|  |  |
|--|--|

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q/A**

 
| **(Mark  One)**                                            |
|------------------------------------------------------------|
|                                                       |   |   |
| **ý**                                                 |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                       |   |   |
| **For the quarterly period ended  December 31, 2002** |
|                                                       |   |   |
| **o**                                                      |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |

 

**For the transition period from             to            **

 

**Commission file number 001-15789**

 

**STRATUS SERVICES GROUP, INC.**

(Exact name of Registrant as specified in itscharter)

 

| **Delaware**                                                                        |   | **22-3499261**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  of other jurisdiction of incorporation or organization)                     |   | (I.R.S.  Employer Identification No.) |
|                                                                                |   |                                  |
| **500 Craig Road, Suite 201, Manalapan, New  Jersey  07726**                   |
| (Address of principal executive offices)                                            |
|                                                                                |   |                                  |
| **(732) 866-0300**                                                                  |
| (Issuer’s telephone number)                                                    |
|                                                                                |   |                                  |
|                                                                                |   |                                  |
| (Former name, former address and former fiscal  year, if changed since last report) |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý           No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 120-b of the Exchange Act). Yes o        No ý

 

As of February 13, 2003, 17,289,161 shares ofthe Registrant’s common stock were outstanding.

 

 

----

 

**PartI – Financial Information**

**Item1. – Financial Statements**

 

**STRATUS SERVICESGROUP, INC.**

Condensed Balance Sheets

 
|                                                                                                                                                                                                          |   | **December  31,  2002** |       | **September  30,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|--------------------------|--------|
|                                                                                                                                                                                                          |   | **As Restated**         |       |                     |   |
|                                                                                                                                                                                                          |   | **(Unaudited)**         |       |                     |   |
| Assets                                                                                                                                                                                                        |   |                    |       |                     |   |
| Current assets                                                                                                                                                                                                |   |                    |       |                     |   |
| Cash and cash equivalents                                                                                                                                                                                     |   | $                       | 13,620     |                     | $      | 162,646 |   |
| Accounts receivable – less allowance for doubtful accounts of  $1,523,000 and $1,742,000                                                                                                            |   | 11,457,414              |       | 9,179,543                |   |
| Unbilled receivables                                                                                                                                                                                          |   | 679,811                 |       | 2,065,972                |   |
| Other receivables                                                                                                                                                                                             |   | 3⁄4                  |       | 250,000                  |   |
| Prepaid insurance                                                                                                                                                                                             |   | 2,845,381               |       | 2,709,331                |   |
| Prepaid expenses and other current assets                                                                                                                                                                     |   | 329,822                 |       | 333,601                  |   |
|                                                                                                                                                                                                          |   | 15,326,048              |       | 14,701,093               |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Property and equipment, net of accumulated depreciation                                                                                                                                                       |   | 1,352,284               |       | 1,281,817                |   |
| Intangible assets, net of accumulated amortization                                                                                                                                                            |   | 1,895,608               |       | 802,145                  |   |
| Goodwill                                                                                                                                                                                                      |   | 7,085,582               |       | 7,085,582                |   |
| Deferred financing costs, net of accumulated amortization                                                                                                                                                     |   | 5,366                   |       | 5,768                    |   |
| Other assets                                                                                                                                                                                                  |   | 182,001                 |       | 154,991                  |   |
|                                                                                                                                                                                                          |   | $                       | 25,746,889 |                     | $      | 24,031,396 |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                    |   |                    |       |                     |   |
| Current liabilities                                                                                                                                                                                           |   |                    |       |                     |   |
| Loans payable (current portion)                                                                                                                                                                               |   | $                       | 1,267,157  |                     | $      | 580,830 |   |
| Notes payable – acquisitions (current portion)                                                                                                                                                           |   | 622,145                 |       | 578,040                  |   |
| Line of credit                                                                                                                                                                                                |   | 8,754,864               |       | 7,739,117                |   |
| Cash overdraft                                                                                                                                                                                                |   | 664,648                 |       | 731,501                  |   |
| Insurance obligation payable                                                                                                                                                                                  |   | 12,343                  |       | 128,075                  |   |
| Accounts payable and accrued expenses                                                                                                                                                                         |   | 6,031,152               |       | 5,472,696                |   |
| Accrued payroll and taxes                                                                                                                                                                                     |   | 2,088,624               |       | 1,828,629                |   |
| Payroll taxes payable                                                                                                                                                                                         |   | 475,569                 |       | 929,328                  |   |
|                                                                                                                                                                                                          |   | 19,916,502              |       | 17,988,216               |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Loans payable (net of current portion)                                                                                                                                                                        |   | 148,997                 |       | 217,965                  |   |
| Notes payable – acquisitions (net of current portion)                                                                                                                                                    |   | 2,546,112               |       | 1,919,532                |   |
| Convertible debt                                                                                                                                                                                              |   | 40,000                  |       | 40,000                   |   |
|                                                                                                                                                                                                          |   | 22,651,611              |       | 20,165,713               |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Temporary equity – put options                                                                                                                                                                           |   | 823,000                 |       | 823,000                  |   |
| Commitments and contingencies                                                                                                                                                                                 |   |                    |       |                     |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Stockholders’ equity                                                                                                                                                                                     |   |                    |       |                     |   |
| Preferred stock, $.01 par value, 5,000,000 shares authorized                                                                                                                                                  |   |                    |       |                     |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Series A voting redeemable convertible preferred stock, $.01 par  value, 1,458,933 shares issued and outstanding, liquidation preference of  $4,376,799 (including unpaid dividends of $421,970 and $345,376) |   | 3,420,970               |       | 3,293,376                |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Series E non-voting convertible preferred stock, $.01 par value,  11,478 and 16,683 shares issued and outstanding, liquidation preference of  $1,147,800 (including unpaid dividends of $40,647 and $20,000)  |   | 1,188,447               |       | 1,485,947                |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Series F voting convertible preferred stock, $.01 par value, 10,000  shares issued and outstanding, liquidation preference of $1,000,000                                                                      |   | 1,000,000               |       | 1,000,000                |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Series H non-voting convertible preferred stock, $.01 par value, 5,000  shares issued and outstanding, liquidation preference of $500,000 (including  unpaid dividends of $7,500 and $-0-)                    |   | 507,500                 |       | 500,000                  |   |
|                                                                                                                                                                                                          |   |                    |       |                     |   |
| Common stock, $.01 par value, 100,000,000 shares authorized;  16,259,478 and 11,522,567 shares issued and outstanding                                                                                         |   | 162,595                 |       | 115,226                  |   |
| Additional paid-in capital                                                                                                                                                                                    |   | 12,761,770              |       | 12,626,733               |   |
| Accumulated deficit                                                                                                                                                                                           |   | (16,669,004             | )          | (15,978,599              | )      |
| Total stockholders’ equity                                                                                                                                                                               |   | 2,372,278               |       | 3,042,683                |   |
|                                                                                                                                                                                                          |   | $                       | 25,746,889 |                     | $      | 24,031,396 |   |

 

See notes to condensed financial statements.

 

1

----

 

**STRATUSSERVICES GROUP, INC.**

Condensed Statements of Operations

(Unaudited)

 
|                                                                              |   | **Three  Months Ended  December 31,** |       |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                              |   | **2002**                              |       | **2001** |   |
|                                                                              |   | **As  Restated**                      |       | **As  Restated** |   |
|                                                                              |   |                                  |       |   |   |
| Revenues                                                                          |   | $                                     | 20,025,020 |   | $ | 13,131,819 |   |
|                                                                              |   |                                  |       |   |   |
| Cost of revenues                                                                  |   | 16,666,292                            |       | 10,457,917 |   |
|                                                                              |   |                                  |       |   |   |
| Gross Profit                                                                      |   | 3,358,728                             |       | 2,673,902 |   |
|                                                                              |   |                                  |       |   |   |
| Selling, general and administrative  expenses                                     |   | 3,556,509                             |       | 2,901,487 |   |
|                                                                              |   |                                  |       |   |   |
| Operating (loss) from continuing operations                                       |   | (197,781                              | )          | (227,585 | ) |
|                                                                              |   |                                  |       |   |   |
| Other income (expenses)                                                           |   |                                  |       |   |   |
| Interest and financing costs                                                      |   | (498,911                              | )          | (512,043 | ) |
| Other income                                                                      |   | 6,287                                 |       | 5,685 |   |
|                                                                              |   | (492,624                              | )          | (506,358 | ) |
| (Loss) from continuing operations                                                 |   | (690,405                              | )          | (733,943 | ) |
|                                                                              |   |                                  |       |   |   |
| Discontinued operations – earnings from  discontinued   Engineering Division |   | 3⁄4                                |       | 73,266 |   |
|                                                                              |   |                                  |       |   |   |
| Net (loss)                                                                        |   | (690,405                              | )          | (660,677 | ) |
| Dividends and accretion on preferred stock                                        |   | (366,094                              | )          | (124,000 | ) |
|                                                                              |   |                                  |       |   |   |
| Net (loss) attributable to common  stockholders                                   |   | $                                     | (1,056,499 | ) | $ | (784,677 | ) |
|                                                                              |   |                                  |       |   |   |
| Net earnings (loss) per share attributable  to common stockholders                |   |                                  |       |   |   |
| Basic:                                                                            |   |                                  |       |   |   |
| Earnings (loss) from continuing operations                                        |   | $                                     | (.07       | ) | $ | (.09 | ) |
| Earnings from discontinued operations                                             |   | 3⁄4                                |       | .01 |   |
| Net (loss)                                                                        |   | $                                     | (.07       | ) | $ | (.08 | ) |
|                                                                              |   |                                  |       |   |   |
| Diluted:                                                                          |   |                                  |       |   |   |
| (Loss) from continuing operations                                                 |   | $                                     | (.07       | ) | $ | (.09 | ) |
| Earnings from discontinued operations                                             |   | 3⁄4                                |       | .01 |   |
| Net (loss)                                                                        |   | $                                     | (.07       | ) | $ | (.08 | ) |
|                                                                              |   |                                  |       |   |   |
| Weighted average shares outstanding per  common share                             |   |                                  |       |   |   |
| Basic                                                                             |   | 14,337,271                            |       | 8,802,821 |   |
| Diluted                                                                           |   | 14,337,271                            |       | 8,802,821 |   |
|                                                                              |   |                                  |       |   |   |

