<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1996
REGISTRATION NO. 333-
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------
STRATEGIA CORPORATION
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
KENTUCKY 7379 61-1064606
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) No.)
</TABLE>
10301 LINN STATION ROAD
P.O. BOX 37144
LOUISVILLE, KENTUCKY 40233-7144
(502) 426-3434
(Address and Telephone Number of Principal Executive Offices)
10301 LINN STATION ROAD
P.O. BOX 37144
LOUISVILLE, KENTUCKY 40233-7144
(Address of Principal Place of Business or Intended Principal Place of Business)
RICHARD W. SMITH
PRESIDENT
STRATEGIA CORPORATION
10301 LINN STATION ROAD
P.O. BOX 37144
LOUISVILLE, KENTUCKY 40233-7144
(502) 426-3434
(Name, Address and Telephone Number of Agent For Service)
----------------------------------
COPIES TO:
ALAN K. MACDONALD JOHN J. HALLE
Brown, Todd & Heyburn PLLC Stoel Rives LLP
3200 Providian Center 900 SW Fifth Avenue
Louisville, Kentucky 40202 Portland, Oregon 97204-1268
(502) 589-5400 (503) 224-3380
----------------------------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER SECURITY(1) OFFERING PRICE(1)
<S> <C> <C> <C>
Common Stock, no par value (2)(3)................................ 2,012,500 $6.94 $13,961,719
Common Stock Purchase Warrants (the Warrants) (2)(4)............. 2,012,500 $.00 $0
Common Stock, issuable upon exercise of Warrants (5)(6).......... 2,012,500 $10.41 $20,942,578
Total............................................................ -- -- $34,904,297
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, no par value (2)(3)................................ 4,231
Common Stock Purchase Warrants (the Warrants) (2)(4)............. --
Common Stock, issuable upon exercise of Warrants (5)(6).......... 6,346
Total............................................................ $10,577
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) The Common Stock and Warrants are being registered as component parts of a
Unit. A total of 2,012,500 Units are being registered, each Unit consisting
of one share of Common Stock and one Warrant. For the purposes of
calculation of the registration fee, each share of Common Stock to be sold
as a component part of the Units has been assumed to have a proposed maximum
offering price per share of $6.94, and each Warrant is assumed to have a
proposed maximum offering price per Warrant of $10.41.
(3) Includes 262,500 shares included in the 262,500 Units that the Underwriter
has the option to purchase to cover over-allotments in connection with the
Registrant's sale of the Units, if any.
(4) Includes 262,500 Warrants included in the 262,500 Units that the Underwriter
has the option to purchase to cover over-allotments in connection with the
Registrant's sale of the Units, if any.
(5) Includes 262,500 shares issuable upon exercise of Warrants included in the
262,500 Units that the Underwriter has the option to purchase to cover over-
allotments in connection with the Registrant's sale of the Units, if any.
Such shares are being registered for sale upon such exercise on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933.
(6) An indeterminate number of additional shares of Common Stock are to be
registered hereunder, as provided in the Warrants in the event provisions
against dilution therein become operative.
----------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
1,750,000 UNITS
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE COMMON STOCK PURCHASE WARRANT
Strategia Corporation ("Strategia" or the "Company") is hereby offering
1,500,000 units ("Units"), each Unit consisting of one share (the "Shares") of
the Company's common stock (the "Common Stock"), and one warrant to purchase one
share of Common Stock (the "Warrants"). The Units will separate immediately upon
issuance, and the Common Stock and Warrants that make up the Units will trade
only as separate securities. Each Warrant initially entitles the holder thereof
to purchase one share of Common Stock at a price of $ per share (150% of
the initial public offering price of a Unit), subject to adjustment under
certain circumstances. The Warrants are exercisable at any time, unless
previously redeemed, until the fifth anniversary of this Prospectus, subject to
certain conditions. The Company may redeem the Warrants, in whole or in part, at
any time upon at least thirty days prior written notice to the registered
holders thereof, at a price of $0.25 per Warrant, provided that the closing bid
price of the Common Stock has been at least $ (200% of the initial public
offering price of a Unit) for the 20 consecutive trading days immediately
preceding the date of the notice of redemption.
Prior to this offering, the Common Stock was quoted on the
over-the-counter-market. The closing bid price for the Common Stock on October
11, 1996 was $6.75. See "Price Range of Common Stock." It is currently
anticipated that initial public offering price for the Units will be between
$8.00 and $10.00 per Unit. The Company has applied to have the Common Stock and
the Warrants listed on the Nasdaq National Market under the symbols "STGI" and
"STGIW," respectively, upon consummation of this Offering.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit................................................. $ $ $
Total(3)................................................. $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance of $280,000 (2% of the
aggregate offering price of the Units sold in the offering, based on an
assumed offering price of $8.00 per Unit), payable to Paulson Investment
Company, Inc., the representative (the "Representative") of the several
Underwriters, and the value of a five-year warrant (the "Representative's
Warrant") entitling the Representative to purchase up to 175,000 Units at a
price of $9.60 per Unit (120% of the initial public offering price of a
Unit, based on an assumed offering price of $8.00 per Unit). The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses payable by the Company estimated at
$680,000, including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
262,500 additional Units on the same terms as set forth above to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
The Units are offered by the several Underwriters subject to prior sale,
when and if delivered to and accepted by the Underwriters, and subject to the
right to reject any order in whole or in part and to certain other conditions.
It is expected that delivery of the Units will be made in New York, New York on
or about , 1996.
This prospectus includes trademarks and registered trademarks of the Company
and other companies.
------------------------------
PAULSON INVESTMENT COMPANY, INC.
The date of this Prospectus is , 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048; and at the
Commission's Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Copies may also be obtained through
the Internet from the Commission's site on the World Wide Web at the following
address: http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Units offered hereby, of which this Prospectus forms a part. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Units, Common Stock and Warrants, reference is
made to the Registration Statement and such exhibits and schedules. Statements
contained in this Prospectus as to the contents of any contract or other
documents referred to are not necessarily complete and, in each instance, if
such contract or document is filed as an exhibit to the Registration Statement,
reference is made to the copy of such contract or document filed as an exhibit,
each such statement being qualified in all respects by such reference to such
exhibit. The Registration Statement and the exhibits and schedules thereto may
be inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain fees prescribed by the Commission. Copies may
also be obtained through the Internet from the Commission's site on the World
Wide Web at the following address: http://www.sec.gov.
The following documents previously filed with the Commission by the Company
are incorporated herein by reference:
(a) Annual Report on Form 10-KSB for the year ended December 31, 1995; and
(b) Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30,
1996.
All other reports filed pursuant to Sections 13(a) or 15(d) of the Exchange
Act since the end of the fiscal year covered by the Annual Report referred to in
(a) above will be deemed to be incorporated by reference in this Prospectus and
to be a part hereof.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS) ARE AVAILABLE UPON REQUEST AT NO CHARGE FROM RICHARD W. SMITH,
PRESIDENT, STRATEGIA CORPORATION, P.O. BOX 37144, LOUISVILLE, KENTUCKY
40233-7144, TELEPHONE (502) 426-3434.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK AND
WARRANTS ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE EXCHANGE ACT. SEE
"PLAN OF DISTRIBUTION."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, THE WARRANTS OR THE REPRESENTATIVE'S
WARRANT. SEE "DESCRIPTION OF SECURITIES" AND "UNDERWRITING." NUMBERS OF SHARES
OF COMMON STOCK AND PER SHARE INFORMATION CONTAINED IN THIS PROSPECTUS HAVE BEEN
ADJUSTED TO REFLECT A 1-FOR-2 REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTIVE
AS OF JULY 29, 1996 (THE "REVERSE SPLIT").
THE COMPANY
Strategia Corporation provides disaster recovery, consulting, information
processing and outsourcing services to users of large-scale computer systems in
North America and Europe. For twelve years the Company has specialized in
assisting business organizations and government agencies to prepare for and
avert the consequences of unknown, unplanned interruptions in data processing.
Since 1984, the Company has provided its services to more than 200 large and
medium-sized organizations in diverse industries. During the next several years
the Company expects to devote substantial resources to assisting clients in
preparing for and implementing the conversion of their computer systems to allow
those systems to function without interruption on and after January 1,
2000--often referred to as the "Year 2000 problem." The Company recently began
offering outsourcing services, managing some or all of a client's information
processing functions on a transitional or permanent basis. The Company believes
that its disaster recovery and millennium services expertise will enhance its
ability to provide outsourcing and other computer services that address client
needs beyond 2000.
The Company has provided alternate site processing (or "backup" services) to
users of large-scale Bull (formerly Honeywell) computers in North America since
1984, and to users of IBM computers in North America since 1993. In February
1995, the Company formed Twinsys Dataguard, SA ("Twinsys"), based in Paris,
France and began offering contingency planning services and alternate site
processing to users of Bull and Unix-based computer systems in France. The
Company plans to open an operations facility in the United Kingdom and offer
these services to users of Bull and Unix-based systems in the United Kingdom
within the next twelve months. Clients are entitled to use the Company's data
centers in Louisville, Kentucky and Paris, France if the client's data center is
rendered inoperable as a result of natural disaster, fire, sabotage, strike or
other emergency. The Company provides contingency planning consulting services
to assess a client's vulnerability in the event of an unplanned interruption of
data processing and to assist the client in preparing a contingency plan to
allow critical business functions to resume as promptly as possible.
The Year 2000 problem arises from the way dates are expressed in computer
programs. Computer programs commonly rely on two-digit date fields for
calculations and decision making functions. Many of these computer programs have
begun to misfunction due to an inability to properly interpret dates after 1999,
and others may misfunction in the future. Programs asked to process a date after
the year 2000 may interpret the date as 100 years earlier than the intended date
(e.g. 1905 for 2005), may go to an arbitrary default date such as 1980, may fail
to process the date or may fail altogether. Even if the particular program will
accommodate a 21st century date, it may be unable to communicate that date to
other programs with which it must interact. Because of the prevalence and
interdependence of date dependent applications in complex control systems, the
failure of these applications could lead to widespread disruption of financial
transactions, telecommunications, utilities and other systems.
