The Audit Committee's principal
functions include making recommendations to the Board regarding the annual
selection of independent public accountants, reviewing the proposed scope of
each annual audit and reviewing the recommendations of the independent public
accountants as a result of their audits of our financial statements. H. Robert
Kingston, Donald W. Feidt and Sanford Feld currently serve as members of the
Audit Committee. The Board of Directors may from time to time establish other
committees to facilitate the management of Stratus.
Executive Compensation
The following table provides certain summary information regarding
compensation paid by us during the period from our inception in March 1997
through September 30, 1997 and during the fiscal years ended September 30, 1998
and 1999 to our Chief Executive Officer and to each of our other four most
highly paid executive officers (together with the Chief Executive Officer, the
"Named Executive Officers").
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<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
----------------
Annual Compensation
-------------------------------------
Number of Shares
Underlying Stock
Name and Principal Position Fiscal Year Salary(s) Bonus($) Options(#)
- --------------------------- ----------- --------- -------- ----------------
<S> <C> <C> <C> <C>
Joseph J. Raymond 1999 $ 53,846 -- --
Chairman and Chief Executive 1998 45,308 $ 10,000 --
Officer 1997 -- -- 166,667
Michael A. Maltzman 1999 145,550 7,500 --
Treasurer and Chief Financial 1998 133,704 7,500 --
Officer 1997 14,131 -- 83,333
Charles Sahyoun 1999 159,284 -- --
President, Engineering Services 1998 107,284 35,000 83,333
Division 1997 -- -- --
Mark Levine 1999 165,000 -- --
Chief Marketing Officer 1998 66,635 50,000 83,333
1997 -- -- --
A. George Komer 1999 165,000 -- --
President, Staffing Services Division 1998 63,462 50,000 83,333
1997 -- -- --
</TABLE>
Employment Agreements
In September 1997, we entered into an employment agreement with
Joseph J. Raymond, our Chairman and Chief Executive Officer, which has an
initial term that expires in September 2000. Pursuant to the agreement and
subsequent amendments, Mr. Raymond is entitled to a minimum annual base salary
of $175,000 which is reviewed periodically and subject to such increases as the
Board of Directors, in its sole discretion, may determine. Mr. Raymond has
waived the payment of salary until such time as we complete this offering.
During the term of the agreement, if Stratus is profitable, Mr. Raymond is
entitled to a bonus/profit sharing award equal to .4% of Stratus' gross margin,
but not in excess of 100% of his base salary. If Stratus is not profitable, he
is entitled to a $10,000 bonus. Mr. Raymond is eligible for all benefits made
available to senior executive employees, and is entitled to the use of an
automobile. In addition, in recognition of Mr. Raymond's waiver of salary until
the completion of this offering, and his contribution to the public offering
process, our Board of Directors approved, in January 2000, the issuance to Mr.
Raymond, upon the completion of this offering, of options to acquire 1,000,000
shares of our common stock at an exercise price per share equal to the initial
public offering price. These options, which will have a ten year term, will
become exercisable only after the Company achieves earnings of $1.00 per share
in a fiscal year and will be forfeited if Mr. Raymond leaves the employ of the
Company.
In the event Stratus terminates Mr. Raymond without "Good Cause", he
will be entitled to severence compensation equal to 2.9 times his base salary
then in effect plus any accrual and unpaid bonuses and unreimbursed expenses. As
defined in the Agreement "Good Cause" shall exist only if Mr. Raymond:
o willfully or repeatedly fails in any material respect to perform his
obligations under the Agreement subject to certain opportunities to
cure such failure;
o is convicted of a crime which constitutes a felony or misdemeanor or
has entered a plea of guilty or no contest with respect to a felony
or misdemeanor during his term of employment;
o has committed any act which constitutes fraud or gross negligence;
o is determined by the Board of Directors to be dependent upon alcohol
or drugs; or
o breaches confidentiality or non-competition provisions of the
employment agreement.
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<PAGE>
Mr. Raymond is also entitled to severance compensation in the event
that he terminates the agreement for "Good Reason" which includes:
o the assignment to him of any duties inconsistent in any material
respect with his position or any action which results in a
significant diminution in his position, authority, duties or
responsibilities;
o a reduction in his base salary unless his base salary is, at the
time of the reduction, in excess of $200,000 and the percentage
reduction does not exceed the percentage reduction of gross sales of
Stratus over the prior twelve month period;
o Stratus requires Mr. Raymond to be based at any location other than
within 50 miles of Stratus' current executive office location; and
o a Change in Control of Stratus, which includes the acquisition by
any person or persons acting as a group of beneficial ownership of
more than 20% of the outstanding voting stock of Stratus, mergers or
consolidations of Stratus which result in the holders of Stratus'
voting stock immediately before the transaction holding less than
80% of the voting stock of the surviving or resulting corporation,
the sale of all or substantially all of the assets of Stratus, and
certain changes in the Stratus Board of Directors.
In the event that the aggregate amount of compensation payable to Mr. Raymond
would constitute an "excess parachute payment" under the Internal Revenue Code,
then the amount payable to Mr. Raymond will be reduced so as not to constitute
an "excess parachute payment." All severance payments are payable within 60 days
after the termination of employment.
Mr. Raymond has agreed that during the term of the agreement and for
a period of one year following the termination of his employment, he will not
engage in or have any financial interest in any business enterprise in
competition with Stratus that operates anywhere within a radius of 25 miles of
any offices we maintain as of the date of the termination of employment.
We have entered into employment agreements with each of the other
officers named in the Executive Compensation table set forth above on the
following dates: Mr. Sahyoun - 1/1/98; Mr. Levine - 4/17/98; Mr. Komer - 5/7/98;
and Mr. Maltzman - 9/1/97. These agreements provide for an annual base salary as
follows: Mr. Sahyoun - $165,000; Mr. Levine - $165,000; Mr. Komer - $165,000;
and Mr. Maltzman - $146,000. As part of their employment agreements, Mr. Levine
and Mr. Komer were each granted signing bonuses of $50,000. The agreement with
Mr. Sahyoun entitles him to a profit sharing award equal to 10% of the
Engineering Services Division's pre-tax income, but not in excess of his base
salary. Mr. Levine and Mr. Komer are entitled to profit sharing awards based
upon a percentage of the gross margin of the accounts under their
responsibility. Mr. Maltzman is entitled to profit sharing awards based upon our
overall profitability. All agreements are terminable by either party at any time
without cause. However, in the event that any of the agreements are terminated
by Stratus without cause or by the executive with good reason, the executive
will be entitled to a severance payment equal to the greater of one month's
salary for each year worked or three months salary. In addition, Stratus will
pay the executive any earned but unused vacation time and any accrued but unpaid
profit sharing. We are also required to maintain insurance and benefits for the
executive during the severance period.
Compensation of Directors
Except for the reimbursement of out-of-pocket expenses, our
directors are not currently compensated for serving on the Stratus Board of
Directors or any committee of the Board. It is anticipated that non-management
Directors will be paid a fee of $500 per Board and Committee meeting attended
when we become profitable.
Option Grants in the Last Fiscal Year
No stock options were granted in the fiscal year ended September 30,
1999 to the Named Executive Officers.
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<PAGE>
Aggregate Option Exercises in Twelve Months Ended September 30, 1999 and Year
End Option Values
The following table provides certain information with respect to
options to purchase common stock held by the Named Executive Officers at
September 30, 1999. The value of unexercised options has been determined by
using the price per share of common stock ($3.75) effectively paid by investors
in connection with the conversions of debt to equity which were completed in
September 1999.
<TABLE>
<CAPTION>
Number of Underlying Value of Unexercised
Unexercised In-the-Money Options at
Options at September 30, 1999 September 30, 1999
--------------------------------- -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph J. Raymond 111,111 55,556 $250,000 $125,000
George Komer 20,833 62,500 15,625 46,875
Mark Levine 20,833 62,500 15,625 46,875
Charles Sayhoun 20,833 62,500 15,625 46,875
Michael A. Maltzman 41,666 41,667 31,250 31,250
</TABLE>
No options were exercised by the Named Executive Officers during the fiscal year
ended September 30, 1999.
The Equity Incentive Plan
General. The Stratus Equity Incentive Plan is administered by the
Compensation Committee, which is authorized to grant.
o Incentive stock options within the meaning of Section 422 of the
Internal Revenue Code
o Nonqualified stock options
o Stock appreciation rights
o Restricted stock grants
o Deferred stock awards
o Other stock based awards to employees of Stratus and its
subsidiaries and other persons and entities who, in the opinion of
the Compensation Committee, are in a position to make a significant
contribution to the success of Stratus and its subsidiaries.
The Compensation Committee determines:
o The recipients of awards
o The times at which awards will be made
o The size and type of awards, and
o The terms, conditions, limitations and restrictions of awards
Awards may be made singly, in combination or in tandem. We have
reserved 500,000 shares for issuance under the Equity Incentive Plan. The
maximum number of shares of common stock which can be issued to Stratus' Chief
Executive Officer under the Equity Incentive Plan pursuant to various awards
shall not exceed 35% of the total number of shares of common stock reserved for
issuance, and the maximum number of shares which can be issued to any other
employee or participant under the Equity Incentive Plan shall not exceed 20% of
the total number of shares of common stock reserved for issuance. The Equity
Incentive Plan will terminate on September 1, 2009, unless earlier terminated by
the Board of Directors. No awards have been made under the Equity Incentive
Plan.
Stock Options. The Compensation Committee can grant either incentive
stock options or nonqualified stock options. Only employees of Stratus and its
subsidiaries may be granted incentive stock options. The exercise price of an
incentive stock option shall not be less than the fair market value, or, in the
case of an incentive stock option granted to a 10% or greater shareholder of
Stratus, 110% of the fair market value of Stratus' common stock on the date of
grant. For purposes of the exercise price of an option, "fair market value"
shall mean the arithmetic
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<PAGE>
average of the closing bid and asked prices of the common stock reported on the
Nasdaq Smallcap Market on a particular date. The term of an option and the time
or times at which such option is exercisable shall be set by the Compensation
Committee; provided, however, that no option shall be exercisable more than 10
years (5 years for an incentive stock option granted to a 10% or greater
shareholder of Stratus) from the date of grant, and with respect to an incentive
stock option, the fair market value on the date of grant of the shares of common
stock which are exercisable by a participant for the first time during any
calendar year shall not exceed $100,000. Payment of the exercise price shall be
made in any form permitted by the Compensation Committee, including cash and
shares of Stratus' common stock.
Stock Appreciation Rights. The Compensation Committee may grant
stock appreciation rights either alone or in combination with an underlying
stock option. The term of an SAR and the time or times at which an SAR shall be
exercisable shall be set by the Compensation Committee; provided, that an SAR
granted in tandem with an option will be exercisable only at such times and to
the extent that the related option is exercisable. SARs entitle the grantees to
receive an amount in cash or shares of common stock with a value equal to the
excess of the fair market value of a share of common stock on the date of
exercise over the fair market value of a share of common stock on the date the
SAR was granted, which represents the same economic value that would have been
derived from the exercise of an option. Payment may be made in cash, or shares
of common stock or a combination of both at the discretion of the Compensation
Committee. If an SAR granted in combination with an underlying stock option is
exercised, the right under the underlying option to purchase shares of common
stock is terminated.
Restricted Stock Grants. The Compensation Committee may grant shares
of common stock under a restricted stock grant which sets forth the applicable
restrictions, conditions and forfeiture provisions which shall be determined by
the Compensation Committee and which can include restrictions on transfer,
continuous service with Stratus or any of its subsidiaries, achievement of
business objectives, and individual, subsidiary and Company performance. Shares
of common stock may be granted pursuant to a restricted stock grant for no
consideration or for any consideration as determined by the Compensation
Committee. A grantee is entitled to vote the shares of common stock and receive
any dividends thereon prior to the termination of any applicable restrictions,
conditions or forfeiture provisions.
Deferred Stock Awards. The Compensation Committee may grant shares
of common stock under a deferred stock award, with the delivery of such shares
of common stock to take place at such time or times and on such conditions as
the Compensation Committee may specify. Shares of common stock may be granted
pursuant to deferred stock awards for no consideration or for any consideration
as determined by the Compensation Committee.
Other Stock Based Awards. The Compensation Committee may grant
shares of common stock to employees of Stratus or its subsidiaries as bonus
compensation, or if agreed to by an employee, in lieu of such employee's cash
compensation.
Other Information. If there is a stock split, stock dividend or
other relevant change affecting Stratus' common stock, appropriate adjustments
will be made in the number of shares of common stock or in the type of
securities to be issued pursuant to any award granted before such event. In the
event of a merger, consolidation, combination or other similar transaction
involving Stratus in which Stratus is not the surviving entity, either all
outstanding stock options and SARs shall become exercisable immediately and all
restricted stock grants and deferred stock awards shall immediately become free
of all restrictions and conditions, or the Compensation Committee may arrange to
have the surviving entity grant replacement awards for all outstanding awards.
Upon termination of service prior to age 65 for any reason other than death or
disability, or upon involuntary termination after age 65, stock options and SARs
which are exercisable as of the date of such termination may be exercised within
three months of the date of termination, and any restricted stock grants and
deferred stock awards which are still subject to any restriction shall be
forfeited to Stratus. Upon death or disability or voluntary termination of
service after age 65, all stock options and SARs become immediately exercisable
and may be exercised for a period of six months after the date of termination
(three months in the case of voluntary termination after age 65), and all
restricted stock grants and deferred stock awards shall become immediately free
of all restrictions and conditions. The Compensation Committee has the
discretionary authority to alter or establish the terms and conditions of an
award in connection with termination of service. The Board of Directors may
amend, suspend or terminate the Equity Incentive Plan, subject to shareholder
approval if required pursuant to Section 162(m) of the Internal Revenue Code or
Section 16 of the Securities Exchange Act of 1934 or the rules of the Nasdaq
Stock Market.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In August 1997, we purchased certain assets of Royalpar Industries,
Inc. and its subsidiaries, corporations that were the subject of a proceeding
under Chapter 11 of the United States Bankruptcy Code. The assets acquired
included customer lists, furniture, office and computer equipment and workers
compensation insurance agreements. The purchase price of the acquired assets was
$150,000. In addition, we agreed to pay to Royalpar, or its designated
disbursing agent, during each of the five fiscal years commencing in 1997, an
amount equal to 2% of our pre-tax income that exceeds $2 million and 3% of our
pre-tax income that exceeds $5 million; provided, however, that in no event will
we be required to pay more than $250,000 pursuant to this arrangement. We also
assumed certain liabilities, including leases of operating offices, certain
obligations to Royalpar's accounts receivable factor and vacation pay and issued
370,444 shares of common stock to certain creditors of Royalpar.
At the time of the acquisition of the Royalpar assets, Michael A.
Maltzman, our Chief Financial Officer, was an officer of Royalpar and H. Robert
Kingston, who currently serves as a director of Stratus, was a director of
Royalpar. In addition, Joseph J. Raymond, our Chairman and Chief Executive
Officer, was a 12.9% shareholder of Royalpar and Jeffrey J. Raymond, the son of
Joseph J. Raymond, was the President of Royalpar. Following the acquisition of
Royalpar, we engaged Jeffrey J. Raymond as a consultant to Stratus pursuant to
an agreement which had an initial term of six months, subject to automatic six
month extensions unless terminated by either party under the terms of the
agreement. The agreement originally provided for payments of $9,583 per month to
Jeffrey J. Raymond and required him to supervise the collection of certain
accounts receivable, to use his efforts to maintain relationships with certain
clients and to assist in due diligence investigations of acquisitions of other
companies. Beginning in January 1999, the consulting fee payable to Jeffrey J.