 

See notes to condensed financial statements.

 

2

----

 

**STRATUS SERVICESGROUP, INC.**

Condensed Statements of Cash Flows

(Unaudited)

 
|                                                                                                                   |   | **Three  Months Ended  December 31,** |      |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                                                                   |   | **2002**                              |      | **2001** |   |
|                                                                                                                   |   | **As  Restated**                      |      |   |   |
| Cash flows from operating activities                                                                                   |   |                                  |      |   |   |
| Net (loss) from continuing operations                                                                                  |   | $                                     | (690,405  | ) | $ | (733,943 | ) |
| Net earnings from discontinued operations                                                                              |   | 3⁄4                                |      | 73,266 |   |
| Adjustments to reconcile net earnings  (loss) to net cash used by operating activities                                 |   |                                  |      |   |   |
| Depreciation                                                                                                           |   | 138,879                               |      | 132,877 |   |
| Amortization                                                                                                           |   | 74,412                                |      | 138,563 |   |
| Provision for doubtful accounts                                                                                        |   | 25,000                                |      | 25,000 |   |
| Deferred financing costs amortization                                                                                  |   | 402                                   |      | 245,585 |   |
| Loss on sales of shares of investment                                                                                  |   | 3⁄4                                |      | 9,550 |   |
| Loss on extinguishment of convertible debt                                                                             |   | 3⁄4                                |      | 11,184 |   |
| Interest expense amortization for the  intrinsic value of the beneficial conversion feature of convertible  debentures |   | 3⁄4                                |      | 36,535 |   |
| Accrued interest                                                                                                       |   | (20,588                               | )         | 50,221 |   |
| Imputed interest                                                                                                       |   | 7,633                                 |      | 3⁄4 |   |
| Changes in operating assets and liabilities                                                                            |   |                                  |      |   |   |
| Accounts receivable                                                                                                    |   | (916,710                              | )         | 3⁄4 |   |
| Prepaid insurance                                                                                                      |   | (136,050                              | )         | 45,617 |   |
| Prepaid expenses and other current assets                                                                              |   | 3,779                                 |      | (39,185 | ) |
| Other assets                                                                                                           |   | (27,010                               | )         | (122,909 | ) |
| Insurance obligation payable                                                                                           |   | (115,732                              | )         | (253,044 | ) |
| Accrued payroll and taxes                                                                                              |   | 259,995                               |      | (224,723 | ) |
| Payroll taxes payable                                                                                                  |   | (453,759                              | )         | 12,790 |   |
| Accounts payable and accrued expenses                                                                                  |   | 507,544                               |      | 85,990 |   |
| Total adjustments                                                                                                      |   | (652,205                              | )         | 43,548 |   |
|                                                                                                                   |   | (1,342,610                            | )         | (617,129 | ) |
| Cash flows (used in) investing activities                                                                              |   |                                  |      |   |   |
| Purchase of property and equipment                                                                                     |   | (134,346                              | )         | (103,301 | ) |
| Proceeds from sales of shares of investment                                                                            |   | 3⁄4                                |      | 5,466 |   |
| Payments for business acquisitions                                                                                     |   | (38,000                               | )         | 3⁄4 |   |
|                                                                                                                   |   | (172,346                              | )         | (97,835 | ) |
| Cash flows from financing activities                                                                                   |   |                                  |      |   |   |
| Proceeds from issuance of common stock                                                                                 |   | 3⁄4                                |      | 193,250 |   |
| Proceeds from loans payable                                                                                            |   | 680,000                               |      | 3⁄4 |   |
| Payments of loans payable                                                                                              |   | (62,641                               | )         | (38,284 | ) |
| Payments of notes payable – acquisitions                                                                          |   | (182,823                              | )         | (105,000 | ) |
| Net proceeds from line of credit                                                                                       |   | 1,015,747                             |      | 147,546 |   |
| Cash overdraft                                                                                                         |   | (66,853                               | )         | 286,584 |   |
| Net proceeds from convertible debt                                                                                     |   | 3⁄4                                |      | 243,620 |   |
| Redemption of convertible debt                                                                                         |   | 3⁄4                                |      | (145,242 | ) |
| Dividends paid                                                                                                         |   | (17,500                               | )         | 3⁄4 |   |
|                                                                                                                   |   | 1,365,930                             |      | 585,474 |   |
| Net change in cash and cash equivalents                                                                                |   | (149,026                              | )         | (129,490 | ) |
| Cash and cash equivalents – beginning                                                                             |   | 162,646                               |      | 171,822 |   |
| Cash and cash equivalents – ending                                                                                |   | $                                     | 13,620    |   | $ | 42,332 |   |
| Supplemental disclosure of cash paid                                                                                   |   |                                  |      |   |   |
| Interest                                                                                                               |   | $                                     | 519,499   |   | $ | 223,559 |   |
| Schedule of Noncash Investing and Financing  Activities                                                                |   |                                  |      |   |   |
| Fair value of assets acquired                                                                                          |   | $                                     | 1,242,875 |   | $ | — |   |
| Less: cash paid                                                                                                        |   | (153,000                              | )         | 3⁄4 |   |
| Liabilities assumed                                                                                                    |   | $                                     | 1,089,875 |   | $ | — |   |

 

See notes to condensed financial statements.

 

3

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|                                                                            |   | **Three  Months Ended  December 31,** |    |
|---------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                            |   | **2002**                              |    | **2001** |   |
|                                                                            |   | **As  Restated**                      |    |   |   |
|                                                                            |   |                                  |    |   |   |
| Issuance of common stock upon conversion of  convertible preferred stock        |   | $                                     | 511,000 |   | $ | — |   |
| Issuance of common stock in exchange for  accounts payable and accrued expenses |   | $                                     | 37,500  |   | $ | 59,000 |   |
| Issuance of common stock upon conversion of  convertible debt                   |   | $                                     | —  |   | $ | 273,502 |   |
| Issuance of warrants for fees                                                   |   | $                                     | —  |   | $ | 55,000 |   |
| Cumulative dividends and accretion on  preferred stock                          |   | $                                     | 348,594 |   | $ | 124,000 |   |

 

See notes to condensed financial statements.

 

4

----

 

**STRATUS SERVICES GROUP, INC.**

Notes to Condensed Financial Statements

(Unaudited)

 

### **NOTE 1 – BASIS OFPRESENTATION**

 

Theaccompanying condensed financial statements have been prepared by the Company,without audit, pursuant to the rules and regulations of the Securities andExchange Commission.  Certaininformation and disclosures normally included in financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates have been condensed or omitted pursuant to such rules andregulations.  These condensed financialstatements reflect all adjustments (consisting only of normal recurringadjustments) that, in the opinion of management, are necessary to presentfairly the financial position, the results of operations and cash flows of theCompany for the periods presented.  Itis suggested that these condensed financial statements be read in conjunctionwith the consolidated financial statements and the notes thereto included inthe Company’s Annual Report on Form 10-K.

 

Theresults of operations for the interim periods presented are not necessarilyindicative of the results to be expected for the full year.  The condensed balance sheet as at December31, 2002 and the condensed statement of cashflows for the three months thenended, have been amended to include the contingent portion of the purchaseprice of an acquisition on December 1, 2002 (see Note 9).  In addition, the Company has changed themethod of reporting the revenues for payrolling services (“payrolling”) fromgross billing to a net revenue basis. Accordingly, reported revenues and related cost of revenues have beenreduced and restated by $2,122,708 and $1,661,405 in the three months endedDecember 31, 2002 and 2001, respectively. The change had no effect on the Company’s net operating results.

