As Filed with the Securities and Exchange Commission on February 11, 2000
Registration No. 333-83255
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5
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 February 11, 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 4 to read about factors you should consider before buying
shares of common stock.
----------------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved these securities, or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<TABLE>
<CAPTION>
===========================================================================================================================
Underwriting Discounts and Proceeds, before expenses, to
Price to Public Commissions Stratus Services Group, Inc.
<S> <C> <C> <C>
Per Share............ $ $ $
Total................ $ $ $
===========================================================================================================================
</TABLE>
The 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 underwriter expects 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
<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
20
<PAGE>
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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<PAGE>
defendants and 188 unnamed defendants in Dewayne Cargill Et al v. Metropolitan
Water District of Southern California, Et al, where the plaintiffs are seeking
general damages. This case was brought against Stratus as successor in interest
to Mainstream Engineering, Inc., one of the Royalpar subsidiaries. We are
prepared to file a motion if plaintiff's do not agree to voluntary dismissal as
according to the Royalpar Asset Purchase Agreement we did not assume this
liability and do not believe we are a successor in interest. In the event that
we are unsuccessful with that argument and ultimately end up with liability, we
believe our exposure should not be significant as we have never done business
with Metropolitan and Mainstream did minimal business with Metropolitan.
We are currently a party to the following other litigation:
Stratus Services Group, Inc. v. J.P. Industrial, LLC, John Pearson,
and Manfred Goedecke. We brought this action, in the Circuit Court for the State
of Oregon, Clackamas County, in April 1999, against the former owners of JP
Industrial, LLC, an engineering company we acquired in 1998, after we discovered
that they were conducting business in violation of their employment agreements
and in the case of Mr. Pearson, in violation of the Asset Purchase Agreement.
Mr. Pearson and Mr. Goedecke have asserted a counterclaim for approximately
$220,000, which represents the balance of the purchase price of the acquired
business and certain other alleged damages, including unpaid wages, violation of
right of privacy, damage to reputation, loss of property, lost revenues and
punitive damages. Although we can give no assurance, we believe that recoveries
for damages we have suffered as a result of breaches of the acquisition
agreement will exceed any liability we may suffer in the counterclaims. This
case is tentatively scheduled for mediation and/or arbitration in early 2000.
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").
25
<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
28
<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, owned approximately
10% 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 or by a majority of the Board of
Directors. The bylaws provide that only matters set forth in the notice of
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<PAGE>
the special meeting may be considered or acted upon at that special meeting.
Our certificate of incorporation and bylaws also provide that any
action required or permitted to be taken by the stockholders of the company at
an annual or special general meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
Anti Takeover Effects of the Charter Documents and Delaware Law.
Our certificate and bylaws include certain provisions that may have
anti takeover effects. These provisions may delay, defer or prevent a tender
offer or takeover attempt that shareholders may consider to be in their best
interests including attempts that might result in a premium over the market
price for the shares held by the shareholders. These provisions may also make it
more difficult to remove incumbent management.
These provisions, include:
o authorizing our Board of Directors to issue preferred stock;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent;
o establishing advance notice requirements for nominations for
election of our board of directors or for proposing matters that can
be acted on by stockholders at stockholder meetings and
o prohibiting cumulative voting in the election of directors.
Listing
We 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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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. ..................
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. The underwriting agreement provides that Hornblower & Weeks, Inc.
has a right of first refusal for a period of three years from the date of this
prospectus for the underwriting of any public or private sale of securities by
Stratus or its principal stockholders, subject to certain specified exceptions.
Stratus may also obtain a waiver of this right of first refusal upon payment of
a fee to Hornblower & Weeks, Inc. equal to the lesser of $200,000 or 1% of the
offering proceeds from the proposed financing. In addition, 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
the underwriters except:
o options to acquire up to 130,000 shares of common stock which
may be issued to officers, directors, employees and
consultants;
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o as consideration payable in connection with potential mergers
and acquisitions;
o in a public offering at a price less than 90% of the average
closing bid prices of the common stock as reported on the
Nasdaq Stock Market for the 21 consecutive trading day period
immediately preceding the date of sale; and
o in a private sale at not less than 70% of the average closing
bid prices of the common stock as reported on the Nasdaq Stock
Market for the 21 consecutive trading day period immediately
preceding the date of sale.
The 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.
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 herewith).
1.2 Form of Underwriter's Warrant Agreement, including form of warrant
certificate (filed herewith).
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 (filed with Amendment No. 1).
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.*
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)
23.1 Consent of Amper, Politziner & Mattia, LLP. (filed herewith).
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. 5 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 February 11, 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 February 11, 2000
- -------------------------------- (Principal Executive Officer)
Joseph J. Raymond
/s/ Michael A. Maltzman Vice President and Chief Financial February 11, 2000
- -------------------------------- Officer (Principal Financing and
Michael A. Maltzman Accounting Officer)
* Director February 11, 2000
- --------------------------------
Michael J. Rutkin
* Director February 11, 2000
- --------------------------------
H. Robert Kingston
* Director February 11, 2000
- --------------------------------
Donald W. Feidt
* Director February 11, 2000
- --------------------------------
Sanford I. Feld
</TABLE>
*By: /s/ Joseph J. Raymond
---------------------------
Joseph J. Raymond
As Attorney in Fact
II-8
EXHIBIT 1.1
UNDERWRITING AGREEMENT
____________, 2000
Hornblower & Weeks, Inc.
110 Wall Street, 21st Floor
New York, NY 10008
Dirks & Company, Inc.
520 Madison Ave.
10th Floor
New York, NY 10022
Dear Sirs:
Stratus Services Group, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to you, 1,300,000 shares of the common stock, $.01 par value (the "Common
Stock") of the Company (the "Firm Shares"). In addition, solely for the purpose
of covering over-allotments, the Company proposes to grant to you the option to
purchase up to 195,000 additional shares of Common Stock (the "Additional
Shares"). The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares". The Shares are more fully described in the
Registration Statement and Prospectus referred to below.
The Company confirms as follows its agreement with you:
1. Registration Statement and Prospectus: The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder (the "Rules and
Regulations", and together with said Act, the "Act"), a registration statement
on Form SB-2 (File No. 333 - 83255) and may have filed one or more amendments
thereto, including in such registration statement and in certain amendments
thereto a related preliminary prospectus for the registration under the Act of
the Shares. In addition, subject to the provisions of Section 4(e) hereof, the
Company has filed or will promptly file a further amendment to such registration
statement prior to the effectiveness of such registration statement, unless an
amendment is not required pursuant to Rule 430A of the Rules and Regulations. As
used in this Agreement, the term "Registration Statement" means such
registration statement, including the prospectus, financial statements and
schedules thereto, exhibits and other documents filed as part thereof, as
amended when, and in the form in which, it is declared effective by the
Commission, and, in the event any post-effective amendment thereto is filed
thereafter and on or before the Closing Date (as hereinafter defined), shall
also mean (from and after the date such post-effective amendment is effective
under the Act) such registration statement as so amended, provided that such
Registration Statement, at the time it becomes effective, may omit such
information as is permitted to be omitted from the Registration Statement when
it becomes effective pursuant to Rule 430A of the Rules and Regulations, which
information ("Rule 430 Information") shall be deemed to be included in such
Registration Statement when a final prospectus is filed with the Commission in
accordance with Rules 430A and 424(b)(1) or (4) of the Rules and Regulations;
the term "Preliminary Prospectus" means each prospectus included in the
Registration Statement, or any amendments thereto, before it becomes effective
under the Act, the form of prospectus omitting Rule 430A Information included in
the Registration Statement when it becomes effective, if applicable (the "Rule
430A Prospectus"), and any prospectus filed by the Company with your consent
pursuant to Rule 424(a) of the Regulations; the term "Prospectus" means the
final prospectus included as part of the Registration Statement, except that (i)
if any prospectus (including any preliminary prospectus) which differs from such
prospectus included in the Registration Statement is provided to you for use in
connection with the offering of the Shares
<PAGE>
(whether or not such differing prospectus is required to be filed by the Company
pursuant to Rule 424(b) under the Act), the term "Prospectus" as used herein
shall mean such differing prospectus from and after the date on which it shall
have been first used, and (ii) in the event any supplement to or amendment of
such prospectus is made after the date on which the Registration Statement is
declared effective and on or prior to the Closing Date, the term "Prospectus"
shall also mean (with respect to any supplement, from and after the date such
supplement is first used or, with respect to any amendment, the date such
amendment is effective under the Act) such prospectus as so supplemented or
amended; and the term "Effective Date" means (i) if the Company and you have
determined not to proceed pursuant to Rule 430A under the Act, the date on which
the Registration Statement becomes effective, or (ii) if the Company and you
have determined to proceed pursuant to Rule 430A under the Act, the date of this
Agreement.
2. Agreements to Sell and Purchase: Subject to the terms and conditions
herein set forth, the Company agrees to sell to you and each of you agree,
severally and not jointly, to purchase from the Company, at a purchase price of
$___ per Firm Share, the number of Shares as set forth opposite your respective
names in Schedule I hereto and the denominator of which is the aggregate number
of Firm Shares to be purchased hereunder.
Subject to the terms and conditions herein set forth, the Company agrees
to sell to you, and you shall have the right to purchase from the Company, up to
225,000 Additional Shares at a purchase price of $___ per Additional Share.
Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each of you, severally, agrees to
purchase from the Company that proportion (subject to such adjustments as you
may both determine to avoid fractional Additional Shares) of the number of
Additional Shares to be purchased which the number of Firm Shares set forth
opposite your name in Schedule I bears to the aggregate number of Firm Shares to
be purchased from the Company hereunder. Additional Shares may be purchased at
any time and from time to time on or before the thirtieth business day following
the date of this Agreement upon written notice from you to the Company
specifying the number of Additional Shares to be purchased.
You will offer the Shares for sale at the initial public offering price
set forth on the cover of the Prospectus. After the initial public offering, you
may from time to time increase or decrease the public offering price, in your
sole discretion, by reason of changes in general market conditions or otherwise.
3. Delivery and Payment: Delivery of and payment for the Firm Shares shall
be made at the offices of Hornblower & Weeks ("HBW") at 110 Wall Street, 21st
Floor, New York, New York 10008 (or such other place as shall be mutually agreed
upon) at such time and date, not later than the third full business day
following the Effective Date (unless the time of effectiveness is after 4:00
P.M. New York time, in which case the date of closing shall be no later than
four business days following the Effective Date), as you shall designate by at
least forty-eight hours prior notice to the Company (the "Closing Date").
Delivery of and payment for Additional Shares shall be made at said
offices of HBW, or at such other place, and at such time(s) and date(s) (each an
"Optional Closing Date") as may be agreed upon in writing by you and the
Company; provided, however, that in no event may an Optional Closing Date be (i)
earlier than the Closing Date or (ii) later than three business days after the
date on which the related notice to purchase Additional Shares is given.
2
<PAGE>
The Closing Date and the time and place of delivery of and payment for the
Shares may be varied by agreement between you and the Company. The Optional
Closing Date and the time and place of delivery of and payment for the
Additional Shares may be varied by agreement between you, and the Company.
Delivery of certificates for the Shares (in definitive form, registered in such
names and in such denominations as you shall request at least two business days
prior to the Closing Date by written notice to the Company) shall be made to you
against payment of the purchase price therefor by certified or official bank
check or checks payable in New York Clearing House funds to the order of the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at the offices of HBW at least 24 hours prior to the
Closing Date and each Optional Closing Date, as the case may be.
On the Closing Date, at the time of the delivery and payment for the Firm
Shares, (i) the Company shall pay to you as a non-accountable expense allowance
a sum equal to $___ per Share for each Firm Share purchased by you hereunder (or
an aggregate of $_____ in respect of the Firm Shares), less the $___ heretofore
paid to you in respect thereof, by certified or official bank check or checks
payable in New York Clearing House funds payable to the order of, and in
accordance with instructions from, you and (ii) the Company shall issue, sell
and deliver to you, for an aggregate purchase price of $10, a warrant to
purchase up to an aggregate of 130,000 Shares (the "Underwriters' Warrant") in
substantially in the form filed as an exhibit to the Registration Statement. The
shares of Common Stock issuable upon exercise of the Underwriters' Warrant are
hereinafter referred to collectively as the "Underwriters' Warrant Shares". The
Underwriters' Warrant will be exercisable at an initial exercise price of $___
per Share at any time and from time to time, in whole or in part, during a
four-year period commencing one year following the Effective Date. The Company
has granted you certain registration rights with respect to the Underwriters'
Warrant and the securities issuable upon exercise thereof, as set forth in said
Underwriters' Warrant.
On each Additional Closing Date, at the time of the delivery and payment
for the Additional Shares, the Company shall pay to you as a non-accountable
expense allowance, a sum equal to $___ per Additional Share for each Additional
Share purchased by you on such date by certified or official bank check or
checks payable in New York Clearing House funds payable to the order of, and in
accordance with instructions from, you.