Raymond was reduced to $2,200 per week. Total consulting fees and expense
reimbursements paid to Jeffery J. Raymond were $107,000 in fiscal 1999, $175,000
in fiscal 1998 and $31,000 for the three months ended December 31, 1999. As of
November 30, 1999, Jeffrey J. Raymond's wife, Joan Raymond and his children
collectively owned approximately 13% of our common stock.
During fiscal 1998 and fiscal 1999, we paid consulting fees of
$17,000 and $23,000 respectively, to RVR Consulting, Inc. a corporation of which
Joseph J. Raymond, Jr., the son of Joseph J. Raymond, our Chairman and Chief
Executive Officer, is an officer and 50% shareholder. Joseph J. Raymond, Jr.
became the Chief Executive Officer of Complete Wellness, Inc. in March 1999.
During 1999, Complete Wellness Centers, Inc. owed us $663,000 for services
rendered in 1998 and 1999, however on August 31, 1999 we entered into a
promissory note for $1,017,000 representing the outstanding balance plus accrued
interest. On September 23, 1999 we accepted 500,000 shares of Complete Wellness
Centers, Inc. restricted common stock as payment for the promissory note.
Substantially all of the indebtedness owed to us by Complete Wellness, Inc. was
incurred prior to Joseph J. Raymond Jr. becoming an officer of Complete
Wellness, Inc. We continue to service Complete Wellness on a "due upon receipt"
basis. Revenues for services rendered to Complete Wellness were $1,392,000 in
fiscal 1999 and $194,000 in the three months ended December 31, 1999.
At various times throughout our history we have borrowed funds from
Joseph J. Raymond, our Chairman and CEO. This variable indebtedness bore
interest at the rate of 12% per annum. In June 1999, the $50,000 (plus accrued
interest) owed to Mr. Raymond was converted into 14,870 shares of our common
stock.
In June 1998, we borrowed $400,000 from Joseph J. Raymond, Jr. The
remaining balance of this indebtedness, which bore interest at the rate of 12%
per annum, plus accrued interest was converted into 116,533 shares of our common
stock in June 1999.
In November and December 1998, we borrowed $50,000 from Sanford I.
Feld, a director of Stratus. This loan was represented by a promissory note
which bore interest at the rate of 1.5% per month and was originally due in July
1999. In consideration for making the loan, we issued Mr. Feld warrants to
acquire 6,666 shares of our common stock at an exercise price of $7.50 per share
and agreed to issue Mr. Feld warrants to acquire an additional 1000 shares of
common stock for each month beyond June 1999 that the loan remains unpaid. The
warrants have a five year term.
In addition, in October 1998, we borrowed $250,000 from the estate
of Irene Lynch. J. Todd Raymond, General Counsel and Secretary, is the grandson
of Irene Lynch and the trustee of the Irene Lynch estate. This loan is
represented by a promissory note bearing interest at the rate of 2% per month
and was due on April 14, 1999. The note has been verbally extended until the
completion of this offering. In consideration for making the loan, we issued
26,666 shares of our common stock to the estate.
Payroll services have also been provided to Sarahe, Inc., a
privately held company of which Joseph J. Raymond, our Chairman and Chief
Executive Officer, is an officer and 50% stockholder. Invoices were issued to
Sarahe for $120,000 during the year ended September 30, 1997, $1,277,000 during
the year ended September 30, 1998 and $304,000 during the year ended September
30, 1999. At December 31, 1999 there was no outstanding balance.
All prior and ongoing material transactions with related parties
have been reviewed and/or ratified by a majority of our independent,
disinterested directors. We anticipate that from time to time we will enter into
additional transactions with related parties. However, all future material
transactions will be entered into on terms that are no less favorable than those
that can be obtained from unaffiliated third parties. At all times our directors
have access to our counsel to discuss company related issues.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock, as at January 31, 2000 by:
o persons who are known by us to own beneficially more than 5%
of our shares;
o by each of the persons named in the table under the caption
"Executive Compensation";
o each of our directors; and
o by all of our directors and executive officers as a group.
The calculations in the table are based on an aggregate of 4,349,137 shares
calculated as outstanding as of January 31, 2000 after adjusting for the 2-for-3
reverse stock split. Unless otherwise noted all addresses of the beneficial
owners are 500 Craig Road, Manalapan, New Jersey. The percentage listed under
the "After Offering" column is based on an assumed offering of an aggregate of
1,300,000 shares and the conversion of debt into 116,666 shares upon completion
of this offering. The symbol "*" indicates that the amount shown is less than 1%
of the outstanding shares.
<TABLE>
<CAPTION>
Name and Address of Percentage of Class Percentage of Class
Beneficial Owner(a) Number of Shares Before Offering After Offering
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joseph J. Raymond(b) 924,315 21.00% 15.8%
Joan Raymond(c) 588,665 13.85 10.00
Charles A. Sahyoun(d) 291,444 6.7 5.00
Michael J. Rutkin 234,000 5.50 4.00
Michael A. Maltzman(e) 88,333 2.06 1.50
H. Robert Kingston 33,333 * *
Sanford Feld(f) 31,667 * *
Mark Levine(g) 20,833 * *
A. George Komer(g) 20,833 * *
Donald W. Feidt 20,000 * *
All Directors and
Officers as a Group 1,729,757 38.1 29.5
(b),(d),(e),(f),(g),(h)
</TABLE>
- ----------
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
options or warrants that are currently exercisable or exercisable within
60 days of January
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31, 2000 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(b) Includes 111,111 shares subject to options to purchase that are currently
exercisable or may become exercisable within 60 days of January 31, 2000.
Excludes 1,055,556 shares subject to options that are not vested or
exercisable within 60 days of January 31, 2000.
(c) Includes 250,000 shares held by the children of Joan Raymond residing in
her household.
(d) Includes 41,666 shares subject to options that are currently exercisable.
Excludes 41,666 shares subject to options that are not vested or
exercisable within 60 days of January 31, 2000.
(e) Includes 41,666 shares subject to options that are currently exercisable
or may become exercisable within 60 days of January 31, 2000. Excludes
41,666 shares subject to options that are not vested or exercisable within
60 days of January 31, 2000.
(f) Includes 11,667 shares subject to warrants that are currently exercisable.
(g) Includes 20,833 shares subject to options that are currently exercisable.
Excludes 62,500 shares subject to options that are not vested or
exercisable within 60 days of January 31, 2000.
(h) Includes 63,889 shares that are beneficially owned by J. Todd Raymond our
General Counsel and Corporate Secretary, including 13,333 shares subject
to options and 33,333 shares owned by the estate of Irene Lynch, for which
Mr. Raymond serves as trustee.
Management Control
Upon consummation of this offering, directors, officers and senior
management employees of Stratus will control approximately 31.7% of our
outstanding voting stock. As a result, if they act together, they may have the
ability to significantly influence the outcome of all matters requiring
stockholder approval, including the election and removal of directors and any
merger, consolidation or sale of all or substantially all of our assets, and the
ability to control our management and affairs.
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DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 25,000,000 shares of common
stock, par value $0.01 per share and 5,000,000 shares of preferred stock, par
value $0.01 per share. As of January 31, 2000, there were 4,349,137 shares of
common stock and no shares of preferred stock outstanding. The following
description of the material features of our capital stock is intended as a
summary only and is qualified in its entirety by reference to our certificate of
incorporation and the bylaws, a copy of each of which is filed as an exhibit to
the Registration Statement of which this prospectus is a part.
Common Stock
Each share of common stock entitles the holder thereof to one vote
on all matters submitted to the shareholders. Since the common stock does not
have cumulative voting rights, holders of more than 50% of the outstanding
shares can elect all of the directors and holders of the remaining shares could
not elect any directors. The shares are not subject to redemption and there are
no preemptive rights. All outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock are entitled to receive dividends out of
funds legally available for distribution when, as and if declared by the Board
of Directors. The payment of cash dividends on the common stock is unlikely for
the foreseeable future. Upon any liquidation, dissolution or winding up of the
Company, holders of common stock are entitled to share pro rata in any
distribution to the holders of common stock.
As of January 31, 2000, there were 193 record holders of the
Company's common stock.
Preferred Stock
Our certificate of incorporation authorizes the Board of Directors
to issue shares of preferred stock in one or more series with such dividend,
liquidation, conversion, redemption and other rights as the Board establishes at
the time. Shareholder approval is not required to issue preferred stock. To the
extent that we issue any shares of Preferred Stock, the ownership interest and
voting power of existing shareholders could be diluted.
The preferred stock could be issued in one or more series with such
voting, conversion and other rights as would discourage possible acquirers from
making a tender offer or other attempt to gain control of Stratus, even if such
transaction were generally favorable to our stockholders. In the event of a
proposed merger, tender offer or other attempt to gain control of Stratus which
the Board does not approve, it might be possible for the Board to authorize the
issuance of a series of preferred stock with rights and preferences which could
impede the completion of such a transaction. The Board could authorize holders
of the preferred stock to vote, either separately as a class or with the holders
of common stock, on any merger, sale or exchange of assets or other
extraordinary corporate transaction. preferred stock may be used to discourage
possible acquirors from making a tender offer or other attempt to gain control
of Stratus with a view to imposing a merger or sale of all or any part of
Stratus' assets, even though a majority of shareholders may deem such
acquisition attempts to be desirable.
Preferred stock may also be used as consideration for any
acquisitions that we undertake, either alone or in combination with shares,
notes or other assets including cash or other liquid securities.
Underwriter Warrants
In connection with the completion of this offering, for nominal
consideration, we will grant to the underwriters, underwriters' warrants to
purchase 130,000 shares of common stock at an initial exercise price of 135% of
the initial public offering price of the shares sold in this offering. The
underwriters' warrants are exercisable for a period of four years commencing one
year from the date of this prospectus. The shares of common stock issuable upon
exercise of the underwriters' warrants are identical to the shares being sold in
this offering. The
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underwriters' warrants also grant the holders thereof certain rights of
registration of the shares of common stock issuable upon exercise of such
warrants. Stratus is registering the underwriters' warrants, as well as the
underlying common stock, pursuant to the registration statement of which this
prospectus forms a part.
Statutory Business Combination Provision
We are subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless:
o the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the
Board of Directors of the corporation before the person
becomes an interested stockholder;
o the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same
transaction that makes such person an interested stockholder
(excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain
employee stock ownership plans); or
o on or after the date the person becomes an interested
stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at
least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the
interested stockholder.
Under Section 203, an "interested stockholder" is defined as any person who is
the owner of 15% or more of the outstanding voting stock of the corporation, or
an affiliate or associate of the corporation and who was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage
of Section 203 by amending its certificate of incorporation or bylaws, through
action of its stockholders, to exempt itself from coverage, provided that such
bylaw or certificate of incorporation amendment shall not become effective until
12 months after the date it is adopted. We have not adopted such an amendment to
our Certificate of Incorporation or Bylaws.
Limitation on Liabilities and Indemnification Matters
Pursuant to our certificate of incorporation and bylaws and as
permitted by Delaware law, directors are not liable to Stratus or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has received an improper personal benefit.
Our certificate of incorporation and bylaws also provide that
directors and officers shall be indemnified to the fullest extent authorized by
Delaware law against all expenses and liabilities actually and reasonably
incurred in undertaking their duties. Nonofficer employees and agents may be
similarly indemnified at the Board of Directors discretion and further permits
the advancing of expenses incurred in defense of claims.
Certain provisions of the Certificate of Incorporation and Bylaws
Our bylaws provide that a special meeting of stockholders can only
be called by the Chief Executive Officer, a majority of the Board of Directors
or holders of 10% of our capital stock then entitled to vote generally in the
election of directors. The bylaws provide that only matters set forth in the
notice of
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the special meeting may be considered or acted upon at that special meeting.
Our certificate of incorporation and bylaws also provide that any
action required or permitted to be taken by the stockholders of the company at
an annual or special general meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
Anti Takeover Effects of the Charter Documents and Delaware Law.
Our certificate and bylaws include certain provisions that may have
anti takeover effects. These provisions may delay, defer or prevent a tender
offer or takeover attempt that shareholders may consider to be in their best
interests including attempts that might result in a premium over the market
price for the shares held by the shareholders. These provisions may also make it
more difficult to remove incumbent management.
These provisions, include:
o authorizing our Board of Directors to issue preferred stock;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent;
o establishing advance notice requirements for nominations for
election of our board of directors or for proposing matters that can
be acted on by stockholders at stockholder meetings and
o prohibiting cumulative voting in the election of directors.
Listing
We have applied for quotation of the Common Stock on the Nasdaq Smallcap
Market under the trading symbol SERV.
Transfer Agent and Registrar
The Company's transfer agent is American Stock Transfer and Trust
Company.
"Penny Stock" Rules
The Nasdaq Stock Market has certain continuing listing criteria which we
will be required to satisfy in order to maintain the listing of our common stock
on the Nasdaq SmallCap Market, including criteria pertaining to net tangible
assets, market capitalization and net income. If we are unable to meet these
criteria, our common stock could be delisted from trading on the Nasdaq SmallCap
Market. In the event that the common stock is delisted, the common stock could
be classified as a penny stock depending upon its market price and the manner in
which it is traded. The Securities and Exchange Commission has adopted rules
that regulate broker-dealer practices in connection with transactions in "penny
stocks." Penny stocks generally are equity securities with a price of less than
$5.00 other than securities registered on certain national securities exchanges
or quoted on the Nasdaq Stock Market, provided that current price and volume
information is proved by the exchange or the Nasdaq Stock Market. The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a risk disclosure document that
provides information about penny stocks and the nature and level of risk in the
penny stock market and other information. In addition the penny stock rules
require a broker-dealer to enter into a special written agreement with respect
to the transaction. These requirements may have the effect of reducing the level
of trading activity in the secondary market for a security that becomes subject
to the penny stock rules. Prices for penny stocks are often not available and
investors are often unable to sell such stocks.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the
common stock and there can be no assurance that a significant public market for
the stock will develop or be sustained after this offering. Future sales of
common stock, including shares issued upon exercise of outstanding options and
warrants, in the public market after this offering could adversely affect market
prices prevailing from time to time and could impair our future ability to raise
capital through the sale of equity securities.
Upon closing of the offering, there will be 5,800,469 shares of
common stock outstanding, assuming no exercise of warrants and options
outstanding. Of these shares, the 1,300,000 shares of common stock sold pursuant
to this offering will be freely tradable without restriction under the
Securities Act unless purchased by "affiliates" of Stratus as that term is
defined in Rule 144 under the Securities Act.