 

The following summarizes revenues:

 
|       |   | **Three  Months Ended  December 31,** |       |
|------------|--------|---------------------------------------|------------|
|       |   | **2002**                              |       | **2001** |   |
| Staffing   |   | $                                     | 19,781,943 |   | $ | 13,008,727 |   |
|       |   |                                  |       |   |   |
| Payrolling |   | 243,077                               |       | 123,092 |   |
|       |   | $                                     | 20,025,020 |   | $ | 13,131,819 |   |

 

Unliketraditional staffing services, under a payrolling arrangement, the Company’scustomer recruits and identifies individuals for the Company to hire to provideservices to the customer.  The Companybecomes the statutory employer although the customer maintains substantiallyall control over those employees. Accordingly, Emerging Issues Task Force (“EITF”) 99-19, “ReportingRevenue Gross as a Principal versus Net as an Agent” requires that we do notreflect the direct payroll costs paid to such employees in revenues and cost ofrevenue.

 

**NOTE 2 – LIQUIDITY**

 

AtDecember 31, 2002, the Company had limited liquid resources.  Current liabilities were $19,916,502 andcurrent assets were $15,326,048.  Thedifference of $4,590,454 is a working capital deficit, which is primarily theresult of losses incurred during the years ended September 30, 2002 and 2001.  Current liabilities include a cash overdraftof $664,648, which is represented by outstanding checks.  These conditions raise substantial doubtsabout the Company’s ability to continue as a going concern.  The financial statements do not include anyadjustments to reflect the possible future effect on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the outcome of this uncertainty.

 

TheCompany’s continuation of existence is dependent upon the continued cooperationof its creditors, its ability to generate sufficient cash flow to meet itscontinuing obligations on a timely basis, to fund the operating and capitalneeds, and to obtain additional financing as may be necessary.

 

5

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Managementof the Company has taken steps to revise and reduce its operating requirement,which it believes will be sufficient to assure continued operations andimplementation of the Company’s plans. The steps include closing branches that are not profitable,consolidating branches and reductions in staffing and other selling, generaland administrative expenses.

 

TheCompany continues to pursue other sources of equity or long-term debtfinancings.  The Company also continuesto negotiate payment plans and other accommodations with its creditors.

 

**NOTE3 – EARNINGS/LOSS PER SHARE**

 

Basic“Earnings Per Share” (“EPS”) excludes dilution and is computed by dividingearnings available to common stockholders by the weighted-average number ofcommon shares outstanding during the period. Diluted EPS assumes conversion of dilutive options and warrants, and theissuance of common stock for all other potentially dilutive equivalent sharesoutstanding.  Dilutive shares were -0-and -0- for the three months ended December 31, 2002 and 2001 respectively.

 

**NOTE 4 – INTANGIBLE ASSETS**

 

Atthe beginning of fiscal quarter ended December 31, 2002, the Company adoptedthe provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”. The provisions of SFAS No. 142 prohibit the amortization of goodwill andcertain intangible assets that are deemed to have indefinite lives and requirethat such assets be tested for impairment annually, or more frequently ifevents or changes in circumstances indicate that the asset might be impairedand written down to fair value.  Inorder to assess the fair value of its goodwill and indefinite-lived intangibleassets as of the adoption date, the Company engaged an independent valuationfirm to assist in determining the fair value. The valuation process appraised the Company’s assets and liabilitiesusing a combination of present value and multiple of earnings valuationtechniques.  Based upon the results ofthe valuation it was determined that there was no impairment of goodwill.

 

Asof December 31, 2002 and September 30, 2002, intangible assets consisted of thefollowing:

 
|                                  |   | **December  31, 2002** |      | **September  30, 2002** |   |
|---------------------------------------|--------|------------------------|-----------|-------------------------|--------|
|                                  |   |                   |      |                    |   |
| Covenant-not-to-compete               |   | $                      | 232,680   |                    | $      | 213,180 |   |
| Customer list                         |   | 2,040,091              |      | 891,716                 |   |
|                                  |   | 2,272,771              |      | 1,104,896               |   |
| Less:   accumulated amortization |   | (377,163               | )         | (302,751                | )      |
|                                  |   | $                      | 1,895,608 |                    | $      | 802,145 |   |

 

Forthe quarter ended December 31, 2001, the Company recorded goodwill amortizationof $98,974.  Excluding this amortizationexpense net (loss) attributable to common stockholders from continuingoperations for the three months ended December 31, 2001, would have been$(758,969) or $(.09) per basic and diluted share.

 

Estimatedamortization expense for each of the next five years is as follows:

 

| **For the Year Ending  December 31,** |   |    |    |
|---------------------------------------|--------|---------|---------|
|                                  |   |    |    |
| 2004                                  |   | $       | 257,000 |   |
| 2005                                  |   | 214,000 |    |
| 2006                                  |   | 214,000 |    |
| 2007                                  |   | 118,000 |    |
| 2008                                  |   | 118,000 |    |
|                                       |        |         |         |  |

 

6

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### **NOTE 5 – LINE OFCREDIT**

 

TheCompany has a loan and security agreement (the “Agreement”) with a lendinginstitution whereby the Company can borrow up to 85% of eligible accountsreceivable, as defined, not to exceed the lesser of $12 million or six timesthe Company’s tangible net worth (as defined). Borrowings under the Agreement bear interest at 1 1/2% above the primerate and are collateralized by substantially all of the Company’s assets.  The Agreement expires on June 12, 2003.

 

AtDecember 31, 2002, the Company was in violation of the following covenantsunder the Agreement:

 

(i)        Failingto meet the tangible net worth requirement, and;

(ii)       TheCompany’s Common Stock being delisted from the Nasdaq SmallCap Market

 

The Company has received a waiver from thelender on the above violations and, in December 2002, entered into a modificationof the Agreement.  The modificationprovides that borrowings under the Agreement bear interest at 1 3⁄4% above theprime rate, as long as the Company is in violation of any of the covenantsunder the Agreement.

 

The prime rate at December 31, 2002 was 4.25%.

 

### **NOTE 6 – CONVERTIBLEDEBT**

 

At various times during the three monthsended December 31, 2001, the Company issued convertible debentures throughprivate placements.  The debentures boreinterest at 6% a year, payable quarterly and had a maturity date of five yearsfrom issuance.  Each debenture wasconvertible after 120 days from issuance into the number of shares of theCompany’s common stock determined by dividing the principal amount of thedebenture by the lesser of (a) 120% of the closing bid price of the commonstock on the trading day immediately preceding the issuance date or (b) 75% ofthe average closing bid price of the common stock for the five trading daysimmediately preceding the date of the conversion.  The Company had the right to prepay any of the debentures at anytime at a prepayment rate that varied from 115% to 125% of the amount of thedebenture depending on when the prepayment is made.

 

The discount arising from the75% beneficial conversion feature was charged to interest expense during theperiod from the issuance of the debenture to the earliest time at which thedebenture becomes convertible.

 

During the three months endedDecember 31, 2001, the Company redeemed $123,394 of debentures resulting in aloss of approximately $11,000 which is included in “Other income (expense)” inthe condensed statement of operations.

 

**NOTE7 – PREFERRED STOCK**

 

***a.******                                     ******Series A***

 

The shares of Series A Preferred Stock have a stated value of $3.00 pershare.  The difference between thecarrying value and redemption value of the Series A Preferred Stock is beingaccreted through a charge to additional paid-in-capital through the June 30,2008 redemption date.

 

The Series A Preferred Stock entitles the holders thereof to cumulativedividends at $.21 per share per year, payable semi-annually, commencing onDecember 31, 2001, when and if declared by the Board of Directors.  The shares of Series A Preferred Stock areconvertible at the option of the holder into shares of the Company’s CommonStock on a one-for-one basis.  On June30, 2008, the Company will be required to redeem any shares of Series APreferred Stock outstanding at a redemption price of $3.00 per share togetherwith accrued and unpaid dividends, payable at the Company’s option, either incash or in shares of common stock.  Forpurposes of determining the number of shares which the Company

 

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will be required to issue if it chooses to pay the redemption price inshares of Common Stock, the Common Stock will have a value equal to the averageclosing price of the Common Stock during the five trading days immediatelypreceding the date of redemption.

 

***b.******                                     ******Series E***

 

The shares of Series E Preferred Stock have astated value of $100 per share.  The holdersof the Series E Preferred stock are entitled to cumulative dividends at a rateof 6% of the stated value per year, payable every 120 days, in preference andpriority to any payment of any dividend on the Company’s Common Stock.  Dividends may be paid, at the Company’soption, either in cash or in shares of Common Stock, valued at the Series EConversion Price (as defined below). Holders of Series E Preferred Stock are entitled to a liquidationpreference of $100 per share, plus accrued and unpaid dividends.

 

The Series E Preferred Stock is convertibleinto Common Stock at a conversion price equal to 75% of the average of theclosing bid prices, for the five trading days preceding the conversion date,for the Common Stock.  The number ofshares issuable upon conversion is determined by multiplying the number ofshares of Series E Preferred Stock to be converted by $100, and dividing theresult by the Series E Conversion Price then in effect.

 

Holders of Series E Preferred Stock do nothave any voting rights, except as required by law.