4. Covenants and Agreements of the Company: (A) The Company covenants and
agrees with you as follows:
(a) The Company will notify you promptly by telephone and (if requested by
you) will confirm such advice in writing, (1) when the Registration
Statement has become effective and when any post-effective amendment
thereto becomes effective, (2) if Rule 430A under the Act is used, or the
Prospectus is otherwise required to be filed with the Commission pursuant
to Rule 424(b) under the Act, when the Prospectus is filed with the
Commission pursuant to Rule 424(b) under the Act, (3) of any request by
the Commission for amendments or supplements to the Registration Statement
or the Prospectus or for additional information, (4) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement, preventing or suspending the use of the
Preliminary Prospectus, the Prospectus, the Registration Statement or any
amendment or supplement thereto, or refusing to permit the effectiveness
of the Registration Statement ("Stop Order"), or the initiation of any
proceedings for any of those purposes, (5) of the happening of any event
during the period mentioned in paragraph (f) below which in the reasonable
judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or which requires the
3
<PAGE>
making of any changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading, and (6) of the
receipt of any comments from the Commission or the Blue Sky or securities
authorities of any jurisdiction regarding the Registration Statement, any
post-effective amendment thereto, the Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto. The Company will use
its best efforts to prevent the issuance of any Stop Order by the
Commission or any notification from the Blue Sky or securities authorities
of any jurisdiction suspending the qualification or registration of the
Shares for sale in such jurisdictions, and if at any time the Commission
shall issue any Stop Order, or if the Blue Sky or securities authorities
of any jurisdiction shall issue notification suspending the qualification
or registration of the Shares, the Company will make every reasonable
effort to obtain the withdrawal of such Stop Order or notification at the
earliest possible moment. The Company will promptly advise you of its
receipt of any notification with respect to the suspension of the
qualification or registration of the Shares for offer or sale in any
jurisdiction or the initiation or threatening of any action or proceeding
for such purpose.
(b) Prior to any public offering of the Shares by you, the Company will
cooperate with you and your counsel in registering or qualifying the
Shares for offer or sale under the Blue Sky or securities laws, rules or
regulations of such jurisdictions as you may reasonably request; provided
that in no event shall the Company be obligated to register or qualify to
do business as a foreign corporation in any jurisdiction where it is not
now so registered or qualified or to take any action which would subject
it to general service of process, or to taxation as a foreign corporation
doing business, in any jurisdiction where it is not now so subject. The
Company will pay all fees and expenses relating to the registration or
qualification of the Shares under such Blue Sky or securities laws of such
jurisdictions as you may designate (including the legal fees, expenses and
disbursements of counsel to you for the registration or qualification of
the Shares in such jurisdictions as you shall determine). After
registration, qualification or exemption of the Shares for offer and sale
in such jurisdictions, and for as long as any offering pursuant to this
Agreement continues, the Company, at your reasonable request, will file
and make such statements or reports, and pay the fees applicable thereto,
at such times as are or may be required by the laws, rules or regulations
of such jurisdictions in order to maintain and continue in full force and
effect the registration, qualification or exemption for offer or sale of
the Shares in such jurisdictions. After the termination of the offering
contemplated hereby, and as long as any of the Shares are outstanding, the
Company will file and make, and pay all fees applicable thereto, such
statements and reports and renewals of registration as are or may be
required by the laws, rules or regulations of such jurisdictions to
maintain and continue in full force and effect the registration,
qualification or exemption for secondary market transactions in the
Shares, in the various jurisdictions in which the Shares were originally
registered, qualified or exempted for offer or sale. The Company shall
further cause its counsel to provide to HBW at the Effective Date a list
to be updated as of the Closing Date and at least annually thereafter for
a minimum of three years, of those states in which the Company's
securities may be traded in non-issuer transactions under the Blue Sky
laws of the 50 states; provided, that your counsel shall issue the initial
opinion for a fee of $5,000 if the Company so desires.
(c) The Company will furnish to you, without charge, four manually-signed
copies of the Registration Statement as originally filed on Form SB-2 and
of any amendments (including post-effective amendments thereto), including
financial statements and schedules, if any, and all consents, certificates
and exhibits (including those incorporated therein by reference to the
extent not previously furnished to
4
<PAGE>
you), heretofore or hereafter made, signed by or on behalf of its officers
whose signatures are required thereon and a majority of its board of
directors.
(d) The Company will use its best efforts to cause the Registration Statement
to become effective under the Act. Upon such effectiveness, if the Company
and you have determined not to proceed pursuant to Rule 430A under the
Act, the Company will timely file a Prospectus pursuant to, and in
conformity with, Rule 424(b), if required, and if the Company and you have
determined to proceed pursuant to Rule 430A under the Act, the Company
will timely file a Prospectus pursuant to, and in conformity with, Rules
424(b) and 430A under the Act.
(e) The Company will give you and your counsel advance notice of its intention
to file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus, whether before or after the effective date
of the Registration Statement, and will not file any such amendment or
supplement unless the Company shall have first delivered copies of such
amendment or supplement to you and your counsel and you and your counsel
shall have given your consent to the filing of such amendment or
supplement. Any such amendment or supplement shall comply with the Act.
(f) From and after the Effective Date, the Company will deliver to you,
without charge, as many copies of the Prospectus or any amendment or
supplement thereto as you may reasonably request. The Company consents to
the use of the Prospectus or any amendment or supplement thereto by you
and by all dealers to whom the Shares may be sold, both in connection with
the offering or sale of the Shares and for such period of time thereafter
as the Prospectus is required by law to be delivered in connection
therewith. If during such period of time any event shall occur which in
the judgment of you or your counsel should be set forth in the Prospectus
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate
supplement or amendment thereto, and will deliver to each of you, without
charge, such number of copies thereof as you may reasonably request.
(g) The Company will promptly pay all expenses in connection with (1) the
preparation, printing, filing, distribution and mailing (including,
without limitation, express delivery service) of the Registration
Statement, each preliminary prospectus, the Prospectus, and the
preliminary and final forms of Blue Sky memoranda (if any); (2) the
issuance and delivery of the Shares; (3) the fees and expenses of legal
counsel and independent accountants for the Company relating to, among
other things, opinions of counsel, audits, review of unaudited financial
statements and cold comfort review; (4) the fees and expenses of a
registrar or transfer agent for the Common Stock; (5) the printing,
filing, distribution and mailing (including, without limitation, express
delivery service) of this Agreement, the Agreement Among Underwriters, if
any, and the Selected Dealers Agreement; (6) furnishing such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and
all amendments and supplements thereto, as may be requested for use in
connection with the offering and sale of the Shares by you or by dealers
to whom Shares may be sold; (7) any fees and communication expenses with
respect to filings required to be made by you with the National
Association of Securities Dealers Regulation, Inc. (the "NASDR"); and (8)
the quotation of the Shares on Nasdaq Stock Market ("NASDAQ"); (9)
tombstone advertisements (not to exceed $10,000) and lucite cubes for the
offering; and (10) costs of "road shows", if any (with respect to such
road shows, each party shall pay its own travel expenses and the Company
will pay all other costs associated with holding such shows including
expenses in connection with any meetings or presentations).
5
<PAGE>
(h) On the Closing Date, the Company shall sell to you, the Underwriters'
Warrant to purchase 130,000 Shares for an aggregate purchase price of $10.
(i) If this Agreement shall be terminated pursuant to any of the provisions
hereof (otherwise than by notice given by you pursuant to Section 8 hereof
or pursuant to Section 9) or if for any reason the Company shall be unable
to perform its obligations hereunder, the Company will reimburse you for
all of your out-of-pocket expenses (including the fees and expenses of
your counsel) reasonably incurred by you in connection herewith.
(j) For a period of one (1) year after the commencement of the public offering
of the Shares by you, without HBW's prior written consent, the Company
will not:
(1) offer, issue, sell, contract to sell, grant any option for the sale
of, or otherwise dispose of, directly or indirectly, any securities
of the Company, except as provided for and as contemplated by this
Agreement, as specifically disclosed in the Registration Statement
respecting certain post-offering issuances to Company employees and
holders of warrants, or for stock options and stock awards granted
to employees pursuant to the Company's Equity Incentive Plan
attached as an exhibit to the Registration Statement, or as
otherwise contemplated by the Letter of Intent; or
(2) redeem any of its securities outstanding as of the closing date of
the Public Offering, or pay any dividends or make any other cash
distribution in respect of its securities in excess of the amount of
the Company's current or retained earnings after the closing date of
the Public Offering.
HBW shall either approve or disapprove any such contemplated stock
redemption or dividend or distribution within five business days after the
date HBW receives written notice of the proposed action.
(k) On or prior to the Closing Date, the Company shall obtain:
(1) from each of its officers and directors, his or her enforceable
written agreement, in form and substance satisfactory to your
counsel, that for a period of twenty-four (24) months after the
Effective Date (or any longer period required by any jurisdiction in
which the offer and sale of the Shares is to be registered or
qualified);
(3) from each of other shareholders, his or her enforceable written
agreement, in form and substance satisfactory to your counsel, that
for a period of twelve (12) months after the Effective Date (or any
longer period required by any jurisdiction in which the offer and
sale of the Shares is to be registered or qualified)
that he or she will not offer for sale, sell, contract to sell, assign,
pledge, transfer, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any securities of the Company (including without
limitation any shares of Common Stock), owned by him or her as of the Closing
Date, whether upon exercise of warrants, stock options or otherwise, without
HBW's prior written consent (the "Lock-up Letter").
6
<PAGE>
An appropriate legend shall be marked on the face of stock certificates
representing all of such shares of capital stock prior to the Effective Date, as
well as a stop order being issued to the Company's transfer agent.
Notwithstanding the foregoing, the Company's directors, officers and existing
stockholders may make gifts and intrafamily transfer of the Common Stock
provided such transferees agree to be bound by the terms of this restriction on
transfer.
(l) The Company has reserved and shall continue to reserve and keep available
the maximum number of shares of its authorized but unissued Common Stock
and other securities for issuance upon exercise of the Underwriters'
Warrant.
(m) For a period of five years after the date of this Agreement, the Company
shall:
(1) retain Amper, Politziner & Mattia P.A. or another regionally
recognized firm of independent public accountants, as its auditors,
and at its own expense, shall cause such independent certified
public accountants to review the Company's financial statements for
each of the first three fiscal quarters of each fiscal year prior to
the announcement of quarterly financial information, the filing of
the Company's 10-Q quarterly reports and the mailing of quarterly
financial information to its shareholders;
(2) cause the Company's Board of Directors to meet not less frequently
than quarterly, upon proper notice, and cause an agenda and minutes
of the preceding meeting to be distributed to directors prior to
each such meeting;
(3) distribute to its security holders, within 120 days after the end of
each fiscal year, an annual report (containing certified financial
statements of the Company) prepared in accordance with those
required under Rule 14a-3(b) of Regulation 14A promulgated by the
Commission under the Securities Exchange Act of 1934, as amended;
and
(4) appoint a transfer agent for the Common Stock, in each case
acceptable to you.
(n) For a period of five years after the date of this Agreement, the Company
shall furnish you, free of charge, with the following:
(1) within 90 days after the end of each fiscal year, financial
statements for the Company certified by the independent certified
public accountants referred to in Section 4(m)(1) above, including a
balance sheet, statement of operations, statement of shareholders'
equity and statement of cash flows, for the Company, with supporting
schedules, prepared in accordance with generally accepted accounting
principles, as at the end of such fiscal year and for the twelve
months then ended, accompanied by a copy of the certificate or
report thereon of such independent certified public accountants;
(2) (x) for so long as the Company is a reporting company under any of
Sections 12(b), 12(g) or 15(d) of the Securities Exchange Act, as
amended, and the rules and regulations of the Commission promulgated
thereunder (collectively, the "Exchange Act"), promptly after filing
with the Commission, copies of all reports and proxy soliciting
material which the Company is required to file under the Exchange
Act, or (y) at such times as the Company is not a reporting company
under the aforesaid provisions of the Exchange Act, as soon as
practicable after the end of each of the first three fiscal quarters
of each fiscal year, financial
7
<PAGE>
statements of the Company, including a balance sheet, statement of
operations, statement of shareholders' equity and statement of cash
flows as at the end of, or for each such fiscal quarter and the
comparable period of the preceding year, which statements need not
be audited;
(3) as soon as practicable after they have first been distributed to
shareholders of the Company, copies of each annual and interim
financial or other report or communication sent by the Company to
its shareholders (except to the extent duplicative of information
furnished pursuant to any other clause of this Section 4(n));
(4) as soon as practicable following release or other dissemination,
copies of every press release and every material news item and
article in respect of the Company or its affairs released or
otherwise disseminated by the Company;
(5) promptly following receipt thereof, copies of the Company's daily
transfer sheets prepared by the Company's transfer agent, monthly
DTC Transfer Sheets and a list of shareholders; and
(6) promptly following receipt thereof, copies of each and every request
by a shareholder of the Company for a sale of shares of the
Company's Common Stock pursuant to Rule 144 of the Rules and
Regulations promulgated under the Securities Act of 1933, as
amended; and
(7) such additional documents and information with respect to the
Company and its affairs, if any, as you may from time to time
reasonably request.
