** **

****

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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

# ** **

# ** **

# **FORM 10-Q**

 

(Mark One)

 
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------|

**For thequarterly 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 inits charter)

 

 

| **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 formerfiscal 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                                Noo

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

Yeso                    Noý

 

Asof February 13, 2003, 17,289,161 shares of the Registrant’s common stock wereoutstanding.

 

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**Part I —Financial Information**

**Item 1. —Financial Statements**

 

**STRATUSSERVICES GROUP, INC.**

Condensed Balance Sheets

 
| ** **                                                                                                                                                                                                    | ** ** | **December  31,  2002** | ** ** | **September  30,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                                                                                                                                                                                          |       | **(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                                                                                                                                                            |       | 8,737,190               |       | 7,887,727                |       |
| Deferred financing costs, net of accumulated amortization                                                                                                                                                     |       | 5,366                   |       | 5,768                    |       |
| Other assets                                                                                                                                                                                                  |       | 182,001                 |       | 154,991                  |       |
|                                                                                                                                                                                                          |       | $                       | 25,602,889 |                     | $          | 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                                                                                                                                                                         |       | 5,787,152               |       | 5,472,696                |       |
| Accrued payroll and taxes                                                                                                                                                                                     |       | 2,088,624               |       | 1,828,629                |       |
| Payroll taxes payable                                                                                                                                                                                         |       | 475,569                 |       | 929,328                  |       |
|                                                                                                                                                                                                          |       | 19,672,502              |       | 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                   |       |
|                                                                                                                                                                                                          |       | 22,407,611              |       | 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                |       |
|                                                                                                                                                                                                          |       | $                       | 25,602,889 |                     | $          | 24,031,396 |   |

 

See notes to condensed financial statements.

 

 

2

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**STRATUSSERVICES GROUP, INC.**

Condensed Statements of Operations

(Unaudited)

 
| ** **                                                                      | ** ** | **Three  Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                            |       | **2002**                              |       | **2001** |   |
| Revenues                                                                        |       | $                                     | 22,147,728 |   | $ | 14,793,224 |   |
|                                                                            |       |                                  |       |   |   |
| Cost of revenues                                                                |       | 18,789,000                            |       | 12,119,322 |   |
|                                                                            |       |                                  |       |   |   |
| 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.

 

 

3

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**STRATUSSERVICES GROUP, INC.**

Condensed Statements of Cash Flows

(Unaudited)

 
| ** **                                                                                                            | ** ** | **Three  Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                  |       | **2002**                              |       | **2001** |   |
| 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                                                                                         |       | $                                     | 998,875    |   | $ | 3⁄4 |   |
| Less: cash paid                                                                                                       |       | (153,000                              | )          | 3⁄4 |   |
| Liabilities assumed                                                                                                   |       | $                                     | 845,875    |   | $ | 3⁄4 |   |

 

Seenotes to condensed financial statements.

 

 

4

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**STRATUSSERVICES GROUP, INC.**

Condensed Statements of Cash Flows - Continued

(Unaudited)

 
| ** **                                                                      | ** ** | **Three  Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                            |       | **2002**                              |       | **2001** |   |
| 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 |   |

 

Seenotes to condensed financial statements.

 

 

5

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**STRATUS SERVICES GROUP, INC.**

Notesto 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 present fairlythe financial position, the results of operations and cash flows of the Companyfor the periods presented.  It issuggested that these condensed financial statements be read in conjunction withthe consolidated financial statements and the notes thereto included in theCompany’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.

 

**NOTE 2 — LIQUIDITY**

 

AtDecember 31, 2002, the Company had limited liquid resources.  Current liabilities were $19,672,502 andcurrent assets were $15,326,048.  Thedifference of $4,346,454 is a working capital deficit, which is primarily theresult of losses incurred during the years ended September 30, 2002 and2001.  Current liabilities include acash overdraft of $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.

 

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.

 

**NOTE 3 —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 

 

 

6

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theCompany’s assets and liabilities using a combination of present value andmultiple of earnings valuation techniques. Based upon the results of the valuation it was determined that there wasno impairment of goodwill.

 

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

 

|                                  |   | **December  31, 2002** |      | **September  30, 2002** |   |
|---------------------------------------|--------|------------------------|-----------|-------------------------|--------|
| Goodwill                              |   | $                      | 8,020,953 |                    | $      | 8,020,953 |   |
| Covenant-not-to-compete               |   | 232,680                |      | 213,180                 |   |
| Customer list                         |   | 1,796,091              |      | 891,716                 |   |
|                                  |   | 10,049,724             |      | 9,125,849               |   |
| Less:  accumulated  amortization |   | (1,312,534             | )         | (1,238,122              | )      |
|                                  |   | $                      | 8,737,190 |                    | $      | 7,887,727 |   |

 

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.