Holders of 2,885,143 shares of common stock, including our directors
and officers, have agreed not to sell, offer to sell or otherwise dispose of any
of their shares for a period of 24 months from the date of this prospectus
without the prior written consent of the underwriter. Holders of an additional
1,094,743 shares of common stock have agreed not to sell, offer or to otherwise
dispose of any of their shares for a period of 12 months from the date
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<PAGE>
of this prospectus without the written consent of the underwriter. After the
expiration of these restrictions, the holders of the shares which are the
subject of the restrictions may sell the shares under Rule 144. Holders of
approximately 586,050 shares of common stock will be eligible to sell their
shares of common stock under Rule 144 at various times commencing 90 days after
the date of this prospectus. In addition, the company has agreed to register
approximately 31,334 shares subject to outstanding warrants for public sale six
to twelve months after the date of this offering; however 50% of these shares
are subject to an agreement restricting sales for a twelve month period as
described above and the remaining 50% of the shares are subject to an agreement
restricting sales for 24 months.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year (including
the holding period of any prior owner, except an affiliate) is entitled to sell
in "broker's transactions" or to market makers, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of:
o One percent of the number of common shares then outstanding
(approximately 58,005 shares immediately after this offering);
or
o The average weekly trading volume of the common shares during
the four calendar weeks preceding the required filing of a
Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
No predictions can be made on the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
preceding from time to time. Moreover, we cannot predict the number of shares of
common stock which may be sold in the future pursuant to Rule 144 since such
sales will depend on the market price of the common stock, the individual
circumstances of the holders thereof and other factors. Nevertheless, any sales
of substantial amounts of common stock could have a significant adverse effect
on the market price of our Common Stock.
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<PAGE>
UNDERWRITING
Hornblower & Weeks, Inc. and Dirks & Company, Inc., as underwriters here
agreed, subject to the terms and conditions of the underwriting agreement with
Stratus to purchase from Stratus the number of shares of common stock indicated
below:
Underwriters Number of Shares
------------ ----------------
Hornblower & Weeks, Inc. ...............
Dirks & Company, Inc. ..................
----------------
Total ............................
The underwriters are committed to purchase and pay for all of the
shares offered hereby if any are purchased. The common stock is being offered by
the underwriters subject to prior sale, when, as and if delivered to and
accepted by the underwriters and subject to approval of certain legal matters
by counsel and to certain other conditions, such as no adverse changes in
Stratus and market conditions.
The underwriters have advised Stratus that they propose to offer the
common stock to the public at the initial public offering price set forth on the
cover page of this prospectus. The underwriters may allow to certain dealers who
are members of the NASD concessions, not in excess of $0.__ per share, of which
not in excess of $0.__ per share may be reallowed to other dealers who are
members of the NASD. After the initial public distribution of the shares is
completed, the public offering price, concession and reallowance may be changed
by the underwriters.
We have granted the underwriters an over-allotment option,
exercisable during the 30-day period commencing with the date of the
underwriting agreement, to purchase from Stratus at the initial offering price
less underwriting discounts, up to an aggregate of 195,000 additional shares of
common stock from Stratus for the sole purpose of covering over-allotments, if
any. Stratus will be obligated, pursuant to this over-allotment option, to sell
such additional shares to the underwriters.
We have agreed to pay to the underwriters a non-accountable expense
allowance of 3% of the gross proceeds of the offering, of which $40,000 has been
paid as of the date of this prospectus. Stratus has also agreed to pay all
expenses in connection with qualifying the common stock offered hereby for sale
under the laws of such states as the underwriters may designate, including
expenses of counsel retained for such purpose by the underwriters.
In connection with the offering, we have agreed to sell to the
underwriters, for $100, the underwriter's warrants to acquire 130,000 shares of
our common stock. The underwriter's warrants initially are exercisable at a
price of 135% of the per share initial public offering price of the shares
offered hereby, for a period of four years commencing one year from the date of
this prospectus. The shares of common stock issuable upon exercise of the
underwriter's warrants are identical to the shares being sold in this offering.
The underwriter's warrants also grant the holders thereof certain rights of
registration of the shares of common stock issuable upon exercise of such
warrants. Stratus is registering the underwriter's warrants, as well as the
underlying common stock, pursuant to the registration statement of which this
prospectus forms a part. The underwriter's warrants may not be sold,
transferred, assigned, pledged or hypothecated for a period of one year
following the date of the registration statement of which this prospectus forms
a part, except to NASD members participating in the offering and the bona fide
officers or partners thereof.
Hornblower & Weeks, Inc. has the right to designate one member of
the Board of Directors for a period of 5 years commencing with the closing of
this offering. Stratus has agreed to pay Hornblower & Weeks, Inc. a finder's fee
equal to five percent (5%) of the consideration paid in any merger, acquisition,
joint venture or similar transaction to which Stratus is a party that is
originated by Hornblower & Weeks, Inc.
Stratus has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act.
The underwriters have informed us that they will not sell any shares
of the common stock to any accounts over which they exercise discretionary
authority.
We have agreed with the underwriters that for a period of 12 months
from the date of this prospectus, we will not issue any securities or grant
options or warrants to purchase any securities of Stratus without the consent of
Hornblower & Weeks, Inc. except pursuant to outstanding warrants and options
and:
o options to acquire up to 130,000 shares of common stock which
may be issued to officers, directors, employees and
consultants;
o award to employees under the Stratus Equity Incentive Plan;
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o as consideration payable in connection with potential mergers
and acquisitions;
o in a public offering at a price less than 90% of the average
closing bid prices of the common stock as reported on the
Nasdaq Stock Market for the 21 consecutive trading day period
immediately preceding the date of sale; and
o in a private sale at not less than 70% of the average closing
bid prices of the common stock as reported on the Nasdaq Stock
Market for the 21 consecutive trading day period immediately
preceding the date of sale.
The underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934. Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the underwriter to reclaim a
selling concession from a syndicate member when the securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the common stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be affected on Nasdaq or otherwise and, if commenced, may
be discontinued at any time and will, in any event, be discontinued thirty (30)
days after settlement of this offering.
Copies of the underwriting agreement and related documents have been
filed as exhibits to the registration statement of which this prospectus forms
a part.
Prior to this offering there has been no public market for the
common stock. The initial public offering price for the shares of common stock
offered will be determined by negotiation between Stratus and the underwriter.
The factors to be considered in determining the initial public offering price
include the history of and the prospects for the industry in which we compete,
our past and present operation, our historical financial results, our prospects
for future earnings, the recent market prices of securities of generally
comparable companies and the general conditions of the securities market at the
time of the offering.
A firm controlled by a group of brokers with whom the Hornblower &
Weeks, Inc. branch office managed by Christopher Janish previously had a
business relationship is currently the subject of an investigation by the SEC.
Pursuant to this investigation, the SEC's New York office has served Hornblower
& Weeks, Inc. with a subpoena that requests that Hornblower & Weeks, Inc.
produce various documents, including all documents pertaining to all contracts,
arrangements or agreements between Hornblower & Weeks, Inc. and/or an entity
controlled by Christopher Janish, on the one hand, and Stratus and any entities
affiliated with or controlled by Joseph J. Raymond, the President and Chief
Executive Officer of Stratus, J. Todd Raymond, Secretary and General Counsel of
Stratus, and any other members of the Raymond family, on the other hand. Stratus
has been advised by Hornblower & Weeks, Inc. that copies of the letter of intent
and underwriting agreement relating to the offering being made pursuant to this
prospectus will be provided to the SEC. Stratus is not aware of any other
documents which are responsive to the SEC's subpoena regarding its relationship
with Hornblower & Weeks, the entity under investigation or the entity controlled
by Mr. Janish.
LEGAL MATTERS
The legality of the shares offered by this prospectus will be passed
upon for us by Giordano, Halleran & Ciesla, a Professional Corporation,
Middletown, New Jersey. Certain legal matters will be passed on for the
Underwriters by Lehman & Eilen LLP, Uniondale, New York.
EXPERTS
Certain financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Amper, Politziner &
Mattia, PA independent auditors, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of the firm as experts
in giving such reports. Reference is made to such reports which include
explanatory paragraphs that state substantial doubts about our ability to
continue as a going concern.
38
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form SB-2 under the
Securities Act with respect to the offered common stock. We have not included in
this prospectus additional information contained in the Registration Statement
and you should refer to the Registration Statement and its exhibits for further
information. The Registration Statement and exhibits and schedules filed as a
part thereof, which may be inspected, without charge, at the Public Reference
Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices at the SEC located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60611-2511. The
SEC maintains a worldwide web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements regarding registrants that
file electronically with the SEC. Copies of all or any portion of the
Registration Statement may be obtained from the public reference section of the
SEC upon payment of the prescribed fees.
39
<PAGE>
STRATUS SERVICES GROUP, INC.
For the Years Ended
September 30, 1999 and 1998
and the Three Months Ended
December 31, 1999 and 1998 (unaudited)
Page
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statement of Stockholders' Deficiency F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - 19
B & R EMPLOYMENT, INC.
For the Years Ended December 31, 1998 and 1997
Independent Auditors' Report F-20
Balance Sheets F-21
Statements of Operations F-22
Statement of Stockholders' Deficiency F-23
Statements of Cash Flows F-24
Notes to Financial Statements F-25 - 27
UNAUDITED PROFORMA FINANCIAL STATEMENTS
Unaudited Proforma Condensed Statement of Operations
For the Year Ended September 30, 1998 F-28
Unaudited Proforma Condensed Statements of Operations:
For the Year Ended September 30, 1999 F-29
Notes to Unaudited Proforma Condensed Statements of Operations F-30
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders of
Stratus Services Group, Inc.
We have audited the accompanying balance sheets of Stratus Services Group, Inc.
as of September 30, 1999 and 1998, and the related statements of operations,
stockholders' deficiency, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratus Services Group, Inc. as
of September 30, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit, which raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Amper, Politziner & Mattia P.A.
AMPER, POLITZINER & MATTIA P.A.
December 1, 1999
Edison, New Jersey
F-2
<PAGE>
STRATUS SERVICES GROUP, INC.
Balance Sheets
<TABLE>
<CAPTION>
Assets
September 30, September 30, December 31,
1999 1998 1999
------------- ------------- ------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 423,072 $ 249,987 $ 11,192
Due from factor - less allowance for recourse
obligation of $-0-, $-0- and $70,000 -- -- 256,468
Accounts receivable - less allowance for
doubtful accounts of $703,000, $37,000 and
$703,000 571,679 65,536 632,274
Unbilled receivables 486,338 282,485 526,110
Unbilled receivables - related parties 15,408 22,445 --
Prepaid insurance 257,213 222,291 86,336
Prepaid expenses and other current assets 15,908 5,130 68,592
----------- ----------- -----------
1,769,618 847,874 1,580,972
Property and equipment, net of accumulated depreciation 311,058 95,562 355,065
Goodwill 2,345,555 -- 2,304,431
Investment in marketable securities -- -- --
Deferred registration costs 326,878 -- 391,977
Other assets 172,756 151,213 166,643
----------- ----------- -----------
$ 4,925,865 $ 1,094,649 $ 4,799,088
=========== =========== ===========
Liabilities and Stockholders' Deficiency
Current liabilities
Loans payable $ 772,460 $ -- $ 984,344
Loans payable - related parties 15,500 406,350 252,500
Notes payable - acquisition (current portion) 1,117,810 -- 1,208,335
Insurance obligation payable 252,886 211,708 102,842
Due to factor - less allowance for recourse obligation of $50,000,
$795,000 and $-0- 683,924 2,602 --
Accounts payable and accrued expenses 1,410,367 927,743 1,584,449
Accrued payroll and taxes 934,335 869,823 503,990
Payroll taxes payable 226,232 143,312 277,522
Litigation fees payable 133,299 271,361 133,299
----------- ----------- -----------
5,546,813 2,832,899 5,047,281
Notes payable - acquisition (net of current portion) 252,657 -- 157,776
----------- ----------- -----------
5,799,470 2,832,899 5,205,057
Temporary equity - put options 520,000 -- 520,000
Commitments and contingencies
Stockholders' deficiency
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,272,470 and 3,719,734 and 4,349,137
shares issued and outstanding 42,725 37,198 43,492
Additional paid-in capital 3,094,602 1,275,241 3,393,835
Deferred compensation (114,700) (161,500) (103,000)
Accumulated deficit (4,416,232) (2,889,189) (4,260,296)
----------- ----------- -----------
Total stockholders' deficiency (1,393,605) (1,738,250) (925,969)
----------- ----------- -----------
$ 4,925,865 $ 1,094,649 $ 4,799,088
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
STRATUS SERVICES GROUP, INC.
Statements of Operations
For the Years Ended September 30, 1999 and 1998
and for the Three Months Ended
December 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
For the Year Ended For the Three Months Ended
September 30, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues (including $1,696,000,
$3,598,000, $194,000 and $996,000 from
related parties) $ 30,042,751 $ 24,919,639 $ 7,723,887 $ 5,912,643
Cost of revenue (including $1,521,000,
$3,228,000, $172,000 and $929,000
from related parties) 23,677,093 20,329,718 5,728,323 4,679,119
------------ ------------ ------------ ------------
Gross profit 6,365,658 4,589,921 1,995,564 1,233,524
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative expenses 6,288,610 5,617,843 1,544,238 1,418,475
Provision for recourse obligation 595,000 670,445 20,000 595,000
Impairment of JPI assets -- 174,688 -- --
------------ ------------ ------------ ------------
6,883,610 6,462,976 1,564,238 2,013,475
------------ ------------ ------------ ------------
Earnings (loss) from operations (517,952) (1,873,055) 431,326 (779,951)
------------ ------------ ------------ ------------
Other income (expenses)
Finance charges (722,020) (524,649) (173,115) (199,448)
Interest expense (309,257) (48,170) (104,172) (31,600)
Other income 22,186 33,729 1,897 13,150
------------ ------------ ------------ ------------
(1,009,091) (539,090) (275,390) (217,898)
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,527,043) $ (2,412,145) $ 155,936 $ (997,849)
============ ============ ============ ============
Net earnings (loss) per common share -
Basic $ (.40) $ (.67) $ .04 $ (.27)
Diluted (.40) (.67) .03 (.27)
Weighted average shares, outstanding
per common share -
Basic 3,828,530 3,602,086 4,308,131 3,719,733
Diluted 3,828,530 3,602,086 4,492,024 3,719,733
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
STRATUS SERVICES GROUP, INC.
Statement of Stockholders' Deficiency
For the Years Ended September 30, 1999 and 1998 and
for the Three Months Ended December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Additional
Deferred Accumulated Paid-In Common Stock
Total Compensation Deficit Capital Amount Shares
----- ------------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance - October 1, 1997 $ (157,335) $ -- $ (477,044) $ 285,995 $ 33,714 3,371,334
Net (loss) (2,412,145) -- (2,412,145) -- -- --
Deferred compensation in connection with stock
options granted (no tax effect) -- (187,500) -- 187,500 -- --
Compensation expense in connection with stock
options granted (no tax effect) 26,000 26,000 -- -- -- --
Proceeds from sale of private placement of common stock
(net of cost of $501,370) for cash 773,730 -- -- 770,330 3,400 340,000
Issuance of common stock to employees
(compensation expense of $31,500) 31,500 -- -- 31,416 84 8,400
----------- ----------- ----------- ----------- ----------- ----------
Balance - September 30, 1998 (1,738,250) (161,500) (2,889,189) 1,275,241 37,198 3,719,734
Net (loss) (1,527,043) -- (1,527,043) -- -- --
Compensation expense in connection with stock
options granted (no tax effect) 46,800 46,800 -- -- -- --
Issuance of common stock in connection with acquisition -- -- -- (347) 347 34,667
Issuance of common stock in exchange for notes payable 1,092,762 -- -- 1,089,848 2,914 291,403
Proceeds from the sale of private placement of
common stock (net of costs of $117,874) for cash 732,126 -- -- 729,860 2,266 226,666
----------- ----------- ----------- ----------- ----------- ----------
Balance - September 30, 1999 $(1,393,605) $ (114,700) $(4,416,232) $ 3,094,602 $ 42,725 4,272,470
Net earnings for the three months ended December 31,
1999 (unaudited) 155,936 -- 155,936 -- -- --
Compensation expense in connection with stock options
granted (no tax effect) (unaudited) 11,700 11,700 -- -- -- --
Issuance of common stock in exchange for notes payable
(unaudited) 300,000 -- -- 299,233 767 76,667
----------- ----------- ----------- ----------- ----------- ----------
Balance - December 31, 1999 (unaudited) $ (925,969) $ (103,000) $(4,260,296) $ 3,393,835 $ 43,492 4,349,137
=========== =========== =========== =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
STRATUS SERVICES GROUP, INC.