(o) Prior to the Effective Date, the Company shall apply, on expedited basis,
for listing in the Corporation Records Service published by Standard and
Poor's Corporation and/or Moody's Industrial Manual and shall use its good
faith efforts to have the Company listed in one of such reports at or
prior to the Closing Date. Further, the Company shall use its good faith
efforts to remain listed in one of such reports for a period of five years
from the Effective Date.
(p) On or prior to the Effective Date, the Company will have accomplished the
quotation of the Shares on the NASDAQ SmallCap Market, subject only to
notice of issuance and the registration of such securities under the
Exchange Act. For a period of five years from the date of this Agreement,
the Company agrees, at its sole cost and expense, to take all necessary
and appropriate action such that its securities continue to be quoted on
NASDAQ, provided that the Company otherwise complies with the prevailing
requirements of NASDAQ.
(q) For a period of two years after the date of this Agreement, the Company
will not seek to amend its certificate of incorporation to authorize the
issuance of any other class of its capital stock, including, without
limitation, any preferred stock, without your prior written consent.
(r) The Company agrees, at its own cost and expense, to deliver to you and
your counsel, within 180 days after the Optional Closing Date, or the
expiration of the period in which you may exercise the over-allotment
option, five bound volumes containing copies of all documents and
correspondence filed with, or received from, the Commission and the NASD
relating to the offering of the Shares and the closing thereof, including
related matters.
(s) The Company will make generally available to its security holders and
deliver to you as soon as it is practicable to do so (but in no event
later than the 45th day after the end of the twelve-month period beginning
at end of fiscal quarter of the Company during which the Registration
Statement
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becomes effective, or, if the Registration Statement becomes effective
during the Company's last fiscal quarter, the 90th day after the end of
such twelve-month period), an earnings statement of the Company (which
need not be audited) covering a period of at least twelve consecutive
months commencing after the effective date of the Registration Statement,
which shall satisfy the requirements of Section 11(a) of the Act.
(t) The Company will, promptly upon your request, prepare and file with the
Commission any amendments or supplements to the Registration Statement,
any Preliminary Prospectus or the Prospectus and take any other action,
which in the reasonable opinion of Lehman & Eilen, counsel to you, may be
reasonably necessary or advisable in connection with the distribution of
the Shares, and will cause the same to become effective as promptly as
possible.
(u) The Company will furnish to you as early as practicable prior to the
Closing Date and any Optional Closing Date, as the case may be, but no
less than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which have
been reviewed by the Company's independent certified public accountants,
as stated in their letters to be furnished pursuant to Section 7(e)
hereof.
(v) The Company will apply the net proceeds from the issuance and sale of the
Shares for the purposes and in substantially the manner set forth under
the caption "Use of Proceeds" in the Prospectus, and will file on a timely
basis such reports with the Commission with respect to the sale of the
Shares and the application of the proceeds therefrom as may be required
pursuant to Rule 463 under the Act. The Company will operate its business
in such a manner and, pending application of the net proceeds of the
offering for the purposes and in the manner set forth under the caption
"Use of Proceeds" in the Prospectus, will invest such net proceeds in
certain types of securities so as not to become an "investment company" as
such term is defined under the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(w) The Company has filed a registration statement on Form 8-A covering the
Shares pursuant to Section 12(b) of the Exchange Act and will use its best
efforts to cause said registration statement to become effective on the
Effective Date. The Company will comply with all registration, filing and
reporting requirements of the Exchange Act, which may from time to time be
applicable to the Company. The Company shall comply with the provisions of
all undertakings contained in the Registration Statement.
(x) Prior to the Closing Date or any Optional Closing Date, as the case may
be, the Company shall neither issue any press release or other
communication, directly or indirectly, nor hold any press conference with
respect to the offering of the Shares, the Company or its business,
results of operations, condition (financial or otherwise), property,
assets, liabilities or prospects of the Company, without your prior
written consent.
(y) For a period of ninety (90) days after the date hereof, the Company will
not, directly or indirectly, take any action designed, or which will
constitute or which might reasonably be expected to cause or result in,
stabilization or manipulation of the market price of the Shares, or the
facilitation of the sale or resale of the Shares.
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<PAGE>
(aa) The Company maintains a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to maintain asset accountability; (iii) access to cash and cash
equivalents is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for cash and
cash equivalents is compared with the existing cash and cash equivalents
at reasonable intervals and appropriate action is taken with respect to
any differences.
(bb) There are no business relationships or related party transactions of the
nature described in Item 404 of Regulation S-B of the Rules and
Regulations involving the Company and any person referred to in Items 401
or 404, except as required to be described in the Prospectus and as so
described.
(cc) It is understood that, except for the issuance of shares of Common Stock
to be issued (a) upon the exercise of any options described herein, (b)
pursuant to and in order to consummate a merger with or acquisition from
an unaffiliated party in a transaction negotiated at arms' length and
approved by a majority of the Company's Board of Directors, (c) in a
public offering, at a price not less than ninety percent (90%) of the
average of the closing bid prices of the Common Stock as reported on the
NASDAQ for the 21 consecutive trading day period immediately preceding the
date of sale (the "Exempt Price"), and (d) in a private sale at a price
not less than seventy percent (70%) of the Exempt Price, during the period
of the Public Offering and for 12 months from the Effective Date, the
Company will not sell or otherwise dispose of any securities without the
prior written consent of HBW.
(dd) The Company shall elect a minimum of two (2) "outside" persons (excluding
affiliates of the Company and family members of the Company's existing
directors, officers and stockholders) to the Company's Board of Directors
within 90 days of the Effective Date. Unless waived by HBW, HBW shall have
the right to designate a member to the Company's Board of Directors for a
period of 60 months after the Effective Date, which member shall be
reasonably acceptable to the Company. Management of the Company will
obtain, prior to the Effective Date, agreements from each of the Company's
directors, officers and 5% shareholders to vote all shares of the
Company's securities owned by him, her or it, whether directly or
indirectly in favor of such designee. To the extent permitted by law and
on the same basis as all other directors, the Company will agree to
indemnify HBW's designee for the actions of its designee as a director of
the Company. In the event the Company maintains a liability insurance
policy affording coverage for the acts of its officers and directors, it
will agree to include HBWs' designee and HBW as an insured under such
policy.
(ee) The Company hereby grants HBW a right of first refusal for a period of
three years after the Effective Date of the Registration Statement for the
underwriting of any public or private sale of securities of the Company to
be made by the Company or its subsidiaries, and shall use its best efforts
to cause the grant to HBW of a similar right for any public or private
sale of its securities by its principal stockholders. Notwithstanding the
foregoing, should an investment banking firm which is generally recognized
to be of a higher tier than HBW agree to the underwriting of any public or
private sale of securities of the Company resulting in aggregate gross
proceeds of $15,000,000 or more and HBW is permitted to participate in
such offering to the extent of at least ten percent (10%), then the right
of first refusal provided herein shall not apply with respect to that
offering and any related offering. Should the Company prefer to work with
another investment banking firm in connection with a future underwriting
of any public or private sale of securities of the Company and
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<PAGE>
the investment banking firm is not generally to be of a higher tier than
HBW and/or the underwriting will not result in aggregate gross proceeds of
at least $15,000,000, then upon payment to HBW of a fee in the amount
$200,000, the right of first refusal provided herein shall not apply with
respect to that offering and any related offerings; provided, further,
that in no event shall such fee exceed 1% of the offering proceeds.
(ff) The Company will pay HBW a finder's fee based on the Transaction Value of
any covered transactions, in the event that HBW originates a merger,
acquisition, joint venture or other similar transaction to which the
Company or a subsidiary of the Company is a party, in the amount of five
percent (5%). "Transaction Value" shall mean the aggregate value of all
cash, securities, and other property (a) paid to the Company, its
affiliates, or their stockholders in connection with any transaction
referred to above involving an investment in or acquisition of the Company
or any affiliate (or the assets of either), (b) paid by the Company or any
affiliate in any such transaction involving an investment in or
acquisition of another party or its equity holdings by the Company or any
affiliate, or (c) paid or contributed by the Company or any affiliate and
by the other party or parties in the event of any such transaction
involving a joint venture or similar joint enterprise or undertaking. The
value of any such securities (whether debt or equity) or other property
shall be the fair market value thereof as deter-mined by mutual agreement
of the Company and HBW or by an independent appraiser jointly selected by
the Company and HBW.
5. Representations and Warranties of the Company: (A) The Company
represents and warrants to you that:
(a) When the Registration Statement becomes effective, and at all times
subsequent thereto to and including the Closing Date and each Optional
Closing Date, and during such longer period as the Prospectus may be
required to be delivered in connection with sales by you or any dealer,
and during such longer period until any post-effective amendment thereto
shall become effective, the Registration Statement (and any post-effective
amendment thereto) and the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment or
supplement to the Registration Statement or the Prospectus) will contain
all statements which are required to be stated therein in accordance with
the Act, will comply with the Act, and will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and no event will have occurred which should have been set
forth in an amendment or supplement to the Registration Statement or the
Prospectus which has not then been set forth in such an amendment or
supplement; if a Rule 430A Prospectus is included in the Registration
Statement at the time it becomes effective, the Prospectus filed pursuant
to Rules 430A and 424(b)(1) or (4) will contain all Rule 430A Information
and all statements which are required to be stated therein in accordance
with the Act, will comply with the Act, and will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading; and each Preliminary Prospectus, as of the date filed with the
Commission, did not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading; except that no representation or warranty
is made in this Section 5(A)(a) with respect to statements or omissions
made in reliance upon and in conformity with written information furnished
to the Company as stated in Section 6(b) with respect to you expressly for
inclusion in any
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<PAGE>
Preliminary Prospectus, the Registration Statement, or the Prospectus, or
any amendment or supplement thereto.
(b) Neither the Commission nor the Blue Sky or securities authorities of any
jurisdiction has issued an order suspending the effectiveness of the
Registration Statement, preventing or suspending the use of any
Preliminary Prospectus, the Prospectus, the Registration Statement, or any
amendment or supplement thereto, refusing to permit the effectiveness of
the Registration Statement, or suspending the registration or
qualification of the Shares, nor has the Commission or any of such
authorities instituted or threatened to institute any proceedings with
respect to such an order.
(c) The Company is a corporation duly incorporated and validly existing in
good standing under the laws of Delaware, its jurisdiction of
incorporation. The Company has full corporate power and authority and has
obtained all necessary consents, authorizations, approvals, orders,
licenses, certificates, declarations and permits of and from, and has made
all required filings with, all federal, state, local and other
governmental authorities and all courts and other tribunals, to own,
lease, license and use its properties and assets and to carry on its
business in the manner described in the Prospectus. All such consents,
authorizations, approvals, orders, licenses, certificates, declarations,
permits and filings are in full force and effect and the Company is in all
material respects complying therewith. The Company is duly registered or
qualified to do business as a foreign corporation and is in good standing
in each other jurisdiction in which its ownership, leasing, licensing, or
use of property and assets or the conduct of its business requires such
registration or qualification.
(d) The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, of which 4,349,137 shares are outstanding, and 5,000,000
shares of Preferred Stock of which no shares are outstanding. The Company
does not have any subsidiaries or own any capital stock or equity interest
in any other corporation, partnership, limited liability company or other
entity. Each outstanding share of Common Stock, including the Additional
Shares to be sold by the Company to you hereunder, are validly authorized,
validly issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and has not been issued and
is not owned or held in violation of any preemptive rights of
shareholders. There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of,
any share of capital stock of the Company or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company, except as disclosed in the
Prospectus. There is outstanding no security or other instrument which by
its terms is convertible into or exchangeable for capital stock of the
Company, except as disclosed in the Prospectus.
(e) The financial statements of the Company included in the Registration
Statement and the Prospectus fairly present the financial position, the
results of operations and the other information purported to be shown
therein at the respective dates and for the respective periods to which
they apply. Such financial statements have been prepared in accordance
with generally accepted accounting principles and are prepared in
accordance with the books and records of the Company. The accountants
whose reports on the audited financial statements are filed with the
Commission as a part of the Registration Statement are, and during the
periods covered by their report(s) included in the Registration Statement
and the Prospectus were, independent certified public accountants with
respect to the Company within the meaning of the Act. No other financial
statements are required by Form SB-2 or otherwise to be included in the
Registration Statement or the Prospectus, which are not included therein.
Except as disclosed in the Prospectus, there has at no time been a
material adverse change in the condition (financial or otherwise), results
of operations, business, property, assets, liabilities
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<PAGE>
or prospects of the Company from the latest information set forth in the
Registration Statement or the Prospectus.