Millennium services, which address the Year 2000 problem, are a natural
extension of the Company's historic contingency planning and processing
services. The planning and operational methodologies developed by the Company as
a disaster recovery specialist can be readily adapted to manage a client through
certain aspects of a typical Year 2000 conversion project. Such a project
typically involves four
3
<PAGE>
phases: (i) impact and alternatives analysis to assess the operational and
financial risks to the client; (ii) magnitude assessment to analyze the
technical issues involved in converting the client's applications and systems to
select the optimal conversion strategy; (iii) code conversion to plan and
implement the conversion of applications; and (iv) compliance testing under
realistic operating conditions to ensure compliance before the converted
applications are integrated into the client's system. The Company currently has
pilot projects underway for three clients on a no-charge basis, which have
enabled the Company to refine and validate its Year 2000 methodologies and to
evaluate different code conversion software tools. The Company offers to manage
a conversion project through all four phases on a turnkey basis, or to manage
each phase separately, including the critical testing component. Unlike many
millennium services consulting firms, the Company operates data centers,
enabling it to comprehensively test a client's converted applications at an
off-site location to avoid disrupting the client's ongoing business processing.
The Company's near term strategy is to apply its consulting and operational
expertise developed over more than a decade as a leading computer disaster
recovery specialist to provide a full range of millennium analysis, assessment,
conversion and testing services to clients in both North America and Europe. In
the next six months, the Company plans to focus its millennium marketing efforts
on its past and present disaster recovery clients as well as on industries such
as insurance, financial services, health care, government and higher education,
where many organizations have allocated funds for Year 2000 conversion projects.
The Company's marketing strategy will emphasize its capability both to manage an
organization's entire conversion project on a turnkey basis and to conduct
full-system testing of the conversions undertaken by in-house staff or other
millennium providers without interfering with ongoing processing operations. As
more organizations reach the testing phase of their conversion projects, the
Company plans to open several regional facilities dedicated exclusively to
testing Year 2000 conversions. The expertise and familiarity with client systems
that the Company expects to develop through Year 2000 conversions would
strengthen its capability to provide outsourcing, application and systems
reengineering, and other information management services to clients after 2000.
The Company's longer term strategy is to offer a wide range of computer
services to meet the changing needs of organizations in a rapidly evolving
information technology environment, as well as to pursue opportunities to add
new clients for its established disaster recovery and outsourcing services,
particularly in Europe. Rapidly changing technology and budgetary and staffing
constraints on information management are expected to continue to lead many
companies to consider outsourcing certain information functions, such as data
center operations, design and maintenance of computer systems and networks, or
entire information processing functions. As organizations migrate from older
mainframe systems to newer technologies such as client/server systems, they may
find it cost-effective to convert their customized proprietary mainframe
programs to operate on the new system and thereby reduce transitional costs.
Organizations with operations in Europe may also face a code conversion issue
similar to the Year 2000 problem as a result of the European Community's plan to
adopt a single European currency. The Company's objective is to develop new
skills to apply with its traditional methodologies to take advantage of future
opportunities in the computer services markets.
The Company was incorporated under Kentucky law in 1984. The Company's
executive offices are located at 10301 Linn Station Road, Louisville, Kentucky
40223, and its telephone number is (502) 426-3434.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 1,750,000 Units, each consisting of one share of Common
Stock and one Warrant to purchase one share of Common
Stock. The Common Stock and Warrants will be separately
tradeable immediately following the offering. See
"Description of Securities."
Common Stock to be outstanding
after the offering.............. 5,019,069 shares (1)
Use of proceeds................... To add additional marketing and technical personnel, to
establish regional and international testing facilities,
to repay indebtedness of $800,000 and for working
capital and other general corporate purposes. Offering
proceeds may also be used to redeem unconverted shares
of Series AA Preferred Stock ("Series AA Preferred")
upon call by the Corporation, although it is expected
that all outstanding shares of Series AA Preferred will
be converted. See "Use of Proceeds."
Nasdaq National Market symbols.... Common Stock--"STGI"
Warrants--"STGIW"
</TABLE>
- ------------------------
(1) Includes 258,184 shares issuable upon conversion of Series AA Preferred.
Excludes 76,339 shares of Common Stock issuable upon exercise of stock
options outstanding at October 11, 1996 and 170,295 options granted October
14, 1996; shares issued after September 30, 1996, including 8,000 shares
issuable as of October 7, 1996 upon renewal of a shareholder loan; and
544,546 shares of Common Stock issuable upon exercise of outstanding
warrants as of October 11, 1996. See "Management-- Certain Transactions" and
"Description of Securities."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................................... $ 4,616 $ 8,927 $ 6,692 $ 7,007
Cost of services.............................................. 3,162 5,394 3,974 5,223
Selling, general and administrative expenses.................. 1,053 2,435 1,732 1,765
---------- ---------- ---------- ----------
Income from operations........................................ 400 1,098 986 19
Other expense................................................. 394 612 462 473
---------- ---------- ---------- ----------
Income (loss) before income tax benefit....................... 6 486 524 (454)
Income taxes(1)............................................... 0 444 417 130
---------- ---------- ---------- ----------
Net income(loss).............................................. $ 6 $ 42 $ 107 $ (583)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per common share (2)........................ $ (.01) $ .00 $ .03 $ (.25)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding........................... 2,418,792 2,493,603 2,489,537 2,523,790
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................................. $ (2,021) $ 10,319
Total assets........................................................................... 12,451 24,791
Total liabilities...................................................................... 10,353 9,553
Total stockholders' equity............................................................. 2,098 14,438
</TABLE>
- ------------------------
(1) Represents provision for French income taxes payable on income of Twinsys
during 1995 and the nine months ended September 30, 1996, which totaled
$1,127,000 and $354,000, respectively. North American operations incurred a
loss for the period, thereby reducing income for the period on a
consolidated basis.
(2) Net income (loss) per common share is computed by dividing net income
(loss), after reduction for preferred stock dividends, by the weighted
average number of common shares and common share equivalents outstanding
during each of the periods presented. Options and warrants to purchase stock
and convertible preferred stock are not included as common stock equivalents
because their effect is antidilutive.
(3) Adjusted to give effect to the sale by the Company of 1,750,000 Units
offered hereby at an assumed initial public offering price of $8.00 per
share, the receipt of the estimated net proceeds therefrom, and the
repayment of an $800,000 loan from a shareholder. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS."
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTS SET FORTH
BELOW AND INFORMATION ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS:
PLANNED EXPANSION OF SERVICES; CONTRACTION OF HISTORIC BUSINESS BASE. The
Company has sought to expand the range of computer services it can offer to
customers in recent years, as the market for its historic business has
contracted. Since its inception in 1984, the Company has specialized in offering
disaster recovery services to data center operators using large-scale computer
systems, including backup services for Bull computer systems and contingency
planning consulting. For more than a decade, the Company has been the leading
provider of computer backup services to users of Bull computer systems in North
America. However, the number of large Bull data centers in North America has
decreased from approximately 700 in 1986 to approximately 100 in 1996, largely
due to the "migration" of data center operators to other computer systems. In
addition, in 1994 an affiliate of Groupe Bull began offering computer backup
services in North America, which has reduced the Company's margins on its backup
services contracts. As a result of these factors, the Company's revenues from
its historic business base have declined significantly in recent years. The
Company has offered backup services for certain IBM computer systems since 1992,
and began in February 1995 to offer Bull backup services in France, where the
number of data centers using Bull computers is much larger than in North
America. In 1996, the Company began to market data center outsourcing and
millennium services. Demand for millennium services, however, is likely to
diminish significantly after 2000. The development of the Company's new computer
service offerings is in an early stage, and there can be no assurance that a
long-term market will develop for the computer services the Company will offer
or, if there is a market for those services, that the Company will develop those
services sufficiently to compete in that market. The failure to diversify into
millennium services or to develop computer services required by clients after
2000 could materially and adversely affect the Company's business, operating
results and financial condition. See "Business--Strategy."
RECENT LOSS AND NEED FOR ADDITIONAL WORKING CAPITAL. The Company incurred a
loss of $583,000 for the nine months ended September 30, 1996 and had an
accumulated deficit of $2,785,000 and a working capital deficit of $2,021,000 as
of that date. The Company expects to require significant amounts of cash to
support marketing and other anticipatory activities related to the establishment
of its millennium services business. See "Management's Discussion and Analysis
of Results of Operations and Financial Conditions." The sale of the Units
offered hereby will provide the Company with additional working capital that is
expected to meet the Company's budgeted capital requirements for at least twelve
months, but there can be no assurance that the Company will not experience
liquidity problems because of adverse market conditions or other unfavorable
events. Further, because of the various business risks described elsewhere in
this "Risk Factors" discussion, there can be no assurance that the Company will
be consistently profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
RELATIONSHIP WITH AUTOMATED TOOL VENDORS. The Company's ability to manage
large Year 2000 conversion projects will depend on the development of effective
automated conversion software tools that can convert large volumes of code
without substantial human involvement, and on the Company's having access to
such tools. The Company does not intend to develop conversion tools and
therefore expects to be dependent on access to effective tools developed by
others. The Year 2000 problem of a typical large organization is expected to
involve the examination and conversion of millions of lines of computer code.
Reliance on manual conversion is not feasible, in the Company's view, if, as
expected, most organizations attempt to complete their conversions before
January 1, 2000 because demand for qualified programmers
7
<PAGE>
would likely exceed the number of available programmers. One objective of the
Company's Year 2000 pilot projects is to evaluate the performance of different
conversion software tools. Should a particular tool prove to offer significant
advantages in cost, speed, and effectiveness of conversion for a specific
portion of the Company's clientele, the Company may consider entering into an
alliance or other relationship with the tool vendor to insure access to the
tool. The Company is negotiating an agreement with one such vendor, which would
give the Company an exclusive right to use the vendor's tool to convert
applications on Bull systems. If automated conversion tools do not prove to be
effective, or if the Company cannot obtain access to effective conversion tools,
the Company's capacity to execute conversion projects in a timely manner would
be significantly impaired, which would materially and adversely affect its
revenues from millennium services. Competitive factors may affect the Company's
access to effective automated tools that may be developed for Year 2000
conversions. The Company anticipates that, as new conversion tools are
developed, computer services vendors will compete to establish relationships
with tool vendors that could limit the availability of a particularly effective
conversion tool. The Company would be competing with companies that have greater
financial resources and name recognition than it has. There can be no assurance
that the Company will have access to conversion tools necessary to carry out its
millennium services strategy.