Statements of Cash Flows
For the Years Ended September 30, 1999 and 1998
and for the Three Months Ended
December 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
For the Years Ended For the Three Months Ended
September 30, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $(1,527,043) $(2,412,145) $ 155,936 $ (997,849)
----------- ----------- ----------- -----------
Adjustments to reconcile net earnings (loss) to net
cash used by operating activities
Depreciation 74,970 40,656 29,319 11,477
Amortization 121,848 -- 41,124 --
Imputed interest 25,645 -- 18,253 --
Accrued interest 91,996 -- 28,275 --
Compensation for issuance of common stock -- 31,500 -- --
Impairment of JPI assets -- 174,688 -- --
Compensation - stock options 46,800 26,000 11,700 11,700
Changes in operating assets and liabilities
Due to/from factor 465,532 437,663 (940,392) 808,267
Accounts receivable (702,959) (209,214) (84,959) (242,667)
Prepaid insurance (34,922) 338,917 170,877 130,729
Prepaid expenses and other current assets (10,778) 8,462 (52,684) (1,973)
Other assets 6,582 (29,357) 6,113 (4,574)
Insurance obligation payable 41,178 (153,467) (150,044) (158,781)
Accrued payroll and taxes 64,512 392,899 (430,345) (508,867)
Payroll taxes payable 82,920 (95,471) 51,290 (2,634)
Litigation fees payable (138,062) 271,361 -- (40,151)
Accounts payable and accrued expenses 397,336 538,020 165,695 76,445
----------- ----------- ----------- -----------
Total adjustments 532,598 1,772,657 (1,135,778) 78,971
----------- ----------- ----------- -----------
(994,445) (639,488) $ (979,842) $ (918,878)
----------- ----------- ----------- -----------
Cash flows (used in) investing activities
Purchase of property and equipment (283,466) (96,789) (73,326) (70,824)
Payments for business acquisitions (194,930) (89,688) -- --
----------- ----------- ----------- -----------
(478,396) (186,477) (73,326) (70,824)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from sale of common stock 732,126 735,230 -- --
Proceeds from loans payable 1,388,375 550,000 750,000 775,000
Payments of loans payable (370,746) (302,150) (52,000) --
Payments of registration costs (103,829) -- (56,712) --
----------- ----------- ----------- -----------
1,645,926 983,080 641,288 775,000
----------- ----------- ----------- -----------
Net change in cash and cash equivalents 173,085 157,115 (411,880) (214,702)
Cash and cash equivalents - beginning 249,987 92,872 423,072 249,987
----------- ----------- ----------- -----------
Cash and cash equivalents - ending $ 423,072 $ 249,987 $ 11,192 $ 35,285
=========== =========== =========== ===========
Supplemental disclosure of cash paid
Interest $ 174,175 $ 37,872 $ 29,294 $ 16,500
=========== =========== =========== ===========
Schedule of Noncash Investing and Financing Activities
Fair value of assets acquired $ 2,421,903 $ 289,688 $ -- $ --
Less: cash paid (57,430) (89,688) -- --
Less: common stock and put options issued (520,000) -- -- --
----------- ----------- ----------- -----------
Liabilities assumed $ 1,844,473 $ 200,000 $ -- $ --
=========== =========== =========== ===========
Issuance of common stock in
exchange for notes payable $ 1,092,762 $ -- $ 300,000 $ --
=========== =========== =========== ===========
Accrued and imputed interest $ 117,641 $ -- $ 46,528 $ --
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 1 - Liquidity
Stratus Services Group, Inc. ("Company") has been experiencing
significant losses from operations due to increasing overhead in
anticipation of additional future revenues, litigation fees, and
unusual reserves for estimated recourse obligations. The
accompanying financial statements have been prepared assuming the
Company will continue as a going concern.
Management's plans consist of reducing overhead by eliminating and
consolidating locations and applicable staff, and implementing cost
reduction measures such as decreasing salaries. The Company
completed a private placement of its common stock and notes in 1999
raising approximately $1,000,000 for working capital purposes.
Thirdly, the Company is in the registration process with the
Securities Exchange Commission to raise additional capital.
Note 2 - Nature of Operations and Summary of Significant Accounting Policies
Operations
The Company was incorporated on March 11, 1997, for the purpose of
providing contract labor and staffing services. The only activity
between March 11, 1997 and August 11, 1997, was the issuance of 667
shares of common stock. The Company commenced operations on August
11, 1997 when it acquired certain assets and assumed certain
liabilities of Royalpar Industries, Inc. ("Royalpar") and its
subsidiaries (an entity in bankruptcy). This acquisition enabled the
Company to immediately commence its temporary staffing business by
providing customers, qualified staff and accounting and payroll
support services from offices in New Jersey, Colorado, Texas,
California and Arizona.
The Company operates as one business segment. The one business
segment consists of its traditional staffing services, engineering
staffing services, and SMARTSolutions (TM), a structured program to
monitor and enhance the production of a client's labor resources.
The Company's customers are in various industries and are located
throughout the United States. Credit is granted to substantially all
customers. No collateral is maintained.
Revenue Recognition
The Company recognizes revenue as the services are performed by its
workforce. The Company's customers are billed weekly. At balance
sheet dates, there are accruals for unbilled receivables and related
compensation costs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Interim Financial Statements
The financial statements as of December 31, 1999 and for the three
months ended December 31, 1999 and 1998 have been prepared by the
Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to
present fairly the financial position as of December 31, 1999 and
the results of operations and cash flows for the three months ended
December 31, 1999 and 1998 have been made. The results of operations
for the three months ended December 31, 1999 are not necessarily
indicative of the results to be expected for the year ending
September 30, 2000.
Reclassification
Certain items in the statement of operations for the year ended
September 30, 1998 have been reclassified to conform to the year
ended September 30, 1999 presentation.
F-7
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 2 - Nature of Operations and Summary of Significant Accounting Policies -
(continued) Earnings/Loss Per Share
The Company adopted Statement of Financial Accounting Standards No.
128 "Earnings per Share," (SFAS 128). SFAS 128 replaces the
presentation of primary earnings per share ("EPS") and fully diluted
EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted EPS assumes
conversion of dilutive options and warrants, and the issuance of
common stock for all other potentially dilutive equivalent shares
outstanding.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
Estimated
Method Useful Life
------ -----------
Computer equipment Straight-line 3 years
Office equipment Declining balance 5 years
Furniture and fixtures Declining balance 5 years
Goodwill
Goodwill 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."
Stock Options
The Company has elected to follow Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its employee
stock options. Under this method, compensation cost is measured as
the amount by which the market price of the underlying stock exceeds
the exercise price of the stock option at the date at which both the
number of options granted and the exercise price are known.
Advertising Costs
Advertising costs are expensed as incurred. The expenses for the
years ended September 30, 1999 and 1998 and the three months ended
December 31, 1999 and 1998 were $133,000, $110,000, $37,000 and
$24,000 respectively, and are included in selling, general and
administrative expenses.
F-8
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 2 - Nature of Operations and Summary of Significant Accounting Policies -
(continued) Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.
Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company operates as a
single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities and
measure them at a fair value. Under certain circumstances, the gains
or losses from derivatives may be offset against those from the
items the derivatives hedge against. The Company will adopt SFAS No.
133 in the fiscal year ending September 30, 2001. The Company does
not anticipate that SFAS No. 133 will have a material impact.
Note 3 - Acquisitions
JP Industrial, LLC
On August 10, 1998, the Company acquired certain assets of JP
Industrial, LLC, ("JPI") an engineering services company in Oregon
for $289,688 of which $89,688 was paid at closing and the remainder
payable in monthly installments through May 1999. The assets
acquired consisted of equipment, customer and vendor lists and any
open and pending contracts and purchase orders. The Company did not
assume any liabilities or obligations unless expressly agreed to.
Shortly after the acquisition and before assigning values to the
assets, the Company filed a lawsuit alleging breach of contract by
the former owners of JPI. The former owners of JPI have filed a
counter claim. Arbitration is to commence in early 2000.
Management believes that the breach of contract has impaired the
value of assets purchased and has consequently charged operations
for $174,688 during the year ended September 30, 1998.
F-9
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 3 - Acquisitions - (continued)
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 a note for $1,610,000 (Note #1),
a note for $270,000 (Note #2) and the issuance of 34,667 shares of
the Company's common stock. B&R has a put option to sell these
shares back to the Company at $15 per share, provided that the
Company does not conduct an initial public offering within
twenty-four months.
In addition, the Company purchased existing accounts receivable of
$657,000 from B&R and sold them to the factor. Any uncollectible
accounts receivable and costs associated therewith are deductible
from the notes payable. In this connection, $197,186 has been
credited against Note #1 at September 30, 1999 and December 31,
1999. In addition, B&R's
$57,430 share of a finder's fee paid by the Company has also been
credited against Note #1.
A payment of $269,000 was made against Note #1 in April 1999. In
addition, payments of $12,000 a month began June 1999. Note #1
accrues interest at 10% a year and is due thirty days after
successful completion of an initial public offering or March 1,
2000, whichever is sooner. Note #2 is payable in eight quarterly
installments of principal and interest commencing ninety days after
payment of Note #1 with interest accruing at 12%.
Notes payable - acquisition comprises the following:
September 30, December 31,
1999 1999
------------- ------------
(unaudited)
Note #1 $ 1,025,814 $ 986,814
Note #2 270,000 270,000
Accrued interest 91,996 120,271
Less: unamortized discount (17,343) (10,974)
----------- -----------
1,370,467 1,366,111
Less: current portion (1,117,810) (1,208,335)
----------- -----------
$ 252,657 $ 157,776
=========== ===========
In connection with this acquisition, the Company entered into an
employment and a non-compete agreement for a three year period with
the sole stockholder of B&R. The excess of cost paid over net assets
acquired resulted in goodwill of $2,414,903, computed as follows:
Net assets acquired
Office equipment $ 7,000
-----------
Amounts paid
Notes payable (net of $35,527 discount) 1,844,473
Issuance of common stock and put options 520,000
Finder's fee 57,430
-----------
2,421,903
-----------
Excess of amounts paid over net assets
acquired-goodwill $ 2,414,903
===========
F-10
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 4 - Factoring Agreement
The Company has a factoring agreement under which it may sell up to
$3,000,000 of qualified trade accounts receivable, with limited
recourse provisions. The agreement expires August 10, 2000 and is
renewed automatically for one year periods unless either party is
notified of termination sixty days prior to renewal. The Company is
required to repurchase or replace any receivable remaining
uncollected for more than 90 days. During the years ended September
30, 1999 and 1998 and the three months ended December 31, 1999 and
1998 gross proceeds from the sale of receivables were $25,227,640,
$23,146,923, $6,557,788 and $5,239,179 respectively. The provision
for recourse obligation includes the estimated recourse obligations
on the sale of receivables. As of September 30, 1999 and 1998, and
December 31, 1999, $3,789,000, $2,943,000 and $2,981,000
respectively, of the receivables sold to the factor had not been
collected.
As of September 30, 1999 and 1998 and December 31, 1999 $-0-,
$1,105,000, and $-0- respectively, of related-party receivables sold
to the factor had not been collected. Reserves for recourse
obligations of $-0-, $500,000 and $-0- respectively, have been
provided against these receivables.
The Company is an impaired seller under the terms of the factoring
agreement. Although in technical violation for not repurchasing
outstanding receivables over 90 days, the factor is not exercising
any of the remedies available to them. However, two stockholders of
the Company have pledged 1,055,334 shares of the Company as
collateral.
As of January 21, 2000 the factor confirmed that the Company was no
longer in technical violation and is releasing the shares held as
collateral.
Note 5 - Property and Equipment
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Furniture and fixtures $ 42,071 $ 10,700 $ 43,195
Office equipment 34,423 26,223 57,275
Computer equipment 296,960 78,362 336,559
Computer software 54,892 22,593 64,642
---------- --------- ----------
428,346 137,878 501,671
Accumulated depreciation (117,288) (42,316) (146,606)
---------- --------- ----------
Net property and equipment $ 311,058 $ 95,562 $ 355,065
========== ========= ==========
</TABLE>
Note 6 - Goodwill
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Goodwill $2,467,403 $ -- $2,467,403
Less: accumulated amortization (121,848) -- (162,972)
---------- --------- ----------
$2,345,555 $ -- $2,304,431
========== ========= ==========
</TABLE>
F-11
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 7 - Loans Payable
a. Related Parties
As of September 30, 1999 and 1998 and December 31, 1999, various
stockholders advanced funds to the Company for working capital and
payment of litigation expenses (see Note 8). These loans bear
interest at the rate of 12% per annum and are payable upon demand.
Interest expense for the years ended September 30, 1999 and 1998 and
the three months ended December 31, 1999 and 1998 was $43,544,
$40,863, $5,000 and $11,600 respectively.
In August 1999, the Chief Executive Officer of the Company and his
son agreed to exchange, effective June 30, 1999, $440,000 of notes
payable by the Company to them plus accrued interest of $52,762 for
131,403 shares of the Company's common stock. The stock was valued
at $3.75 per share which 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) $365,000 as of September 30, 1999 and December 31, 1999,
bearing interest at the rates of 18% to 24% a year, due
on demand;
(ii) $157,460 and $169,344 as of September 30, 1999 and
December 31, 1999, respectively, representing the
discounted notes ($200,000 face value) from the private
placement (see Note 17). These notes bear interest at
the rate of 13% and are due upon the earlier of one year
or the successful completion of the IPO;
(iii) $150,000 as of September 30, 1999 and December 31, 1999,
due on demand, bearing interest at 12% a year; and
(iv) $100,000 as of September 30, 1999 and December 31, 1999,
due on demand, bearing interest at 30% a year.
(v) 200,000 as of December 31, 1999, due on demand, bearing
interest at 12% a year.
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 in
September, 1999. Other loans during the three months ended December
31, 1999 aggregating $100,000 and $200,000 were settled by the
issuance of 26,667 shares at $3.75 per share in October 1999 and
50,000 shares at $4.00 per share in November and December 1999.
Note 8 - Litigation Fees Payable
The Company and four individuals were defendants in a legal action
alleging breach of various agreements. The action was settled in
June 1998 as a result of which the Company paid $408,000 (for
plaintiff's attorneys fees) and incurred $390,000 for its own legal
fees. The Company owed $133,299, $271,361 and $133,299 at
September 30, 1999, September 30, 1998 and December 31, 1999
respectively, and is making periodic payments.
Note 9 - Related Party Transactions
Consulting Agreement
The former president of Royalpar, who is the son of the Chief
Executive Officer of the Company, provides consulting services to
the Company. Consulting expense was $107,000, $175,000, $31,000 and
$21,000 for the years ended September 30, 1999 and 1998 and the
three months ended December 31, 1999 and 1998, respectively.