 

The Company may redeem the shares of theSeries E Preferred Stock at any time prior to conversion, at a redemption priceof 115% of the purchase price paid for the Series E Preferred Shares, plus anyaccrued but unpaid dividends.

 

The discount arising from the beneficialconversion feature is being treated as a dividend from the date of issuance tothe earliest conversion date.

 

During the three months ended December 31,2002, holders of Series E Preferred Stock converted 5,205 shares into 4,486,911shares of Common Stock at conversion prices between $.108 and $.1365.

 

***c.******                                      ******Series F***

 

In July 2002, the Company’s Chief ExecutiveOfficer invested $1,000,000 in the Company in exchange for 10,000 shares ofnewly created Series F Convertible Preferred Stock (the “Series F PreferredStock”), which has a stated value of $100 per share.

 

The holder of the Series F Preferred Stock isentitled to receive, from assets legally available therefore, cumulativedividends at a rate of 7% per year, accrued daily, payable monthly, inpreference and priority to any payment of any dividend on the Common Stock andon the Series F Preferred Stock. Dividends may be paid, at the Company’s option, either in cash or inshares of Common Stock, valued at the Series F Conversion Price (as definedbelow).  Holders of Series F PreferredStock are entitled to a liquidation preference of $100 per share, plus accruedand unpaid dividends.

 

The Series F Preferred Stock is convertibleinto Common Stock at a conversion price (the “Series F Conversion Price”) equalto $.10 per share.  The number of sharesissuable upon conversion is determined by multiplying the number of shares ofSeries F Preferred Stock to be converted by $100, and dividing the result bythe Series F Conversion Price.

 

Except as otherwise required by law, holdersof Series F Preferred Stock and holders of Common Stock shall vote together asa single class on each matter submitted to a vote of stockholders.  Each outstanding share of Series F PreferredStock shall be entitled to the number of votes equal to the number of fullshares of Common Stock into which each such share of Series F Preferred Stockis then convertible on the date for determination of stockholders entitled tovote at the meeting.  Holders of the

 

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Series F PreferredStock are entitled to vote at the meeting. Holders of the Series F Preferred Stock are entitled to vote as aseparate class on any proposed amendment to the terms of the Series F PreferredStock which would increase or decrease the number of authorized shares ofSeries F Preferred Stock or have an adverse impact on the Series F PreferredStock and on any proposal to create a new class of shares having rights orpreferences equal to or having priority to the Series F Preferred Stock.

 

The Company mayredeem the shares of the Series F Preferred Stock at any time prior toconversion at a redemption price of 115% of the purchase price paid for theSeries F Preferred Shares plus any accrued but unpaid dividends.

 

***d.******                                     ******Series H***

 

The holders of theSeries H Preferred Stock are entitled to cumulative dividends at a rate of 6%per year, payable quarterly, commencing on March 30, 2004, in preference andpriority to any payment of any dividend on the Company’s Common Stock.  Dividends may be paid, at the Company’soption, either in cash or in shares of Common Stock, valued at the Series HConversion Price (as defined below). Holders of Series H Preferred Stock are entitled to a liquidationpreference of $100 per share, plus accrued and unpaid dividends before anyliquidation payment may be made to holders of the Company’s Common Stock.

 

The Series HPreferred Stock is convertible into Common Stock at a conversion price (the“Series H Conversion Price”) equal to the lower of $.20 per share or theaverage market price of the Common Stock for the five trading days immediatelypreceding the conversion date.  Thenumber of shares issuable upon conversion is determined by multiplying thenumber of shares of Series H Preferred Stock to be converted by $100 anddividing the result by the Series H Conversion Price then in effect.

 

Holders of Series HPreferred Stock do not have any voting rights, except as required by law.

 

The Company has theright, but not the obligation, to redeem the shares of Series H Preferred Stockat any time prior to conversion at a redemption price of 115% of the purchaseprice paid for the Series H Preferred Shares plus any accrued but unpaiddividends.

 

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**NOTE 8 – DISCONTINUED OPERATIONS, SALE OFENGINEERING DIVISION**

 

On March 28, 2002, the Companycompleted the sale of the assets of its Engineering Services Division (the“Division”) to SEA Consulting Services Corporation (“SEA”) pursuant to theAsset Purchase Agreement dated as of January 24, 2002, among the Company, SEP,LLC (“SEP”), Charles Sahyoun, Sahyoun Holders LLC and SEA.

 

The assets of the Division hadbeen transferred to SEP, a limited liability company in which the Company ownsa 70% interest, at the time of the execution of the Asset PurchaseAgreement.  Sahyoun Holders, LLC, acompany wholly-owned by Charles Sahyoun, the President of the Division, ownsthe remaining 30% interest in SEP.

 

Under the terms of the AssetPurchase Agreement, the Company received an initial cash payment of $1,560,000,which represented 80% of the initial $2,200,000 installment of the purchaseprice payable to SEP after the satisfaction of certain liabilities and expensesof SEP.  Sahyoun Holdings, LLC receivedthe other 20% of the initial net installment of the purchase price, or$440,000.

 

The AssetPurchase Agreement requires SEA to make the following additional payments toSEP:

 

(i)                  A payment of $1million, plus or minus the amount by which SEA’s profit for the six monthsending June 30, 2002, as determined pursuant to the Asset Purchase Agreement,is greater or less than $600,000 (the “Second Payment”);

 

(ii)               A payment of $1million, plus or minus the amount by which SEA’s profit for the six monthsending December 31, 2002, as determined pursuant to the Asset PurchaseAgreement, is greater or less than $600,000 (the “Third Payment”);

 

(iii)            Five subsequent annualpayments (the “Subsequent Payments”) which will be based upon a multiple of theannual successive increases, if any, in SEA’s profit during the five yearperiod beginning on January 1, 2003 and ending December 31, 2007.

 

Pursuant to an allocation andindemnity agreement entered into by the Company, Sahyoun Holdings, LLC and CharlesSahyoun (the “Allocation and Indemnity Agreement”), the Company was entitled to$250,000 of the Second Payment and $250,000 of the Third Payment.  On April 15, 2002, by letter agreementbetween the Company, Sahyoun Holdings, LLC and Joseph J. Raymond, Sr., theChairman and Chief Executive Officer of the Company, the parties agreed to amodification of the Allocation and Indemnity Agreement.  Per that letter agreement, Sahyoun Holdings,LLC provided the Company with $200,000 cash in exchange for the Company’sshort-term, 90-day demand note, due and payable by August 1, 2002 in the amountof $250,000.  Such $250,000 was repaidby the Company from its $250,000 share of the Second Payment which was receivedin June 2002.  Sahyoun Holdings, LLC andCharles Sahyoun have guaranteed the $250,000 payment to be made to the Companyfrom the Third Payment, regardless of the operating results of SEA (see Note25).  Upon its receipt of all of thepayments required under the Allocation and Indemnity Agreement, the Company’sinterest in SEP will terminate and the Company will not be entitled to anyadditional payments under the Asset Purchase Agreement, including theSubsequent Payments.  Sahyoun Holdings,LLC is entitled to all amounts paid to SEP under the Asset Purchase Agreementother than $500,000 of payments made or payable to the Company pursuant to theAllocation and Indemnity Agreement and guaranteed by Charles Sahyoun andSahyoun Holdings, LLC, as described above.

 

In December 2002, the Companyand Charles Sahyoun agreed to offset the $250,000 of the Third Payment due tothe Company against $250,000 of accrued commissions due Charles Sahyoun.

 

Revenues from the Division were$1,595,000 for the three months ended December 31, 2001.

 

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### **NOTE 9 – ACQUISITION**

 

Effective as of December 1, 2002, (the“Effective Date”), the Company purchased substantially all of the tangible andintangible assets, excluding accounts receivable, of six offices of ElitePersonnel Services (“Elite”), a California corporation.  The Elite branches provide temporary lightindustrial and clerical staffing in six business locations in California andNevada. The Company also took over Elite’s Downey, California office, fromwhich Elite serviced no accounts but which it utilized as a corporateoffice.  The company will continue toutilize the Downey office as a regional corporate facility.  The acquisition of Elite furthers theCompany’s expansion into the California staffing market.  Pursuant to the terms of an Asset PurchaseAgreement between the Registrant and Elite dated November 19, 2002 (the “AssetPurchase Agreement”), the purchase price payable at closing (the “Base PurchasePrice”) for the assets was $1,264,000, all of which was represented by anunsecured promissory note.  In additionto the Base Purchase Price, Elite will also receive as a deferred purchaseprice, an amount equal to 10% of the annual “Gross Profits” as defined in theAsset Purchase Agreement of the acquired business between $2,500,000 and$3,200,000, and 15% of the annual Gross Profits of the acquired business inexcess of $3,200,000 for a minimum period of one year from the Effective Dateand for a period of two years from the Effective Date, if Gross Profits duringthe first year reach specified levels. The note includes a stated imputed interest at 4% per year and ispayable over an eight-year period in equal monthly payments beginning 30 daysafter the Effective Date.  In connectionwith the transaction, Elite, its President and other key management membersentered into Non-Competition and Non-Solicitation Agreements pursuant to whichthey agreed not to compete with the Registrant in the territories of theacquired business for periods ranging from twelve months to five years, and tonot solicit the employees or customers of the acquired business for periodsranging from twelve months to five years. Additionally, Elite’s President has also entered into an EmploymentAgreement, as of the Effective Date, with the Company for a minimum of a oneyear term.  This term can be extended ifcertain targeted Gross Profit levels are attained.