(f) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, threatened, or
in prospect (or any basis therefor known to the Company) with respect to
or affecting the Company, its operation, business, property or assets,
except as disclosed in the Prospectus or such as individually or in the
aggregate do not now have and are not expected to have a material adverse
effect upon the operations, businesses, property, assets, condition
(financial or otherwise) or prospects of the Company. The Company is not
in violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree, except as disclosed in the Prospectus or such
as individually or in the aggregate do not now have and are not expected
to have a material adverse effect upon the operations, businesses,
property, assets, condition (financial or otherwise) or prospects of the
Company; nor is the Company required to take any action in order to avoid
any such violation or default.
(g) The Company has good and marketable title in fee simple absolute to all
real properties and good title to all other properties and assets which
the Prospectus indicates are owned by them, free and clear of all liens,
security interests, pledges, charges, mortgages and other encumbrances
(except as may be required to be disclosed in the Prospectus). The
properties held under lease by the Company are held by it under valid and
enforceable leases and the interests of the Company in such leases are
free and clear of all liens, encumbrances and defects, except as disclosed
in the Prospectus, and the Company is in full compliance with all material
terms and conditions thereunder and such leases are in full force and
effect. No real property owned, leased, licensed or used by the Company is
situated in an area which is, or to the knowledge of the Company, will be,
subject to zoning, use, or building code restrictions which would prohibit
(and no state of facts relating to the actions or inaction of another
person or entity or his or its ownership, leasing, licensing, or use of
any real or personal property exists or will exist which would prevent)
the continued effective ownership, leasing, licensing, or use of such real
property in the business of the Company as presently conducted or as the
Prospectus indicates it contemplates conducting, except as disclosed in
the Prospectus).
(h) Except as disclosed in the Prospectus, neither the Company nor, to its
knowledge, any other party is now or is expected by the Company to be in
violation or breach of, or in default with respect to complying with, any
material provision of any indenture, mortgage, deed of trust, debenture,
note or other evidence of indebtedness, contract, agreement, instrument,
lease or license, or arrangement or understanding which is material to the
Company, and each such indenture, mortgage, deed of trust, debenture, note
or other evidence of indebtedness, contract, agreement, instrument, lease
or license is in full force and is the legal, valid and binding obligation
of the Company, and to the knowledge of the Company, of the other
contracting party and is enforceable as to them in accordance with its
terms. The Company enjoys peaceful and undisturbed possession under all
leases and licenses under which they are operating. The Company is not a
party to or bound by any contract, agreement, instrument, lease, license,
arrangement or understanding, or subject to any charter or other
restriction, which has had or is expected in the future to have a material
adverse effect on the condition (financial or otherwise), results of
operations, businesses, property, assets or liabilities of the Company.
The Company is not in violation or breach of, or in default with respect
to, any term of its Certificate of Incorporation or By-laws.
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<PAGE>
(i) Except as disclosed in the Prospectus, the Company does not own or have
any licensed rights to, in or under any patents, patent applications,
trademarks, servicemarks, trademark or servicemark applications, trade
names, service marks, copyrights, technology, know-how or other intangible
properties or assets (all of the foregoing being herein called
"Intangibles") that are material to the business of the Company. There is
no right under any Intangibles of the Company necessary to the business of
the Company as presently conducted or as proposed to be conducted as
indicated in the Prospectus, except as may be disclosed in the Prospectus.
The Company have not received notice of infringement with respect to
asserted Intangibles of others. To the knowledge of the Company, there is
no infringement by others of Intangibles of the Company. To the knowledge
of the Company, there is no Intangible of others which has had or may in
the future have a materially adverse effect on the condition (financial or
otherwise), results of operations, businesses, property, assets,
liabilities or prospects of the Company.
(j) Neither the Company, any director or officer of the Company, or to the
best knowledge of the Company, any agent, employee, or other person
authorized to act on behalf of the Company have, directly or indirectly:
used any corporate funds of the Company for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds of the Company; violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, as relates to the business of
the Company; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment in connection with the business of the
Company.
(k) Any contract, agreement, instrument, lease or license required to be
described in the Registration Statement or the Prospectus has been
properly described therein in all material respects. Any contract,
agreement, instrument, lease or license required to be filed as an exhibit
to the Registration Statement has been filed with the Commission as an
exhibit to or has been incorporated as an exhibit by reference into the
Registration Statement.
(l) The Company has all requisite corporate power and authority to execute,
deliver and perform under the terms and conditions of this Agreement and
the Underwriters' Warrant. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution, delivery and
performance by the Company of this Agreement and the Underwriters'
Warrant. This Agreement has been duly authorized, executed and delivered
by the Company, is a legal, valid, and binding agreement of the Company,
and is enforceable as to the Company in accordance with its terms. The
Underwriters' Warrant has been duly authorized by the Company and, when
executed and delivered by the Company, assuming the due execution and
delivery thereof by the other parties thereto, will be a legal, valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms. No consent, authorization, approval, order,
license, certificate, declaration or permit of or from, or filing with,
any governmental or regulatory authority, agent, board or other body is
required for the issue and sale of the Shares by the Company and the
execution, delivery or performance by the Company of this Agreement or the
Underwriters' Warrant (except filings with and orders of the Commission
pursuant to the Act which have been or will be made or obtained prior to
the Closing Date, and such filings, consents or permits as are required
under Blue Sky or securities laws in connection with the transactions
contemplated by this Agreement). No consent of any party to any contract,
agreement, instrument, lease, license, arrangement or understanding to
which the Company is a party, or to which any of their properties or
assets are subject, is required for the
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execution, delivery or performance of this Agreement or the Underwriters'
Warrant; and the execution, delivery and performance of this Agreement and
the Underwriters' Warrant will not violate, result in a breach of,
conflict with, or (with or without the giving of notice or the passage of
time or both) entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license, arrangement or
understanding, result in the creation or imposition of, any lien, security
interest, pledge, charge, or other encumbrance upon any of the property or
assets of the Company pursuant to the terms of any indenture, mortgage,
deed of trust, loan or credit agreement, lease or other agreement or
instrument to which the Company is a party or by which the Company is
bound or to which any of the property or assets of the Company is subject
or violate or result in a breach of any term of the Certificate of
Incorporation or By-laws of the Company, or violate, result in a breach
of, or conflict with any law, rule, regulation, order, judgment or decree
binding on the Company or to which its operations, business, properties or
assets are subject.
(m) The Shares are validly authorized, and when issued, paid for and delivered
in accordance with this Agreement, will be validly issued, fully paid, and
nonassessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive rights of
shareholders. You will receive good title to the Shares and the
Underwriters' Warrant purchased by it, upon payment of the purchase price
therefor in accordance with the provisions of this Agreement, free and
clear of all liens, security interests, pledges, charges, encumbrances,
shareholders' agreements and voting trusts (collectively, "Encumbrances").
(n) The Underwriters' Warrant Shares are validly authorized and reserved for
issuance and, when issued, paid for and delivered upon exercise of the
Underwriters' Warrant, in accordance with the provisions of the
Underwriters' Warrant will be validly issued, fully paid and
non-assessable and will not be issued in violation of any preemptive
rights of shareholders; and the holders of the Underwriters' Warrant
Shares will receive good title to them, free and clear of all
Encumbrances.
(o) The Shares and the Underwriters' Warrant conform in all material respects
to all statements relating thereto contained in the Registration Statement
and the Prospectus.
(p) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as otherwise may be
stated therein, (i) the Company has not entered into any transaction or
incurred any liability or obligation, contingent or otherwise, which is
material to the Company, except in the ordinary course of business, (ii)
there has not been any change in the outstanding capital stock of the
Company, or any issuance of options, warrants or rights to purchase the
capital stock of the Company, or any material increase in the long-term
debt of the Company, or any material adverse change in the business,
condition (financial or otherwise) or results of operations of the
Company, (iii) no loss or damage (whether or not insured) to the
properties of the Company has been sustained which is material to the
Company, (iv) the Company has not paid or declared any dividend or other
distribution with respect to its stock, and (v) there has not been any
change, contingent or otherwise, in the direct or indirect control of the
Company nor, to the best knowledge of the Company, do there exist any
circumstances which would likely result in such a change.
(q) Neither the Company nor any officers or directors of the Company or
Affiliates (as defined in Rule 405 of the Rules and Regulations), have
taken or will take, directly or indirectly, prior to the termination of
the offering contemplated by this Agreement, any action designed to
stabilize or
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<PAGE>
manipulate the price of any security of the Company, or which has caused
or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
security of the Company, to facilitate the sale or resale of any of the
Shares.
(r) The Company has not incurred, directly or indirectly, any liability for a
fee, commission or other compensation on account of the employment of a
broker or finder in connection with the offering of the Shares
contemplated by this Agreement, except as contemplated by this Agreement
or as disclosed in the Registration Statement.
(s) The Company is not, and does not intend to conduct its business in a
manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act.
(t) The Company has obtained, or prior to the Closing Date will obtain a
Lock-up Letter, from each of its officers and directors who owns shares of
Common Stock.
(u) No person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement.
(v) The Company has adequately insured its properties against loss or damage
by fire, maintain adequate insurance against liability for negligence and
maintain such other insurance as is usually maintained by companies
engaged in the same or similar businesses, including product liability
insurance.
(w) The Company has filed all federal, state and local tax returns required to
be filed (or have obtained extensions therefor) and have paid all taxes
shown on such returns and all assessments received by it to the extent
that payment has become due. The Company and its subsidiaries have made
adequate accruals for all taxes which may be owed by it but has not been
paid.
(y) Amper, Politziner & Mattia P.A. who have certified certain financial
statements of the Company are independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder.
6. Indemnification and Contribution:
(a) The Company agrees to indemnify and hold harmless you, your officers,
directors, partners, employees, agents and counsel, and each person, if any, who
controls you within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any and all loss, liability, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 6, but not be
limited to, reasonable attorneys' fees and any and all reasonable expenses
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when incurred
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact contained (1) in any Preliminary
Prospectus, the Rule 430A Prospectus, the Registration Statement, or the
Prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto, or (2) in any application or other document or communication
(in this Section 6 collectively called an "application") executed by or on
behalf of the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Shares
under the Blue Sky or securities laws thereof (or the rules and regulations
promulgated thereunder) or filed with the Commission or any securities exchange
or automated
16
<PAGE>
quotation system; or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company as stated in
Section 6(b) by you for inclusion in any Preliminary Prospectus, the Rule 430A
Prospectus, the Registration Statement, of the Prospectus, or any amendment or
supplement thereto, or in any application, as the case may be, or (ii) any
breach of any representation, warranty, covenant or agreement of the Company
contained in this Agreement. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have, including liabilities
arising under this Agreement.
If any action is brought against you or any of your officers, directors,
partners, employees, agents or counsel, or any of your controlling persons
(each, an "indemnified party") in respect of which indemnity may be sought
against the Company pursuant to the foregoing paragraph, such indemnified party
or parties shall promptly notify the Company in writing of the institution of
such action (but the failure so to notify shall not relieve the Company from any
liability it may have pursuant to this Section 6(a)) and the Company shall
promptly assume the defense of such action, including the employment of counsel
(satisfactory to such indemnified party or parties) and payment of expenses.
Such indemnified party or parties shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such indemnified party or parties, unless the employment of
such counsel shall have been authorized in writing by the Company in connection
with the defense of such action or the Company shall not have promptly employed
counsel satisfactory to such indemnified party or parties to have charge of the
defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be one or more legal defenses available to
it or them or to other indemnified parties which are different from or
additional to those available to the Company, in any of which events such fees
and expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties. Anything in this paragraph to the contrary notwithstanding, the Company
shall not be liable for any settlement of any such claim or action effected
without its written consent. The Company agrees promptly to notify you of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of the Shares, any Preliminary
Prospectus, the Rule 430A Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or any application.
(b) Each of you agree, on a several but not joint basis, to indemnify and
hold harmless the Company, each director of the Company, each officer of the
Company who shall have signed the Registration Statement, and each other person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, and the Company, to the same extent as the
foregoing indemnity from the Company to you in Section 6(a), but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Rule 430A Prospectus, the Registration Statement, or the Prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
or in any application, in reliance upon and in conformity with written
information furnished to the Company by you expressly for inclusion in any
Preliminary Prospectus, the Rule 430A Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto, or in any application,
as the case may be. For all purposes of this Agreement, the public offering
price, the amounts of the selling concession and reallowance set forth in the
Prospectus and the information in the third paragraph under "Underwriting"
constitute the only information furnished in writing by or on your behalf
expressly for inclusion in any Preliminary Prospectus, the Rule 430A Prospectus,
the Registration Statement or the Prospectus (as from time to time amended or
supplemented), or any amendment or supplement thereto, or in any application, as
the case may be. If any action shall be brought against the Company or any other
person so indemnified based upon any Preliminary
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Prospectus, the Rule 430A Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or any application, and in
respect of which indemnity may be sought against you pursuant to this Section
6(c), you shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 6(a).