F-12
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 9 - Related Party Transactions - (continued)
Consulting Agreement - (continued)
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 $23,000, $17,000, $-0- and $19,000 for
the years ended September 30, 1999 and 1998 and the three months
ended December 31, 1999 and 1998, respectively.
Revenues
The Company provides 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,
1999 and 1998, and the three months ended December 31, 1999 and 1998
were $1,392,000, $2,321,000, $194,000 and $692,000 respectively. In
August 1999, $663,000 of accounts receivable from this related party
were 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 are restricted. Accordingly, the investment has
been valued at $-0-. A value will be assigned to the common stock
when the shares are registered and the restriction is released. A
realized gain will be recognized in the statement of operations upon
the sale or exchange of these freely traded shares. The market price
of unrestricted common shares of the related party at September 30,
1999 and December 31, 1999 was $2.69 and $1.38 per common share,
respectively.
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, 1999 and 1998, and
the three months ended December 31, 1999 and 1998, revenues were
$304,000, $1,277,000, $-0- and $304,000 respectively.
Note 10 - Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Accounts payable $ 535,883 $ 220,370 $ 681,548
Accrued compensation 303,430 312,402 276,896
Accrued legal 261,894 -- 338,032
Accrued other 122,751 107,124 104,591
Accrued interest 19,133 71,242 22,987
Accrued lease 52,276 101,605 45,395
Due to JPI (see Note 3) 115,000 115,000 115,000
---------- --------- ----------
$1,410,367 $ 927,743 $1,584,449
========== ========= ==========
</TABLE>
F-13
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 11 - Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities follow:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets and liabilities
Allowance for recourse obligation $ 20,000 $ 318,000 $ 28,000
Allowance for doubtful accounts 281,000 12,000 281,000
Valuation allowance (301,000) (330,000) (309,000)
-------- --------- ---------
Net current deferred tax asset
(liability) $ -- $ -- $ --
======== ======== =========
Noncurrent assets and liabilities
Net operating loss carryforward $844,000 $683,000 $ 764,000
Stock compensation 29,000 11,000 34,000
Depreciation (16,000) (9,000) (16,000)
Valuation allowance (857,000) (685,000) (782,000)
-------- --------- --------
Net noncurrent deferred tax asset
(liability) $ -- $ -- $ --
======== ======== =========
</TABLE>
There were no provisions for income taxes for the years ended
September 30, 1999 and 1998 and the three months ended December 31,
1999 and 1998 because the Company has net operating loss
carryforwards with a corresponding valuation allowance against them.
The change in the valuation allowances was an increase of $143,000
and $87,000 and a decrease of $67,000 and $-0- for the years ended
September 30, 1999 and 1998 and the three months ended December 31,
1999 and 1998, respectively.
At September 30, 1999, the Company has available the following
federal net operating loss carryforwards for tax purposes:
Expiration Date
Year Ending
September 30,
-------------
2012 $ 218,000
2018 1,491,000
2019 400,000
The utilization of the net operating loss carryforwards may be
limited due to possible changes in control from private placements.
The effective tax rate on net loss varies from the statutory federal
income tax rate for periods ended September 30, 1999 and 1998.
1999 1998
---- ----
Statutory rate (34.0)% (34.0)%
State taxes net (6.0) (6.0)
Other differences, net 1.3 0.9
Valuation allowance 38.7 39.1
------- -------
--% --%
======= =======
F-14
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 12 - Commitments and Contingencies
Office Leases
The Company leases offices and equipment under various leases
expiring through July 31, 2004. Monthly payments under these leases
are $20,000.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of
September 30, 1999.
For the Years Ending
September 30
------------
2000 $ 236,000
2001 207,000
2002 117,000
2003 26,000
2004 22,000
Rent expense was $342,000, $187,000, $75,000 and $78,000 for the
years ended September 30, 1999 and 1998, and the three months ended
December 31, 1999 and 1998, respectively.
Employment Agreements
The Company has entered into employment agreements with five
executives. The terms of the agreements stipulate annual salaries,
aggregating $916,000 plus additional bonuses with stock options of
500,000 shares granted and vested over three to four years. The
agreement with the Chief Executive Officer is for three years, while
the others continue until terminated by the Company. The agreement
with the Chief Executive Officer entitles him to severance
compensation equal to 2.9 times his base salary.
Royalpar Industries, Inc. ("Royalpar")
In connection with the acquisition of certain assets and assumption
of certain liabilities of Royalpar, 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. No amounts are
currently due under this provision.
Other
Certain stockholders of the Company may have a right to pursue
claims against the Company as a result of possible technical
violations of the laws and regulations governing the private
placement and issuance of securities. In addition, the Company is a
defendant in the normal course of business involving a few unfair
labor practices. Management believes that the ultimate resolution of
these matters will not have a material adverse effect on the
Company's financial position and results of operations.
F-15
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 13 - Stock Options and Warrants
The Company has issued stock options to employees with terms of
three to four years. The options may be granted for 534,000 shares.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement
("FASB No. 123"), and has been determined as if the Company had
accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the date
of grant using the minimum method option pricing model.
The minimum method option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following weighted-average assumptions were used:
September 30,
1999 1998
---- ----
Risk-free interest rate 5% 6%
Dividend yield 0% 0%
Expected life 4 years 4 years
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
For the Years Ended
September 30,
1999 1998
---- ----
Pro forma net loss $(1,583,829) $(2,434,525)
Pro forma loss per common share -
basic and diluted $ (.41) $ (.68)
Compensation expense under APB 25 was $46,800 and $26,000 for the
years ended September 30, 1999 and 1998, respectively. Deferred
compensation at September 30, 1999, was $114,700 to be amortized
over the remaining vesting period.
F-16
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 13 - Stock Options and Warrants - (continued)
A summary of the Company's stock option activity, and related
information for the years ended September 30, follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at September 30, 1997 -- $ --
Granted 534,000 2.55
Canceled -- --
Exercised -- --
Outstanding at September 30, 1998 534,000 2.55
Granted -- --
Canceled -- --
Exercised -- --
--------- ---------
Outstanding at September 30, 1999 534,000 $ 2.55
========= =========
Exercisable at September 30, 1999 230,444 $ 2.29
========= =========
The exercise prices range from $1.50 to $4.50 per share.
The Company has also issued 66,667 warrants to purchase shares at
$7.50 per share, expiring in 2003 and 6,667 warrants to purchase
shares at $7.50 per share expiring in 2004.
Following is a summary of the status of stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Life Exercise Price Number Exercise Price
----- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 1.50 166,667 2.9 years $ 1.50 111,111 $ 1.50
3.00 360,000 2.3 years 3.00 117,500 3.00
4.50 7,333 2.7 years 4.50 1,833 4.50
--------
230,444
========
</TABLE>
As of September 30, 1999, no stock options nor warrants have been
exercised.
Note 14 - Major Customers
The Company had two customers who accounted for 30% and 31% of total
revenues for the years ended September 30, 1999 and 1998,
respectively. Major customers are those who account for more than
10% of total revenues. For the three months ended December 31, 1999
the Company had three customers who accounted for 36% of the total
revenues. For the three months ended December 31, 1998, the Company
had two customers who accounted for 33% of the total revenues.
F-17
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
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, 1999 and
1998 and the three months ended December 31, 1999 and 1998, were
$26,000, $16,000, $7,000 and $7,000 respectively.
The Company has determined that its 401(k) plans may be disqualified
due to operational deficiencies. Management is attempting to remedy
the deficiencies. The effects on the Company's financial position
and results of operations are not determinable at this time.
Note 16 - Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's operational equipment or internal computer software
that have time sensitive programs may recognize a date using "00 as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruption of operations
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business.
The Company has assessed the implications on its operations of the
Year 2000 Issue. At September 30, 1999, the process of evaluating
the Company's internal systems was completed and such systems are
presently year 2000 compliant. At this time, the Company is
satisfied that all of its major vendors have verified or are in the
process of verifying to the Company their year 2000 compliance. The
Company's internal systems have been updated, where appropriate, to
accommodate year 2000 compliance and actual impact of year 2000
compliance on the Company's future results of operations, capital
spending, and business operations is not expected to be material.
Note 17 - Private Placement
The Company raised $1,000,000 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.
F-18
<PAGE>
STRATUS SERVICES GROUP, INC.
Notes to Financial Statements
(Information as of December 31, 1999 and for the Three Months Ended
December 31, 1999 and 1998 is unaudited)
Note 17 - Private Placement - (continued)
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 has 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 is being
accrued to interest expense over the expected life of the debt.
Note 18 - Reverse Stock Split
The Company's Board of Directors has approved a two for three
reverse stock split of common stock to be effective prior to the
effective date of the Company's initial public offering of
securities. All common stock and per share information has been
adjusted to reflect the reverse stock split as if such split had
taken place at the beginning of the periods presented.
Note 19 - Subsequent Event
In November 1999, the Company entered into a debt-equity conversion
agreement with B&R (see Note 3) whereby B&R will convert, except for
$24,000, 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 will be based on the offering price in
the initial public offering. The agreement is null and void if the
offering does not take place by March 1, 2000.
In February 2000, the Company and B&R agreed to extend the agreement
until March 31, 2000 with a modification whereby $666,000 of the
debt will not be converted into shares of the Company's common
stock.
F-19
<PAGE>
Independent Auditors' Report
To the Stockholder of
B&R Employment, Inc.
We have audited the accompanying balance sheets of B&R Employment, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholder's deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B&R Employment, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
AMPER, POLITZINER & MATTIA, P.A.
August 20, 1999
Edison, New Jersey
F-20
<PAGE>
B&R EMPLOYMENT, INC.
Balance Sheets
December 31,
Assets
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets
Cash $ 1,173 $ 936
Due from factor 81,548 170,108
Accounts receivable - in house, net of allowance
for doubtful accounts of $42,113 and $-0- -- 4,598
Unbilled receivables -- 25,516
Due from affiliate - net of allowance for doubtful
accounts of $329,724 and $-0- -- 122,411
--------- ---------
82,721 323,569
Property and equipment, net of
accumulated depreciation 8,039 14,039
--------- ---------
$ 90,760 $ 337,608
========= =========
Liabilities and Stockholder's Equity
Current liabilities
Accounts payable $ 79,280 $ 79,230
Accrued payroll and payroll taxes payable 42,467 16,964
Due to insurance company 70,000 115,000
--------- ---------
191,747 211,194
Stockholder's (deficiency) equity
Common stock, no par value, 1,000 shares
authorized, 100 shares issued and outstanding 1,000 1,000
(Accumulated deficit) retained earnings (101,987) 125,414
--------- ---------
Total stockholder's (deficiency) equity (100,987) 126,414
--------- ---------
$ 90,760 $ 337,608
========= =========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
B&R EMPLOYMENT, INC.
Statements of Operations
For the Years Ended December 31,
1998 1997
---- ----
Revenues $ 4,668,089 $ 4,367,050
Cost of revenue 3,246,769 3,002,725
----------- -----------
Gross profit 1,421,320 1,364,325
Selling, general, and administrative
expenses 1,503,645 1,074,168
----------- -----------
Earnings (loss) from operations (82,325) 290,157
----------- -----------
Other income (expense)
Interest expense (5,995) --
Other income 45,541 --
Finance charges (174,800) (164,829)
----------- -----------
(135,254) (164,829)
----------- -----------
Net (loss) income $ (217,579) $ 125,328
=========== ===========
See accompanying notes to financial statements.
F-22
<PAGE>
B&R Employment, Inc.
Statement of Stockholder's Deficiency
For the Years Ended December 31,
<TABLE>
<CAPTION>
Common Retained Earnings
Stock (Accumulated Deficit) Total
----- --------------------- -----
<S> <C> <C> <C>
Balance - December 31, 1996 $ 1,000 $ 86 $ 1,086
Net income -- 125,328 125,328
--------- --------- ---------
Balance - December 31, 1997 1,000 125,414 126,414
Net (loss) -- (217,579) (217,579)
Stockholder's distributions -- (9,822) (9,822)
--------- --------- ---------
Balance - December 31, 1998 $ 1,000 $(101,987) $(100,987)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
B&R EMPLOYMENT, INC.
Statements of Cash Flows
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(217,579) $ 125,328
--------- ---------
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 6,300 499
Changes in operating assets and liabilities
Accounts receivable - in house 4,598 357,724
Due from factor 88,560 (170,108)
Unbilled receivables 25,516 (25,516)
Due to/from affiliate 122,411 (134,612)
Accounts payable 50 (102,224)
Accrued payroll and payroll taxes 25,503 (150,671)
Due to insurance company (45,000) 115,000
--------- ---------
Total adjustments 227,938 (109,908)
--------- ---------
10,359 15,420
--------- ---------
Cash flows from investing activities
Purchase of property and equipment (300) (14,484)
--------- ---------
Cash flows from financing activities
Stockholders' distributions (9,822) --
--------- ---------
(9,822) --
--------- ---------
Net change in cash 237 936
Cash - beginning 936 --
--------- ---------
Cash - ending $ 1,173 $ 936
========= =========
Supplemental disclosure of cash paid
Interest $ 5,995 $ --
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
B&R EMPLOYMENT, INC.
Notes to Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Operations
The Company was incorporated in August 16, 1995, for the purpose of
providing temporary staffing services. The Company provides
qualified staff for customers from its three offices in Delaware.
The Company's customers are in various industries and are located in
Delaware, Maryland and Pennsylvania. Credit is granted to
substantially all customers. No collateral is maintained.
Revenue Recognition
The company recognizes revenue as the services are performed by its
workforce. The company's customers are billed weekly. At balance
sheet dates there may be accruals for unbilled receivables and
related compensation costs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
Estimated
Method Useful Life
------ -----------
Furniture and fixtures Declining balance 5 - 7 years
Leasehold improvements Straight-line 3 years
Factoring
The Company's factoring agreement (see Note 2) with a financing
institution ("factor") has been accounted for as a sale of
receivables under Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Services of Financial Assets and
Extinguishment of Liabilities."
Income Taxes
The Company has elected to be taxed as a S-Corporation for federal
and state tax purposes. Under this election, substantially all of
the profits, losses, credits and deductions of the Company are
passed through to the individual stockholder. There is no provision
for corporate income taxes.
Advertising Costs
Advertising costs are expensed as incurred. The expense for the
years ended December 31, 1998 and 1997, were $29,000 and $42,000,
respectively.
F-25
<PAGE>
B&R EMPLOYMENT, INC.
Notes to Financial Statements
Note 2 - Factoring Agreement
The Company has a factoring agreement with a financing institution
("factor") under which it may sell qualified trade accounts
receivable, with limited recourse provisions. The agreement, which
expired December 31, 1998, required the Company to repurchase or
replace any receivables remaining uncollected for more than 90 days.
During the years ended December 31, 1998 and 1997, the gross
proceeds resulting from the sale of receivables were $4,668,000 and
$2,035,000, respectively. As of December 31, 1998 and 1997, $658,000
and $622,000, respectively of the receivables sold to the factor had
not been collected.
Note 3 - Property and Equipment
December 31,
1998 1997
---- ----
Furniture and fixtures $ 7,359 $ 7,059
Leasehold improvements 7,500 7,500
------- -------
14,859 14,559
Accumulated depreciation 6,820 520
------- -------
Net property and equipment $ 8,039 $14,039
======= =======
Note 4 - Related Party Transaction
Rent
The Company rents on a month-to-month basis one of its office
facilities from its sole stockholder at an annual rental of $14,000.
Rent expense was $37,208 and $25,400 for the years ended December
31, 1998 and 1997, respectively.