 

Forfinancial accounting purposes, interest on the note has been imputed at a rateof 11% per year.  Accordingly, the noteand Base Purchase Price has been recorded at $845,875.  In accordance with SFAS No. 141, “BusinessCombinations”, the contingent portion of the purchase price has been recognizedas a liability to the extent that the net acquired assets exceed the purchaseprice.  Accordingly $144,000 is includedin “Accounts payable and accrued expenses” on the attached condensed balancesheet as at December 31, 2002.  Therewas an additional $153,000 of costs paid to third parties in connection withthe acquisition.

 

Thefollowing summarizes the fair value of the assets acquired at the date ofacquisition based upon a third-party valuation of certain intangible assets:

 

| Property and equipment  |   | $       | 75,000  |   |
|-------------------------|--------|---------|---------|--------|
| Covenant-not-to-compete |   | 19,500  |    |
| Customer list           |   | 904,375 |    |
| Total assets acquired   |   | $       | 998,875 |   |

 

Thecovenant-not-to-compete and customer list are being amortized over theirestimated useful life of five and seven years, respectively.

 

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### **The unaudited pro forma results of operations presentedbelow assume that the acquisition and another acquisition that occurredeffective January 1, 2002, had occurred at the beginning of fiscal 2002.  This information is presented forinformational purposes only and includes certain adjustments such as amortizationof intangibles resulting from the acquisitions and interest expense related toacquisition debt.**

### ** **

|                                                                       |   | **Unaudited  Three Months Ended  December 31,** |       |
|----------------------------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                                       |   | **2002**                                        |       | **2001** |   |
| Revenues                                                                   |   | $                                               | 25,606,020 |   | $ | 23,290,818 |   |
| Net (loss) from continuing operations  attributable to common stockholders |   | (996,525                                        | )          | (797,943 | ) |
|                                                                       |   |                                            |       |   |   |
| Net (loss) per share attributable to common  stockholders                  |   |                                            |       |   |   |
| Basic                                                                      |   | $                                               | (.07       | ) | $ | (.09 | ) |
| Diluted                                                                    |   | $                                               | (.07       | ) | $ | (.09 | ) |

### ** **

### **NOTE 10 – RELATED PARTY TRANSACTIONS**

### ** **

During the three months ended December 31, 2002,a son and the brother of the Chief Executive Officer of the Company each loaned$100,000 to the Company.  In addition,one of the members of the Board of Directors of the Company loaned $100,000 tothe Company.  Each of the aforementionedloans is unsecured, due on demand and bear interest at various rates.  The loans are outstanding at December 31,2002 and included in loans payable on the condensed balance sheet.

 

### **NOTE 11 - SUBSEQUENT EVENTS**

 

a.                                       In January 2003, the Company received thedecision of the NASD Board of Governors which has declined to call for reviewof the November 22, 2002 decision of the Nasdaq Listing and Hearing ReviewCouncil to delist the Company’s securities from the Nasdaq SmallCap Market.

 

b.                                      In January 2003, the Company’s ChiefExecutive Officer converted 1,000 shares of the Series F Preferred Stock into1,000,000 shares of Common Stock.

 

c.                                       In January 2003, a $367,216 judgment wasawarded against the Company to an insurance carrier.  We had previously recorded a reserve of $323,775 in connectionwith this matter.  As of February 13,2003, the judgment was unpaid.

 

d.                                      In February 2003, the holder of a $100,000short-term note due by the Company, agreed to convert the note into 1,000shares of Series E Preferred Stock.  Inaddition, the holder purchased 6,000 shares of Series E Preferred Stock fromthe Company for $600,000.

 

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**Item 2 - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Form 10-Q contains “forward-looking statements” within the meaningof Section 27A of the Securities Act of 1933, as amended and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements relate to future economic performance, plans andobjectives of management for future operations and projections of revenue andother financial items that are based on the beliefs of our management, as wellas assumptions made by, and information currently available to, our management.  The words “expect”, “estimate”,“anticipate”, “believe”, “intend”, and similar expressions are intended toidentify forward-looking statements. Such statements involve assumptions, uncertainties and risks.  If one or more of these risks oruncertainties materialize or underlying assumptions prove incorrect, actualoutcomes may vary materially from those anticipated, estimated orexpected.  Among the key factors thatmay have a direct bearing on our expected operating results, performance orfinancial condition are economic conditions facing the staffing industrygenerally; uncertainties related to the job market and our ability to attractqualified candidates; uncertainties associated with our brief operatinghistory; our ability to raise additional capital; our ability to achieve andmanage growth; our ability to successfully identify suitable acquisitioncandidates, complete acquisitions or integrate the acquired business into ouroperations; our ability to attract and retain qualified personnel; our abilityto develop new services; our ability to cross-sell our services to existingclients; our ability to enhance and expand existing offices; our ability toopen new offices; general economic conditions; and other factors discussed fromtime to time in our filings with the Securities and Exchange Commission.  These factors are not intended to representa complete list of all risks and uncertainties inherent in our business.  The following discussion and analysis shouldbe read in conjunction with the Condensed Financial Statements and notesappearing elsewhere in this report.

 

Our critical accounting policies and estimates are described in ourAnnual Report on Form 10-K for the fiscal year ended September 30, 2002.

 

### **Introduction**

 

We provide a wide range of staffing, engineering and productivityconsulting services nationally through a network of offices located throughoutthe United States.  We recognizerevenues based on hours worked by assigned personnel.  Generally, we bill our customers a pre-negotiated, fixed rate perhour for the hours worked by our temporary employees.  We are responsible for workers’ compensation, unemploymentcompensation insurance, Medicare and Social Security taxes and other generalpayroll related expenses for all of the temporary employees we place.  These expenses are included in the cost ofrevenue.  Because we pay our temporaryemployees only for the hours they actually work, wages for our temporarypersonnel are a variable cost that increases or decreases in proportion torevenues.  Gross profit margin variesdepending on the type of services offered. In some instances, temporary employees placed by us may decide to acceptan offer of permanent employment from the customer and thereby “convert” thetemporary position to a permanent position. Fees received from such conversions are included in our revenues.  Selling, general and administrative expensesinclude payroll for management and administrative employees, office occupancycosts, sales and marketing expenses and other general and administrative costs.

 

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**Results of Operations**

**Discontinued Operations/Acquisition orDisposition of Assets**

 

OnJanuary 24, 2002, we entered into an agreement to sell the assets of ourEngineering Services Division (the “Division”) to SEA Consulting ServicesCorporation (“SEA”).  Closing of thesale was contingent upon shareholder approval and the receipt of a fairnessopinion by us.

 

On March 28, 2002, we completed the sale of theassets of the Division to SEA pursuant to the Asset Purchase Agreement dated asof January 24, 2002 among us, SEP, LLC (“SEP”), Charles Sahyoun, SahyounHoldings LLC and SEA.  The transactionwas approved by a vote of our stockholders at the annual meeting ofstockholders held on March 28, 2002.

 

The assets of the Division had been transferredto SEP, a limited liability company in which we own a 70% interest, at the timeof the execution of the Asset Purchase Agreement.  Sahyoun Holdings, LLC, a company wholly owned by Charles Sahyoun,the President of the Division, owns the remaining 30% interest in SEP.

 

Under the terms of the Asset Purchase Agreement,we received an initial cash payment of $1,560,000, which represented 80% of theinitial $2,200,000 installment of the purchase price payable to SEP after thesatisfaction of certain liabilities and expenses of SEP.  Sahyoun Holdings, LLC received the other 20%of the initial net installment of the purchase price, or $440,000.

 

The Asset Purchase Agreement requires thepurchaser to make the following additional payments to SEP:

 

(a)                         A payment of $1 million, plus or minus theamount by which SEA’s profit for the six months ended June 30, 2002, asdetermined pursuant to the Asset Purchase Agreement, is greater or less than$600,000 (the “Second Payment”);

 

(b)                        A payment of $1 million, plus or minus theamount by which the SEA’s profit for the six months ending December 31, 2002,as determined pursuant to the Asset Purchase Agreement, is greater or less than$600,000 (the “Third Payment”);

 

(c)                         Five subsequent annual payments (the“Subsequent Payments”) which will be based upon a multiple of the annualsuccessive increases, if any, in the SEA’s profit during the five year periodbeginning on January 1, 2003 and ending December 31, 2007.