 

**NOTE 5 —LINE OF CREDIT**

 

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)        Failing to meet the tangible net worthrequirement, and;

                (ii)       The Company’s Common Stock being delistedfrom the Nasdaq SmallCap Market

 

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

 

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

 

### **NOTE 6 — CONVERTIBLEDEBT**

 

At various times during the three months ended December 31, 2001, theCompany issued convertible debentures through private placements.  The debentures bore interest at 6% a year,payable quarterly and had a maturity date of five years from issuance.  Each debenture was convertible after 120days from issuance into the number of shares of the Company’s common stockdetermined by dividing the principal amount of the debenture by the lesser of(a) 120% of the closing bid price of the common stock on the trading dayimmediately preceding the issuance date or (b) 75% of the average closing bidprice of the common stock for the five trading days immediately preceding thedate of the conversion.  The Company hadthe right to prepay any of the debentures at any time at a prepayment rate thatvaried from 115% to 125% of the amount of the debenture depending on when theprepayment is 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 becomesconvertible.

 

 

7

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During the three months ended December 31,2001, the Company redeemed $123,394 of debentures resulting in a loss ofapproximately $11,000 which is included in “Other income (expense)” in thecondensed statement of operations.

 

**NOTE 7 —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.  For purposesof determining the number of shares which the Company will be required to issueif it chooses to pay the redemption price in shares of Common Stock, the CommonStock will have a value equal to the average closing price of the Common Stockduring the five trading days immediately preceding the date of redemption.

 

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

 

The shares of Series E Preferred Stock have astated value of $100 per share.  Theholders of the Series E Preferred stock are entitled to cumulative dividends ata rate of 6% of the stated value per year, payable every 120 days, inpreference and priority to any payment of any dividend on the Company’s CommonStock.  Dividends may be paid, at theCompany’s option, either in cash or in shares of Common Stock, valued at theSeries E Conversion 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.

 

 

8

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***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 theSeries F Preferred Stock are entitled to vote at the meeting.  Holders of the Series F Preferred Stock areentitled to vote as a separate class on any proposed amendment to the terms ofthe Series F Preferred Stock which would increase or decrease the number ofauthorized shares of Series F Preferred Stock or have an adverse impact on theSeries F Preferred Stock and on any proposal to create a new class of shareshaving rights or preferences equal to or having priority to the Series FPreferred Stock.

 

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

 

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

 

The holders of the Series H Preferred Stockare entitled to cumulative dividends at a rate of 6% per year, payablequarterly, commencing on March 30, 2004, in preference and priority to anypayment 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 H Preferred Stock is convertibleinto Common Stock at a conversion price (the “Series H Conversion Price”) equalto the lower of $.20 per share or the average market price of the Common Stockfor the five trading days immediately preceding the conversion date.  The number of shares issuable uponconversion is determined by multiplying the number of shares of Series HPreferred Stock to be converted by $100 and dividing the result by the Series HConversion Price then in effect.

 

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

 

The Company has the right, but not theobligation, to redeem the shares of Series H Preferred Stock at any time priorto conversion at a redemption price of 115% of the purchase price paid for theSeries H Preferred Shares plus any accrued but unpaid dividends.

 

 

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**NOTE 8 —DISCONTINUED OPERATIONS, SALE OF ENGINEERING DIVISION**

 

OnMarch 28, 2002, the Company completed the sale of the assets of its EngineeringServices Division (the “Division”) to SEA Consulting Services Corporation(“SEA”) pursuant to the Asset Purchase Agreement dated as of January 24, 2002,among the Company, SEP, LLC (“SEP”), Charles Sahyoun, Sahyoun Holders LLC andSEA.

 

Theassets of the Division had been transferred to SEP, a limited liability companyin which the Company owns a 70% interest, at the time of the execution of theAsset Purchase Agreement.  SahyounHolders, LLC, a company wholly-owned by Charles Sahyoun, the President of theDivision, owns the remaining 30% interest in SEP.

 

Underthe terms of the Asset Purchase Agreement, the Company received an initial cashpayment of $1,560,000, which represented 80% of the initial $2,200,000installment of the purchase price payable to SEP after the satisfaction ofcertain liabilities and expenses of SEP. Sahyoun Holdings, LLC received the other 20% of the initial netinstallment of the purchase price, or $440,000.

 

The Asset Purchase Agreement requires SEA to make the followingadditional payments to SEP:

 

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

                        (ii)       A payment of $1 million, plus or minusthe amount by which 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”);

                        (iii)      Five subsequent annual payments (the“Subsequent Payments”) which will be based upon a multiple of the annualsuccessive increases, if any, in 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 the Company, SahyounHoldings, LLC and Charles Sahyoun (the “Allocation and Indemnity Agreement”),the Company was entitled to $250,000 of the Second Payment and $250,000 of theThird Payment.  On April 15, 2002, byletter agreement between the Company, Sahyoun Holdings, LLC and Joseph J.Raymond, Sr., the Chairman and Chief Executive Officer of the Company, theparties agreed to a modification of the Allocation and IndemnityAgreement.  Per that letter agreement,Sahyoun Holdings, LLC provided the Company with $200,000 cash in exchange forthe Company’s short-term, 90-day demand note, due and payable by August 1, 2002in the amount of $250,000.  Such$250,000 was repaid by the Company from its $250,000 share of the SecondPayment which was received in June 2002. Sahyoun Holdings, LLC and Charles Sahyoun have guaranteed the $250,000payment to be made to the Company from the Third Payment, regardless of theoperating results of SEA (see Note 25). Upon its receipt of all of the payments required under the Allocationand Indemnity Agreement, the Company’s interest in SEP will terminate and the Companywill not be entitled to any additional payments under the Asset PurchaseAgreement, including the Subsequent Payments. Sahyoun Holdings, LLC is entitled to all amounts paid to SEP under theAsset Purchase Agreement other than $500,000 of payments made or payable to theCompany pursuant to the Allocation and Indemnity Agreement and guaranteed byCharles Sahyoun and Sahyoun Holdings, LLC, as described above.