(c) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to Section 6(a), 6(b) or 6(c)
(subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company), as one entity, and you,
as a second entity, shall contribute to the losses, liabilities, claims, damages
and expenses whatsoever to which any of them may be subject, so that you are
responsible for the proportion thereof equal to the percentage which the
aggregate underwriting discount set forth on the cover page of the Prospectus
represents of the initial public offering price of the Shares set forth on the
cover page of the Prospectus and the Company are responsible for the remaining
portion, in proportion to the net proceeds from the offering received by them;
provided, however, that if applicable law does not permit such allocation, then
other relevant equitable considerations such as the relative fault of the
Company, and you in the aggregate in connection with the facts which resulted in
such losses, liabilities, claims, damages and expenses shall also be considered.
The relative fault, in the case of an untrue statement, alleged untrue
statement, omission, or alleged omission, shall be determined by, among other
things, whether such statement, alleged statement, omission, or alleged omission
relates to information supplied by the Company, or by you, and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such statement, alleged statement, omission or alleged omission. The
Company and you agree that it would be unjust and inequitable if the respective
obligations of the Company and you for contribution were determined by pro rata
or per capita allocation of the aggregate losses, liabilities, claims, damages
and expenses or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 6(d). No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 6(d), each person, if
any, who controls you within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company, shall have the same
rights to contribution as the Company, subject in each case to the provisions of
this Section 6(d). Anything in this Section 6(d) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 6(d) is intended to supersede any right to contribution under the Act,
the Exchange Act, or otherwise.
7. Conditions of Your Obligations: Your obligations hereunder are subject
to the continuing accuracy of the representations and warranties of the Company
contained herein and in each certificate and document contemplated under this
Agreement to be delivered to you, as of the date hereof, as of the Closing Date,
and each Optional Closing Date, as the case may be, to the performance by the
Company of their respective obligations hereunder, and to the following
additional conditions:
(a) Notification that the Registration Statement has become effective shall be
received by you not later than 6:30 p.m., New York City time, on the date
of this Agreement or at such later date and time as
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shall be consented to in writing by you. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Shares
and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) of the
Rules and Regulations within the prescribed time period, and prior to the
Closing Date the Company shall have provided evidence satisfactory to you
of such timely filing, or a post-effective amendment providing such
information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and
Regulations.
(b) The Commission shall not have issued a Stop Order and no Blue Sky or
securities authority of any jurisdiction shall have issued an order
suspending the registration or qualification of the Securities, and no
proceedings for such purpose shall have been instituted or shall be
pending, or to the knowledge of the Company, be threatened or contemplated
by the Commission or the Blue Sky or securities authorities of any such
jurisdiction.
(c) You shall have received an opinion, dated the Closing Date and
satisfactory in form and substance to your counsel from Giordano, Halleran
& Cresla, P.C., counsel to the Company, to the effect that:
(1) The Company is a corporation duly incorporated and validly existing
in good standing under the laws of Delaware, its jurisdiction of
incorporation, with full corporate power and authority to own its
property and conduct its business in the manner described in the
Prospectus. To the knowledge of such counsel, the Company has
obtained all necessary consents, authorizations, approvals, orders,
licenses, certificates, declarations and permits of and from, and
has made all required filings with, all federal, state, local and
other governmental authorities and all courts and other tribunals,
to own, lease, license and use its properties and assets and to
carry on its business in the manner described in the Prospectus. The
Company is duly registered or qualified to do business as a foreign
corporation and is in good standing in each other jurisdiction in
which the ownership, leasing, licensing, or use of its property and
assets or the conduct of its business require such registration or
qualification, except where the failure to be so qualified would not
have a material adverse effect on it.
(2) The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, of which 4,349,137 shares are outstanding,
and 5,000,000 shares of Preferred Stock, of which no shares are
outstanding. Each outstanding share of Common Stock is validly
authorized, validly issued, fully paid, and nonassessable, with no
personal liability attaching to the ownership thereof, has not been
issued and is not owned or held in violation of any preemptive right
of shareholders. To the knowledge of such counsel, there is no
commitment, plan or arrangement to issue, and no outstanding option,
warrant or other right calling for the issuance of, any share of
capital stock of the Company or any security or other instrument
which by its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company, except as disclosed
in the Prospectus. To
19
<PAGE>
knowledge of such counsel, there is outstanding no security or other
instrument which by its terms is convertible into or exchangeable
for capital stock of the Company, except as disclosed in the
Prospectus.
(3) To the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending or threatened, with respect to
the Company or any of its operations, business, property or assets,
except as disclosed in the Prospectus or such as individually or in
the aggregate do not now have and are not expected to have a
material adverse effect on the operations, business, property,
assets or condition (financial or otherwise) of the Company. The
Company is not in violation of, or in default with respect to, any
law, rule or regulation, or to the knowledge of such counsel, after
reasonable investigation, any order, judgment or decree, except as
disclosed in the Prospectus or such as individually or in the
aggregate do not now have and are not expected to have a material
adverse effect on the operations, businesses, property, assets or
condition (financial or otherwise) of the Company; nor is the
Company required to take any action in order to avoid any such
violation or default.
(4) Except as disclosed in the Prospectus, the Company is not now in
violation or breach of, or in default with respect to complying
with, any material provision of any indenture, mortgage, deed of
trust, debenture, note or other evidence of indebtedness, contract,
agreement, instrument, lease or license, or arrangement or
understanding which is material to the Company, and each such
indenture, mortgage, deed of trust, debenture, note or other
evidence of indebtedness, contract, agreement, instrument, lease or
license is in full and force and is the legal, valid and binding
obligation of the Company.
(5) The Company is not in violation or breach of, or in default with
respect to, any term of its Certificate of Incorporation or By-laws.
(6) The Company has all requisite corporate power and authority to
execute, deliver and perform this Agreement and the Underwriters'
Warrant. All necessary corporate proceedings of the Company have
been taken to authorize the execution, delivery, and performance by
the Company of this Agreement and the Underwriters' Warrant. This
Agreement and the Underwriters' Warrant have been duly authorized,
executed and delivered by the Company, constitute legal, valid, and
binding agreements of the Company, and (subject to applicable
bankruptcy, insolven-
20
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cy, reorganization and other laws affecting the enforceability of
creditors' rights generally, and the application of equitable
principles affecting the enforceability of remedies in the nature of
specific enforcement, and except as the enforceability of the
indemnification and contribution provisions of this Agreement and
the Underwriters' Warrant may be limited under applicable securities
laws) is enforceable as to the Company in accordance with its terms.
The Underwriters' Warrant has been duly authorized by the Company
and, when executed, issued and delivered by the Company and paid for
by you in accordance with the provisions of this Agreement, will be
a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with their respective terms,
except as may be limited by applicable bankruptcy, insolvency,
registration and other laws affecting the enforceability of
creditors' rights generally and the application of equitable
principles affecting the availability of remedies in the nature of
specific enforcement.
(7) All legally required proceedings in connection with the
authorization, issue and sale of the Shares by the Company in
accordance with the provisions of this Agreement have been taken,
and no consent, authorization, approval, order, license,
certificate, declaration or permit of or from, or filing with, any
governmental or regulatory authority, agency, board, bureau or other
body or is required for the execution, delivery or performance by
the Company of this Agreement and the Underwriters' Warrant (except
filings with and orders of the Commission pursuant to the Act which
have been made or received and matters under Blue Sky or state
securities laws, rules or regulations, as to which such counsel need
not express an opinion).
(8) No consent of any party to any material contract, agreement,
instrument, lease or license, or arrangement or understanding known
to such counsel, to which the Company is a party, or to which any of
the property or assets of the Company is subject, is required for
the execution, delivery or performance of this Agreement or the
Underwriters' Warrant; and the execution, delivery and performance
of this Agreement and the Underwriters' Warrant will not violate,
result in a breach of, conflict with, or (with or without the giving
of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement,
instrument, lease, license, arrangement or understanding, result in
the creation or imposition of any lien, security interest, pledge,
charge or other encumbrance upon any of the property or assets of
the Company
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pursuant to the terms of any indenture, mortgage, deed of trust,
loan or credit agreement, lease or other agreement or instrument to
which the Company is a party or by which the Company is bound or to
which any of the property or assets of the Company is subject, known
to such counsel, or violate or result in a breach of any term of the
Certificate of Incorporation or By-laws of the Company, or violate,
result in a breach of, or conflict with any law, rule, regulation,
order, judgment or decree binding on the Company or to which the
operations, business, property or assets of the Company are subject
to.
(9) The Shares are validly authorized. Upon payment of the purchase
price thereunder in accordance with the provisions of this
Agreement, the Underwriters' Warrant will be duly delivered. The
Shares, when issued, paid for and delivered in accordance with the
provisions of this Agreement, will be validly issued, fully paid and
nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any
preemptive rights of shareholders. Upon payment of the purchase
price therefor in accordance with the provisions of this Agreement,
you will receive good title to the Shares and the Underwriters'
Warrant purchased by it from the Company, free and clear of all
Liens.
(10) The Underwriters' Warrant Shares are validly authorized and have
been duly and validly reserved for issuance, and when issued, paid
for and delivered upon exercise of the Underwriters' Warrant in
accordance with the provisions of the Underwriters' Warrant will be
validly authorized, validly issued, fully paid, and nonassessable,
with no personal liability attaching to the ownership thereof, and
will not have been issued in violation of any preemptive rights of
shareholders, and the holders of the Underwriters' Warrant Shares
will receive good title to them, free and clear of all Encumbrances.
(11) The Shares and the Underwriters' Warrant Shares conform in all
material respects to all statements relating thereto contained in
the Registration Statement and the Prospectus.
(12) To the knowledge of such counsel, any contract, agreement,
instrument, lease or license required to be described in the
Registration Statement or the Prospectus has been properly described
therein in all material respects. To the knowledge of such counsel,
any contract, agreement, instrument, lease, or license required to
be filed as an exhibit to the Registration Statement has been filed
with the Commission as an
22
<PAGE>
exhibit to or has been incorporated as an exhibit by reference into
the Registration Statement.
(13) The Shares are duly authorized for quotation on the SmallCap
National Market, subject to notice of issuance.
(14) To the knowledge of such counsel, no person or entity has the right
to require registration of shares of Common Stock or other
securities of the Company because of the filing or effectiveness of
the Registration Statement who has not waived such right.
(15) The Company is not an "investment company" by reason of its assets
and operations as defined in Section 3(a) of the Investment Company
Act.
(16) The statements in the Prospectus under captions "Business", "Risk
Factors", "Use of Proceeds", "Management" and "Description of
Capital Stock" have been reviewed by such counsel and insofar as
such statements refer to descriptions of agreements, instruments or
leases, summarize the status of litigation or other proceedings, or
the provisions of orders, judgments or decrees, or constitute
statements of law, descriptions of statutes, rules or regulations,
or conclusions of law, such statements fairly present the
information called for and are accurate and complete in all material
respects.
(17) The Registration Statement has become effective under the Act, and
to the knowledge of such counsel, no Stop Order has been issued and
no proceedings for that purpose have been instituted or threatened.
(18) The Registration Statement, any Rule 430A Prospectus, and the
Prospectus, and any amendment or supplement thereto (except for the
financial statements and the notes and schedules related thereto,
and other financial information and statistical data contained
therein or omitted therefrom, as to which such counsel need express
no opinion), comply as to form in all material respects with the
applicable requirements of the Act.
(19) Such counsel has participated in the preparation of the Registration
Statement and the Prospectus and any amendments or supplements
thereto, and in the course thereof participated in conferences with
officers and other representatives of the Company, representatives
of the independent certified public accountants for the Company and
your representatives at which the contents of the Registration
Statement and Prospectus and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements
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<PAGE>
contained in the Registration Statement and Prospectus, or any
amendment or supplement thereto, on the basis of the foregoing, no
facts have come to the attention of such counsel which lead them to
believe that either the Registration Statement or any amendment
thereto at the time such Registration Statement or such amendment
became effective or the Prospectus as of its date or any amendment
or supplement thereto as of its date contained an untrue statement
of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading (it being understood that such counsel need express no
comment with respect to the financial statements, and the notes and
schedules related thereto, and other financial information and
statistical data included in the Registration Statement or
Prospectus).
(20) To the knowledge of such counsel, since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not been set forth in such an
amendment or supplement.
In rendering such opinion, counsel for the Company may rely (i) as to
matters involving the application of laws other than the laws of the United
States, to the extent counsel for the Company deems proper and to the extent
specified in such opinion, upon an opinion or opinions of local counsel (in form
and substance satisfactory to your counsel) acceptable to your counsel, familiar
with the applicable laws, in which case the opinion of counsel for the Company
shall state that the opinion or opinions of such other counsel are satisfactory
in scope, form and substance to counsel for the Company and that reliance
thereon by counsel for the Company is reasonable; (ii) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company; and (iii) to the extent they deem proper, upon written statements or
certificates of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to your counsel.