 

Pursuantto an allocation and indemnity agreement entered into by us, Sahyoun Holdings,LLC and Mr. Sahyoun (the “Allocation and Indemnity Agreement”), we wereentitled to $250,000 of the Second Payment and $250,000 of the Third Payment.  On April 15, 2002, by letter agreementbetween us, Sahyoun Holdings, LLC and Joseph J. Raymond, Sr., our Chairman andChief Executive Officer, the parties agreed to a modification of the Allocationand Indemnity Agreement.  Per thatletter agreement, Sahyoun Holdings, LLC provided us with $200,000 cash inexchange for our short-term, 90-day demand note, due and payable by August 1,2002 in the amount of $250,000.  The$250,000 was paid by us from our share of the Second Payment which was receivedby us in June 2002.

 

Sahyoun Holdings LLC and Mr. Sahyoun haveguaranteed the $250,000 payment to be made to us from the Third Payment,regardless of the operating results of SEA. In December 2002, Mr. Sahyoun and we agreed to offset the $250,000 against$250,000 of accrued commissions due Mr. Sahyoun.  As a result, we will not be entitled to any additional paymentsunder the Asset Purchase Agreement, including the Subsequent Payments.  Sahyoun Holdings LLC is entitled to allamounts paid to SEP under the Asset Purchase Agreement other than $500,000 ofpayments made or payable to us pursuant to the Allocation and IndemnityAgreement and guaranteed by Charles Sahyoun and Sahyoun Holdings, LLC asdescribed above.  Under the terms of theAsset Purchase Agreement, Sahyoun Holdings LLC will not be entitled to anySubsequent Payments or its allocable share of the Second and Third Payments ifMr. Sahyoun’s employment with SEA ceases for any reason other than death orpermanent disability prior to December 31, 2003.

 

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Effective January 1, 2002, we purchasedsubstantially all of the tangible and intangible assets, excluding accountsreceivable, of seven offices of PES. The initial purchase price was $1,480,000, represented by a $1,100,000promissory note and 400,000 shares of our common stock.  There was an additional $334,355 of costsincurred in connection with the acquisitions. In addition, PES is entitled to earnout payments of 15% of pretax profitof the acquired business up to a total of $1.25 million or the expiration often years, whichever occurs first.  Thenote bears interest at 6% a year and is payable over a ten-year period in equalquarterly payments.  See Note 3 to theFinancial Statements included with this Report.

 

EffectiveDecember 1, 2002, we purchased substantially all of the tangible and intangibleassets, excluding accounts receivable, of six offices of Elite PersonnelServices, Inc.  We also took overElite’s Downey, California office, from which Elite serviced no accounts, but whichit utilized as a corporate office.  Wewill continue to utilize the Downey office as a regional corporatefacility.  Pursuant to a Asset PurchaseAgreement dated November 19, 2002 between us and Elite (the “Asset PurchaseAgreement”), the purchase price paid at closing (the “Base Purchase Price”) was$1,264,000, all of which was represented by a promissory note (the “Note”)payable over eight years, in equal monthly installments.  Imputed interest at the rate of 4% per yearis included in the Note amount.  Forfinancial accounting purposes, interest on the note has been imputed at a rateof 11% per year.  Accordingly, the netBase Purchase Price was recorded as $845,875.

 

Inaddition to the Base Purchase Price, Elite may also receive as deferred purchaseprice an amount equal to 10% of “Gross Profits” as defined in the AssetPurchase Agreement, of the acquired business between $2,500,000 and $3,200,000per year, plus 15% of Gross Profits of the acquired business in excess of$3,200,000 per year, for a minimum of one year from the Effective Date, and fora period of two years from the Effective Date if Gross Profits for the firstyear reach specified levels.

 

Inconnection with this acquisition, we also entered into an employment andnon-compete agreement for a five-year period with the President and solestockholder of Elite.

 

**Continuing Operations**

**Three Months Ended December 31, 2002 Comparedto Three Months Ended December 31, 2001**

 

***Revenues.***  Revenues increased 52.5% to $20,025,020 forthe three months ended December 31, 2002 from $13,131,819 for the three monthsended December 31, 2001.  Approximately$6.4 million of the increase was attributable to the acquisitions in Januaryand December 2002.  Excludingacquisitions revenues increased 3.8%. This increase was a result of an increase in billable hours.

 

***Gross Profit.***  Gross profit increased 25.6% to $3,358,728for the three months ended December 31, 2002 from $2,673,902 for the threemonths ended December 31, 2001, primarily as a result of increased revenues.  Gross profit as a percentage of revenuesdecreased to 16.8% for the three months ended December 31, 2002 from 20.4% forthe three months ended December 31, 2001. This decrease was a result of increased pricing competition of staffingservices and increases in the cost of workers’ compensation insurance.

 

***Selling, General andAdministrative Expenses.**** *Selling, generaland administrative expenses, not including depreciation and amortization,increased 27.1% to $3,343,218 for the three months ended December 31, 2002 from$2,630,047 for the three months ended December 31, 2001.  Selling, general and administrativeexpenses, not including depreciation and amortization, as a percentage ofrevenues decreased to 16.7% for the three months ended December 31, 2002 from20.0% for the three months ended December 31, 2001.  The increase in the dollar amount is primarily a result of theacquisitions in January and December 2002, whereas the percentage of revenuedecrease is attributable to significant cost reductions implemented by us andthe increase in revenues with no proportionate increase in selling, general andadministrative expenses.

 

***Depreciation andAmortization.*** Depreciation and amortization expenses decreased 21.4% to $213,291 forthe three months ended December 31, 2002 from $271,440 for the three monthsended December 31, 2001.  Depreciationand amortization as a percentage of revenues decreased to 1.1% for the threemonths ended December 31, 2002 from 2.1% for the three months ended December31, 2001.  The decrease was primarilydue to the discontinuance of the amortization of goodwill.

 

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***Interest andFinancing Costs.*** Interest and financing costs decreased 2.6% to $498,911 for the threemonths ended December 31, 2002 from**$512,043for the three months ended December 31, 2001. Included in the amounts for the three months ended December 31, 2001 was$36,535, which is the portion of the discount on the beneficial conversionfeature of convertible debt.  Alsoincluded in the amounts for the three months ended December 31, 2001 wasapproximately $224,000 of amortization of deferred financing costs related tothe convertible debt.

 

***Net LossAttributable to Common Stockholders.**** *Asa result of the foregoing, we had a net loss and net loss attributable tocommon stockholders of ($690,405) and ($1,056,499), respectively for the threemonths ended December 31, 2002 compared to a net loss and net loss attributableto common stockholders of ($733,943) and ($857,943) for the three months endedDecember 31, 2001, respectively.

 

**Liquidity and Capital Resources**

 

At December 31, 2002, we had limited liquidresources.  Current liabilities were$19,672,502 and current assets were $15,326,048.  The difference of $4,346,454 is a working capital deficit, whichis primarily the result of losses incurred during the last two years.  These conditions raise substantial doubtsabout our ability to continue as a going concern.  The financial statements do not include any adjustments toreflect the possible future effect on the recoverability and classification ofassets or the amounts and classification of liabilities that may result fromthe outcome of this uncertainty.

###### ** **

Our continuation of existence is dependent uponthe continued cooperation of our creditors, our ability to generate sufficientcash flow to meet our continuing obligations on a timely basis, to fund theoperating and capital needs, and to obtain additional financing as may benecessary.

 

We have taken steps to revise and reduce ouroperating requirements, which we believe will be sufficient to assure continuedoperations and implementation of our plans. The steps include closing branches that are not profitable,consolidating branches and reductions in staffing and other selling, generaland administrative expenses.  Wecontinue to pursue other sources of equity or long-term debt financings.  We also continue to negotiate payments plansand other accommodations with our creditors.

 

Net cash used in operating activities was$1,342,610 and $617,129 in the three months ended December 30, 2002 and 2001,respectively.

 

Net cash used in investing activities was$172,346 and $97,835 in the three months ended December 31, 2002 and 2001,respectively.  Cash used for acquisitionsfor the three months ended December 31, 2002, was $38,000.  The balance in both periods was primarilyfor capital expenditures.

 

Net cash provided by financing activities was$1,365,930 and $585,474 in the three months ended December 31, 2002 and 2001, respectively.  We had net borrowings of $1,015,747 and$147,546 under our line of credit in the three months ended December 31, 2002and 2001, respectively.  We alsoreceived net proceeds less redemptions of $98,378 from the issuance ofconvertible debt in the three months ended December 31, 2001.  During the three months ended December 31,2001, we received $193,250 in proceeds from the issuance of our CommonStock.  Net short-term borrowings(repayments) were $617,359 and ($38,284) in the three months ended December 31,2002 and 2001, respectively.  Paymentsof notes payable - acquisitions was $182,823 and $105,000 in the three monthsended December 31, 2002 and 2001, respectively.

 

Our principal uses of cash are to fund temporaryemployee payroll expense and employer related payroll taxes, investment incapital equipment, start-up expenses of new offices, expansion of servicesoffered, workers’ compensation, general liability and other insurancecoverage’s, debt service and costs relating to other transactions such asacquisitions.  Temporary employees arepaid weekly.