 

InDecember 2002, the Company and Charles Sahyoun agreed to offset the $250,000 ofthe Third Payment due to the Company against $250,000 of accrued commissionsdue Charles Sahyoun.

 

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

 

 

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### **NOTE 9 — ACQUISITION**

 

Effectiveas of December 1, 2002, (the “Effective Date”), the Company purchasedsubstantially all of the tangible and intangible assets, excluding accountsreceivable, of six offices of Elite Personnel Services (“Elite”), a Californiacorporation.  The Company also took overElite’s Downey, California office, from which Elite serviced no accounts butwhich it utilized as a corporate office. The company will continue to utilize the Downey office as a regionalcorporate facility.  Pursuant to theterms of an Asset Purchase Agreement between the Registrant and Elite datedNovember 19, 2002 (the “Asset Purchase Agreement”), the purchase price payableat closing (the “Base Purchase Price”) for the assets was $1,264,000, all ofwhich was represented by an unsecured promissory note.  In addition to the Base Purchase Price,Elite will also receive as a deferred purchase price, an amount equal to 10% ofthe annual “Gross Profits” as defined in the Asset Purchase Agreement of theacquired business between $2,500,000 and $3,200,000, and 15% of the annual GrossProfits of the acquired business in excess of $3,200,000 for a minimum periodof one year from the Effective Date and for a period of two years from theEffective Date, if Gross Profits during the first year reach specified levels.  The note includes imputed interest at 4% peryear and is payable over an eight-year period in equal monthly paymentsbeginning 30 days after the Effective Date. In connection with the transaction, Elite, its President and other keymanagement members entered into Non-Competition and Non-Solicitation Agreementspursuant to which they agreed not to compete with the Registrant in theterritories of the acquired business for periods ranging from twelve months tofive years, and to not solicit the employees or customers of the acquiredbusiness for periods ranging from twelve months to five years.  Additionally, Elite’s President has alsoentered into an Employment Agreement, as of the Effective Date, with theCompany for a minimum of a one year term. This term can be extended if certain targeted Gross Profit levels areattained.

 

The Elite branches provide temporary lightindustrial and clerical staffing in six business locations in California andNevada.

 

For financial accounting purposes, intereston the note has been imputed at a rate of 11% per year.  Accordingly, the note and Base PurchasePrice has been recorded at $845,875. There was an additional $153,000 of costs incurred in connection withthe acquisition.

 

The following summarizes the fair value ofthe assets acquired at the date of acquisition based upon a third-partyvaluation of certain intangible assets:

 

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

 

The covenant-not-to-compete and customer listare being amortized over their estimated useful life of five and ten years,respectively.

 

 

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### **The unaudited proforma results of operations presented below assume that the acquisition and anotheracquisition that occurred effective January 1, 2002, had occurred at thebeginning of fiscal 2002.  Thisinformation is presented for informational purposes only and includes certainadjustments such as amortization of intangibles resulting from the acquisitionsand interest expense related to acquisition debt.**

### ** **

| ** **                                                                 | ** ** | **Unaudited  Three Months Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                       |       | **2002**                                        |       | **2001** |   |
| Revenues                                                                   |       | $                                               | 27,725,728 |   | $ | 24,952,224 |   |
| 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**

### ** **

Duringthe three months ended December 31, 2002, a son and the brother of the ChiefExecutive Officer of the Company each loaned $100,000 to the Company.  In addition, one of the members of the Boardof Directors of the Company loaned $100,000 to the Company.  Each of the aforementioned loans isunsecured, 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 January2003, the Company received the decision of the NASD Board of Governors whichhas declined to call for review of the November 22, 2002 decision of the NasdaqListing and Hearing Review Council to delist the Company’s securities from theNasdaq SmallCap Market.

 

b.                                      In January2003, the Company’s Chief Executive Officer converted 1,000 shares of theSeries F Preferred Stock into 1,000,000 shares of Common Stock.

 

c.                                       In January2003, a $367,216 judgment was awarded against the Company 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.

 

d.                                      In February2003, the holder of a $100,000 short-term note due by the Company, agreed toconvert 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.

 

 

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| **Item 2 -** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

This Form 10-Q contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended and Section 21E of the Securities Exchange Act of 1934, asamended.  These statements relate tofuture economic performance, plans and objectives of management for futureoperations and projections of revenue and other financial items that are basedon the beliefs of our management, as well as assumptions made by, andinformation currently available to, our management.  The words “expect”, “estimate”, “anticipate”, “believe”,“intend”, and similar expressions are intended to identify forward-lookingstatements.  Such statements involveassumptions, uncertainties and risks. If one or more of these risks or uncertainties materialize or underlyingassumptions prove incorrect, actual outcomes may vary materially from thoseanticipated, estimated or expected. Among the key factors that may have a direct bearing on our expectedoperating results, performance or financial condition are economic conditionsfacing the staffing industry generally; uncertainties related to the job marketand our ability to attract qualified candidates; uncertainties associated withour brief operating history; our ability to raise additional capital; ourability to achieve and manage growth; our ability to successfully identifysuitable acquisition candidates, complete acquisitions or integrate theacquired business into our operations; our ability to attract and retainqualified personnel; our ability to develop new services; our ability tocross-sell our services to existing clients; our ability to enhance and expandexisting offices; our ability to open new offices; general economic conditions;and other factors discussed from time to time in our filings with theSecurities and Exchange Commission. These factors are not intended to represent a complete list of all risksand uncertainties inherent in our business. The following discussion and analysis should be read in conjunction withthe Condensed Financial Statements and notes appearing elsewhere in thisreport.