(d) You shall have received letters addressed to you and dated the date hereof
and the Closing Date from Amper, Politziner & Mattia P.A., independent
certified public accountants for the Company, addressed to you, and in
form and substance satisfactory to you, to the effect that:
(1) Such accountants are independent public accountants as required by
the Act and the rules and regulations of the
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Commission thereunder and no information need be supplied with
respect to them in answer to Item 13 of Form SB-2.
(2) In their opinion, the financial statements and related notes of the
Company examined by them, at all dates and for all periods referred
to in their report therein, and included in the Registration
Statement and the Prospectus on their authority as experts comply as
to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations of the
Commission promulgated thereunder.
(3) On the basis of limited procedures not constituting an audit,
including a reading of the latest available unaudited interim
financial statements of the Company and the financial data and
accounting records of the Company, inquiries of officials of the
Company and others responsible for financial and accounting matters,
a reading of the minute books of the Company, including without
limitation the minutes (if any) of meetings or consents in lieu of
meetings of the shareholders and of the Board of Directors (and any
committees thereof) of the Company, and other specified procedures
and inquiries requested by you, if any, nothing has come to their
attention which causes them to believe that:
(i) except as disclosed in or contemplated by the Registration
Statement and the Prospectus, during the period from the date
of the last audited balance sheet of the Company included in
the Registration Statement and Prospectus to a specified date
not more than five (5) days prior to the date of such letter,
there were any decreases, as compared with the corresponding
period of the preceding year, in net sales, cost of goods
sold, operating, selling, general and administrative expenses,
earnings from operations, the total or per share amounts of
net earnings, or the weighted average number of shares
outstanding;
(ii) except as disclosed in or contemplated by the Registration
Statement and the Prospectus, during the period from the date
of the last audited balance sheet of the Company included in
the Registration Statement and Prospectus to a specified date
not more than five (5) days prior to the date of such letter,
there has been any change in the capital stock or other
securities of the Company or any payment or declaration of any
dividend or other distribution in respect thereof or in
exchange therefor, or any increase in the long-term debt of
the Company or any decrease in the net current
25
<PAGE>
assets or net assets of the Company as compared with the
amounts shown on the last audited balance sheet of the
Company, included in the Registration Statement and the
Prospectus (other than in the ordinary course of business);
and
(iii) On the basis of their examinations referred to in their report
and consent included in the Registration Statement and
Prospectus and the indicated procedures and inquiries referred
to above, nothing has come to their attention which, in their
judgment, would cause them to believe or indicate that the
financial statements and related notes and schedules of the
Company included in the Registration Statement and Prospectus
do not present fairly the financial position and results of
operations of the Company, as at the dates and for the periods
indicated, in conformity with generally accepted accounting
principles applied on a consistent basis, and are not in all
material respects a fair presentation of the information
purported to be shown.
(4) In addition to their examination referred to in their report
included in the Registration Statement and the Prospectus and the
inquiries and limited procedures referred to in clause (ii) of this
Section 7(d), they have performed other procedures, not constituting
an audit, with respect to certain numerical data, percentages,
dollar amounts and other financial information appearing in the
Registration Statement and the Prospectus, which are derived from
the general accounting records of the Company, and have compared
certain of such data and information with the accounting records of
the Company and found them to be in agreement.
(5) Such other matters as you may have reasonably requested.
(e) The representations and warranties of the Company in this Agreement shall
be true and correct with the same effect as if made on and as of the
Closing Date and the Company shall have complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to the Closing Date.
(f) The Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations,
and shall in all material respects conform to the requirements thereof,
and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a
material fact or omit to state any material fact required to
26
<PAGE>
be stated therein or necessary to make the statements therein not
misleading.
(g) There shall have been, since the respective dates as of which information
is given in the Registration Statement and the Prospectus, no material
adverse change in the business, property, condition (financial or
otherwise), results of operations, capital stock, long-term or short-term
debt or general affairs of the Company, except changes which the
Registration Statement and the Prospectus indicate might occur after the
effective date of the Registration Statement, and the Company shall not
have incurred any material liabilities or entered into any agreements not
in the ordinary course of business, except as disclosed in the
Registration Statement and the Prospectus.
(h) No action, suit or proceeding, at law or in equity, shall be pending or
threatened against the Company which would be required to be set forth in
the Registration Statement, and no proceedings shall be pending or
threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would have a materially adverse
affect on the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company.
(i) The Company shall have furnished to you or caused to be furnished to you
at the Closing Date, certificates of the President and chief financial
officer of the Company, in form and substance satisfactory to you, as to
the accuracy of the representations and warranties of the Company, herein
at and as of the Closing Date and as to the performance by the Company of
all its obligations hereunder to be performed at or prior to the Closing
Date and the Company shall have furnished to you a certificate of the
President and chief financial officer of the Company satisfactory to you
as to the matters set forth in Sections 7(a) and (b) above.
(j) The NASD, upon review of the terms of the public offering of the Shares,
shall have indicated that it has no objections to the underwriting
arrangements pertaining to the sale of the Shares and the participation by
you in the sale of the Shares.
(k) Prior to or on the Closing Date, the Company shall have executed and
delivered the Underwriters' Warrant to you.
(l) Prior to or on the Closing Date, the Company shall have delivered to you
executed copies of the Lock-up Letters.
(m) Subsequent to the date hereof, there shall not have occurred any change,
or any development involving a prospective change,
27
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in or affecting particularly the business or financial affairs of the
Company which would materially and adversely affect the market for the
Shares.
(n) Subsequent to the date hereof, no executive officer of the Company listed
as such in the Prospectus shall have died, become physically or mentally
disabled, resigned or have been removed or discharged.
(o) The Company shall furnish you with such further certificates and documents
as you or your counsel shall have reasonably requested.
All opinions, certificates, letters and other documents required by this
Section 7 to be delivered to you by the Company will be in compliance with the
provisions hereof only if they are satisfactory in form and substance to you and
your counsel. The Company will furnish you with such conformed copies of such
opinions, certificates, letters and other documents as you shall reasonably
request.
(p) Upon the exercise, in whole or in part, by you of the option to purchase
the Additional Shares, referred to in Section 2 hereof, your obligations
to purchase and pay for the Additional Shares will be subject to the
continuing accuracy of the representations and warranties of the Company
contained herein and in each certificate and document contemplated under
this Agreement to be delivered to you, as of the date hereof and as of
each Optional Closing Date, to the performance by the Company of its
obligations hereunder, and the following additional conditions:
(1) The Registration Statement shall remain effective at the Optional
Closing Date, and no Stop Order shall have been issued by the
Commission and no proceedings for that purpose shall have been
instituted or shall be pending, or to your knowledge or the
knowledge of the Company, shall be contemplated by the Commission,
and any reasonable request on the part of the Commission for
additional information shall have been complied with to the
satisfaction of Lehman & Eilen, your counsel.
(2) You shall have received an opinion, dated the Optional Closing Date
and satisfactory in form and substance to counsel to you, from
Giordano, Halleran Cresla, P.C., counsel to the Company, which
opinion shall be substantially the same in scope and substance as
the opinion furnished to you on the Closing Date pursuant to Section
7(c) hereof, except that such opinion, where appropriate, shall
cover the Additional Shares.
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(3) You shall have received a letter in form and substance satisfactory
to you from Amper, Politziner & Mattia, PA, independent certified
public accountants for the Company, dated the Optional Closing Date
and addressed to you confirming the information in their letter
referred to in Section 7(d) hereof and stating that nothing has come
to their attention during the period from the ending date of their
review referred to in said letter to a date not more than five (5)
days prior to the Optional Closing Date, which would require any
change in said letter if it were required to be dated the Optional
Closing Date.
(4) You shall have received a certificate of the President and chief
financial officer of the Company, dated the Optional Closing Date,
in form and substance satisfactory to you, substantially the same in
scope and substance as the certificate furnished to you on the
Closing Date pursuant to Section 7(i) hereof.
8. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective at 9:30 A.M., New York City
time, on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering by you
of the Shares, whichever is earlier. The time of the initial public offering
shall mean the time, after the Registration Statement becomes effective, of the
release by you for publication of the first newspaper advertisement which is
subsequently published relating to the Shares or the time, after the
Registration Statement becomes effective, when the Shares are first released by
you for offering by you or dealers by letter or telegram, whichever shall first
occur. You, or the Company may prevent this Agreement from becoming effective
without liability of any party to any other party, except as noted below in this
Section 8, by giving the notice indicated in Section 8(c) before the time this
Agreement becomes effective.
(b) In addition to the right to terminate this Agreement pursuant to
Section 7 hereof by reason of the Company's failure, refusal or inability to
perform all obligations and satisfy all conditions on their part to be performed
or satisfied hereunder prior to the Closing Date or Optional Closing Date, as
the case may be, you shall have the right to terminate this Agreement at any
time prior to the Closing Date or any Optional Closing Date, as the case may be,
by giving notice to the Company, if the Company shall have sustained a material
loss or material adverse interference with its business or properties from fire,
flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or
malicious act, including the death or disability of Joseph J. Raymond, whether
or not covered by insurance, or from any labor dispute or any court or
governmental action, order or decree, of
29
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such a character as to have a material adverse effect with the conduct of the
business and operations of the Company; or if there shall have been a general
suspension of, or a general limitation on prices for, trading in securities on
the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market; or if a banking moratorium has been declared by a state
or federal authority; or if there shall have been an outbreak of major
hostilities between the United States and any foreign power, or any other
insurrection, armed conflict or national calamity, which in the judgment of a
majority-in-interest of the underwriters, makes it impracticable or inadvisable
to proceed with the offering, sale or delivery of the Firm Shares or the
Additional Shares, as the case may be.
(c) If you elect to prevent this Agreement from becoming effective as
provided in this Section 8, or to terminate this Agreement pursuant to Section 7
or this Section 8, you shall notify the Company promptly by telephone,
telecopier, telex, or telegram, confirmed by letter. If, as so provided in this
Section 8, the Company elects to prevent this Agreement from becoming effective,
the Company shall notify you promptly by telephone, telecopier, telex, or
telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding other than
Section 8(e), if this Agreement shall not become effective by reason of an
election by the Company pursuant to this Section 8 or if this Agreement shall
terminate or shall otherwise not be carried out within the time specified herein
by reason of any failure on the part of the Company to perform any covenant or
agreement or satisfy any condition of this Agreement by it to be performed or
satisfied, the sole liability of the Company to you, in addition to the
obligations the Company assumed pursuant to Section 4(g), will be to reimburse
you for such out-of-pocket expenses (including the reasonable fees and
disbursements of your counsel) as shall have been incurred by you in connection
with this Agreement or the proposed offer, sale, and delivery of the Shares, and
upon demand the Company agrees to pay promptly the full amount thereof to you.
(e) Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 4(b), 4(g), 6, 10(b) and 10(c) shall not be in any way
affected by such election or termination or failure to carry out the terms of
this Agreement or any part hereof.
9. Substitution of Underwriters.
If any one or more of the Underwriters shall fail or refuse to purchase
any of Shares which it or they have agreed to purchase hereunder, and the number
of Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of
Shares, the other Underwriters shall be obligated, severally, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
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refused to purchase, in the proportions which the number of Shares which they
have respectively agreed to purchase pursuant to Section 2 hereof bears to the
aggregate number of Shares which all such non-defaulting Underwriters have so
agreed to purchase or in such other proportions as you may specify, provided
that in no event shall the maximum number of Shares which any Underwriter has
become obligated to purchase pursuant to Section 2 hereof be increased pursuant
to this Section 9 by more than one-ninth of such number of Shares, without the
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Shares and the aggregate number of Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase exceeds one-tenth of the aggregate number of Shares and arrangements
satisfactory to you and the Company for the purchase of such Shares are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company for the
purchase or sale of any Shares under this Agreement. In any such case either you
or the Company shall have the right to postpone the Closing Date, but in no
event for longer than five business days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Miscellaneous: (a) Notices required to be in writing shall be mailed
or delivered (i) to the Company at the Company's office at 500 Craig Road,
Manalapan, New Jersey 07726 Attention: Joseph Raymond, with copies to Giordano,
Halleran & Cresla, P.C., 125 Half Mile Road, P.O. Box 190, Middletown, New
Jersey 07748, Attention: John A. Aiello, Esq. or (ii) to you, at the office of
Hornblower & Weeks, 110 Wall Street, 21st Floor, New York, New York 10008,
Attention: Eric Ellenhorn and Lehman & Eilen, 50 Charles Lindbergh Boulevard,
Suite 505, Uniondale, New York 11553, Attention: Hank Gracin, Esq., and shall be
deemed given when received. Any notice not required to be in writing, including
but not limited to notices under Section 7(a) or 8 hereof, may be made by telex,
telecopier or telephone and shall be deemed given at the time the telex, or
telecopied communication is received or the telephone call is made, but if so
made shall be subsequently confirmed in writing.
(b) The representations, warranties, covenants and agreements of the
Company, and the indemnity and contribution agreements, contained in Sections 4,
5 and 6 of this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of you, the Company or any of its
officers or directors or any controlling persons of you, or the Company and will
survive acceptance of and payment for any of the Shares and the termination of
this Agreement.