AVAILABILITY OF TECHNICAL PERSONNEL. Even if adequate automated conversion
tools are available, the Company's strategy will require the addition of skilled
technical, marketing and management personnel. The Company competes with major
computer, communications, consulting and software companies, as well as
information service departments of major corporations, in seeking to attract
qualified personnel, and this competition is expected to intensify as demand for
millennium service grows. There can be no assurance that the Company will be
able to attract and retain the personnel necessary to pursue its strategy.
UNCERTAIN AND UNDEVELOPED MARKET FOR MILLENNIUM SERVICES. Millennium
services are expected to represent a significant portion of the Company's
business for the next three years. Although the Company believes that the market
for millennium services will grow significantly as the Year 2000 approaches,
there can be no assurance that this market will develop to the extent
anticipated by the Company, or at all. Significant expenses for sales and
marketing may be required to inform the public of the millennium problem and the
need for millennium services. There can be no assurance that the millennium
services industry will devote the resources necessary to effectively inform the
public of this problem or that potential clients will understand or acknowledge
the Year 2000 problem. In addition, affected companies may not be willing or
able to allocate the resources, financial or otherwise, to address the problem
in a timely manner. Many companies may be able to resolve the problem using
internal staff, by discontinuing the use of some older programs, or by replacing
existing systems with new, Year 2000 compliant systems. Due to these factors,
development of the market for millennium consulting services is uncertain and
unpredictable. If the market for millennium consulting services fails to grow,
or grows more slowly than anticipated, the Company's business, operating results
and financial condition could be materially and adversely affected. See
"Business--Industry Background--Millennium Services--The Consulting Market."
COMPETITION. The markets for millennium services and the Company's other
computer services are highly competitive. The market for millennium services
will become increasingly competitive as the Year 2000 approaches. The primary
competitive factors in the computer services industry are availability of
equipment and facilities, price, service, the expertise and experience of the
provider's personnel and the ability of such personnel to provide the skills and
knowledge necessary to solve information processing problems. A large number of
companies engaged in the computer services business are more established,
benefit from greater name recognition and have substantially greater financial,
technical and marketing resources than the Company. Moreover, other than
technical expertise, there are no significant proprietary or other barriers to
entry in the consulting services industry, and millennium consulting services in
particular, that could keep potential competitors from developing similar
services or providing competing
8
<PAGE>
services in the Company's market. There can be no assurance that the Company
will be able to compete successfully against its competitors or that the
competitive pressures faced by the Company will not affect its financial
performance. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE. The computer services industry is characterized
by evolving technology and changing methodologies. The introduction of software
tools embodying new technology and the emergence of new methodologies could
render existing products and services obsolete. The Company's future success
will depend on its ability to continue to refine and update its proprietary
methodologies, including identifying and evaluating software tools specifically
designed to economically and efficiently address the Year 2000 problem. There
can be no assurance that one of the Company's competitors will not develop a
software tool or millennium consulting methodology that is superior to the
Company's services or achieves greater market acceptance than the Company's
methodologies. The development of a superior tool or methodology by one or more
competitors, or any failure by the Company to successfully respond to such a
development, could materially and adversely affect the Company's business,
operating results and financial condition. See "Business--Competition" and
"Business--Millennium Services."
CONCENTRATION OF CLIENTS. During 1995, Twinsys' largest client, France
Telecom (including several affiliates that contract independently with Twinsys)
accounted for approximately $2,471,000, or 27.7% of the Company's revenue. The
Company's ten largest clients in 1995 accounted for approximately 55.6% of
revenue. Most of the Company's contracts with its alternate site processing
clients are for multi-year terms. The loss of any of the major clients of
Twinsys or the Company could materially and adversely affect the Company's
business, operating results and financial condition. See "Business--Clients."
DEPENDENCE ON KEY EXECUTIVES. The Company is largely dependent on the
efforts of Richard W. Smith, its Chief Executive Officer and President, and
James P. Buren, its Executive Vice President-Technology. Neither Mr. Smith nor
Mr. Buren is subject to an employment agreement that would prevent him from
leaving the Company or restrict his ability to compete with the Company
following the termination of his employment. There can be no assurance that the
Company will be able to retain the services of Mr. Smith or Mr. Buren. Although
the Company currently maintains life insurance on the lives of Mr. Smith or Mr.
Buren, the loss of either of them could materially and adversely affect the
Company's business, operating results and financial condition. See
"Management--Directors and Executive Officers."
LIMITED PROTECTION OF PROPRIETARY INFORMATION. The Company depends in part
on its proprietary know-how to differentiate its services from those of its
competitors. The Company does not have any patents and relies upon a combination
of trade secret, copyright and trademark laws and contractual restrictions to
establish and protect its proprietary information. The Company generally enters
into non-disclosure and confidentiality agreements with its employees,
independent sales agents and clients. Despite these precautions, it may be
possible for an unauthorized third party to replicate the Company's computer
services methodologies or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the means used by the Company to
protect its proprietary information will be adequate or that the Company's
competitors will not independently develop substantially similar or superior
techniques. See "Business--Intellectual Property."
POTENTIAL CONTRACT LIABILITY. The Company's computer services involve key
aspects of its clients' computer systems. The Company has never been the subject
of a damages claim related to its services. However, any failure in a client's
system could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The Company
attempts to contractually limit its liability for damages arising from negligent
acts, errors, mistakes or omissions in rendering its professional services.
Despite this precaution, there can be no assurance that the limitations of
liability set forth in its service contracts would be enforceable or would
otherwise protect the Company from liability for damages. The Company maintains
general liability insurance coverage, including coverage for errors or
omissions. However, there can be no assurance that such coverage will continue
to be available on acceptable terms, or will be available in sufficient amounts
to cover one or more large claims, or that the
9
<PAGE>
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against the Company that exceed available
insurance coverage or changes in the Company's insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could materially and adversely affect the Company's business,
operating results and financial condition.
RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT. As the number of competitors
providing computer services, and millennium services in particular, increases,
overlapping techniques used in such services will become more likely. Although
the Company has never been the subject of an infringement claim, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future, that assertion of such claims will not result in
litigation, or that the Company would prevail in such litigation or be able to
obtain a license for the use of any infringed intellectual property from a third
party on commercially reasonable terms. Furthermore, litigation, regardless of
its outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations. Any infringement claim or
litigation against the Company could, therefore, materially and adversely affect
the Company's business, operating results and financial condition. See
"Business--Intellectual Property."
OFFICER AND DIRECTOR CONTROL. Upon completion of this offering, the
Company's officers and directors will beneficially own approximately 35.1% of
the Company's outstanding Common Stock (approximately 33.5% if the
over-allotment option granted is exercised in full). As a result, although they
will not have the ability to control matters requiring approval by the Company's
shareholders, they may have the ability to influence how other shareholders will
vote on such matters, including the election of directors. The Company currently
has only two non-employee directors; however, the Company intends to identify
and elect one or more additional non-employee directors in the near future.
Currently, the affiliated directors may have the ability to control how the
Board of Directors will vote on certain transactions. See "Principal
Shareholders."
NO LIQUID MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION. Prior to
this offering, there has been a limited public market for the Common Stock and
no public market for the Warrants. There can be no assurance that an active
trading market for the Common Stock or the Warrants will develop or be sustained
after this offering. The trading price of the Common Stock and Warrants could be
subject to significant fluctuations in response to factors such as, among
others, variations in the Company's anticipated or actual results of operations,
announcements of new products or technological innovations by the Company or its
competitors, and changes in earnings estimates by analysts. In addition, the
stock market is subject to price and volume fluctuations that affect the market
prices for companies in general, and small capitalization, emerging growth and
technology companies in particular, and are often unrelated to their operating
performance. These broad market fluctuations may adversely affect the market
prices of the Common Stock or the Warrants. Purchasers of the Units will incur
an immediate book value dilution, and certain events, such as the issuance of
Common Stock pursuant to the exercise of outstanding warrants and stock options,
could result in additional dilution. See "Dilution."
RISK OF LOW-PRICED STOCKS. The Common Stock has applied for listing on the
Nasdaq National Market upon completion of this offering. In order to qualify for
listing and to continue to be listed on the Nasdaq National Market, a company
must meet certain financial criteria. Although the Company expects to meet these
criteria upon completion of this offering, there can be no assurance that the
Company will meet such tests or will continue to do so in the future. Failure to
obtain a listing on the Nasdaq National Market would reduce market interest in
the Common Stock and Warrants. Failure to meet maintenance criteria in the
future may result in the delisting of the Common Stock from the Nasdaq National
Market.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering and
assuming no exercise of outstanding options and warrants to purchase Common
Stock but assuming conversion of the outstanding shares of Series AA Preferred
into Common Stock, there will be 5,027,069 shares of Common Stock outstanding.
The Company has also granted options to directors, employees and others to
acquire 246,634
10
<PAGE>
shares of Common Stock, all of which are currently exercisable. An additional
802,730 shares of Common Stock are issuable upon the exercise of stock purchase
warrants issued and outstanding as of October 11, 1996, which carry certain
registration rights. Immediately following the completion of this offering, a
total of 4,112,885 shares of Common Stock (including the 1,750,000 shares sold
in this offering) will be freely tradeable without restriction. An additional
136,668 shares of Common Stock subject to issuance upon the conversion of Series
AA Preferred would also be freely tradeable upon issuance. The remaining shares
are "restricted securities" within the meaning of Rule 144 of the Securities Act
("Rule 144") and may not be resold except pursuant to a registration statement
effective under the Securities Act or pursuant to an exemption therefrom. The
possibility that substantial amounts of Common Stock may be sold in the public
market would likely have a material adverse effect on prevailing market prices
of the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale."