Expenses
An affiliated company, also owned 100% by the Company's stockholder
paid certain expenses including salaries, payroll taxes, employee
benefits, rent, selling, advertising, utilities, professional and
other administrative expenses on behalf of the Company. For the
years ended December 31, 1998 and 1997, $1,217,000 and $1,600,000
was advanced to the affiliate. As of December 31, 1997, the amount
was expected to be collected in the normal course of business. For
the years ended December 31, 1998 and 1997, $1,009,000 and
$1,457,000 of expenses respectively were allocated to the Company
from this affiliate. At December 31, 1998, the amount due from the
affiliate was fully reserved and $329,724 was charged to operations.
Note 5 - Major Customer
The Company had one customer who accounted for 11% of total revenues
for the year ended December 31, 1998. Major customers are those who
account for more than 10% of total revenues. There were no major
customers for the year ended December 31, 1997.
Note 6 - Commitments and Contingencies
In June 1999, an insurance company filed a lawsuit against the
Company. The suit alleges that the insurance company is owed unpaid
workers' compensation premiums. In July 1999, the Company, through
its attorneys, negotiated a settlement of $70,000, which is
reflected as due to insurance company in current liabilities. The
payment terms of the settlement are currently under negotiations.
Management believes that the ultimate resolution of this matter will
not have a material adverse effect upon the Company's financial
position or results of operations.
F-26
<PAGE>
B&R EMPLOYMENT, INC.
Notes to Financial Statements
Note 7 - Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's operational equipment or internal computer software
that have time sensitive programs may recognize a date using "00 as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruption of operations
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business.
The Company has assessed the implications on its operations of the
Year 2000 Issue. At December 31, 1998, the process of evaluating the
Company's internal systems was completed. All systems are presently
Year 2000 compliant. At this time the Company is satisfied that all
of its major vendors have or are in the process of verifying to the
Company their Year 2000 compliance. The Company's internal systems
have been updated, where appropriate, to accommodate Year 2000
compliance. The actual impact of Year 2000 compliance on the
Company's future results of operations, capital spending, and
business operations is not expected to be material.
Note 8 - Subsequent Events
On January 4, 1999, the Company entered into an asset purchase
agreement with Stratus Services Group, Inc. ("Stratus"). The Company
sold certain assets including office equipment, furniture and
fixtures, sales and operating records, customer contracts and
agreements, vendor lists, and seller's licenses and certificates.
The sale price was $2,400,000, consisting of two notes aggregating
$1,800,000 and the issuance of 52,000 shares of Stratus' common
stock. The Company has a put option to sell these shares back to
Stratus at $10 per share, provided that Stratus does not conduct an
initial public offering within 24 months. A payment of $269,000 was
made on the notes and an accounts receivable adjustment of $131,000
resulting in a balance of $1,210,000 to be paid 30 days after the
successful completion of the initial public offering or March 1,
2000, whichever is sooner. The remaining note of $270,000 is payable
in eight monthly principal and interest installments of $37,656
commencing 90 days after payment of the first note. In addition,
Stratus purchased outstanding accounts receivable from the Company's
factor of $658,000 (see Note 2).
The Company will continue to exist in order to collect the proceeds
of the notes receivable and liquidate its debt.
F-27
<PAGE>
STRATUS SERVICES GROUP, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
<TABLE>
<CAPTION>
For the Year Ended Pro Forma
September 30, 1998 December 31, 1998 Adjustments Pro Forma
Stratus B & R
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 24,919,639 $ 4,668,089 $ -- $ 29,587,728
Cost of revenue 20,329,718 3,246,769 -- 23,576,487
------------ ------------ ------------ ------------
Gross Profit 4,589,921 1,421,320 -- 6,011,241
Operating Expenses 6,462,976 1,503,645 160,993(a) 8,127,614
------------ ------------ ------------ ------------
(Loss) from operations (1,873,055) (82,325) (160,993) (2,116,373)
Other income (expenses):
Finance charges (524,649) (174,800) -- (699,449)
Interest expense (48,170) (5,995) (154,788)(b) (208,953)
Other income 33,729 45,541 -- 79,270
------------ ------------ ------------ ------------
(539,090) (135,254) (154,788) (829,132)
Net (Loss) ($ 2,412,145) ($ 217,579) $ (315,781) ($ 2,945,505)
============ ============ ============ ============
Pro forma loss per common share -
Basic Diluted $ (.82)
Weighted average shares used in computing
Pro forma loss per common share -
Basic and Diluted 3,602,086
</TABLE>
See accompanying notes to unaudited pro forma condensed
statements of operations
F-28
<PAGE>
STRATUS SERVICES GROUP, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
<TABLE>
<CAPTION>
For the Year ended For the three months
September 30, 1999 ended December 31, 1998 Pro Forma
Stratus B & R Adjustments Pro Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 30,042,751 $ 1,333,791 $ -- $31,376,542
Cost of revenue 23,677,093 1,007,407 -- 24,684,500
------------ ------------ ------------ ------------
Gross Profit 6,365,658 326,384 -- 6,692,042
Operating Expenses 6,883,610 302,216 40,428(a) 7,226,254
------------ ------------ ------------ ------------
(Loss) from operations (517,952) 24,168 (40,428) (534,212)
------------
Other income (expenses):
Finance charges (722,020) (39,297) -- (761,317)
Interest expense (309,257) (5,748) (39,043)(b) (354,048)
Other income 22,186 -- -- 22,186
------------ ------------ ------------ ------------
(1,009,091) (45,045) (39,043) (1,093,179)
------------ ------------ ------------ ------------
Net (Loss) $ (1,527,043) ($ 20,877) ($ 79,471) ($ 1,627,391)
============ ============ ============ ============
Pro forma loss per common share -
Basic Diluted $ (.43)
Weighted average shares used in computing
Pro forma loss per common share -
Basic and Diluted 3,828,530
</TABLE>
See accompanying notes to unaudited pro forma condensed
statements of operations
F-29
<PAGE>
STRATUS SERVICES GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
NOTE 1 -- Basis of Presentation
The unaudited pro forma condensed statements of operations present
the accounts of Stratus Services Group, Inc. ("Stratus") and B&R
Employment, Inc. ("B&R") as if the acquisition of B&R by Stratus
occurred on October 1, 1997. The pro forma statements of operations
should be read in conjunction with the historical financial
statements of Stratus and B&R and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The results of operations of B&R have
been included in the results of operations of Stratus from January
4, 1999, the date of the acquisition.
For the year ended September 30, 1998, the unaudited pro forma
condensed statement of operations includes Stratus with year end of
September 30, 1998 and B&R with a December 31, 1998 year end.
For the year ended September 30, 1999, the unaudited pro forma
condensed statement of operations include B & R operations from
January 4, 1999 included in Stratus plus B & R unaudited three
months ended December 31, 1998.
The pro forma condensed statements of operations (unaudited) for the
year ended September 30, 1998 and 1999 do not purport to be
indicative of the results that actually would have been obtained if
operations were combined at the beginning of the fiscal year ended
September 30, 1998, and this presentation is not intended to be a
projection of future results or trends.
NOTE 2 - Pro Forma Adjustments
The following adjustments would be required if the acquisition
occurred as indicated above:
(a) Reflects the amortization of goodwill;
(b) Reflects interest expense on the notes payable to B&R in
incurred in connection with the acquisition.
F-30
<PAGE>
Until , 2000 (25 days after the date of this Prospectus) all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
STRATUS SERVICES GROUP, INC.
1,300,000 Shares
Common Stock
PROSPECTUS
Hornblower & Weeks, Inc.
Dirks & Company, Inc.
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Delaware General Corporation Law, Section 102(b)(7), authorizes a corporation to
eliminate or limit personal liability of members of its board of directors for
violations of a director's fiduciary duty of care. Such elimination or
limitation of personal liability is not permitted, however, where there has been
a breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or knowing violation of law, or payment of a dividend or approval of
a stock repurchase which was deemed illegal or where a director obtains an
improper personal benefit.
The Registrant's Certificate of Incorporation (filed as Exhibit 3.1 to this
Registration Statement) provides that a director of the Company shall, to the
maximum extent permitted by Section 102(b)(7) or any successor provision or
provisions, have no personal liability to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director.
Delaware General Corporation Law, Section 145, permits a corporation organized
under Delaware law to indemnify directors and officers with respect to any
matter in which the director or officer acted in good faith and in a manner he
reasonably believed to be not opposed to the best interests of the corporation
and, with respect to any criminal action, had no reasonable cause to believe his
conduct was unlawful.
The Registrant's Certificate of Incorporation and Bylaws (filed as Exhibit 3.2
to this Registration Statement) provides that any director or officer of the
Company involved in any action, suit or proceeding, the basis of which is
alleged action or inaction by such director or officer while he was acting in an
official capacity as a director or officer of the Registrant or as a director,
trustee, officer, employee or agent of another entity at the request of the
Registrant, shall be indemnified and held harmless by the Registrant to the
fullest extent permitted by Section 145 against all expense, liability and loss
reasonably incurred or suffered by such person in connection therewith. Such
indemnification as to such alleged action or inaction continues as to an
indemnitee who has after such alleged action or inaction ceased to be a director
or officer of the Registrant or a director, officer, trustee, employee or agent
of such other entity and inures to the benefit of the indemnitee's heirs,
executors and administrators. The Certificate of Incorporation also provides
that the right to indemnification shall be a contract right which shall not be
affected adversely as to any indemnitee by any amendment to the Certificate of
Incorporation with respect to any action or inaction occurring prior to such
amendment and shall include, unless otherwise restricted or prohibited by law or
the Registrant's By-laws, the right to be paid by the Registrant for expenses
incurred in defending any such proceeding in advance of its final disposition.
The Registrant's Board of Directors may also grant these indemnification rights
to any employee or agent of the Registrant or to any person who is or was a
director, officer, employee or agent of the Registrant's affiliates,
predecessors or subsidiaries.
Reference is made to the Underwriting Agreement, the proposed form of which is
filed as Exhibit 1 to the Registration Statement, which contains certain
provisions for the indemnification by the Underwriter of the Registrant and the
director and officers of the Registrant who signed the Registration Statement
against certain liabilities, including civil liabilities, under the Securities
Act of 1933. The Underwriting Agreement also contains certain provisions for the
indemnification by the Registrant of, among others, persons who control the
Underwriter against certain liabilities, including civil liabilities under the
Securities Act of 1933.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses, all of which are being paid by the
Registrant, in connection with this offering. All the fees are estimates except
the Securities and Exchange Commission Registration fee, the NASD filing fee and
the Nasdaq Smallcap fee.
Registration fee - Securities and Exchange Commission............. $ 3,941
NASD filing fee................................................... 1,918
Nasdaq Smallcap fee............................................... 10,000
Accounting fees and expenses...................................... 150,000
Legal fees and expenses........................................... 100,000
Blue sky fees and expenses, including legal fees.................. 35,000
Printing; stock certificates...................................... 125,000
Transfer agent and registrar fees................................. 5,000
Non-accountable expense allowance................................. 234,000
Miscellaneous..................................................... 10,000
-----------
Total............................................................ $ 674,859
===========
Item 26. Recent Sales of Unregistered Securities.
All shares of Common Stock and the exercise price of warrants and options have
been adjusted to reflect a 2-for-3 reverse split to be effected prior to the
effective date of this Registration Statement.
Between April 4, 1997 and September 1, 1997, Joseph J. Raymond, Michael J.
Rutkin and other investors contributed capital amounting in aggregate to
approximately $125,000 to purchase the assets of Royalpar Industries, Inc. In
exchange for their investment, these initial investors, each of whom was an
executive or management level employee or a relative of an executive or
management employee of the Registrant, were issued 2,486,667 shares of Common
Stock of the Registrant resulting in a price per share of $0.075. Based upon its
familiarity with the investors, the Registrant determined that each investor had
such knowledge and experience in financial and business matters to enable the
investor to evaluate the merits and risks of the investments. The issuance and
sale of these securities was made in reliance on an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") as a transaction not involving any public offering.
Below is a chart showing these initial investors, the number of shares issued to
them, and the date of issue.
Date Name/Entity Shares
- ---- ----------- ------
4/4/97 Rutkin, Michael J. 667
9/1/97 Raymond, Sr., Joseph J. 1,736,000
9/1/97 Kingston Family Revocable Trust 33,333
9/1/97 Sahyoun, Charles A. 220,000
9/1/97 Foley, Thomas 8,333
9/1/97 Abruzzese, Arthur 8,333
9/1/97 Porzio, Eugene Robert 8,333
9/1/97 Ribaudo, Alfonso 8,333
9/1/97 Rutkin, Michael J. 333,333
9/1/97 Feidt, Don W. 20,000
9/1/97 Schneider, Frank Jr. 16,667
9/1/97 Townsend, Donna A. 667
9/1/97 Zomak, Beth S. 667
9/1/97 Barbara A. Danner Miglio as cutodian of 333
II-2
<PAGE>
Eugene Miglio IV
9/1/97 Barbara A. Danner Miglio as custodian of
Anna Marcella Miglio 333
9/1/97 Sullivan, Rani L. 667
9/1/97 Raymond, J. Todd, trustee for I. Lynch 26,667
9/1/97 Raymond, J. Todd 16,667
9/1/97 Maltzman, Scott A. 667
9/1/97 Maltzman, Michael A. & Valerie M. 46,667
On September 1, 1997, the Registrant issued to 33 purchasers, units ("Phase I
Units"), comprised of 8,667 shares of Common Stock of the Registrant at a price
of $.075 per share for a total price per unit of $650. Thirty-four and one-half
units were sold resulting in the sale of 299,000 shares of Common Stock and
gross proceeds of $22,425. In connection with the offering, (i) based on
financial information provided by the investors, the Registrant determined that
each investor was an "Accredited Investor" (as that term is defined under
Regulation D promulgated under the Securities Act), (ii) each investor signed a
written agreement that the Phase I Units which he purchased would not be sold
without registration under the Securities Act, except in reliance upon an
exemption therefrom, and (iii) the Registrant did not engage in any general
solicitation or general advertisement for the issuance. Based upon
representations made by the investors as to their experience in financial and
business matters, the Registrant determined that each investor had the ability
to evaluate the merits and risks of the investment. The issuance and sale of
these securities was made in reliance on the exemption provided by Section 4(2)
of the Securities Act as a transaction not involving any public offering.
On August 11, 1997, the Registrant issued 133,333 shares of Common Stock to each
of Congress Financial Corporation and AGR Financial, L.L.C. (collectively,
"Congress and AGR") in consideration for Congress' and AGR's consent to the
acquisition of assets from Royalpar Industries, Inc. and its release of liens on
certain of the acquired assets. In connection with the offering, (i) based on
the status of Congress and AGR as large financial institutions and
representations made by Congress and AGR, the Registrant determined that each of
Congress and AGR was an Accredited Investor (as that term is defined under
Regulation D promulgated under the Securities Act) and each had the ability to
evaluate the merits and risks of the investment, (ii) both Congress and AGR
represented that the securities acquired could not be sold without registration
under the Securities Act, except in reliance upon an exemption therefrom, and
(iii) the Registrant did not engage in any general solicitation or advertisement
for the issuance. The issuance and sale of these securities were made in
reliance on the exemption provided by Section 4(2) of the Securities Act, as a
transaction not involving any public offering.