 

Our critical accounting policies andestimates are described in our Annual Report on Form 10-K for the fiscal yearended September 30, 2002.

 

### **Introduction**

 

We provide a wide range of staffing,engineering and productivity consulting services nationally through a networkof offices located throughout the United States.  We recognize revenues based on hours worked by assignedpersonnel.  Generally, we bill ourcustomers a pre-negotiated, fixed rate per hour for the hours worked by ourtemporary employees.  We are responsiblefor workers’ compensation, unemployment compensation insurance, Medicare andSocial Security taxes and other general payroll related expenses for all of thetemporary employees we place.  Theseexpenses are included in the cost of revenue. Because we pay our temporary employees only for the hours they actuallywork, wages for our temporary personnel are a variable cost that increases ordecreases in proportion to revenues. Gross profit margin varies depending on the type of servicesoffered.  In some instances, temporaryemployees placed by us may decide to accept an offer of permanent employmentfrom the customer and thereby “convert” the temporary position to a permanentposition.  Fees received from such conversionsare included in our revenues.  Selling,general and administrative expenses include payroll for management andadministrative employees, office occupancy costs, sales and marketing expensesand other general and administrative costs.

 

 

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**Results ofOperations**

**DiscontinuedOperations/Acquisition or Disposition of Assets**

 

On January 24, 2002, we entered into anagreement to sell the assets of our Engineering Services Division (the“Division”) to SEA Consulting Services Corporation (“SEA”).  Closing of the sale was contingent uponshareholder approval and the receipt of a fairness opinion by us.

 

OnMarch 28, 2002, we completed the sale of the assets of the Division to SEApursuant to the Asset Purchase Agreement dated as of January 24, 2002 among us,SEP, LLC (“SEP”), Charles Sahyoun, Sahyoun Holdings LLC and SEA.  The transaction was approved by a vote ofour stockholders at the annual meeting of stockholders held on March 28, 2002.

 

Theassets of the Division had been transferred to SEP, a limited liability companyin which we own a 70% interest, at the time of the execution of the AssetPurchase Agreement.  Sahyoun Holdings,LLC, a company wholly owned by Charles Sahyoun, the President of the Division,owns the remaining 30% interest in SEP.

 

Underthe terms of the Asset Purchase Agreement, we received an initial cash paymentof $1,560,000, which represented 80% of the initial $2,200,000 installment ofthe purchase price payable to SEP after the satisfaction of certain liabilitiesand expenses of SEP.  Sahyoun Holdings,LLC received the other 20% of the initial net installment of the purchaseprice, or $440,000.

 

TheAsset Purchase Agreement requires the purchaser to make the followingadditional payments to SEP:

 

                        (a)           Apayment of $1 million, plus or minus the amount by which SEA’s profit for thesix months ended June 30, 2002, as determined pursuant to the Asset PurchaseAgreement, is greater or less than $600,000 (the “Second Payment”);

 

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

 

                        (c)           Fivesubsequent annual payments (the “Subsequent Payments”) which will be based upona multiple of the annual successive increases, if any, in the SEA’s profitduring the five year period beginning on January 1, 2003 and ending December31, 2007.

 

Pursuant to an allocation and indemnityagreement entered into by us, Sahyoun Holdings, LLC and Mr. Sahyoun (the“Allocation and Indemnity Agreement”), we were entitled to $250,000 of theSecond Payment and $250,000 of the Third Payment.  On April 15, 2002, by letter agreement between us, SahyounHoldings, LLC and Joseph J. Raymond, Sr., our Chairman and Chief ExecutiveOfficer, the parties agreed to a modification of the Allocation and IndemnityAgreement.  Per that letter agreement,Sahyoun Holdings, LLC provided us with $200,000 cash in exchange for ourshort-term, 90-day demand note, due and payable by August 1, 2002 in the amountof $250,000.  The $250,000 was paid byus from our share of the Second Payment which was received by us in June 2002.

 

SahyounHoldings LLC and Mr. Sahyoun have guaranteed the $250,000 payment to be made tous from the Third Payment, regardless of the operating results of SEA.  In December 2002, Mr. Sahyoun and we agreedto offset the $250,000 against $250,000 of accrued commissions due Mr.Sahyoun.  As a result, we will not beentitled to any additional payments under the Asset Purchase Agreement,including the Subsequent Payments. Sahyoun Holdings LLC is entitled to all amounts paid to SEP under theAsset Purchase Agreement other than $500,000 of payments made or payable to uspursuant to the Allocation and Indemnity Agreement and guaranteed by CharlesSahyoun and Sahyoun Holdings, LLC as described above.  Under the terms of the Asset Purchase Agreement, Sahyoun HoldingsLLC will not be entitled to any Subsequent Payments or its allocable share ofthe Second and Third Payments if Mr. Sahyoun’s employment with SEA ceases forany reason other than death or permanent disability prior to December 31, 2003.