ANTI-TAKEOVER EFFECT OF CERTAIN STATUTORY AND CHARTER PROVISIONS. The
Company's Articles of Incorporation provide that the Company will be governed by
the anti-takeover provisions of the Kentucky Business Combinations Act. In
general, this statute prohibits a Kentucky corporation from engaging in a
"business combination" with an "interested stockholder" for a period of five
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
In addition, certain provisions of the Company's Articles of Incorporation could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
These statutory and charter provisions could have the effect of delaying,
deferring or preventing a change in control of the Company and could limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. See "Description of Capital Stock--Certain Statutory and
Charter Provisions Regarding Change of Control."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 Units offered
by the Company at an assumed public offering price of $8.00 per share are
estimated to be $12,340,000 ($14,251,000 if the over-allotment option granted to
the Underwriters is exercised in full), after deducting the estimated
underwriting discount and other estimated offering expenses payable by the
Company. The principal reasons for this offering are to increase the Company's
working capital in anticipation of increased demand for the Company's millennium
services during the next several months. The Company plans to use a portion of
the offering proceeds to add marketing staff, project managers, and technical
personnel in late 1996 and 1997, when more organizations are expected to begin
the initial assessment and planning phases of their conversion projects. As
projects enter the implementation phase, the Company also plans to use working
capital provided by the offering to establish and equip regional testing
facilities that will be dedicated to testing converted applications under
realistic operating conditions. The Company will also use offering proceeds to
repay an $800,000 loan from a shareholder. See "Certain Transactions." The
Company anticipates that it will call the Series AA Preferred for redemption
following completion of the Offering, and will use offering proceeds to pay the
redemption price of any unconverted shares, although there are expected to be
none. The Company intends to use the balance for additional working capital
needs and general corporate purposes. The Company's management will have broad
discretion with respect to the specific working capital requirements to which
the proceeds will be applied. Pending use, the proceeds will be invested in
short-term, investment-grade, interest-bearing securities.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the over-the-counter market
under the symbol "STGI" since July 29, 1996, and under the symbol "DARS" before
that date. The stock prices listed below, which have been adjusted to reflect
the 1-for-2 reverse stock split of the Common Stock as of July 29, 1996,
represent the high and low closing bid prices of the Common Stock by the
National Quotation Bureau, Inc. as reported for each fiscal quarter beginning
with the first fiscal quarter of 1994.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1994:
Quarter ended March 31, 1994................................................................... $ 2.50 $ 1.00
Quarter ended June 30, 1994.................................................................... 2.50 1.00
Quarter ended September 30, 1994............................................................... 2.00 1.00
Quarter ended December 31, 1994................................................................ 2.50 .75
FISCAL YEAR 1995:
Quarter ended March 31, 1995................................................................... 1.75 .75
Quarter ended June 30, 1995.................................................................... 2.25 .75
Quarter ended September 30, 1995............................................................... 2.25 .75
Quarter ended December 31, 1995................................................................ 2.50 .75
FISCAL YEAR 1996:
Quarter ended March 31, 1996................................................................... 2.00 1.50
Quarter ended June 30, 1996.................................................................... 5.00 2.00
Quarter ended September 30, 1996............................................................... 8.50 3.50
Quarter ended December 31, 1996 (through October 11, 1996)..................................... 8.13 6.75
</TABLE>
On October 11, 1996, the closing bid price of the Common Stock on the
over-the-counter market was $6.75 per share. The foregoing quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. As of September 30, 1996, the Company believes
there were approximately 700 beneficial owners of the Company's Common Stock.
DIVIDEND POLICY
Since its inception the Company has not declared or paid cash dividends on
its Common Stock. The Company intends to retain earnings, if any, for use in its
business and to support growth and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and as adjusted to give effect to the sale by the Company of
the 1,500,000 Units offered hereby at the public offering price of $8.00 per
share (and after deducting the underwriting discount, estimated offering
expenses payable by the Company, and an $800,000 loan to be repaid with offering
proceeds).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current installments)........................................... $ 1,954 $ 1,154
Obligations under capital leases (including current installments)......................... 3,968 3,968
Stockholders' equity (deficit):
Preferred Stock, no par value, 2,000,000 shares authorized, 64,546 shares issued and
outstanding, actual and adjusted...................................................... 645 --
Common Stock, no par value, 20,000,000 shares authorized; 3,010,885 shares issued and
outstanding and 4,510,885 shares as adjusted(1)....................................... 4,254 17,239
Accumulated (deficit)................................................................... (2,801) (2,801)
Total stockholders' equity............................................................ 2,098 14,438
Total capitalization...................................................................... 8,020 19,560
</TABLE>
- ------------------------
(1) As adjusted includes 258,184 shares issuable upon conversion of Series AA
Preferred but excludes 76,339 shares of Common Stock issuable upon exercise
of options outstanding as of September 30, 1996 and 170,295 shares of Common
Stock issuable upon exercise of options granted October 14, 1996 under the
Company's stock option plan and 544,546 shares issuable upon the exercise of
outstanding warrants.
DILUTION
The net tangible book value of the Company at September 30, 1996 was
$2,097,734 or $0.70 per share of Common Stock ($0.64 per share including in
Common Stock the shares of Common Stock issuable on conversion of the Series AA
Preferred.) Net tangible book value per share is equal to the Company's total
tangible assets (total assets less intangible assets) less total liabilities
divided by the number of shares of Common Stock outstanding. After giving effect
to (i) the sale by the Company of the 1,750,000 Units offered hereby at an
assumed initial public offering price of $8.00 per share and the receipt of the
estimated net proceeds therefrom (after deducting underwriting discounts and
commissions and other estimated offering expenses payable by the Company and
attributing no portion of the value of a Unit to the Warrant) and (ii) the
conversion of the Series AA Preferred, the net tangible book value of the
Company at September 30, 1996 would have been $14,437,734 or $2.88 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $2.24 per share to the existing stockholders (including the holders of Series
AA Preferred) and an immediate dilution of $5.12 per share to new investors, as
illustrated by the following table:
<TABLE>
<S> <C> <C>
Public offering price per share....................................... $ 8.00
Net tangible book value per share before the offering............... $ 0.70
Net tangible book value per share before offering, adjusted for
conversion of Series AA Preferred................................. $ 0.64
Increase per share attributable to new investors.................... 2.24
---------
Net tangible book value per share after the offering.................. 2.88
---------
Dilution per share to new investors................................... $ 5.12
---------
---------
</TABLE>
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below with respect to the
Company's consolidated statements of operations for the years ended December 31,
1995 and 1994, and the Company's consolidated balance sheet at December 31,
1995, are derived from consolidated financial statements of the Company included
elsewhere in this Prospectus that have been audited by Ernst & Young, LLP,
independent auditors, and are qualified by reference to such consolidated
financial statements and notes related thereto. The consolidated statements of
operations for the nine months ended September 30, 1996 and 1995 have been
derived from unaudited consolidated financial statements of the Company and
include all adjustments, consisting of only normal recurring adjustments, that
the Company considers necessary for a fair presentation of the results of
operations for these periods. The selected consolidated financial data set forth
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------------
1994 1995 1995 1996
------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $ 4,616 $ 8,927 $ 6,692 $ 7,007
Cost of Services............................................ 3,162 5,394 3,974 5,223
Selling, general and administrative expenses................ 1,053 2,435 1,732 1,765
------------- ---------- ---------- ----------
Income from operations...................................... 400 1,098 986 19
Other expense............................................... 394 612 462 473
------------- ---------- ---------- ----------
Income (loss) before income tax benefit..................... 6 486 524 (454)
Income taxes(1)............................................. 0 444 417 130
------------- ---------- ---------- ----------
Net income (loss)........................................... $ 6 $ 42 $ 107 $ (583)
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
Net income (loss) per common share(2)....................... $ (.01) $ .00 $ .03 $ (.25)
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
Weighted average shares outstanding......................... 2,418,792 2,493,603 2,489,537 2,523,790
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................................. $(3,295) $(2,021 )
Total assets............................................................... 10,788 12,451
Total liabilities.......................................................... 9,508 10,353
Total stockholders' equity................................................. 1,279 2,098
</TABLE>
- ------------------------
(1) Represents provision for French income taxes payable on income of Twinsys
during 1995 and the nine months ended September 30, 1996, which totaled
$1,127,000 and $354,000, respectively. North American operations incurred a
loss for the period, thereby reducing income for the period on a
consolidated basis.
(2) Net income (loss) per common share is computed by dividing net income
(loss), after reduction for preferred stock dividends, by the weighted
average number of common shares and common share equivalents outstanding
during each of the periods presented. Options and warrants to purchase stock
and convertible preferred stock are not included as common stock equivalents
because their effect is antidilutive.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of
Results of Operations and Financial Condition" below and in "Risk Factors," "Use
of Proceeds" and "Business" includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, and is subject to the safe harbor created by those sections. Factors that
realistically could cause results to differ materially from those projected in
the forward-looking statements are set forth in "Management's Discussion and
Analysis of Results of Operations and Financial Condition" below and in "Risk
Factors."
OVERVIEW
Strategia Corporation provides disaster recovery, consulting, information
processing and outsourcing services to users of medium- and large-scale
computers in North America and Europe. Its clients include large and
medium-sized organizations, including government agencies, universities, health
care providers, financial institutions, manufacturers and telecommunications
firms.
The Company has sought to expand the range of computer services it can offer
to customers in recent years, as its historic business has contracted. Since its
inception in 1984, the Company has specialized in offering disaster recovery
services to operators of large-scale data centers, including alternate site
processing for Bull computer systems and contingency planning consulting.
However, the number of large data centers using Bull computer systems in North
America has decreased from approximately 700 in 1986 to approximately 100 in
1996, largely due to the "migration" of data centers to other computer systems.
As a result, the Company's revenues from its historic business base have
declined significantly in recent years. The Company has offered backup services
for certain IBM computer systems since 1993, and began in February 1995 to offer
Bull backup services in France, where the number of data centers using Bull
computers is much larger than in North America. The Company plans to open an
operations center and to offer Bull backup services in the United Kingdom within
the next twelve months. In 1996, the Company began to market data center
outsourcing and millennium services. Demand for millennium services, however, is
likely to diminish significantly after 2000.
Revenue from disaster recovery backup and contingency planning services
represented approximately 95% of the Company's revenue in 1995. Twinsys
generated approximately 65% of the Company's total service revenues in 1995 and
approximately 73% during the nine months ended September 30, 1996. Revenue from
alternate site processing is typically generated under multi-year contracts and
is recognized ratably over the life of the contract. The Company's contingency
planning services are rendered for a fixed fee, based on estimated hours
required at each participating consultant's hourly rate, and revenue is
recognized at the time the services are performed. Outsourcing revenue is
generated under contracts at a specified monthly fee. Millennium consulting
services will be offered on a fixed fee basis, while technical assessment and
code conversion charges will be based upon the number of lines of program code.
Millennium testing services will be charged at a per hour rate based on the
equipment needed to test the client's system.
Most of the Company's current cost structure is fixed. Cost of services
relates mainly to computer and peripheral lease and maintenance expenses,
facility lease, maintenance and utility expenses, and data communication costs.
Personnel expenses, such as salaries and wages, along with employee benefit
costs, are also largely fixed.