On September 1, 1997, the Registrant issued 291,666 shares of Common Stock to 8
creditors (the "Creditors") in consideration for their consent to the
acquisition of assets by the Registrant from Royalpar Industries, Inc. of the
acquired assets. Based upon the Registrant's familiarity with the Creditors, the
Registrant determined that each Creditor had such knowledge and experience in
financial and business matters as to enable the Creditor to evaluate the merits
and risks of the investment. The issuance and sale of these securities were made
in reliance on the exemption provided by Section 4(2) promulgated under the
Securities Act as a transaction not involving any public offering.
On January 1, 1998, the Registrant issued a cumulative total of 8,400 shares of
Common Stock to 20 employees as bonuses for efforts contributing to the
continuing success and growth of the Registrant in 1997. The issuance of these
securities was made without payment to the Registrant of any consideration and
therefore was not a "sale" within the meaning of, and not subject to, Section 5
of the Securities Act.
Between December 1, 1997 and September 1, 1998, the Registrant issued to 43
purchasers, units ("Phase II Units"), comprised of 13,333 shares of Common Stock
at a price of $3.75 per share for a total price per unit of $50,000. Twenty-two
and one half units were sold resulting in gross proceeds of $1,125,000. In
connection with the offering, (a) based upon information provided by the
investors and its familiarity with certain investors, the Registrant determined
that each investor was an "Accredited Investor" (as that term is defined under
Regulation D promulgated under the Securities Act of 1933, as amended), (b) each
investor signed a written agreement stating that the Phase II Units which he
purchased would not be sold without registration under the Securities Act,
except
II-3
<PAGE>
in reliance upon an exemption therefrom, and (c) the Registrant did not engage
in any general solicitation or general advertisement for the issuance. The
issuance and sale of these securities was made in reliance on the exemption
provided by Rule 506 of Regulation D promulgated under the Securities Act.
In connection with the offering of Phase II Units, the Registrant issued a
cumulative total of 70,000 shares of Common Stock to nineteen individuals who
assisted the Registrant in locating investors for the offering. Based upon its
familiarity with each of the individuals, the Registrant determined that each
such individual had such knowledge and experience in financial and business
matters as to enable such individual to evaluate the merits and risks of the
investment. The issuance of these securities was made in reliance on Section
4(2) of the Securities Act as a transaction not involving any public offering.
On January 1, 1999, the Registrant issued 34,667 shares of Common Stock to B & R
Employment Inc. in partial consideration for substantially all of the assets of
B & R Employment Inc. In addition to these shares, the Registrant also granted
to B & R Employment Inc., in the event the Registrant does not conduct an
initial public offering of Common Stock within 24 months of the closing of the
Asset Purchase Agreement between the Registrant and B & R Employment Inc., an
option to sell its stock to the Registrant at $15 per share. Based upon
representations made by B&R and the Registrant's familiarity with B&R, the
Registrant determined that B&R had such knowledge and experience in financial
and business matters as to enable it to evaluate the merits and risks of the
investment. The issuance and sale of these securities was made in reliance on
the exemption provided by Section 4(2) of the Securities Act as a transaction
not involving any public offering.
During June 1999, the Registrant issued to 11 purchasers, units, each consisting
of a $50,000 Promissory Note and 3,333 shares of Common Stock of the Registrant.
The price per unit was $50,000. Sixteen and one-half (16-1/2) units were sold
resulting in gross proceeds of $825,000. The proceeds were used to meet the
working capital requirements and expenditures of the Registrant in preparing for
its initial public offering of Common Stock. In connection with the offering (a)
based upon financial information provided by the investors, the Registrant
determined that each investor was an "Accredited Investor" (as that term is
defined under Regulation D promulgated under the Securities Act of 1933, as
amended), (b) each investor signed a written agreement stating that the units
which he purchased would not be sold without registration under the Securities
Act and (c) the Registrant did not engage in any general solicitation or general
advertisement in conducting this offering. The issuance and sale of these
securities was made in reliance on the exemption provided by Rule 506 of
Regulation D promulgated under the Securities Act.
Between September 1, 1997 and December 2, 1998, the Registrant issued options to
purchase an aggregate of 534,000 shares of Common Stock to eight of its
employees. Based upon its familiarity with each of the individuals, the
Registrant determined that each such individual had such knowledge and
experience in financial and business matters as to enable such individual to
evaluate the merits and risks of the investment. The issuance of these
securities was made in reliance on the exception provided in Section 4(2) of the
Securities Act as a transaction not involving any public offering.
Between November 23, 1998 and December 2, 1998 the Registrant issued warrants to
acquire 66,666 shares of Common Stock to five individuals in consideration for
their making loans to the Registrant. Based upon its familiarity with each of
the individuals, the Registrant determined that each such individual had such
knowledge and experience in financial and business matters as to enable such
individual to evaluate the merits and risks of the investment. The issuance of
these securities was made in reliance upon Section 4(2) of the Securities Act as
a transaction not involving any public offering.
Between May 1999 and September 1999, the Registrant issued 436,959 shares of
common stock to 15 creditors in connection with the conversions to equity of
indebtedness owed to the creditors including 14,870 shares issued to Joseph J.
Raymond our CEO and 116,533 shares issued to Joseph J. Raymond, Jr. Based upon
information provided by the creditors and the Registrant's familiarity with each
of the creditors, the Registrant determined that each creditor was an
"Accredited Investor" (as that term is defined under Regulation D promulgated
under the Securities Act of 1933, as amended). The issuance and sale of these
securities was made in reliance on the exemption provided by Rule 506 of
Regulation D promulgated under the Securities Act.
In each of the offerings described above that were made in reliance upon Section
4(2) of the Securities Act, the Registrant determined that each purchaser was
sophisticated and had access to the type of information that would generally be
available in a registration statement filed under the Securities Act in
connection with such an offering.
II-4
<PAGE>
Item 27. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit Number Exhibit Description
1.1 Underwriting Agreement (filed with Amendment No. 5).
1.2 Form of Underwriter's Warrant Agreement, including form of warrant
certificate (filed with Amendment No. 5).
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. (filed with Amendment No. 1).
2.2 Asset Purchase Agreement, effective January 1, 1999, by and between
Stratus Services Group, Inc. and B&R Employment Inc. (filed with
Amendment No. 1).
3.1 Proposed Form of Amended and Restated Certificate of Incorporation
of the Registrant (filed with Amendment No. 1).
3.2 By-Laws of the Registrant to be effective upon completion of
offering (refiled herewith).
4.1 Specimen Common Stock Certificate of the Registrant (filed with
Amendment No. 1).
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 (filed with Amendment No. 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. (filed with Amendment No.
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 I.
Feld and Stratus Services Group, Inc., and supplemental letter
thereto dated December 2, 1998 (filed with Amendment No. 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. (filed with Amendment
No. 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. (filed with Amendment No. 1).
5.1 Opinion of Giordano, Halleran & Ciesla, a Professional Corporation,
including consent of such counsel. (filed herewith)
10.1.1 Employment Agreement, dated September 1, 1997, between Stratus
Services Group, Inc. and Joseph J. Raymond (filed with Amendment No.
1).
10.1.2 Executive Employment Agreement, dated September 1, 1997, between
Stratus Services Group, Inc. and J. Todd Raymond, Esq. (filed with
Amendment No. 1).
10.1.3 Executive Employment Agreement, dated December 1, 1997, between
Stratus Services Group, Inc. and Charles A. Sahyoun (filed with
Amendment No. 1).
10.1.4 Executive Employment Agreement, dated April 17, 1998, between
Stratus Services Group, Inc. and Mark S. Levine (filed with
Amendment No. 1).
10.1.5 Executive Employment Agreement, dated May 7, 1998, between Stratus
Services Group, Inc. and A.
II-5
<PAGE>
George Komer (filed with Amendment No. 1).
10.1.6 Executive Employment Agreement, dated September 1, 1997 between
Stratus Services Group, Inc. and Michael A. Maltzman (filed with
Amendment No. 1).
10.1.7 Consulting Agreement, dated as of August 11, 1997, between Stratus
Services Group, Inc. and Jeffrey Raymond (filed with Amendment No.
1).
10.2 Lease, effective June 1, 1998, for offices located at 500 Craig
Road, Manalapan, New Jersey 07726. (filed with Amendment No. 1).
10.3 Sale and Purchase Agreement, dated August 11, 1997, between AGR
Financial, LLC and Stratus Services Group, Inc., with supplemental
letter thereto dated January 8, 1999. (filed with Amendment No. 1).
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 (filed with Amendment No. 1).
10.5.1 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and AGR Financial, L.L.C. (filed with
Amendment No. 1).
10.5.2 Registration Rights Agreement, dated August, 1997, by and among
Stratus Services Group, Inc. and Congress Financial Corporation
(Western). (filed with Amendment No. 1).
10.6.1 Stock Purchase and Investor Agreement, dated August, 1997, by and
between Stratus Services Group, Inc. and Congress Financial
Corporation (Western). (filed with Amendment No. 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. (filed
with Amendment No. 1).
10.7 1999 Equity Incentive Plan (filed with Amendment No. 1).
10.8 Debt to Equity Conversion Agreement by and between Stratus Services
Group and B & R Employment, Inc. (filed with Amendment No. 3)
10.8.1 Amendment to Debt to Equity Conversion Agreements by and between
Stratus Services Group and B & R Employment, Inc. (filed herewith).
23.1 Consent of Amper, Politziner & Mattia, LLP. (filed with Amendment
No. 5).
23.2 Consent of Giordano, Halleran & Ciesla, P.C. (filed with Exhibit
5.1).
24 Powers of Attorney of officers and directors of the Company
[included in the signature page to the Registration Statement
amended by Amendment No. 5].
27.1 Financial Data Schedule for the 12 months ended September 30, 1998
(filed with Amendment No. 3).
27.2 Financial Data Schedule for 12 months ended September 30, 1999
(filed with Amendment No. 3).
27.3 Financial Data Schedule for three months ended December 31, 1999
(filed with Amendment No. 4).
*To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in
the
II-6
<PAGE>
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by the Registrant is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 6 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Manalapan, the State of New
Jersey, on March 9, 2000.
STRATUS SERVICES GROUP, INC.
By: /s/ Joseph J. Raymond
------------------------------------
Joseph J. Raymond
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph J. Raymond Chairman, Chief Executive Officer March 9, 2000
- -------------------------------- (Principal Executive Officer)
Joseph J. Raymond
/s/ Michael A. Maltzman Vice President and Chief Financial March 9, 2000
- -------------------------------- Officer (Principal Financing and
Michael A. Maltzman Accounting Officer)
* Director March 9, 2000
- --------------------------------
Michael J. Rutkin
* Director March 9, 2000
- --------------------------------
H. Robert Kingston
* Director March 9, 2000
- --------------------------------
Donald W. Feidt
* Director March 9, 2000
- --------------------------------
Sanford I. Feld
</TABLE>
*By: /s/ Joseph J. Raymond
---------------------------
Joseph J. Raymond
As Attorney in Fact
II-8
Exhibit 3.2
BY-LAWS
OF
STRATUS SERVICES GROUP, INC.
ARTICLE I.
CORPORATE OFFICES
1.1 Registered Office. The address of the Corporation's registered office
in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle.
The name of its registered agent at such address is Corporation Service Company.
1.2 Other Offices. The Board of Directors may at any time establish other
offices at any place or places where the Corporation is qualified to do
business.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings. Meetings of stockholders shall be held at any
place, within or outside the State of Delaware, designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the registered office of the Corporation.
2.2 Annual Meeting.
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by the Board of Directors. At the meeting,
directors shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be transacted by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the Corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in this Section 2.2, who is entitled to vote at the meeting and who
has complied with the notice procedures set forth in this Section 2.2.
(c) In addition to the requirements of Section 2.5, for nominations
or other business to be properly brought before an annual meeting by a
stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation and such business must be a proper matter for stockholder action
under the General Corporation Law of Delaware. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the
<PAGE>
Corporation not less than 20 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting of stockholders; provided,
however, that in the event that the date of the annual meeting is more than 30
days prior to or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 20th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (A) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (B) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.2. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 Special Meeting.
(a) A special meeting of the stockholders may be called at any time
by the Board of Directors, or by the chairman of the board, or by the president.
A special meeting of stockholders may also be called by holders of shares
representing not less than ten percent (10%) of the shares of capital stock of
the Corporation then entitled to vote generally in the election of directors.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice.
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<PAGE>
(b) Nominations of persons for election to the Board of Directors
may be made at a special meeting of stockholders at which directors are to be
elected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 Notice of Stockholder's Meetings; Affidavit of Notice. All notices of
meetings of stockholders shall be in writing and shall be sent or otherwise
given in accordance with this Section 2.4 of these Bylaws not less than 10 nor
more than 60 days before the date of the meeting to each stockholder entitled to
vote at such meeting (or such longer or shorter time as is required by Section
2.5 of these Bylaws, if applicable). The notice shall specify the place, date,
and hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.5 Advance Notice of Stockholder Nominees. Only persons who are nominated
in accordance with the procedures set forth in this Section 2.5 shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a meeting of stockholders
by or at the direction of the Board of Directors or by any stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.5. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including, without
limitation, such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such stockholder and (ii) the class and number of shares
of the Corporation which are beneficially owned by such stockholder. At the
request of the Board of Directors any person nominated by the Board of Directors
for election as a director shall furnish to the secretary of the Corporation
3
<PAGE>
that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 2.5. The chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the Bylaws, and if he
or she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
2.6 Quorum. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice. When a meeting is adjourned to another time
or place, unless these Bylaws otherwise require, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken. At the adjourned meeting the Corporation may
transact any business that might have been transacted at the original meeting.
If the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 Conduct of Business. The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including the
manner of voting and the conduct of business.
2.9 Voting.
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
(b) Except as may be otherwise provided in the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver of Notice. Whenever notice is required to be given under any
provision of the General Corporation Law of Delaware or of the Certificate of
Incorporation of Incorporation or these Bylaws, a written waiver thereof, signed
by the person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance
4
<PAGE>
of a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these Bylaws.
2.11 Record Date for Stockholder Notice; Voting. In order that the
Corporation may determine the stockholders entitled to notice of or to vote any
meeting of stockholders or any adjournment thereof or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
2.12 Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for such stockholder
by a written proxy, signed by the stockholder and filed with the secretary of
the Corporation, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III.
DIRECTORS
3.1 Powers. Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the Certificate of Incorporation or these Bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the Corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
5
<PAGE>
3.2 Number of Directors. The number of directors of the Corporation shall
be not less than three (3) nor more than seven (7). The exact number of
directors shall be fixed by resolution of the Board of Directors.
3.3 Election, Qualification and Term of Office of Directors. Except as
provided in Section 3.4 of these Bylaws, directors shall be elected at each
annual meeting of stockholders to hold office until the next annual meeting.
Directors need not be stockholders unless so required by the Certificate of
Incorporation or these Bylaws, wherein other qualifications for directors may be
prescribed. Each director, including a director elected to fill a vacancy, shall
hold office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
Election of directors need not be by written ballot.
3.4 Resignation and Vacancies. Any director may resign at any time upon
written notice to the attention of the secretary of the Corporation. When one or
more directors so resigns and the resignation is effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this section in the filling
of other vacancies. A vacancy created by the removal of a director by the vote
of the stockholders or by court order may be filled only by the affirmative vote
of a majority of the shares represented and voting at a duly held meeting at
which a quorum is present (which shares voting affirmative also constitute a
majority of the quorum). Each director so elected shall hold office until the
next annual meeting of the stockholders and until a successor has been elected
and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
Certificate of Incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole Board
of Directors (as constituted
6
<PAGE>
immediately prior to any such increase), then the Court of Chancery may, upon
application of any stockholder or stockholders holding at least 10% of the total
number of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office as aforesaid, which election shall be governed by the provisions
of Section 211 of the General Corporation Law of Delaware as far as applicable.