 

 

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EffectiveJanuary 1, 2002, we purchased substantially all of the tangible and intangibleassets, excluding accounts receivable, of seven offices of PES.  The initial purchase price was $1,480,000,represented by a $1,100,000 promissory note and 400,000 shares of our commonstock.  There was an additional $334,355of costs incurred in connection with the acquisitions.  In addition, PES is entitled to earnoutpayments of 15% of pretax profit of the acquired business up to a total of$1.25 million or the expiration of ten years, whichever occurs first.  The note bears interest at 6% a year and ispayable over a ten-year period in equal quarterly payments.  See Note 3 to the Financial Statementsincluded with this Report.

 

Effective December 1, 2002,we purchased substantially all of the tangible and intangible assets, excludingaccounts receivable, of six offices of Elite Personnel Services, Inc.  We also took over Elite’s Downey, Californiaoffice, from which Elite serviced no accounts, but which it utilized as a corporateoffice.  We will continue to utilize theDowney office as a regional corporate facility.  Pursuant to a Asset Purchase Agreement dated November 19, 2002between us and Elite (the “Asset Purchase Agreement”), the purchase price paidat closing (the “Base Purchase Price”) was $1,264,000, all of which wasrepresented by a promissory note (the “Note”) payable over eight years, inequal monthly installments.  Imputedinterest at the rate of 4% per year is included in the Note amount.  For financial accounting purposes, intereston the note has been imputed at a rate of 11% per year.  Accordingly, the net Base Purchase Price wasrecorded as $845,875.

 

In addition to the BasePurchase Price, Elite may also receive as deferred purchase price an amountequal to 10% of “Gross Profits” as defined in the Asset Purchase Agreement, ofthe acquired business between $2,500,000 and $3,200,000 per year, plus 15% ofGross Profits of the acquired business in excess of $3,200,000 per year, for aminimum of one year from the Effective Date, and for a period of two years fromthe Effective Date if Gross Profits for the first year reach specified levels.

 

In connection with thisacquisition, we also entered into an employment and non-compete agreement for afive-year period with the President and sole stockholder of Elite.

 

**ContinuingOperations**

**ThreeMonths Ended December 31, 2002 Compared to Three Months Ended December 31, 2001**

 

***Revenues.*** Revenues increased 49.7% to $22,147,728 for the three months endedDecember 31, 2002 from $14,793,224 for the three months ended December 31,2001.  Approximately 87% of theincreased amount was a result of the acquisitions in January and December 2002.

 

***Gross Profit.*** Gross profit increased 25.6% to $3,358,728 for the three months ended December31, 2002 from $2,673,902 for the three months ended December 31, 2001,primarily as a result of increased revenues. Gross profit as a percentage of revenues decreased to 15.2% for thethree months ended December 31, 2002 from 18.1% for the three months endedDecember 31, 2001.  This decrease was aresult of increased pricing competition of staffing services and increases inthe cost of workers’ compensation insurance.

 

***Selling, General and Administrative Expenses.**** *Selling, general andadministrative expenses, not including depreciation and amortization, increased27.1% 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 15.1% for the three months ended December 31, 2002 from17.8% 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 and Amortization.***  Depreciation and amortization expenses decreased 21.4% to$213,291 for the three months ended December 31, 2002 from $271,440 for thethree months ended December 31, 2001.  Depreciationand amortization as a percentage of revenues decreased to 1.0% for the threemonths ended December 31, 2002 from 1.8% for the three months ended December31, 2001.  The decrease was primarilydue to the discontinuance of the amortization of goodwill.

 

 

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***Interest and Financing Costs.***  Interest and financing costs decreased 2.6% to $498,911 for thethree months 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 Loss Attributable to Common Stockholders.**** *As a result of theforegoing, we had a net loss and net loss attributable to common stockholdersof ($690,405) and ($1,056,499), respectively for the three months endedDecember 31, 2002 compared to a net loss and net loss attributable to commonstockholders of ($733,943) and ($857,943) for the three months ended December31, 2001, respectively.

 

**Liquidityand Capital Resources**

 

AtDecember 31, 2002, we had limited liquid resources.  Current liabilities were $19,672,502 and current assets were$15,326,048.  The difference of$4,346,454 is a working capital deficit, which is primarily the result oflosses incurred during the last two years. These conditions raise substantial doubts about our ability to continueas a going concern.  The financialstatements do not include any adjustments to reflect the possible future effecton the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the outcome of thisuncertainty.

###### ** **

Ourcontinuation of existence is dependent upon the continued cooperation of ourcreditors, our ability to generate sufficient cash flow to meet our continuingobligations on a timely basis, to fund the operating and capital needs, and toobtain additional financing as may be necessary.

 

Wehave taken steps to revise and reduce our operating requirements, which webelieve will be sufficient to assure continued operations and implementation ofour plans.  The steps include closingbranches that are not profitable, consolidating branches and reductions instaffing and other selling, general and administrative expenses.