Gross margins for the Company's computer backup and outsourcing businesses
depend upon volume of service because the costs of these services are largely
fixed. Margins are also affected by depreciation and estimated useful life of
computer equipment. If the useful life of equipment continues after the
equipment is depreciated, margins will typically increase. If the useful life of
equipment ends before it is
15
<PAGE>
depreciated, margins will typically decrease. Depreciation on equipment
currently installed at the Louisville facility has largely been completed.
Assuming no purchases of additional equipment, depreciation expenses on
equipment of Twinsys are expected to peak in 1997 and would decrease thereafter.
See "--Twinsys Assets Acquisition." Increased competition has also tended to
reduce margins on Bull backup contracts negotiated in the last two years. An
affiliate of Bull began offering backup services in 1994 in the United States,
representing the first significant competition the Company has faced in the
North American Bull backup market in several years. Competition for IBM backup
contracts has continued to be intense, which tends to keep margins tight.
Gross margins for contingency planning depend and millennium services are
expected to depend primarily on the productivity of the Company's technical and
consulting staff. Most of the Company's contingency planning projects are priced
on a fixed fee basis depending on the estimated staff hours to complete the
project. Therefore, the profitability of an individual project depends on
completing the project within the budget. In addition, productivity is based
upon the number of billable personnel, billing rates, and the number of hours
billed per day.
General, administrative and selling expenses consist primarily of the
salaries and benefits paid to the Company's marketing and administrative
personnel and benefits, travel, promotions and trade show expenses, offices
expenses and other general overhead costs. As a result of its plan to offer a
wider range of computer services, the Company expects these costs to increase in
absolute terms. However, the Company anticipates that these costs will remain
stable or decrease slightly as a percentage of total revenue. Whether these
expenses actually do stabilize or decrease as a percentage of revenue depends on
the Company's ability to generate revenue from its new computer service
offerings and the productivity of its marketing and administrative staff.
Other expenses relate primarily to finance charges associated with capital
leases for computer and peripheral equipment as well as funds borrowed from a
shareholder. The Company expects to reduce its finance costs by reducing or
eliminating certain capital lease obligations or refinancing them at lower
rates. There can be no assurance that the Company will be able to procure less
expensive sources of financing for these obligations. In addition to interest
payable in cash on the principal balance of the shareholder loan, upon each
90-day renewal of the term of the loan, the Company issues 1,000 shares of
Common Stock to the shareholder for each $100,000 of outstanding principal on
the loan. See "Certain Transactions." The value of the shares issued during the
nine months ended September 30, 1996 totaled $80,000. The shareholder loan was
renewed as of October 7, 1996, and the value of the shares issued as of that
date totaled $56,000, which will be recorded as interest expense during the
fourth quarter of 1996. The Company intends to use $800,000 in offering proceeds
to repay the shareholder loan. See "Use of Proceeds."
The Company's results of operations for 1995 and 1996 include a provision
for French income taxes on the income of Twinsys. The Company's North American
operations incurred losses for these periods, thereby reducing income for the
periods on a consolidated basis. The Company has net operating loss carry
forwards available for U.S. federal and state income tax purposes and,
accordingly, paid no U.S. income taxes for 1994 and 1995. At December 31, 1995
and 1994, the Company had net operating loss carry forwards of $3,340,000 and
$2,873,000, respectively, for federal income tax reporting purposes. The Company
has recognized a valuation allowance on a portion of its deferred tax assets due
to the uncertainty of realizing the benefits thereof. The use of these carry
forwards to offset future income is subject to limitations under Section 382 of
the Internal Revenue Code.
TWINSYS ASSETS ACQUISITION
In February 1995, Twinsys, the newly formed French subsidiary of the
Company, paid $200,000 to acquire certain assets of Twinsys, SA ("TSA"), a
Paris, France disaster recovery provider then in bankruptcy proceedings under
French law, and DKI, an affiliate of TSA. Twinsys acquired (i) the lease to the
office space that housed one of the two former TSA data centers; (ii) certain
tangible fixed assets of TSA
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and DKI valued at approximately $260,000; and (iii) intangible assets of TSA of
negligible value. As a condition to court approval of the transaction, Twinsys
agreed to provide backup services without charge to former TSA customers who had
prepaid for these services and to assume approximately $65,000 of accrued
vacation liabilities to former employees of TSA who became Twinsys employees.
The Company financed the acquisition of the TSA assets and provided initial
working capital to Twinsys with $500,000 in funds borrowed from a shareholder.
See "Certain Transactions."
Twinsys commenced operations in February 1995 with no revenue-producing
contracts in effect and no lease arrangements in place for the computer
equipment required to operate a backup services business. Twinsys' operating
results during 1995 and 1996 are principally the result of Twinsys' success in
entering into contracts with new subscribers, including a substantial number of
the former customers of TSA, and in negotiating new computer leases at rates
substantially less than the rates previously paid by TSA.
Twinsys did not succeed TSA as a party to TSA's contracts with its
customers. As a result, the bankruptcy decree effectively terminated the former
TSA customers' obligations under those contracts, and the former TSA customers
became free to subscribe for computer backup services with any vendor they
chose. During the first three quarters of 1995, Twinsys was able to negotiate
and enter into new backup services arrangements with more than 30 former TSA
customers as well as several new clients.
Similarly, Twinsys did not assume any rights or obligations under any leases
for the computer equipment present at the TSA data centers. Twinsys planned to
(and ultimately did) negotiate new leases for necessary computer equipment at
substantially lower rates than would have been payable under the TSA leases. The
equipment owners were also willing to allow Twinsys to operate the equipment
present at the data center while negotiations were underway, during which time
Twinsys was not obligated to make lease payments. In negotiating new client
contracts, Twinsys committed to certain equipment upgrades to meet the backup
requirements of some of its larger clients. To meet the commitment, Twinsys
leased a large new computer system effective April 1, 1996. See "Results of
Operations--For the Nine Months Ended September 30, 1996." Many of the 1995
leases will terminate in 1997, and the Company anticipates that Twinsys'
equipment costs will increase after new leases are negotiated and take effect.
Depreciation expenses on currently installed equipment are expected to peak in
1997 and decrease thereafter. See "Overview."
Because Twinsys commenced operations effective as of February 1, 1995, the
Company's consolidated financial statements and other financial information
contained in this Prospectus include only eleven months of combined operations
with Twinsys during 1995. See Note 3 of Notes to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The Company reported revenue of $7,007,000 for the nine months ended
September 30, 1996, an increase of $316,000 or 4.7% from the comparable period
in 1995. The Company reported net losses of $583,000 for the nine months ended
September 30, 1996, after reporting net income of $107,000 for the comparable
period in 1995. The net loss for the nine months ended September 30, 1996 was
affected by the addition of new computer equipment by Twinsys in April 1996 and
by a nonrecurring charge to operations of approximately $117,000 to reflect a
judgment rendered in September 1996 by a French court in a lawsuit by a former
employee of Twinsys.
For the first nine months of 1996, Twinsys accounted for approximately 73%
of consolidated service revenue. Twinsys' revenues increased by approximately
19% for the nine months ended September 30, 1996 compared to the comparable
period in 1995, when Twinsys operated for only eight months. See Note 3 of Notes
to Consolidated Financial Statements. Backup service revenue for the Company's
North American operations decreased by approximately 30% during the nine months
ended September 30, 1996,
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compared to the same period in 1995. Bull backup service revenue decreased
significantly due to the expiration of the Company's then largest contract on
June 1, 1995, and increased competition. The expired contract generated
approximately 9% of the Company's revenue during the first nine months in 1995.
Revenues receivable under the Company's new contract with this customer
decreased significantly due to the customer's reduced backup service
requirements. See "--Liquidity and Capital Resources." Since 1994, an affiliate
of Groupe Bull has offered backup services to Bull computer users in North
America, representing the first competition the Company has faced in this market
in several years. Increased competition has and can be expected to continue to
reduce margins on new Bull backup contracts as the Company's backup contracts
expire and new contracts are negotiated. IBM backup service revenue grew by 23%
for the nine months ended September 30, 1996 compared to the same period in
1995, but was more than offset by the decrease in Bull backup service revenue.
Consulting service revenue for the nine months ended September 30, 1996
decreased by 57% over the comparable period in 1995. The Company's consulting
services are not recurring, and therefore significant changes in these revenues
can occur from year to year. The Company began marketing data center outsourcing
services in December 1995, completing its initial contract during the second
quarter of 1996. Two new outsourcing contracts are expected to commence during
the fourth quarter.
The Company's operating expenses for the nine months ended September 30,
1996 increased to $6,988,000, an increase of $1,282,000 or 22% compared to the
same period in 1995. The increase is principally due to higher maintenance and
depreciation expenses that Twinsys began to incur in April 1996. Twinsys'
operating expenses were lower in 1995, when Twinsys operated largely with
equipment previously leased to TSA. Twinsys was able to negotiate substantially
lower lease payments for this equipment following TSA's bankruptcy. Beginning in
April 1996, Twinsys was obligated to obtain additional computer equipment to
meet the backup requirements of some of its largest customers, resulting in
higher depreciation and maintenance expenses and consequently, smaller margins.
Maintenance and depreciation expenses for Twinsys are expected to remain at
approximately current levels through 1997. The cost of services for North
American operations decreased approximately 13% in 1995 principally from
reductions in Bull computer equipment lease and maintenance costs. Selling,
general and administrative expenses were $1,765,000 for the nine months ended
September 30, 1996, a 1.9% increase compared to $1,732,000 for the same period
in 1995. These expenses had increased throughout 1995 due primarily to the
addition of personnel and marketing expenses for Twinsys. Although the costs for
establishing and coordinating Twinsys' technical, sales and administrative
procedures are expected to decrease in 1996, selling, general and administrative
expenses are expected to increase for the year as the Company increases its
marketing and technical staffs in North America and Europe in anticipation of
increased demand for millennium services. Professional fees attributable to
Twinsys are also expected to be lower in 1996. Legal fees are likely to be
higher for the year as the result of litigation in the United States that was
settled during the third quarter.
Interest expense increased to $488,000 for the nine months ended September
30, 1996, a $24,000 or 4.8% decrease compared to the same period in 1995.
Interest expense for Twinsys totaled $230,000 for the nine months ended
September 30, 1996, and is related mainly to capital leases for computer
equipment. Interest expense in North America, which is principally related to
capital leases for computer equipment and debt incurred to establish and provide
working capital for Twinsys, decreased by approximately 18% compared to the same
period in 1995.