(c) This Agreement has been and is made solely for the benefit of you and
the Company and the controlling persons, directors and officers referred to in
Section 6 hereof and their respective successors and assigns, and no other
person shall acquire or have any right under or by virtue of this Agreement. The
term "successors and assigns" as used in this Agreement shall not include a
purchaser, as such purchaser, of Shares from you.
(d) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, applicable to contracts made and to be
performed entirely with such State, without regard to conflict of laws
provisions thereof.
Please confirm that the foregoing correctly sets forth the agreement among
the Company and you.
Very truly yours,
STRATUS SERVICES GROUP INC.
By:
--------------------------------
Joseph J. Raymond
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Confirmed, as of the date first above mentioned.
HORNBLOWER & WEEKS, INC.
By:
----------------------------
Eric Ellenhorn, CEO
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SCHEDULE I
Underwriting Agreement, dated _____________, 2000
Underwriter Number of Firm Shares
- ----------- ---------------------
Hornblower & Weeks, Inc................................
Total.................................................. 1,300,000 shares
33
STRATUS SERVICES, INC.
UNDERWRITERS' WARRANT AGREEMENT
UNDERWRITERS' WARRANT AGREEMENT dated as of ___________, 2000 by and among
STRATUS SERVICES, INC., (the "Company"), a Delaware corporation and HORNBLOWER &
WEEKS, INC. ("HBW"), as Representative of the several Underwriters (the
"Underwriters").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue warrants to the Underwriters
("Warrants") to purchase up to 130,000 shares of common stock, $.001 par value,
of the Company (the "Common Stock"); and
WHEREAS, the Underwriters have agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _________, 2000 by and among the
Underwriters and the Company, to act as the underwriters in connection with the
Company's public offering of up to 1,300,000 shares of its Common Stock at a
public offering price of $_____ per share (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriters in consideration for, and as part
of their compensation in connection with acting as underwriters pursuant to the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the foregoing premises which are
incorporated into the terms hereof, of the payment by the Underwriters to the
Company of $100.00 for the Warrants purchased hereunder, the agreements herein
set forth and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. The holders of the Warrants issued hereunder are hereby granted the
right to purchase, at any time from ________, 2001 until 5:00 p.m., New York
time, on ________, 2005, up to 130,000 shares of the Common Stock of the
Company, at an initial exercise price (subject to adjustment as provided in
Article 8 hereof) of $____ per Share (135% of the public offering price per
share), subject to the terms and conditions of this Agreement. The shares
issuable upon exercise of the Warrants are referred to as the "Warrant Shares".
2. Warrant Certificates. The warrant certificates (the "Warrant Certificates")
delivered and to be delivered pursuant to this Agreement shall be in the form
set forth in Exhibit A, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrants. The Warrants are exercisable during the term set forth
in Section 1 hereof at the Exercise Price (defined below) per Share set forth in
Section 6 hereof payable by certified or cashier's check or money order payable
in lawful money of the United States, subject to adjustment as provided in
Article
<PAGE>
8 hereof. Upon surrender of a Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares (and such other amounts, if any,
arising pursuant to Section 4 hereof) at the Company's principal office in
Manalapan, New Jersey, the registered holder of a Warrant Certificate ("Holder"
or "Holders") shall be entitled to receive a certificate or certificates for the
Warrant Shares so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part, (but not as to fractional Shares). The Warrants may be exercised to
purchase all or part of the Warrant Shares represented thereby. In the case of
the purchase of less than all the Warrant Shares purchasable on the exercise of
the Warrants represented by a Warrant Certificate, the Company shall cancel the
Warrant Certificate represented thereby upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Warrant Shares purchasable thereunder.
4. Issuance of Certificates. Upon the exercise of the Warrants and payment of
the Exercise Price therefor, the issuance of certificates for the Warrant Shares
underlying such Warrants shall be made forthwith (and in any event within three
(3) business days thereafter) without further charge to the Holder thereof, and
such certificates shall (subject to the provisions of Sections 5 and 7 hereof)
be issued in the name of, or in such names as may be directed by, the Holders
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holders, and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Warrant
Certificates and the certificates representing the Warrant Shares shall be
executed on behalf of the Company by the manual or facsimile signature of the
then present Chairman or Vice Chairman of the Board of Directors or President or
Vice President of the Company under its corporate seal reproduced thereon,
attested to by the manual or facsimile signature of the then present Secretary
or Assistant Secretary or Treasurer or Assistant Treasurer of the Company.
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
5. Restriction on Transfer of Warrants. The Holder of a Warrant Certificate (and
its Permitted Transferee, as defined below), by its acceptance thereof,
covenants and agrees that the Warrants are being acquired as an investment and
not with a view to the distribution thereof; that the Warrants may be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, to any person (a "Permitted Transferee"), provided such transfer,
assignment, hypothecation or other deposition is made in accordance with the
provisions of the Securities Act of 1933 (the "1933 Act"); and provided,
further, that until ________, 2001 (one year after the Effective Date, defined
below) only officers of the Underwriters, or any selling group member or their
respective officers or partners, shall be Permitted Transferees.
6. Exercise Price.
a. Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 8 hereof, the initial exercise price of each Warrant to purchase Warrant
Shares shall be $____ per Share. The adjusted exercise price shall be the price
which shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 8 hereof.
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b. Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
7. Registration Rights.
a. Registration Under the Securities Act of 1933. The Warrant certificates
shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE
OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT"), OR (II) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH 1933 ACT IS AVAILABLE.
b. Demand Registration. At any time commencing one (1) year and expiring
five (5) years after the effective date of the Company's Registration Statement
relating to the Public Offering (the "Effective Date"), the Holders of the
Warrants and the Warrant Shares representing at least a Majority (as hereinafter
defined) of such securities shall have the right, exercisable by written notice
to the Company, to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one (1) occasion, a registration
statement on Form S-1, SB-2 (or other appropriate form, including, without
limitation, a post-effective amendment to the Company's Registration Statement)
and such other documents, including a prospectus, as may be necessary in the
opinion of both counsel for the Company and counsel for the Holders, in order to
comply with the provisions of the 1933 Act, so as to permit a public offering
and sale, for a period of nine (9) months, of the Warrant Shares by such Holders
and any other Holders of the Warrants and/or Warrant Shares who notify the
Company within fifteen (15) business days after receipt of the notice described
in the succeeding sentence. The Company covenants and agrees to give written
notice of any registration request under this Section 7(b) by any Holder(s) to
all other registered Holders of the Warrants and the Warrant Shares within ten
(10) days from the date of the receipt of any such registration request. For
purposes of this Agreement, the term "Majority" in reference to the Holders of
the Warrants or Warrant Shares, shall mean in excess of fifty percent (50%) of
the then outstanding Warrants or Warrant Shares that (i) are not held by the
Company, an affiliate, officer, director, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting as nominees
or in conjunction therewith, or (ii) have not been resold to the public pursuant
to a registration statement filed with the Commission under the 1933 Act. The
Holders of the Warrants may demand registration without exercising the Warrants,
and shall never be required to exercise same.
c. Piggyback Registration. If, at any time within the period commencing
one (1) year and expiring six (6) years after the Effective Date, the Company
should file a registration statement with the Commission under the 1933 Act
(other than in connection with a merger or pursuant to Form S-8) it will give
written notice by registered mail, at least twenty (20) days prior to the filing
of each such registration statement, to the Underwriters and to all other
Holders of the Warrants and/or the Warrant Shares of its intention to do so. If
the Underwriters or other Holders of the Warrants and/or the Warrant Shares
notify the Company within
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ten (10) days after receipt of any such notice of its or their desire to include
any Warrant Shares in such proposed registration statement, the Company shall
afford the Underwriters and such Holders of the Warrants and/or Warrant Shares
the opportunity to have any such Warrant Shares registered under such
registration statement. Notwithstanding the provisions of this Section 7(c), the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7(c) (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
If the underwriter of an offering to which the above piggyback rights
apply objects to such rights, such objection shall preclude such inclusion.
However, in such event, the Company will, within six (6) months of completion of
such subsequent underwriting, file at its sole expense, a registration statement
relating to such excluded Warrant Shares, which shall be in addition to any
registration statement required to be filed pursuant to Section 7(b), unless
such Holders had refused an opportunity provided with the consent of the
underwriter, to be included in the registration statement on the condition that
they agree not to offer the securities for sale without the prior written
consent of the underwriter for a period not exceeding 60 days from the effective
date of such registration statement.
If the underwriter in such underwritten offering shall advise the Company
that it declines to include a portion or all of the Warrant Shares requested by
the Underwriters and the Holders to be included in the registration statement,
then (A) registration of all of the Warrant Shares shall be excluded from such
registration statement on the condition that all securities to be registered by
other selling security holders, if any, are also excluded and (B) registration
of a portion of such Warrant Shares shall be allocated among the Underwriters
and the Holders and any other selling securityholders in proportion to the
respective numbers of securities to be registered by the Underwriters and each
such Holder and other selling securityholder. In such event the Company shall
give the Underwriters and the Holders prompt notice of the number of Warrant
Shares excluded.
d. Covenants of the Company With Respect to Registration. In connection
with any registrations under Sections 7(b) and 7(c) hereof, the Company
covenants and agrees as follows:
(1) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand
therefor; provided, however, that the Company shall not be required
to produce audited or unaudited financial statements for any period
prior to the date such financial statements are required to be filed
in a report on Form 10-K or Form 10-Q (or Form 10-KSB or Form
10-QSB), as the case may be. The Company shall use its best efforts
to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to
sell Shares such number of prospectuses as shall reasonably be
requested.
(2) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting discounts or selling fees,
expenses or commissions), fees and expenses in connection with any
registration statement filed pursuant to Sections 7(b) and 7(c)
hereof including, without limitation, the Company's legal and
accounting fees, printing expenses,
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blue sky fees and expenses. If the Company shall fail to comply with
the provisions of Section 7(d) (1), the Company shall, in addition
to any other equitable or other relief available to the Holder(s),
be liable for any or all incidental, special and consequential
damages and damages due to loss of profit sustained by the Holder(s)
requesting registration of their Warrant Shares.
(3) The Company will take all necessary action which may be required to
qualify or register the Warrant Shares included in a registration
statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s),
provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(4) The Company shall indemnify the Holder(s) of the Warrant Shares to
be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the Securities Exchange Act of 1934
(the "Exchange Act"), against all losses, claims, damages, expenses
or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the 1933 Act, the
Exchange Act or otherwise, arising from such registration statement,
but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the
Underwriters contained in Section 6 of the Underwriting Agreement,
and the Holder(s) shall indemnify the Company to the same extent and
with the same effect as the provisions pursuant to which the
Underwriters have agreed to indemnify the Company contained in
Section 6 of the Underwriting Agreement.
(5) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and
directors and each persons, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20(a) of the
Exchange Act, against all losses, claims, damages, expenses or
liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the 1933 Act, the Exchange
Act or otherwise, arising from information furnished by or on behalf
of such Holders, or their successors or assigns, for specific
inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 6 of the
Underwriting Agreement pursuant to which the Underwriters have
agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
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(7) If the manner of distribution proposed by the holders of the
Warrants and the Warrant Shares is an underwriting, the Company
shall furnish to each Holder participating in the offering and to
each underwriter, a signed counterpart, addressed to such Holder or
underwriter of (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (and if such
registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and
(ii) a "cold comfort" letter dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing
under the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in
the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in
accountants' letter, with respect to events subsequent to the date
of such financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(8) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within the first full
four fiscal quarters following the effective date, make "generally
available to its security holders" (within the meaning of Rule 158
under the 1933 Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the 1933 Act.
(9) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence described below and any
managing underwriter, copies of all correspondence between the
Commission and the Company, its counsel or auditors with respect to
the registration statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect
to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable
securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to
books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as
often as any such Holder shall reasonably request.
(10) In connection with an offering for which the Holders have demand
rights, the Company shall enter into an underwriting agreement with
the managing underwriter selected for such underwriting by Holders
holding a Majority of the Shares requested to be included in such
underwriting. In connection with an offering for which the Holders
have piggyback rights, the Company shall have the sole right to
select the managing underwriter. Such underwriting agreement shall
be satisfactory in form and substance to the Company, a Majority of
such Holders and such managing underwriters, and shall contain such
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representations, warranties and covenants by the Company and such
other terms as are customarily contained in agreements of that type
used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their
Warrant Shares and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for
the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make
any representations or warranties to or agreements with the Company
or the underwriters except as they may relate to such Holders their
ownership and their intended methods of distribution.
e. Further Registrations. The Company will cooperate with the Holder(s) of the
Warrants and Warrant Shares in preparing and signing one additional registration
statement, in addition to the registration statements discussed above, required
in order to sell or transfer the Shares and will supply all information required
therefor, but such additional registration statement expenses or offering
statement expenses will be prorated between the Company and the Holders of the
Warrants and Warrant Shares according to the aggregate sales price of the
securities being issued. The provisions of Section 7(d) other than subsection
(2) shall apply to any such registration statement.