 

Netcash used in operating activities was $1,342,610 and $617,129 in the threemonths ended December 30, 2002 and 2001, respectively.

 

Netcash used in investing activities was $172,346 and $97,835 in the three monthsended December 31, 2002 and 2001, respectively.  Cash used for acquisitions for the three months ended December31, 2002, was $38,000.  The balance inboth periods was primarily for capital expenditures.

 

Netcash provided by financing activities was $1,365,930 and $585,474 in the threemonths 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.

 

Ourprincipal uses of cash are to fund temporary employee payroll expense andemployer related payroll taxes, investment in capital equipment, start-upexpenses of new offices, expansion of services offered, workers’ compensation,general liability and other insurance coverage’s, debt service and costsrelating to other transactions such as acquisitions.  Temporary employees are paid weekly.

 

Atvarious times during the years ended September 30, 2002 and 2001, we issuedconvertible debentures through private placements.  The debentures bore interest at 6% a year, payable quarterly andhad a maturity date of five years from issuance.  Each debenture was convertible after 120 days from issuance intothe number of shares of our common stock determined by dividing the principalamount of the debenture by the lesser of (a) 

 

 

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120%of the closing bid price of the common stock on the trading day immediatelypreceding the issuance date or (b) 75% of the average closing bid price of thecommon stock 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.

 

Thediscount arising from the 75% beneficial conversion feature was charged to interestexpense during the period from the issuance of the debenture to the earliesttime at which the debenture became convertible.

 

Asa result of conversions of the debentures and certain transactions with thedebenture holders, only $40,000 of debentures remained outstanding at September30, 2002 and December 31, 2002.

 

Wehave a loan and security agreement (the “Agreement”) with a lending institutionwhich provides for a line of credit up to 85% of eligible accounts receivable,as defined, not to exceed $12,000,000. Advances under the Agreement bear interest at a rate of prime plus 11/2%.  The credit agreement restrictsour ability to incur other indebtedness, pay dividends and repurchasestock.  Borrowings under the agreementare collateralized by substantially all of our assets.  As of December 31, 2002, $8,754,864 wasoutstanding under the credit agreement.

 

AtDecember 31, 2002, we were in violation of the following covenants under theloan and security agreement:

 

        i)          Failing to meet the tangible net worthrequirement;

 

        ii)         Our common stock being delisted fromthe Nasdaq SmallCap Market.

 

Wehave received a waiver from the lender on all of the above violations and inDecember 2002, entered into a modification of the Agreement.  The modification provides that borrowingsunder the Agreement bear interest at a rate of prime plus 1 3/4% as long as weare in violation of any of the covenants under the Agreement.

 

Holdersof the 1,458,933 outstanding shares of our Series A Preferred Stock areentitled to dividends at a rate of $.21 per share per annum when and ifdeclared by our Board of Directors in preference and priority to any payment ofdividends on our common stock or any other series of our capital stock.  Dividends on the Series A Preferred Stock maybe paid in additional shares of Preferred Stock if the shares of common stockissuable upon the conversion of the Series A Preferred Stock have beenregistered for resale under the Securities Act of 1933.  We are obligated to pay quarterly dividendsto holders of our Series E Preferred Stock and, commencing March 2004, holdersof our Series H Preferred Stock, at a rate of 6% per annum of the stated valueof the stock in preference and priority to any payment of dividends on ourcommon stock.  We are obligated to paymonthly dividends on our Series F Preferred Stock at a rate of 7% per annum ofthe stated value of the stock in preference and priority to any payment ofdividends on our common stock.  Theaggregate stated value of the Series E, Series F and Series H Preferred Stockwas $1,147,800, $1,000,000 and $500,000, respectively, as of December 31,2002.  Dividends on the Series E, SeriesF and Series H Preferred Stock may be paid at the Company’s option in shares ofcommon stock (valued at the conversion price of the applicable class ofpreferred stock) if such shares have been registered for resale under theSecurities Act of 1933.

 

Weare obligated to redeem any shares of Series A Preferred Stock outstanding onJune 30, 2008 at a redemption price of $3.00 per share together with accruedand unpaid dividends.  We have theoption to pay the redemption price through the issuance of shares of commonstock.  For purposes of determining thenumber of shares we will be required to issue if we 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 preceding thedate of redemption.

 

Otherfixed obligations that we had as of December 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.

 

 

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•                                $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 bear interestat various rates, including $100,000 owed to a son of Joseph J. Raymond, ourChief 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.

 

All of our offices areleased through operating leases that are not included on the balancesheet.  As of December 31, 2002, futureminimum lease payments under lease agreements having initial terms in excess ofone year were:  2003 - $463,000,2004-$221,000, 2005-$180,000, 2006 - $137,000 and 2007 - $137,000.

 

We may be required to makecertain “earnout” payments to sellers of businesses that we have acquired inrecent years, including Source One, PES and Elite.  The amount of these payments, if any, will depend upon theresults of the acquired businesses. There were no earnout payments made in fiscal 2002.