 

At various times during the years endedSeptember 30, 2002 and 2001, we issued convertible debentures through privateplacements.  The debentures boreinterest at 6% a year, payable quarterly and had a maturity

 

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date of five years from issuance.  Each debenture was convertible after 120days from issuance into the number of shares of our common stock determined bydividing the principal amount of the debenture by the lesser of (a) 120% of theclosing bid price of the common stock on the trading day immediately precedingthe issuance date or (b) 75% of the average closing bid price of the commonstock for the five trading days immediately preceding the date of theconversion.  We had the right to prepayany of the debentures at any time at a prepayment rate that varied from 115% to125% of the amount of the debenture depending on when the prepayment was made.

 

The discount arising from the 75% beneficialconversion feature was charged to interest expense during the period from theissuance of the debenture to the earliest time at which the debenture becameconvertible.

 

As a result of conversions of the debenturesand certain transactions with the debenture holders, only $40,000 of debenturesremained outstanding at September 30, 2002 and December 31, 2002.

 

We have a loan and security agreement (the“Agreement”) with a lending institution which provides for a line of credit upto 85% of eligible accounts receivable, as defined, not to exceed$12,000,000.  Advances under theAgreement bear interest at a rate of prime plus 1 1/2%.  The credit agreement restricts our abilityto incur other indebtedness, pay dividends and repurchase stock.  Borrowings under the agreement arecollateralized by substantially all of our assets.  As of December 31, 2002, $8,754,864 was outstanding under thecredit agreement.

 

At December 31, 2002, we were in violation ofthe following covenants under the loan and security agreement:

 

i)                      Failing to meet the tangible net worthrequirement;

 

ii)                   Our common stock being delisted from theNasdaq SmallCap Market.

 

We have received a waiver from the lender on allof the above violations and in December 2002, entered into a modification ofthe Agreement.  The modificationprovides that borrowings under the Agreement bear interest at a rate of primeplus 1 3/4% as long as we are in violation of any of the covenants under theAgreement.

 

Holders of the 1,458,933 outstanding shares ofour Series A Preferred Stock are entitled to dividends at a rate of $.21 pershare per annum when and if declared by our Board of Directors in preferenceand priority to any payment of dividends on our common stock or any otherseries of our capital stock.  Dividendson the Series A Preferred Stock may be paid in additional shares of PreferredStock if the shares of common stock issuable upon the conversion of the SeriesA Preferred Stock have been registered for resale under the Securities Act of1933.  We are obligated to pay quarterlydividends to holders of our Series E Preferred Stock and, commencing March2004, holders of our Series H Preferred Stock, at a rate of 6% per annum of thestated value of the stock in preference and priority to any payment ofdividends on our common stock.  We areobligated to pay monthly dividends on our Series F Preferred Stock at a rate of7% per annum of the stated value of the stock in preference and priority to anypayment of dividends on our common stock. The aggregate stated value of the Series E, Series F and Series HPreferred Stock was $1,147,800, $1,000,000 and $500,000, respectively, as ofDecember 31, 2002.  Dividends on theSeries E, Series F and Series H Preferred Stock may be paid at the Company’soption in shares of common stock (valued at the conversion price of theapplicable class of preferred stock) if such shares have been registered forresale under the Securities Act of 1933.

 

We are obligated to redeem any shares of SeriesA Preferred Stock outstanding on June 30, 2008 at a redemption price of $3.00per share together with accrued and unpaid dividends.  We have the option to pay the redemption price through theissuance of shares of common stock.  Forpurposes of determining the number of shares we will be required to issue if wepay the redemption price in shares of common stock, the common stock will havea value equal to the average closing price of the common stock during the fivetrading days preceding the date of redemption.

 

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Other fixed obligations that we had as ofDecember 31, 2002 include:

 

•                       $1,297,693 under a promissory notebearing interest at 7% per annum which was issued in connection with ouracquisition of Source One and which is payable in equal quarterly installmentsof $130,717 until its maturity date in August 2005.

 

•                       $1,017,078 under a promissory notebearing interest at 6% per annum which was issued in connection with ouracquisition of certain assets of PES and which is payable in equal quarterlyinstallments of $36,770 until its maturity date in December 2011.

 

•                       $1,237,666, including $410,492 of imputedinterest, under a promissory note which was issued in connection with ouracquisition of Elite and which is payable in equal monthly installments of$13,167 until its maturity in November 2010.

 

•                       $80,000 under a promissory note that wasdue in April 2002 which bears interest at 18% per annum.

 

•                       $26,312 due under promissory notesbearing interest at 6% per annum which were issued in connection with anacquisition transaction completed in January 2001 and which are past due.

 

•                       $150,318 under a promissory note whichbears interest at 15% per annum and which requires us to make payments ofprincipal and interest of $8,000 per month until its maturity date in October2004.

 

•                       $167,758 under a non-interest bearingpromissory note which requires us to make monthly payments of principal andinterest of $13,437 and which is due in full upon the demand of the holder.

 

•                       $41,000 under a demand note bearinginterest at 10% per annum issued to a corporation wholly owned by the son ofJoseph J. Raymond, our Chief Executive Officer.

 

•                       $75,000 owed to Joseph J. Raymond, ourChief Executive Officer, in connection with a non-interest bearing demand loan.

 

•                       $805,000 under demand loans which bearinterest at various rates, including $100,000 owed to a son of Joseph J.Raymond, our Chief Executive Officer.

 

•                       $97,078 under promissory notes used toacquire, and secured by, motor vehicles which require aggregate monthlypayments of principal and interest of $3,453 and which becomes due in full atvarious dates between July and August, 2005.

 

Allof our offices are leased through operating leases that are not included on thebalance sheet.  As of December 31, 2002,future minimum lease payments under lease agreements having initial terms inexcess of one year were:  2003 -$463,000, 2004-$221,000, 2005-$180,000, 2006 - $137,000 and 2007 - $137,000.

 

Wemay be required to make certain “earnout” payments to sellers of businessesthat we have acquired in recent years, including Source One, PES andElite.  The amount of these payments, ifany, will depend upon the results of the acquired businesses.  There were no earnout payments made infiscal 2002.

 

SourceOne has the right to require us to repurchase 400,000 shares of our commonstock at a price of $2.00 per share at any time after July 27, 2003 and beforethe later of July 27, 2005 and the full payment of the outstanding note that weissued to it in connection with the acquisition transaction completed withSource One in July 2001.  In addition,the holder of the $80,000 note which was due in April 2002 has the right torequire us to repurchase 20,000 shares of common stock at a price of $1.00 pershare plus interest at a rate of 15% per annum until the note is paid in full.

 

InJanuary 2003, a $367,216 judgment was awarded against us to an insurancecarrier.  We had previously recorded areserve of $323,775 in connection with this matter.  As of February 13, 2003, the judgment was unpaid.

 

Asof December 31, 2002, there were no off-balance sheet arrangements,unconsolidated subsidiaries, commitments or guarantees of other parties, exceptas disclosed in the notes to financial statements.  Stockholders’ equity at that date was $2,372,278 whichrepresented 9% of total assets.

###### ** **

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###### **Seasonality**

 

Our business follows the seasonal trends of our customer’sbusiness.  Historically, we haveexperienced lower revenues in the first calendar quarter with revenuesaccelerating during the second and third calendar quarters and then staring toslow again during the fourth calendar quarter.

 

###### **Impact of Inflation**

 

We believe that since our inception, inflation has not had a significantimpact on our results of operations.

 

**Impact of Recent Accounting Pronouncements**

 

In June 2001, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and OtherIntangible Assets”.  SFAS No. 142, whichmust be applied to fiscal years beginning after December 15, 2001, modifies theaccounting and reporting of goodwill and intangible assets.  The pronouncement requires entities todiscontinue the amortization of goodwill; reallocate all existing goodwillamong its reporting segments based on criteria set by SFAS No. 142, and performinitial impairment tests by applying a fair-value-based analysis on thegoodwill in each reporting segment.  Anyimpairment at the initial adoption date shall be recognized as the effect of achange in accounting principle. Subsequent to the initial adoption, goodwill shall be tested forimpairment annually or more frequently if circumstances indicate a possibleimpairment.

 

Under SFAS No. 142, entitiesare required to determine the useful life of other intangible assets andamortize the value over the useful life. If the useful life is determined to be indefinite, no amortization willbe recorded.  For intangible assetsrecognized prior to the adoption of SFAS No. 142, the useful life should be reassessed.  Other intangible assets are required to betested for impairment in a manner similar to goodwill.  We adopted SFAS No. 142 and completed atransitional impairment test, as required by SFAS No. 142, and determined thatthere was no impairment of goodwill as of October 1, 2002.