8. Adjustments to Exercise Price and Number of Securities; Redemption.
a. (i) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof, issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the Exercise Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the nearest
cent) determined by dividing (i) the sum of (a) the total number of shares of
Common Stock outstanding immediately prior to such Change of Shares, multiplied
by the Exercise Price in effect immediately prior to such Change of Shares, and
(b) the consideration, if any, received by the Company upon such issuance,
subdivision or combination by (ii) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Exercise Price be adjusted pursuant to this computation to an
amount in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Common
Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a) the following provisions shall be applicable:
(1) Shares or equivalents of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the
day following the record date for the determination of
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shareholders entitled to receive such dividend or other distribution
and shall be deemed to have been issued without consideration.
(2) The reclassification of securities of the Company other than shares
of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the
close of business on the date fixed for the determination of
security holders entitled to receive such shares, and the value of
the consideration allocable to such shares of Common Stock shall be
determined in good faith by the Board of Directors of the Company on
the basis of a record of values of similar property or services.
(3) The number of shares of Common Stock at any one time outstanding
shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof)
upon the exercise of options, rights or warrants and upon the
conversion or exchange of convertible or exchangeable securities.
b. Upon each adjustment of the Exercise Price pursuant to this Section 8,
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Exercise Price.
c. In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger with
a subsidiary in which merger the Company is the continuing corporation and which
does not result in any reclassification or change of the then outstanding shares
of Common Stock or other capital stock issuable upon exercise of the Warrants
(other than a change in par value, or from par value to no par value, or from no
par value to par value or as a result of subdivision or combination) or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance. Such provisions shall include provision for adjustments which shall
be as nearly equivalent as may be practicable to the adjustments provided for in
Section 8a. The above provisions of this Section 8b. shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
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<PAGE>
d. Irrespective of any adjustments or changes in the Exercise Price or the
number of shares of Common Stock purchasable upon exercise of the Warrants, the
Warrant Certificates theretofore and thereafter issued shall, unless the Company
shall exercise its option to issue new Warrant Certificates, continue to express
the Exercise Price per share and the number of shares purchasable thereunder as
the Exercise Price per share and the number of shares purchasable thereunder
were expressed in the Warrant Certificates when the same were originally issued.
e. After each adjustment of the Exercise Price pursuant to this Section 8,
the Company will promptly prepare a certificate signed by the Chairman or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Company setting forth: (i) the Exercise Price as so
adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of
each Warrant, after such adjustment, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will promptly cause a brief summary
thereof to be sent by ordinary first class mail to each registered Holder at his
last address as it shall appear on the registry books of the Company. No failure
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity thereof except as to the holder to whom the Company failed
to mail such notice, or except as to the holder whose notice was defective. The
affidavit of the Secretary or an Assistant Secretary of the Company that such
notice has been mailed shall, in the absence of fraud, be prima facie evidence
of the facts stated therein.
f. No adjustment of the Exercise Price shall be made as a result of or in
connection with the issuance or sale of shares of Common Stock pursuant to
options, warrants, stock purchase agreements and convertible or exchangeable
securities outstanding or in effect on the date hereof or granted upon the
consummation of and in connection with the first Business Combination (as
defined in the Registration Statement). In addition, registered Holders shall
not be entitled to cash dividends paid by the Company prior to the exercise of
any Warrant or Warrants held by them.
g. Definition of Common Stock. For the purpose of this Agreement, the term
"Common Stock" shall mean (i) the class of stock designated as Common Stock in
the Certificate of Incorporation of the Company as it may be amended as of the
date hereof, or (ii) any other class of stock resulting from successive changes
or reclassification of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that the Company shall after the date hereof issue securities with
greater or superior voting rights than those of the shares of Common Stock
outstanding as of the date hereof, the Holder, at its option, may receive upon
exercise of any Warrant either shares of Common Stock or a like number of such
securities with greater or superior voting rights.
h. Reclassification, Merger or Consolidation. The Company will not merge,
reorganize or take any other action which would terminate the Warrants without
first making adequate provision for the Warrants. In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or from nor par value to par value, or as
a result of a subdivision or combination), or in case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any reclassification
or change of the outstanding Common Stock except a change as a result of a
subdivision or combination of such shares or a
9
<PAGE>
change in par value, as aforesaid), or in the case of a sale or conveyance to
another corporation or other entity of the property of the Company as an
entirety, the Holder of each Warrant then outstanding or to be outstanding shall
have the right thereafter (until the expiration of such Warrant) to purchase,
upon exercise of such Warrant, the kind and number of shares of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holder were the owner of the
shares of Common Stock underlying such Warrants immediately prior to any such
events at a price equal to the product of (x) the number of shares issuable upon
exercise of the Warrants and (y) the Exercise Prices in effect immediately prior
to the record date for such reclassification, change, consolidation, merger,
sale or conveyance, as if such Holder has exercised the Warrants. In the event
of a consolidation, merger, sale or conveyance of property, the corporation
formed by such consolidation or merger, or acquiring such property, shall
execute and deliver to the Holders a supplemental warrant agreement to such
effect. Such supplemental warrant agreement shall provide for adjustments which
shall be identical to the adjustment to those provided in Section 8. The
provisions of this Section 8(h) shall similarly apply to successive
consolidations or mergers.
i. No Adjustment of Exercise Prices in Certain Cases. No adjustment of the
Exercise Prices shall be made:
(1) Upon the issuance or sale of (i) the Warrants or the Warrant Shares;
(ii) the shares of Common Stock pursuant to the Public Offering; or
(iii) the shares of Common Stock issuable upon the exercise of the
options or warrants outstanding or in effect on the date hereof as
described in the prospectus relating to the Public Offering.
(2) If the amount of said adjustments shall be less than five ($.05)
cents per Share, provided, however, that in such case any adjustment
that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least five ($.05) cents per Share.
j. Dividends and Other Distributions. In the event that the Company shall
at any time prior to the exercise of all the Warrants declare a dividend (other
than a dividend consisting solely of shares of Common Stock) or otherwise
distribute to its stockholders any assets, property, rights, evidences of
indebtedness, securities (other than shares of Common Stock), whether issued by
the Company or by another, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Section 8 (j).
k. Subscription Rights for Shares of Common Stock of Other Securities. In
the event that the Company or an affiliate of the Company shall at any time
after the date hereof and prior to the exercise of
10
<PAGE>
all the Warrants issue any rights to subscribe for shares of Common Stock or any
other securities of the Company or of such affiliate to all the stockholders of
the Company, the Holders of the unexercised Warrants shall be entitled to
receive, in addition to the Warrant Shares receivable upon the exercise of the
Warrants, such rights at the time such rights are distributed to the other
stockholders of the Company.
9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is
exchangeable without expense, upon the surrender thereof by the registered
Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Shares in such denominations as shall be designated
by the Holder thereof at the time of such surrender. Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Warrant Certificate, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of the Warrants, if mutilated, the Company will
make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be required to
issue certificates representing fractions of Shares upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests; provided, however, that if a Holder exercises all Warrants
or held of record by such Holder the fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Shares.
11. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock as shall be issuable upon the exercise on conversion
thereof. The Company covenants and agrees that, upon exercise of the Warrants
and payment of the Exercise Price therefor, all the Warrant Shares issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to the preemptive rights of any stockholder. As long as the Warrants
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock to be listed and quoted (subject to official notice of issuance) on all
securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed or quoted.
12. Notices to Warrant Holders. Nothing contained in this Agreement shall be
construed as conferring upon the Holders the right to vote or to consent or to
receive notice as a stockholder in respect of any meetings of stockholders for
the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
a. the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
11
<PAGE>
b. the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
c. a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property, assets and business as an entirety shall be proposed; then, in
any one or more of said events, the Company shall give written notice of such
event at least fifteen (15) days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
a. If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
b. If to the Company to the address set forth in Section 3 hereof or to
such other address as the Company may designate by notice to the Holders.
14. Supplements and Amendments. The Company and the Underwriters may from time
to time supplement or amend this Agreement without the approval of any Holders
of Warrant Certificates (other than the Underwriters) in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and HBW may deem necessary or desirable and which the Company and the
Underwriters deem shall not adversely affect the interests of the Holders of
Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Underwriters, the
Holders and their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of business on
__________, 2010. Notwithstanding the foregoing, the indemnification provisions
of Section 7 shall survive such termination until the close of business on the
later of the expiration of any applicable statue of limitations or ________,
2011.
17. Governing Law; Submission to Jurisdiction. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all
12
<PAGE>
purposes shall be construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts of laws, except
that matters concerning the validity of the issuance of securities shall be
determined and construed in accordance with the laws of the State of Delaware.
The Company, the Underwriters and the Holders hereby agree that any action,
proceeding or claim against it arising out of, or relating in any way to, this
Agreement shall be brought and enforced in the courts of the State of New York
or of the United States of America for the Southern District of New York, and
irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive.
The Company, the Underwriters and the Holders hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. Any such process
or summons to be served upon any of the Company, the Underwriters and the
Holders (at the option of the party bringing such action, proceeding or claim)
may be served by transmitting a copy thereof, by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address set
forth in Section 13 hereof. Such mailing shall be deemed personal service and
shall be legal and binding upon the party so served in any action, proceeding or
claim.
18. Entire Agreement; Modification. This Agreement (including the Underwriting
Agreement to the extent portions thereof are referred to herein) contains the
entire understanding between the parties hereto with respect to the subject
matter hereof. Subject to Section 14, this Agreement may not be modified or
amended except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
19. Severability. If any provision of this Agreement shall be held to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are for
convenience of reference only and are not intended, nor should they be construed
as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of This Agreement. Nothing in this Agreement shall be construed to
give to any person or corporation, other than the Company and the Underwriters
and any other registered Holder(s) of the Warrant Certificates or Warrant
Shares, any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the Company and
the Underwriters and any other Holder(s) of the Warrant Certificates or Warrant
Shares.
23. Counterparts. This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
24. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company, the Underwriters and their successors and assigns and
the Holders from time to time of the Warrant Certificate(s) or any of them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
13
<PAGE>
STRATUS SERVICES, INC.
By:
----------------------------------
HORNBLOWER & WEEKS, INC.
By:
----------------------------------
14
<PAGE>
EXHIBIT A
STRATUS SERVICES, INC.
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE OR
SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933
ACT, OR (II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
SUCH 1933 ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING ________, 2001 THROUGH 5:00 P.M., NEW YORK TIME ________,
2005
NO. WC-1 _________ WARRANTS
This Warrant Certificate certifies that ____________________ or registered
assigns, is the registered holder of _________ warrants (the "Warrants") to
purchase initially, at any time from _______, 2001, until 5:00 p.m., New York
time on _______, 2005 (the "Expiration Date"), up to ________ fully paid and
non-assessable shares (the "Shares"), of Common Stock, $.001 par value (the
"Common Stock"), of Stratus Services, Inc. a Delaware corporation (the
"Company"), at the exercise price of $____ per Share (the "Exercise Price"),
upon the surrender of this Warrant Certificate and payment of the Exercise Price
at an office or agency of the Company, but subject to the conditions set forth
herein and in the Warrant Agreement dated as of _______, 2000 (the "Warrant
Agreement") by and among the Company, and Hornblower & Weeks, Inc. Payment of
the Exercise Price shall be made by certified or cashier's check or money order
payable to the order of the Company.
No Warrant may be exercised after 5:00 P.M, New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
__th day of _______, 1996.
[SEAL]
STRATUS SERVICES, INC.
By:
---------------------------
ATTEST:
By:
----------------------------
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder
if such holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________________
hereby sells, assigns and transfers unto _______________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________
Attorney, to transfer the within Warrant Certificate on the books of The Parts
Source, Inc., with full power of substitution.
Dated:____________________
Signature
----------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase:
_______ Shares
and herewith tenders in payment for such securities a certified or cashier's
check or money order payable to the order of The Parts Source, Inc. in the
amount of $_______________, all in accordance with the terms hereof. The
undersigned requests that a certificate for such securities be registered in the
name of _____________________ whose address is ______________________________
and that such Certificate be delivered to _____________________________ whose
address is .
Dated:____________________
Signature
----------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form SB-2 Registration No. 333-83255) and related
Prospectus of Stratus Services Group, Inc. for the registration of 1,500,000
shares of its Common Stock and to the use in this Registration Statement (Form
SB-2) of our report dated December 1, 1999, with respect to the financial
statements of Stratus Services Group, Inc. for the years ended September 30,
1999 and September 30, 1998 and our report dated August 20, 1999 for B&R
Employment, Inc. for the years ended December 31, 1998 and 1997.
/s/ Amper, Politziner & Mattia, P.A.
AMPER, POLITZINER & MATTIA, P.A.
February 11, 2000
Edison, New Jersey