 

Source One has the right torequire us to repurchase 400,000 shares of our common stock at a price of $2.00per share at any time after July 27, 2003 and before the later of July 27, 2005and the full payment of the outstanding note that we issued to it in connectionwith the acquisition transaction completed with Source One in July 2001.  In addition, the holder of the $80,000 notewhich was due in April 2002 has the right to require us to repurchase 20,000shares of common stock at a price of $1.00 per share plus interest at a rate of15% per annum until the note is paid in full.

 

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

 

As of December 31, 2002,there were no off-balance sheet arrangements, unconsolidated subsidiaries,commitments or guarantees of other parties, except as disclosed in the notes tofinancial statements.  Stockholders’equity at that date was $2,372,278 which represented 9% of total assets.

###### ** **

###### **Seasonality**

 

Our business follows the seasonal trends ofour customer’s business.  Historically,we have experienced 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.

 

 

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

 

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

 

**Impact ofRecent Accounting Pronouncements**

 

InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No.142, “Goodwill and Other Intangible Assets”. SFAS No. 142, which must be applied to fiscal years beginning afterDecember 15, 2001, modifies the accounting and reporting of goodwill andintangible assets.  The pronouncementrequires entities to discontinue the amortization of goodwill; reallocate allexisting goodwill among its reporting segments based on criteria set by SFASNo. 142, and perform initial impairment tests by applying a fair-value-basedanalysis on the goodwill in each reporting segment.  Any impairment at the initial adoption date shall be recognizedas the effect of a change in accounting principle.  Subsequent to the initial adoption, goodwill shall be tested forimpairment annually or more frequently if circumstances indicate a possibleimpairment.

 

UnderSFAS No. 142, entities are required to determine the useful life of otherintangible assets and amortize the value over the useful life.  If the useful life is determined to beindefinite, no amortization will be recorded. For intangible assets recognized prior to the adoption of SFAS No. 142,the useful life should be reassessed. Other intangible assets are required to be tested for impairment in amanner similar to goodwill.  We adoptedSFAS No. 142 and completed a transitional impairment test, as required by SFASNo. 142, and determined that there was no impairment of goodwill as of October1, 2002.

 

InAugust 2001, the FASB issued SFAS No. 144, “Impairment of Long-LivedAssets”.  SFAS No. 144 supercedes SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of”.  SFAS No. 144retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of along-lived asset is not recoverable from its undiscounted cash flows and (b)measure an impairment loss as the difference between the carrying amount andthe fair value of the asset.  SFAS No.144 removes goodwill from its scope. SFAS No. 144 is applicable to financial statements issued for fiscalyears beginning after December 15, 2001, or for our fiscal year endingSeptember 30, 2003.  The adoption ofSFAS No. 144 did not have any material adverse impact on our financial positionor results of our operations.

 

InJune 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities” which nullifies EITF No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)”.  SFAS 146 requires that a liability for acost associated with an exit or disposal activity be recognized when theliability is incurred.  Under EITF 94-3,a liability for an exit cost as defined in EITF 94-3 was recognized at the dateof an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activitiesthat are initiated after December 31, 2002. The adoption of SFAS 146 may affect the timing of the recognition offuture exit and disposal costs.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure” which amends SFAS No. 123, “Accountingfor Stock-Based Compensation”.  SFAS No.148 provides alternative methods of transition for a voluntary change to thefair value based method of accounting for stock-based employee compensation andrequires more prominent and more frequent disclosures in the financialstatements of the effects of stock-based compensation.  The provisions of SFAS No. 148 are effectivefor fiscal years ending after December 15, 2002 and the interim disclosure willprovide the required interim and annual disclosures beginning in the quarterended March 31, 2003.

 

 

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**Item 3. —QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**

 

Weare subject to the risk of fluctuating interest rates in the ordinary course ofbusiness for borrowings under our Loan and Security Agreement with CapitalTempfunds, Inc.  This credit agreementprovides for a line of credit up to 85% of eligible accounts receivable, not toexceed $12,000,000.  Advances under thiscredit agreement bear interest at a rate of prime plus 1 1⁄2%; however, advanceswill bear interest at an additional 1⁄4% while we remain in violation of certaincovenants.

 

Webelieve that our business operations are not exposed to market risk relating toforeign currency exchange risk or commodity price risk.

 

**Item 4. —CONTROLS AND PROCEDURES**

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, within the90 days prior to the filing date of this report, we carried out an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures.  This evaluation was carriedout under the supervision and with the participation of our management,including our Chairman and Chief Executive Officer along with our ChiefFinancial Officer, who concluded that our disclosure controls and proceduresare effective.  Their have been nosignificant changes in our internal controls or in other factors, which couldsignificantly affect internal controls subsequent to the date we carried outits evaluation.

 

Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported with the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed inour reports filed under the Exchange Act is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officeras appropriate, to allow timely decisions regarding required disclosure.

 

 

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**Part II — Other Information**

**Item 1 — Legal Proceedings**

 

In January 2003, a $367,216 judgment was awardedagainst us to the plaintiff in Ace American Insurance Company v. StratusServices Group, Inc., a contract/tort action in which the plaintiff allegedthat we had failed to pay certain insurance premiums.  We had previously accrued a liability of $323,775 related to thismatter.  As of February 13, 2003, thejudgment was unpaid.