The provision for income taxes totaled $130,000 for the nine months ended
September 30, 1996, due to French income taxes on income of Twinsys. No income
tax benefits can be recognized currently for U.S. operating losses, but these
losses are available to offset any future U.S. taxable income.
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company reported revenue of $8,927,000 and $4,616,000 for 1995 and 1994,
respectively. The Company reported net income of $42,000 for 1995 after
reporting net income of $6,000 in 1994. The
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increase in revenue and net income in 1995 is attributable entirely to the
commencement of operations by Twinsys effective on February 1, 1995. Twinsys
contributed net income of approximately $750,000 in 1995, which offset the net
loss incurred by the Company's North American operations during the year.
Consolidated service revenue increased by $4,312,000 or 93.4% during 1995.
Twinsys accounted for approximately $5,800,000 or 65.0% of consolidated service
revenue for the year. Backup service revenue for the Company's North American
operations decreased 54% in 1995. Bull backup service revenue decreased
significantly due to the expiration of the Company's then two largest contracts
during the first six months of 1995 and increased competition. The expired
contracts together generated approximately 42% of the Company's revenue in 1994.
The Company entered into a new contract with one of these customers but for
significantly lower revenue due to the customer's reduced backup service
requirements. See "--Liquidity and Capital Resources." IBM backup service
revenue grew by 23% in 1995, but was more than offset by the decrease in Bull
backup service revenue. Consulting service revenue for 1995 increased by 63%
over 1994, but was offset by non-recurring outsourcing revenue in 1994 from peak
load processing.
The Company's operating expenses for 1995 increased by 85.7% to $7,829,000
for 1995 from $4,215,000 in 1994, primarily due to the addition of Twinsys.
Twinsys' operating expenses totaled $4,403,000 in 1995 and consisted mainly of
lease and maintenance expenses for its facility and computer equipment, as well
as personnel costs. The cost of services for North American operations decreased
by approximately 13% in 1995 principally from reductions in Bull computer
equipment lease and maintenance costs. Selling, general and administrative
expenses increased 131.2% to $2,435,000 for 1995 from $1,053,000 in 1994.
Twinsys accounted for $1,451,000 or 59.6% of these expenses in 1995, which
relate largely to personnel and marketing expenses. Legal and accounting fees
increased in 1995 as a result of the acquisition and initial startup of
operations by Twinsys. Interest expense totaled $657,000 and $396,000 for 1995
and 1994, respectively. Interest expense for Twinsys totaled $240,000 or 36.5%
and is related mainly to capital leases for computer equipment. Interest costs
in North America increased approximately 5% principally as a result of debt
incurred by the Company to acquire assets and provide working capital for
Twinsys.
The provision for income taxes totaled $444,000 for 1995, due to French
income taxes resulting from income of Twinsys. No income tax benefits can be
recognized currently for U.S. operating losses, but these losses are available
to offset any future U.S. taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's consolidated current liabilities
exceeded current assets by $2,021,000. The principal resources available to
reduce the Company's liquidity deficiency are monthly revenues payable under its
backup service contracts. Backup services revenue for the Company's customers
are generated in most cases under multi-year contracts that typically provide
predictable revenue streams. These contractual revenues, though not recorded on
the Company's balance sheet, will be available to help meet the Company's
liabilities as recorded at September 30, 1996. In September 1996, the Company
raised gross proceeds of $1,200,000 in a private placement of Common Stock and
warrants to purchase Common Stock. Net proceeds from the sale of those shares
and warrants were used to reduce the Company's accounts payable and for general
working capital needs.
Income generated by Twinsys has provided a significant, positive impact upon
the consolidated cash flow of the Company. However, the timing and amount of
cash transfers between Twinsys and the Company are subject to rules governing
dividend payments by French subsidiaries of multi-national corporations, as well
as practical considerations. The Company assesses the working capital needs of
its North American and European operations periodically and determines
appropriate allocations of cash throughout the year.
The Company's computer equipment is expected to meet the technological
requirements of current and prospective backup services customers in North
America and Europe without the need for any
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additional material capital expenditure during 1996. Twinsys financed its
acquisition of computer equipment needed for the backup requirements of some of
its largest customers through a capital lease obligation totaling approximately
$2,000,000. Twinsys is also expected to incur increased equipment expense in
1997 as leases negotiated in 1995 begin to expire and new leases take effect. To
the extent that additional computer hardware is required to meet the terms of
future contracts for data center outsourcing or millennium testing services, the
Company intends to finance the acquisition of such equipment from contract
revenues whenever possible, and the proceeds of this offering.
The Company intends to use the net proceeds of this offering to fund
increases in marketing and technical personnel needed to support the initial
growth of its millennium services business. The Company believes that the
addition of new customers for millennium services as well as for outsourcing,
backup, and consulting services will enable the Company to generate sufficient
cash from operations to finance its working capital requirements for the next
year and reduce its working capital deficit. To the extent that amounts from
these sources are insufficient to finance the Company's working capital
requirements, the Company will be required to raise additional funding through
equity or debt financing. There can be no assurance that such financing will be
available on terms acceptable to the Company, and if available, such financing
may result in further dilution to the Company's shareholders and higher interest
expense. See "Risk Factors--History of Losses and Need for Additional Working
Capital."
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net cash provided by operating activities decreased to $2,187,000 during the
nine months ended September 30, 1996 compared to $2,613,000 in 1995. The net
change was due to the net loss incurred during this period in 1996 and the
decrease in deferred revenue. A large amount of backup service billing occurred
at Twinsys during the initial months of operations in 1995 that was reflected in
the deferred revenue balance. In addition, the net increase in deferred income
taxes was only $15,000 at September 30, 1996 compared to $292,000 at September
30, 1995.
Net cash used in investing activities was $273,000 in 1996 compared to
$647,000 in 1995. Expenditures for property and equipment were higher in 1995
largely due to the establishment and initial capitalization of Twinsys in
February 1995.
Net cash used in financing activities was $720,000 in 1996 compared to
$1,662,000 in 1995. The use of cash for principal payments on the Company's
capital leases were comparable for these two periods. However, the cash used in
financing activities in 1996 was significantly offset by the proceeds of a
private placement of securities in September 1996. See "Certain Transactions."
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net cash provided by operating activities was $2,707,000 in 1995 and
$772,000 in 1994. The increase was due to increases in depreciation and
amortization, as well as increases in deferred revenue, accrued expenses, and
accounts payable. These increases were partially offset by a decrease in
accounts receivable.
Net cash used in investing activities was $693,000 in 1995 and $43,000 in
1994. The increase was principally due to the establishment and initial
capitalization of Twinsys in February 1995. The purchase of certain assets of
TSA in bankruptcy proceedings and the purchase of computer equipment associated
with the commencement of operations by Twinsys, were the primary investment uses
of cash in 1995.
Net cash used in financing activities was $1,952,000 in 1995 and $665,000 in
1994. During 1995, the Company was required to renegotiate all computer
equipment capital leases in France. These new leases, along with the existing
capital leases at Strategia, resulted in a large increase in principal payments
on these leases during 1995. These increased payments were partially offset by
proceeds from a shareholder loan.
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BUSINESS
INTRODUCTION
Strategia Corporation provides disaster recovery, consulting, information
processing and outsourcing services to users of large-scale computer systems in
North America and Europe. For twelve years the Company has specialized in
assisting business organizations and government agencies prepare for and avert
the consequences of unknown, unplanned interruptions in data processing. The
Company has provided its services to more than 200 large and medium-sized
organizations in diverse industries. During the next several years the Company
expects to devote substantial resources to assisting clients in preparing for
and implementing the conversion of their computer systems to allow those systems
to function without interruption on and after January 1, 2000, which is often
referred to as the "Year 2000 problem."
The Company has provided alternate site processing to users of large-scale
Bull (formerly Honeywell) computers in North America since 1984, and to users of
IBM computers in North America since 1993. In February 1995, the Company formed
Twinsys Dataguard, SA in Paris, France, and began offering contingency planning
services and alternate site processing to users of Bull and Unix-based computer
systems in Europe. The Company plans to open an operations facility in the
United Kingdom and to offer these services to users of Bull and Unix-based
systems in the United Kingdom within the next twelve months. Clients are
entitled to use the Company's data centers in Louisville, Kentucky and Paris,
France if the client's data center is rendered inoperable as a result of natural
disaster, fire, sabotage or other emergency. The Company's contingency planning
consulting services assess a client's vulnerability in the event of an unplanned
interruption of data processing and assist the client in preparing a contingency
plan to allow critical business functions to resume as promptly as possible.
Millennium services, which assist a client to assess the magnitude of its
Year 2000 problem and convert its applications to function without disruption in
2000, represent a natural extension of the Company's historic contingency
planning and information processing services. The Company believes the expertise
and familiarity with client systems that it expects to develop through Year 2000
conversions would strengthen its capability to provide outsourcing, application
and systems reengineering, and other information management services after 2000.
INDUSTRY BACKGROUND
DISASTER RECOVERY SERVICES
Disaster recovery services are intended to reduce a business or government
organization's vulnerability to unanticipated interruptions of critical
information processing functions. The day-to-day operations of most business and
government organizations require immediate and continuous access to their
information processing system. In many cases, the failure of such systems or
critical aspects thereof, even for short periods of time, can affect vital
corporate or government functions, with potentially critical losses to the
organization and its clients or constituents. Such dependence on the computer
system makes organizations vulnerable to catastrophic losses if their
centralized information processing operations are significantly interrupted as a
result of natural disasters, fire, sabotage, strike, long-term power outage,
explosion, or other unanticipated event.
Contingency planning consulting services assist an organization in assessing
the impact a prolonged interruption of information processing could have on
critical operations. They also assist the organization's information services
personnel in developing a contingency plan for resuming normal information
processing functions as soon as possible after interruption. Often the
contingency plan provides for the resumption of processing in alternate
processing facilities maintained by a third party provider. The organization
contracts with the alternate site provider to have access to a fully equipped
and operational data center with full telecommunications capability (a "hot
site") if its internal processing is interrupted. The contract generally
provides a certain amount of testing time in which the provider's technical
personnel and the
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client's information services staff can test the compatibility of the
organization's applications with the back-up system under various disaster
scenarios.