 

In August 2001, the FASB issued SFAS No. 144,“Impairment of Long-Lived Assets”.  SFASNo. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of”.  SFAS No. 144 retains the requirements of SFAS No.  121 to (a) recognize an impairment loss onlyif the carrying amount of a long-lived asset is not recoverable from itsundiscounted cash flows and (b) measure an impairment loss as the differencebetween the carrying amount and the fair value of the asset.  SFAS No. 144 removes goodwill from itsscope.  SFAS No. 144 is applicable tofinancial statements issued for fiscal years beginning after December 15, 2001,or for our fiscal year ending September 30, 2003.  The adoption of SFAS No. 144 did not have any material adverseimpact on our financial position or results of our operations.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” whichnullifies EITF No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)”. SFAS 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred.  Under EITF 94-3, a liability for an exitcost as defined in EITF 94-3 was recognized at the date of an entity’scommitment to an exit plan.  Theprovisions of SFAS 146 are effective for exit or disposal activities that areinitiated after December 31, 2002.  Theadoption of SFAS 146 may affect the timing of the recognition of future exitand disposal costs.

 

In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation – Transition and Disclosure”which amends SFAS No. 123, “Accounting for Stock-Based Compensation”.  SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation and requires more prominent and morefrequent disclosures in the financial statements of the effects of stock-basedcompensation.  The provisions of SFASNo. 148 are effective for fiscal years ending after December 15, 2002 and theinterim disclosure will provide the required interim and annual disclosuresbeginning in the quarter ended March 31, 2003.

 

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In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities.”  Interpretation 46 changes the criteria bywhich one company includes another entity in its consolidated financialstatements.  Previously, the criteriawere based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidatedby a company if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. A company that consolidates a variable interest entity is called theprimary beneficiary of that entity.  Theconsolidation requirements of Interpretation 46 apply immediately to variableinterest entities created after January 31, 2003.  The consolidation requirements apply to older entities in thefirst fiscal year or interim period beginning after June 15, 2003.  Certain of the disclosure requirements applyin all financial statements issued after January 31, 2003, regardless of whenthe variable interest entity was established. The Company does not expect the adoption to have a material impact tothe Company’s financial position or results of operations.

 

**Item 3. – QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISKS**

 

We are subject to the risk offluctuating interest rates in the ordinary course of business for borrowingsunder our Loan and Security Agreement with Capital Tempfunds, Inc.  This credit agreement provides for a line ofcredit up to 85% of eligible accounts receivable, not to exceed $12,000,000.  Advances under this credit agreement bearinterest at a rate of prime plus 1 1⁄2%; however, advances will bear interest atan additional 1⁄4% while we remain in violation of certain covenants.

 

We believe that our businessoperations are not exposed to market risk relating to foreign currency exchangerisk or commodity price risk.

 

**Item 4. – CONTROLS AND PROCEDURES**

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, within the 90 days prior to thefiling date of this report, we carried out an evaluation of the effectivenessof the design and operation of our disclosure controls and procedures.  This evaluation was carried out under thesupervision and with the participation of our management, including ourChairman and Chief Executive Officer along with our Chief Financial Officer,who concluded that our disclosure controls and procedures are effective.  Their have been no significant changes inour internal controls or in other factors, which could significantly affectinternal controls subsequent to the date we carried out its evaluation.

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported with the timeperiods specified in the Securities and Exchange Commission’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed under theExchange Act is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer as appropriate, to allow timelydecisions regarding required disclosure.

 

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**Part II –Other Information**

**Item 1 – LegalProceedings**

 

InJanuary 2003, a $367,216 judgment was awarded against us to the plaintiff in AceAmerican Insurance Company v. Stratus Services Group, Inc., a contract/tortaction in which the plaintiff alleged that we had failed to pay certaininsurance premiums.  We had previouslyaccrued a liability of $323,775 related to this matter.  As of February 13, 2003, the judgment wasunpaid.

 

**Item 2 –Changes in Securities and Use of Proceeds**

 

### ***Conversionof Series E Preferred Stock and Series F Preferred Stock***

### ** **

### **InOctober and November 2002, holders of Series E Preferred Stock converted 5,205shares into 4,486,911 shares of our Common Stock at conversion prices between$.108 and $.1365.  The issuances of theCommon Stock upon such conversions were made in reliance upon the exemptionsfrom registration provided under Rule 506 and Section 4(2) of the SecuritiesAct of 1933.**

 

InJanuary 2003, Joseph J. Raymond, our President and Chief Executive Officer, theholder of the Series F Preferred Stock, converted 1,000 shares into 1,000,000shares of our Common Stock at a conversion price of $.10 per share.  The issuance of the Common Stock upon suchconversion was made in reliance upon the exemptions from registration by Rule506 and Section 4(2) of the Securities Act of 1933.

 

Wedid not receive any proceeds as a result of such conversions.

 

InFebruary 2003, the holder of a $100,000 short-term note due by the Companyagreed to convert the note into 1,000 shares of Series E Preferred Stock.  In addition, the holder purchased 6,000shares of Series E Preferred Stock from the Company for $600,000.  The issuance of the Common Stock upon theconversion of the note and the issuance of the Series E Preferred Stock wasmade in reliance upon the exemptions provided under Rule 506 and Section 4(2)of the Securities Act of 1933.

 

Theproceeds from the purchase will be utilized by the Company for debt reductionand general working capital purposes.

 

**Item 3 – Defaults Upon SeniorSecurities**

 

Dividendson our Series A Preferred Stock accrue at a rate of 7% per annum and arepayable semi-annually when and if declared by our Board of Directors.  No such dividends have been declared and, asof the date of the filing of this report, $458,723.18 of dividends is inarrears on the Series A Preferred Stock.

 

Dividendson our Series E Preferred Stock accrue at a rate of 6% of the stated value peryear, payable every 120 days.  As of thedate of the filing of this report, $48,948.92 is in arrears on the Series EPreferred Stock.

 

Dividendson our Series H Preferred Stock accrue at a rate of 6% per year, payablequarterly, commencing on March 30, 2004. As of the date of the filing of this report, $11,116.36 of suchdividends have accrued, but are not yet in arrears.

### ** **

### **Item 4 – Submission of Matters to a Vote of Security Holders**

 

There were no matters submitted to a vote of oursecurity holders during the three months ended December 31, 2002.

 

### **Item 5 – Other Information**

 

In February 2002, our common stock was delisted from the NasdaqSmallCap Market.  As a result, ourcommon shares currently trade on the OTC Bulletin Board.  In July 2002, the Nasdaq Listing and HearingReview

 

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Council reversed the delistingdecision made by the Nasdaq Listing Qualifications Panel and remanded thedecision to the Panel, subject to certain conditions.  These conditions included, among others, that we haveshareholders’ equity of at least $4,500,000 as of June 30, 2002, and bySeptember 30, 2002, demonstrate a closing bid of at least $1.00 per share.  In addition, the $1.00 closing bid pricemust be maintained for at least 10 consecutive trading days.  We did not have shareholders’ equity of$4,500,000 as of June 30, 2002, and the closing bid price of our common stockhas been substantially less than $1.00 per share since the Council rendered itsdecision.  The Panel notified us inAugust 2002 that it was denying relisting due to our failure to meet conditionsspecified in the Council’s decision.  Wefiled an appeal of that decision.

 

On November 22, 2002, we received notification from the Nasdaq Listingand Hearing Review Council that it was affirming the Nasdaq ListingQualification Panel’s decision to delist our securities from the Nasdaq StockMarket.  However, the Review Councilalso noted that pursuant to Nasdaq Marketplace Rule 4850(a), the NASD Board ofGovernors could call this decision for review in connection with a thenupcoming Board meeting.  The Company hasnow received the decision of the NASD Board of Governors which has declined tocall for review of the November 22, 2002 decision of the Nasdaq Listing andHearing Review Council to delist the Company’s securities from the NasdaqSmallCap Market.

 

### **Item 6 - Exhibits and Reports on Form 8-K**

 
| (a)        |   | Exhibits                                                                                                                                                                                                                                                                                                                                                       |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                           |
| **Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                           |
| 99.1       |   | Certification of Chief Executive Officer  pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                           |
| 99.2       |   | Certification of Chief Financial Officer pursuant to Section 906 of  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                           |
| (b)        |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                           |
|       |   | On November 26, 2002, we filed a Report on  Form 8-K to report the acquisition, as of the effective date of December 1,  2002, of certain of the assets of Elite Personnel Services, Inc.                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                           |
|       |   | On January 30, 2003, the Company filed a  report on Form 8-K/A with the Securities and Exchange Commission to amend and  restate its current Report on Form 8-K filed with the Securities and Exchange  Commission on November 26, 2002, which excluded certain financial statements  and pro forma financial information not available at the time of filing. |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                         | STRATUS SERVICES GROUP, INC. |
|------------------------------|------------------------------|
|                         |                         |   |
| Date:  October 14, 2003 | By:                          | /s/  Joseph J. Raymond |   |
|                         |                         | Joseph J. Raymond |
|                         |                         | Chairman of the Board of Directors, |
|                         |                         | President and Chief Executive Officer |
|                         |                         |   |
| Date:  October 14, 2003 | By:                          | /s/ Michael A. Maltzman |   |
|                         |                         | Michael A. Maltzman |
|                         |                         | Chief Financial Officer |
|                         |                         | (Principal Financial and Accounting Officer) |

 

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