 

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

 

### ***Conversion of Series E Preferred Stock and Series FPreferred Stock***

### ** **

### **In October and November 2002, holders of Series E PreferredStock converted 5,205 shares into 4,486,911 shares of our Common Stock atconversion prices between $.108 and $.1365. The issuances of the Common Stock upon such conversions were made inreliance upon the exemptions from registration provided under Rule 506 andSection 4(2) of the Securities Act of 1933.**

 

In January 2003, Joseph J. Raymond, ourPresident and Chief Executive Officer, the holder of the Series F PreferredStock, converted 1,000 shares into 1,000,000 shares of our Common Stock at aconversion price of $.10 per share.  Theissuance of the Common Stock upon such conversion was made in reliance upon theexemptions from registration provided by Rule 506 and Section 4(2) of theSecurities Act of 1933.

 

We did not receive any proceeds as a resultof such conversions.

 

In February 2003, the holder of a $100,000short-term note due by the Company agreed to convert the note into 1,000 sharesof Series E Preferred Stock.  Inaddition, the holder purchased 6,000 shares of Series E Preferred Stock fromthe Company for $600,000.  The issuanceof the Common Stock upon the conversion of the note and the issuance of theSeries E Preferred Stock were made in reliance upon the exemptions providedunder Rule 506 and Section 4(2) of the Securities Act of 1933.

 

The proceeds from the purchase will beutilized by the Company for debt reduction and general working capitalpurposes.

 

**Item 3 — Defaults Upon Senior Securities**

 

Dividends on our Series A Preferred Stockaccrue at a rate of 7% per annum and are payable semi-annually when and ifdeclared by our Board of Directors.  Nosuch dividends have been declared and, as of the date of the filing of thisreport, $458,723.18 of dividends is in arrears on the Series A Preferred Stock.

 

Dividends on our Series E Preferred Stockaccrue at a rate of 6% per annum, and are payable every 120 days.  As of the date of the filing of this report,$48,948.92 is in arrears on the Series E Preferred Stock.

 

Dividends on our Series H Preferred Stockaccrue at a rate of 6% per year, payable quarterly, commencing on March 30,2004.  As of the date of the filing ofthis report, $11,116.36 of such dividends have accrued, but are not yet inarrears.

### ** **

### **Item 4 — Submission of Matters to a Vote ofSecurity Holders**

 

Therewere no matters submitted to a vote of our security holders during the threemonths ended December 31, 2002.

 

### **Item 5 — OtherInformation**

 

In February 2002, our common stock wasdelisted from the Nasdaq SmallCap Market. As a result, our common shares currently trade on the OTC BulletinBoard.  In July 2002, the Nasdaq Listingand Hearing Review 

 

 

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Council reversed the delisting decision madeby the Nasdaq Listing Qualifications Panel and remanded the decision to thePanel, subject to certain conditions. These conditions included, among others, that we have shareholders’equity of at least $4,500,000 as of June 30, 2002, and by September 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 receivednotification from the Nasdaq Listing and Hearing Review Council that it wasaffirming the Nasdaq Listing Qualification Panel’s decision to delist oursecurities from the Nasdaq Stock Market. However, the Review Council also noted that pursuant to NasdaqMarketplace Rule 4850(a), the NASD Board of Governors could call this decisionfor review in connection with a then upcoming Board meeting.  The Company has now received the decision ofthe NASD Board of Governors which has declined to call for review of theNovember 22, 2002 decision of the Nasdaq Listing and Hearing Review Council todelist the Company’s securities from the Nasdaq SmallCap Market.

 

### **Item 6 - Exhibits andReports 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 theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                          |   | STRATUS SERVICES GROUP,  INC. |
|-------------------------------|--------|-------------------------------|
|                          |   |                          |   |
| Date:  February 13, 2003 |   | By:                           | /s/ Joseph J. Raymond |
|                          |   |                          | Joseph J. Raymond |
|                          |   |                          | Chairman of the Board of  Directors, |
|                          |   |                          | President  and Chief Executive Officer |
|                          |   |                          |   |
| Date:  February 13, 2003 |   | By:                           | /s/  Michael A. Maltzman |
|                          |   |                          | Michael  A. Maltzman |
|                          |   |                          | Chief  Financial Officer |
|                          |   |                          | (Principal  Financial and Accounting Officer) |

 

 

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**CERTIFICATION**

I, Joseph J. Raymond,certify that:

1.                                       I have reviewedthis quarterly report on Form 10-Q for the quarterly period ended December 31,2002 of Stratus Services Group, Inc.;

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c.               presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date.

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.              any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls.

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date:       February 13, 2003
| /s/  Joseph J. Raymond                |
|---------------------------------------|
| Joseph  J. Raymond                    |
| Chairman  and Chief Executive Officer |

 

 

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**CERTIFICATION**

I, Michael A. Maltzman,certify that:

1.                                       I have reviewedthis quarterly report on Form 10-Q for the quarterly period ended December 31,2002 of Stratus Services Group, Inc.;

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this quarterly report;

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c.               presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date.

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.              any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls.

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date:       February 13, 2003
| /s/  Michael A. Maltzman                    |
|---------------------------------------------|
| Michael  A. Maltzman                        |
| Vice  President and Chief Financial Officer |

 

 

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