3.5 Place of Meetings; Meetings by Telephone. The Board of Directors of
the Corporation may hold meetings, both regular and special, either within or
outside the State of Delaware.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and at such place as shall from time to time be
determined by the Board of Directors.
3.7 Special Meetings; Notice. Special meetings of the Board of Directors
for any purpose or purposes may be called at any time by the chairman of the
board, the president, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four days before the time
of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 Quorum. At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
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A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 Waiver of Notice. Whenever notice is required to be given under any
provision of the General Corporation Law of Delaware or of the Certificate of
Incorporation or these Bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the Certificate of Incorporation or these Bylaws.
3.10 Board Action by Written Consent without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board of Directors or committee, as the case may be, consent thereto in writing
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee. Written consents representing actions taken by
the board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 Fees and Compensation of Directors. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. No such compensation
shall preclude any director from serving the Corporation in any other capacity
and receiving compensation therefor.
3.12 Approval of Loans to Officers. The Corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the Corporation or of its subsidiary, including any officer or employee who
is a director of the Corporation or its subsidiary, whenever, in the judgment of
the directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Section 3.12 contained shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the Corporation
at common law or under any statute.
3.13 Removal of Directors. Unless otherwise restricted by statute, by the
Certificate of Incorporation or by these Bylaws, any director or the entire
Board of Directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors;
provided, however, that if the stockholders of the Corporation are entitled to
cumulative voting, if less than the entire Board of Directors is to be removed,
no director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire Board of Directors.
8
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No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
3.14 Chairman of the Board of Directors. The Corporation may also have, at
the direction of the Board of Directors, a chairman of the Board of Directors
who shall not be considered an officer of the Corporation.
ARTICLE IV.
COMMITTEES
4.1 Committees of Directors. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, designate one or more
committees, with each committee to consist of one or more of the directors of
the Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in the Bylaws of the Corporation, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority to (a) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any classes of stock of the Corporation or fix the number of shares of any
series of stock or authorize the increase or decrease of the shares of any
series), (b) adopt an agreement of merger or consolidation under Sections 251 or
252 of the General Corporation Law of Delaware, (c) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, (d) recommend to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or (e) amend
the Bylaws of the Corporation; and, unless the board resolution establishing the
committee, the Bylaws or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 Committee Minutes. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
4.3 Meetings and Action of Committees. Meetings and actions of committees
shall be governed by, and held and taken in accordance with, the provisions of
Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special
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meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V.
OFFICERS
5.1 Officers. The officers of the Corporation shall be a chief executive
officer, a president, a secretary, and a chief financial officer. The
Corporation may also have, at the discretion of the Board of Directors, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these Bylaws. Any number of offices may be held
by the same person.
5.2 Appointment of Officers. The officers of the Corporation, except such
officers as may be appointed in accordance with the provisions of Sections 5.3
or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to
the rights, if any, of an officer under any contract of employment.
5.3 Subordinate Officers. The Board of Directors may appoint, or empower
the chief execute officer or the president to appoint, such other officers and
agents as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority, and perform such duties as are
provided in these Bylaws or as the Board of Directors may from time to time
determine.
5.4 Removal and Resignation of Officers. Subject to the rights, if any, of
an officer under any contract of employment, any officer may be removed, either
with or without cause, by an affirmative vote of the majority of the Board of
Directors at any regular or special meeting of the Board of Directors or, except
in the case of an officer chosen by the Board of Directors, by any officer upon
whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the secretary of the Corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the Corporation under any contract
to which the officer is a party.
5.5 Vacancies in Offices. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
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5.6 Chief Executive Officer. Subject to such supervisory powers, if any,
as may be given by the Board of Directors to the chairman of the board, if any,
the chief executive officer of the Corporation shall, subject to the control of
the Board of Directors, have general supervision, direction, and control of the
business and the officers of the Corporation. He or she shall preside at all
meetings of the stockholders and, in the absence or nonexistence of a chairman
of the board, at all meetings of the Board of Directors and shall have the
general powers and duties of management usually vested in the office of chief
executive officer of a corporation and shall have such other powers and duties
as may be prescribed by the Board of Directors or these Bylaws.
5.7 President. Subject to such supervisory powers, if any, as may be given
by the Board of Directors to the chairman of the board (if any) or the chief
executive officer, the president shall have general supervision, direction, and
control of the business and other officers of the Corporation. He or she shall
have the general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice President. In the absence or disability of the chief executive
officer and president, the vice presidents, if any, in order of their rank as
fixed by the Board of Directors or, if not ranked, a vice president designated
by the Board of Directors, shall perform all the duties of the president and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board of Directors, these Bylaws, the president or the
chairman of the board.
5.9 Secretary. The secretary shall keep or cause to be kept, at the
principal executive office of the Corporation or such other place as the Board
of Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the Corporation or at the office of the Corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required to be given by law or by
these Bylaws. He or she shall keep the seal of the Corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer. The chief financial officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the
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properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the Corporation with such depositories as may
be designated by the Board of Directors. He or she shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, shall render to the
president, the chief executive officer, or the directors, upon request, an
account of all his or her transactions as chief financial officer and of the
financial condition of the Corporation, and shall have other powers and perform
such other duties as may be prescribed by the Board of Directors or the Bylaws.
5.11 Representation of Shares of Other Corporations. The chairman of the
board, the chief executive officer, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this Corporation, or
any other person authorized by the Board of Directors or the chief executive
officer or the president or a vice president, is authorized to vote, represent,
and exercise on behalf of this Corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of this
Corporation. The authority granted herein may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by the person having such authority.
5.12 Authority and Duties of Officers. In addition to the foregoing
authority and duties, all officers of the Corporation shall respectively have
such authority and perform such duties in the management of the business of the
Corporation as may be designated from time to time by the Board of Directors or
the stockholders.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.1 Indemnification of Directors and Officers. The Corporation shall, to
the maximum extent and in the manner permitted by the General Corporation Law of
Delaware, indemnify each of its directors and officers against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the Corporation. For
purposes of this Section 6.1, a "director" or "officer" of the Corporation
includes any person (a) who is or was a director or officer of the Corporation,
(b) who is or was serving at the request of the Corporation as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or (c) who was a director or officer of a Corporation which was a
predecessor corporation of the Corporation or of another enterprise at the
request of such predecessor corporation.
6.2 Indemnification of Others. The Corporation shall have the power, to
the maximum extent and in the manner permitted by the General Corporation Law of
Delaware, to indemnify each of its employees and agents (other than directors
and officers) against expenses (including attorneys' fees), judgments, fines,
settlements and other amounts actually and
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reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of the Corporation. For purposes of
this Section 6.2, an "employee" or "agent" of the Corporation (other than a
director or officer) includes any person (a) who is or was an employee or agent
of the Corporation, (b) who is or was serving at the request of the Corporation
as an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or (c) who was an employee or agent of a corporation
which was a predecessor corporation of the Corporation or of another enterprise
at the request of such predecessor corporation.
6.3 Payment of Expenses in Advance. Expenses incurred in defending any
action or proceeding for which indemnification is required pursuant to Section
6.1 or for which indemnification is permitted pursuant to Section 6.2 following
authorization thereof by the Board of Directors shall be paid by the Corporation
in advance of the final disposition of such action or proceeding upon receipt of
an undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled to
be indemnified as authorized in this Article VI.
6.4 Indemnity Not Exclusive. The indemnification provided by this Article
VI shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any Bylaw, agreement, vote of shareholders
or disinterested directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office, to the
extent that such additional rights to indemnification are authorized in the
Certificate of Incorporation.
6.5 Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.6 Conflicts. No indemnification or advance shall be made under this
Article VI, except where such indemnification or advance is mandated by law or
the order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
Certificate of Incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII.
RECORDS AND REPORTS
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7.1 Maintenance and Inspection of Records. The Corporation shall, either
at its principal executive offices or at such place or places as designated by
the Board of Directors, keep a record of its stockholders listing their names
and addresses and the number and class of shares held by each stockholder, a
copy of these Bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection by Directors. Any director shall have the right to examine
the Corporation's stock ledger, a list of stockholders, and its other books and
records for a purpose reasonably related to his or her position as a director.
The Court of Chancery is hereby vested with the exclusive jurisdiction to
determine whether a director is entitled to the inspection sought. The Court may
summarily order the Corporation to permit the director to inspect any and all
books and records, the stock ledger, and the stock list and to make copies or
extracts therefrom. The Court may, in its discretion, prescribe any limitations
or conditions with reference to the inspection, or award such other and further
relief as the Court may deem just and proper.
ARTICLE VIII.
GENERAL MATTERS
8.1 Checks. From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the Corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution of Corporate Contracts and Instruments. The Board of
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the Corporation; such authority
may be general or confined to specific instances. Unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares. The shares of the Corporation
shall be represented by certificates, provided that the Board of Directors of
the Corporation may provide by resolution or resolutions that some or all of any
or all classes or series of its stock shall be
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uncertificated shares. Any such resolution shall not apply to shares represented
by a certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the Corporation by the chairman or vice-chairman of the Board of
Directors, or the chief executive officer or the president or vice-president,
and by the chief financial officer or an assistant treasurer, or the secretary
or an assistant secretary of the Corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 Special Designation on Certificates. If the Corporation is authorized
to issue more than one class of stock or more than one series of any class, then
the powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights shall be set forth in full or summarized on the fact or back of the
certificate that the Corporation shall issue to represent such class or series
of stock; provided, however, that, except as otherwise provided in Section 202
of the General Corporation Law of Delaware, in lieu of the foregoing
requirements there may be set forth on the face or back of the certificate that
the Corporation shall issue to represent such class or series of stock a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
8.5 Lost Certificates. Except as provided in this Section 8.5, no new
certificates for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the Corporation and canceled at
the same time. The Corporation may issue a new certificate of stock or
uncertificated shares in the place of any certificate previously issued by it,
alleged to have been lost, stolen or destroyed, and the Corporation may require
the owner of the lost, stolen or destroyed certificate, or the owner's legal
representative, to give the Corporation a bond sufficient to indemnity it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate or uncertificated shares.
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8.6 Construction; Definitions. Unless the context requires otherwise, the
general provisions, rules of construction, and definitions in the Delaware
General Corporation Law shall govern the construction of these Bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
8.7 Dividends. The directors of the Corporation, subject to any
restrictions contained in (a) the General Corporation Law of Delaware or (b) the
Certificate of Incorporation, may declare and pay dividends upon the shares of
its capital stock. Dividends may be paid in cash, in property, or in shares of
the Corporation's capital stock.
The directors of the Corporation may set apart out of any of the funds of
the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors and may be changed by the Board of
Directors.
8.9 Seal. The Corporation may adopt a corporate seal, which may be altered
at pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer of Stock. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction in its books.
8.11 Stock Transfer Agreements. The Corporation shall have power to enter
into and perform any agreement with any number of stockholders of any one or
more classes of stock of the Corporation to restrict the transfer of shares of
stock of the Corporation of any one or more classes owned by such stockholders
in any manner not prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner, shall be entitled to
hold liable for calls and assessments the person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of another person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
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ARTICLE IX.
AMENDMENTS
The Bylaws of the Corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the Corporation may, in
its Certificate of Incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
17
Exhibit 5.1
[GIORDANO, HALLERAN & CIESLA LETTERHEAD]
March 9, 2000
Stratus Services Group, Inc.
500 Craig Road
Manalapan, New Jersey 07726
Gentlemen:
We refer to the Registration Statement on Form SB-2 (Registration No.
333-83255) (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Act"), and Amendments Nos. 1, 2, 3, 4, 5 and 6 thereto filed by
Stratus Services Group, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission for the registration of the following
securities which are proposed to be offered and sold by the Company: (a) a
maximum of 1,495,000 shares of Common Stock, $.01 par value (the "Common Stock")
which are proposed to be offered and sold by the Company pursuant to an
Underwriting Agreement among the Company, Hornblower & Weeks, Inc. and Dirks and
Company, Inc. (collectively, the "Underwriters"), (b) a warrant to purchase up
to a maximum of 130,000 shares of Common Stock to be sold to the Underwriters
(the "Underwriters' Warrants") and (c) a maximum of 130,000 shares of Common
Stock underlying the Underwriters' Warrants (the "Warrant Shares").
We have examined the original, or a photostatic or certified copy, of such
records and certificates of the Company, certificates of officers of the Company
and of public officials and such other documents as we have deemed relevant and
necessary as the basis for the opinion set forth below. In such examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such copies and the correctness of all
statements of fact contained therein.
<PAGE>
GIORDANO, HALLERAN & CIESLA
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
Stratus Services Group, Inc.
March 9, 2000
Page 2
Based upon our examination mentioned above, subject to the assumptions
stated and relying on statements of act contained in the documents that we have
examined, we are of the opinion that:
(1) The Common Stock has been duly authorized and will, when issued to and
paid for by the Underwriters in accordance with the terms of the
Underwriting Agreement, be validly issued, fully paid and non-assessable.
(2) The Underwriters' Warrants have been duly authorized and will, when issued
to and paid for by the Underwriter in accordance with the Underwriting
Agreement, be validly issued and constitute legal and binding obligations
of the Company in accordance with their terms.
(3) The Warrant Shares have been duly authorized and will, when issued to and
paid for by the holder of the Underwriters' Warrants upon exercise thereof
in accordance with the terms thereof, be validly issued, fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to this firm appearing under the caption "Legal
Matters" in the Prospectus that forms a part of the Registration Statement. In
giving this consent, we do not thereby admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the General Rules and Regulations of the Securities and Exchange
Commission.
Very truly yours,
GIORDANO, HALLERAN & CIESLA
A Professional Corporation
PDF/db
Exhibit 10.8.1
February 10, 2000
John W. Boyd, Jr., President
B&R Employment Inc.
207 Lewis Lane
Hockessin, Delaware 19707
Re: Stratus Services Group, Inc.
Dear Jack:
We have agreed to the following amendment to the Debit-Equity Conversion
Agreement dated November 4, 1999:
1. Only $700,000 of the amounts owed by Stratus Services Group, Inc. to
B&R Employment, Inc. will be converted to equity. The balance of the
amount owed will remain debt and will be paid in full (including all
accrued but unpaid interest) upon Stratus' receipt of the IPO
proceeds, which is anticipated to be March 23, 2000. The payment
will be made via wire transfer to the account you designate.
2. You have agreed that the Debt-Equity Conversion Agreement shall be
extended through and including March 31, 2000.
3. All other terms and conditions, including incentives or other
agreements with regard to the Debit-Equity Conversion, will remain
in full force and effect.
Please indicate your acceptance to this agreement by signing where indicated
below.
Very truly yours,
/s/ Joseph J. Raymond
Joseph J. Raymond
JJR:lcg
Accepted and agreed to this _____ day of February, 2000
B&R EMPLOYMENT, INC.
By: /s/ John W. Boyd, Jr.
----------------------
JOHN W. BOYD, JR., President
/s/John W. Boyd, Jr.
- --------------------
JOHN W. BOYD, JR., Individually