The Company provides contingency planning consulting services to North
American and European organizations of various sizes, in diverse industries and
using a wide variety of computer systems. The Company also provides alternate
site processing to users of large-scale Bull and IBM computer systems in North
America, and Twinsys offers the same service to users of Bull and Unix-based
systems in Europe. Twinsys offers its services for Unix-based systems through a
majority owned subsidiary in which the other shareholders are officers of
Twinsys. See "Certain Transactions." Although the number of Bull installations
in North America is limited, the number is much greater in Europe, where the
Company believes significant opportunities for growth remain. The Company
believes that its knowledge of client systems and applications gained in
providing contingency planning and back-up services, as well as the Company's
reputation for customer service, provide valuable advantages in marketing
millennium and outsourcing services.
MILLENNIUM SERVICES
THE YEAR 2000 PROBLEM. Throughout most of the history of computer use by
business and government organizations, data storage was severely limited both by
the storage media themselves and by access speed considerations. Accordingly,
for several decades, computer programs and programmers typically encoded years
using a two-digit format (e.g., "96" for "1996") rather than a complete
four-digit format. The use of a two-digit date format makes it impossible to
distinguish between dates in different centuries. Programs asked to process a
date after the year 2000 may interpret the date as 100 years earlier than the
intended date (e.g. 1905 for 2005), may go to an arbitrary default date such as
1980, may fail to process the date or may fail altogether. Even if the
particular program will accommodate a 21st century date, it may be unable to
communicate that date to other programs with which it must interact. As the year
2000 approaches, many of these computer programs have begun to operate
inaccurately or fail altogether due to their inability to properly interpret
dates after 1999.
The complexity of the Year 2000 problem arises from the volume of
programming changes required, the interdependence of systems in exchanging data
and the lack of standardization in the way date fields have been encoded in
different programs. Date dependent applications are prevalent in the information
systems used by most organizations. Until recently, organizations have been able
to perform specific tasks that rely on dates after 1999 (e.g., computing
payments on long-term mortgages) by using stand alone Year 2000-compliant
applications, modifying small amounts of computer code, or manipulating data.
Such solutions are not practical as the percentage of an organization's
applications encountering dates after 1999 increases. Because a single
application can potentially corrupt the organization's entire information
network by passing on noncompliant data, resolving the Year 2000 problem
requires individually identifying and analyzing all applications and systems
used by the organization. An organization's systems can include internally
developed custom mainframe programs and a large number of newer applications
from multiple sources, leading to an absence of standards among highly
integrated and interdependent applications. Changes to applications may require
a corresponding change to data used by the application. Computer hardware and
operating systems generally include date-dependent programs or processing
functions that can be similarly affected.
The Year 2000 problem will affect not only data processing functions but
also process control applications. For example, applications such as traffic
regulation, building environmental control, and factory automation commonly vary
or change programs by date. While these systems typically are not affected by
the Year 2000 problem today (because they typically have no need to process
dates substantially in the future) as the millennium approaches, many of them
will have to be reprogrammed to allow them to function after 2000.
The extensive reliance of large business and government organizations upon
computer-based information systems may make it essential for business and
government organizations to assess and resolve their
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Year 2000 problem within the next three years to continue critical functions
without interruption. Many organizations will be required to analyze and modify
their current systems because it is unlikely that they can abandon substantial
portions of their current systems and complete the transition to new Year
2000-compliant computer systems in the limited time remaining. In addition to
problems arising in its own systems, an organization may be indirectly affected
by the date-dependent computer programs and databases used by other
organizations. For example, suppliers may have software applications that are
directly integrated with a retailer's information processing applications.
The Year 2000 problem has already begun to appear in applications that
incorporate future dates which now extend beyond 2000, and is expected to appear
with greater frequency as the Year 2000 approaches. For example, THE WALL STREET
JOURNAL reported that it must manually process subscriptions for readers whose
subscriptions extend beyond 1999. Another organization's computer began deleting
account records of active customers because it was programmed to eliminate
accounts that showed four or more years of inactivity. For that, it added four
years to the date of the last transaction and compared that to the current date.
If the customer had a transaction in 1996, the computer figured the account
expired in 1900. Similarly, in 1995 the inventory control system for a food
processing company incorrectly ordered that food with a five-year shelf life be
dumped. The computer calculated the food's shelf life had expired 95 years
earlier. Due to the prevalence and interdependence of date dependent
applications in complex control systems, the failure of date dependent
applications could lead to widespread disruption of financial transactions,
telecommunications, utilities and other systems.
THE MARKET. Estimates of the world-wide cost of resolving the Year 2000
problem by computer industry analysts have ranged as high as several hundred
billion dollars over the next three and one-half years, based on an estimated
cost of approximately $1.00 per line of computer code. In July 1996, J.P. Morgan
Securities, Inc. published what it described as "a very conservative estimate"
of $200 billion. While the accuracy of such estimates is acknowledged to be
subject to question because so little reliable data is available to support
them, the consensus view is that the Year 2000 problem will be large enough to
be a substantial factor in the computer service industry for the next several
years.
The Company believes that organizations will attempt to resolve the Year
2000 problem both by using internal programming resources and seeking outside
help from millennium services providers, as well as by eliminating or replacing
some programs or equipment. A substantial number of organizations are expected
to choose to engage a millennium services provider to manage some or all of
their conversion project because completing an internal project within the next
three years would require substantial increases in technical personnel as well
as expertise that few internal staffs have. Some analysts have suggested that
the magnitude of the Year 2000 problem and the limited time in which to
implement a solution may cause demand for millennium services to exceed the
availability of qualified providers.
Industry analysts and government regulatory agencies have emphasized the
importance of adequate testing of converted applications because of the need to
have compliant systems operating no later than January 1, 2000. For this reason,
these sources have estimated that organizations will spend a substantial portion
of their Year 2000 budgets on testing services. Because the Company has
extensive experience in operating complex computer systems and operates fully
functional data centers not already burdened with near full-capacity use
requirements, it believes that it will be well positioned to offer testing
services on a competitive basis.
OUTSOURCING
Business organizations are transferring information processing functions to
outside vendors with increasing frequency as a result of strategic, financial,
operational, and technological factors. The shift in recent years towards
client/server based computer applications, the dispersion of processing into
networks, rapidly advancing and changing technology, and the tendencies of
businesses to "mix and match" new hardware and software applications from a
variety of sources have increased the complexity of the
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information systems of most organizations. At the same time, budgetary and
staffing constraints brought about by increasing competitive pressure have
limited the resources available to manage and operate information systems. Many
organizations have found it cost-effective to use outside vendors to manage
information issues such as compatibility of applications, customizing
applications for specialized uses (reengineering), monitoring advances in
technology, and managing technological obsolescence. As a greater portion of
information processing resources are being directed toward specialized
technologies and applications for particular revenue generating activities,
information managers are focusing on reducing the costs of operating older
"legacy" mainframe systems that often remain in use for recordkeeping and other
traditional business functions. Organizations often find they can reduce costs
by outsourcing legacy system operations, either permanently or during the
transition to other computer systems or to client/ server applications. By
outsourcing, an organization may be able to devote more resources to business
development and other strategic functions rather than more routine functions and
to take advantage of the efficiencies in personnel, systems maintenance, and
software licensing costs offered by a vendor who operates legacy systems for
multiple clients.
The Company believes that during the next several years, organizations using
Bull computers in North America will continue to consider other information
processing arrangements in response to changing technologies and limitations on
financial and human resources. These could include migrating to new
technologies, reengineering customized mainframe operating systems and
applications to operate on open systems, or turning over the operation of the
legacy Bull systems to an outsourcer, either permanently or during migration to
a newer technology. This anticipated trend is expected to present an opportunity
for the Company to shift its focus in the North American Bull market from
providing lower margin computer backup services to higher margin outsourcing
services.
EUROCURRENCY CONVERSION
Organizations with substantial operations in Europe may face a conversion
problem similar to the Year 2000 problem. The decision in December 1995 by the
European Community to adopt a single currency will, if implemented, cause
business organizations and government agencies to modify their applications and
databases so as to accommodate the new currency references and calculations. It
is currently contemplated that beginning on January 1, 1999, currency conversion
rates will be stated, and settlements between banks must be conducted, in
Eurocurrency units. If plans for adopting Eurocurrency remain unchanged, the
Company anticipates that many organizations would elect to modify both the date
fields and the currency fields incorporated into their software and hardware in
a single conversion project.
STRATEGY
The Company's strategy is to use the computer consulting and operational
expertise developed over more than a decade as a leading computer disaster
recovery specialist to become a leading provider of millennium services and a
wide range of other outsourcing and information processing services to existing
and new clients in both North America and Europe. Key elements of this strategy
include the following:
CAPITALIZE ON EXISTING MARKET KNOWLEDGE AND CUSTOMER
RELATIONSHIPS. The Company has provided contingency planning and
backup services to more than two hundred diverse organizations
since its inception. Clients include multinational manufacturers,
national and international financial institutions,
telecommunications companies, health care providers, utilities,
airlines, investment banking firms, insurance companies, city,
state, and federal government agencies, and universities. Several
clients have already made preliminary inquiries to the Company
regarding the Year 2000 problem. The Company believes that its
reputation and relationships with its clients can be used to
establish and expand its millennium services business. The Company
also plans to target industries such as insurance, financial
services, health care, and higher education where many
organizations have already budgeted funds for Year 2000 conversion
projects.
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DISTINGUISH THE COMPANY AS A FULL SERVICE PROVIDER OF
MILLENNIUM SERVICES. As a disaster recovery specialist for twelve
years, the Company has developed methodologies for analyzing and
operating information systems under a variety of adverse
scenarios. The Company intends to market this expertise, which
enables the Company to provide the full range of services
typically necessary to manage an organization's entire Year 2000
project, including the critical testing component. Industry
analysts as well as federal banking regulatory agencies have
publicly emphasized the need for adequate testing of Year 2000
conversions. Unlike most millennium services consultants who offer
assessment and conversion services with only limited testing, the
Company has the experience and facilities to test a client's
entire converted system under realistic operating conditions.
USE CURRENT PROJECTS TO VALIDATE THE COMPANY'S METHODOLOGY AND
ENHANCE MARKET PRESENCE. The Company is currently conducting
pilot programs on a no-charge basis for two U.S. clients and one
French client to assess the impact and magnitude of their Year
2000 problem using the Company's millennium services methodology
and software conversion tools from several vendors. Subsequent
services provided to these clients, if any, are expected to be on
a chargeable basis. The projects have given the Company an
opportunity to refine and validate its approach and to analyze the
effectiveness of different conversion tools on a portfolio of
computer code, while providing value to the clients. The
assessment phase for both U.S. clients is near completion, and
both clients have requested and received proposals for the code
conversion and compliance testing phases of their projects.
Participation in actual Year 2000 conversion projects may enhance
the Company's presence in the market if the number of computer
services vendors offering millennium service increases as expected
during the next several months.
ESTABLISH REGIONAL FACILITIES TO TEST CONVERSIONS BY
ORGANIZATIONS CONDUCTING IN-HOUSE CONVERSIONS AND OTHER MILLENNIUM
PROVIDERS. As more organizations reach the testing phase of their
Year 2000 conversions and demand for testing increases, the
Company plans to open and operate high capacity testing facilities
throughout North America and Europe, where the conversion can be
tested under realistic operating conditions to ensure compliance
before converted applications are integrated into the client's
system. In addition to using these facilities to test the
Company's own conversion projects, the Company plans to market
conversion testing as a separate service to millennium consulting
firms with limited testing capability and to organizations
undertaking in-house conversion projects.
EXPAND SERVICES IN EUROPE. The Company intends to expand its
presence in Europe by offering millennium and Eurocurrency
conversion services through Twinsys. Twinsys' clients include
telecommunications and technology corporations, financial
institutions, and national and local government agencies, which
provide an established base of prospective clients for millennium
and conversion services. The Company also plans to open a remote
computing facility in the United Kingdom during the next twelve
months, which would enable it to offer backup services to users of
Bull and Unix-based computer systems in the UK. The Company
believes its millennium methodology can be readily adapted to
Eurocurrency conversion projects that organizations with
operations in Europe are expected to undertake if plans to adopt a
single European currency are implemented.
EXPAND OUTSOURCING, SOFTWARE CONVERSION AND RE-ENGINEERING
CAPABILITIES. The Company plans to actively market its
outsourcing services to current clients and other
25
<PAGE>
Bull and IBM users. During the next several years, many Bull users
are expected to consider alternatives to operating legacy systems
based on Bull mainframe computers. The Company's familiarity with
the Bull market and its knowledge of client information processing
systems would be advantages in developing this potential base of
outsourcing business. Over the longer term, the expertise gained
as result of its millennium and Eurocurrency projects may enhance
the Company's strategy to provide a wide range of outsourcing and
other computer services to its clients beyond 2000. The
methodology developed for millennium and Eurocurrency conversion
projects can be adapted for future software conversion and
re-engineering projects. The Company believes that opportunities
to expand its outsourcing services in the United States and its
disaster recovery services, particularly in Europe, will continue
after 2000.
COMPANY SERVICES
DISASTER RECOVERY SERVICES
The Company provides contingency planning consulting services to users of
IBM, Bull, and other computer systems. The Company employs full-time consultants
certified by the Disaster Recovery Institute in St. Louis, Missouri. Contingency
planning includes an assessment of the vulnerability of the client's business
operations to unanticipated interruptions of critical data processing functions,
including recommendations to minimize both the probability of occurrence and the
cost of those potential data processing disruptions and the loss or destruction
of critical records. The Company will also assist in designing a recovery plan
to structure procedures for restoration of all organizational functions as well
as information processing capabilities, for replacement of needed supplies and
equipment, and for the division of staff responsibilities. The Company provides
these consulting services either on a fixed price or hourly basis.
Alternate site processing subscribers are entitled to immediate use of the
Company's IBM, Bull or Unix-based computer systems in the event of a disaster,
together with all required peripheral, communications, and support equipment.
Use of certain peripheral and support systems and offices space is included in
the basic service level, and additional peripheral equipment is available at
higher levels of service at additional cost. If a disaster occurs, the client
may process at the hot site for specified periods. Pricing levels of client
contracts depend on the amount of capacity on the large-scale Bull, IBM, and
UNIX computers to be made available to the customer and the particular
configuration of the peripheral and communications equipment needed. Subscribers
are also entitled to a certain amount of testing time at the Company's hot sites
where the Company's technical personnel work with the client's information
services staff to ensure the compatibility of the organization's applications
with the back-up system under various disaster scenarios.
The Company typically stores copies of its clients' operating system and
other operational software at its hot site. The Company typically does not store
client data, which the client typically backs up at another location and brings
to the Company's site for testing or in the event of disaster. Upon receipt of
notice of a possible disaster from a client, Company personnel install the
client's operating software and otherwise prepare the site for operation. Actual
data processing operations at the hot site are conducted by client personnel,
who are also responsible for providing and installing the client's data.
Depending on client requirements and geographic and technical constraints, a hot
site can be fully operational within as little as several hours.
MILLENNIUM SERVICES
The Company's millennium services include identification and analysis of the
magnitude of a client's potential Year 2000 problem, conversion of software date
fields, and testing the performance of the converted software at the Company's
data centers. The Company will offer these services separately or together for
organizations that prefer a turnkey solution for their entire Year 2000 project.
26
<PAGE>
The Company is currently conducting Year 2000 pilot projects for a
manufacturing firm, a state university, and a French bank. Each of the projects
involves the preparation of both an impact and alternatives analysis and
magnitude assessment (as described below) on a no-charge basis using the
Company's proprietary millennium services methodology and software tools from
several vendors. The projects have given the Company an opportunity to refine
and validate its approach, while providing value to the client. Another
objective of the pilot projects has been to analyze the effectiveness of
different software tools in converting a portfolio of sample code according to
the specifications contained in the Company's methodology. The assessment phases
of the pilot projects for both U.S. clients have been completed, and both have
requested and received follow-on proposals for code conversion and compliance
testing which, if accepted by the client, would be provided on a chargeable
basis.
IMPACT AND ALTERNATIVES ANALYSIS. If requested, the Company will initially
conduct an impact and alternatives analysis to assess the scope of the client's
Year 2000 problem. This process is intended to give senior management a clearer
understanding of the organization's operational and financial risks in order to
make informed decisions about resolution. For more than ten years, the Company
has been conducting substantially similar impact and alternatives analyses for
organizations as part of its disaster recovery business. The Company has
developed a proprietary methodology for determining the consequences to an
organization of losing certain business functions from an unplanned interruption
in data processing. Assessments based on the Company's methodology are conducted
by its staff of full-time consultants. The Company's methodology is well suited
for assessing the consequences of any organization's Year 2000 problem.
The impact and alternatives assessment initially identifies critical
planning issues such as lead times, technology and personnel requirements, and
estimated costs. The Company's consultants then work with the organization's
technical personnel to analyze the organization's operating systems, utilities,
third party products, and network environments in order to identify exposures
and assess alternatives for each application. The analysis will address the Year
2000 issues and risks specific to the organization, including the importance of
certain business applications, related liabilities, and costs and benefits of
various Year 2000 compliance alternatives.
MAGNITUDE ASSESSMENT. The Company will conduct a detailed analysis of an
organization's application portfolio, data, and application interfaces in order
to permit selection of the optimal conversion strategy for the organization. The
Company's consultants will use software and hardware tools best suited to the
organization's systems to conduct this analysis. The process involves
identification of date fields, data, and program source codes requiring
modification; examination of interdependencies of applications, platforms and
standards; evaluation of potential problems arising from inconsistent data
definitions and field naming conventions, the use of multiple synonyms and hard
coded date values; and the development of appropriate conversion techniques. The
analysis describes the number of applications affected, states the total lines
of code to be converted, and estimates the hours, computer hardware, software,
and personnel necessary to complete the conversion. In appropriate
circumstances, the Company may subcontract with another vendor, probably one
having developed a proprietary software tool, for all or a portion of this
assessment.
CODE CONVERSION. First, the Company will assist the organization to develop
a comprehensive conversion plan. The plan will prioritize the conversion
sequence, define the conversion approach, and direct critical elements of the
conversion such as unit testing, bridging converted applications to non-
converted applications, and managing changes. Second, all programs and data will
be systematically converted according to the plan. Following the conversion, the
converted code will be validated.
The Company intends to execute most conversion projects through arrangements
with third party conversion specialists, using automated conversion software
whenever possible, although the Company will maintain some internal code
conversion capability. The number of conversion projects the Company can
undertake may depend on the development of effective automated conversion
products that can convert
27
<PAGE>
large volumes of code without substantial human involvement and in accordance
with the specifications set out in the Company's methodology. The costs of
software conversion products range from tens of thousands to several hundred
thousand dollars. One objective of the Company's ongoing pilot projects is to
evaluate the performance of different conversion software products on a
portfolio of sample applications.
An alternative approach is to set up or contract with a conversion "factory"
where a large staff of programmers manually explores each line of code,
identifies a date field, and converts it. However, this alternative has, in the
Company's view, significant disadvantages. The staffing requirements of this
approach have led to concerns that a shortage of qualified personnel may
develop. Millennium services providers who rely on labor intensive conversion
methods may not have the capacity to complete a significant number of conversion
projects before 2000 without significantly expanding their facilities and
personnel. The availability of "factory" conversion capacity would therefore be
a constraint on the number of conversions projects the Company could accept. In
addition, the Company believes there is a much higher risk that a converted
application will be not be internally uniform, and therefore more likely to
fail, when converted manually by dozens of different programmers due to the
greater difficulty in adhering to conversion disciplines.
The Company has identified and is evaluating many providers of millennium
services and software tools. Should a particular tool prove to offer significant
advantages in cost, speed, and effectiveness of conversion for a specific
portion of the Company's clientele, the Company may consider entering into an
alliance or other relationship with the tool vendor that might increase the
Company's capacity to complete conversion projects in a timely manner. The
Company is negotiating an agreement with one such vendor, which would give the
Company an exclusive right to use the vendor's tool to convert applications on
Bull systems. Because the Year 2000 problem has only recently been the subject
of serious management planning, most of the tools expected to be used in such
conversions are currently in development, and none has an established history of
successful use. Accordingly, there can be no assurance that the Company will
have access to effective software tools or that it will not have to resort, to
an extent not now contemplated, to manual conversion processes.
COMPLIANCE TESTING. Industry analysts as well as federal banking regulatory
agencies have publicly emphasized the importance of adequate testing of Year
2000 conversions because of the need to have compliant systems operating no
later than January 1, 2000. The number and complexity of interrelated
applications typically involved in a business or government organization's
information system, as well as the critical nature of a substantial number of
these applications to the conduct of the business or government function,
increase the importance of thorough testing before the organization relies on
converted applications. The Company believes that few millennium service
providers have the capacity or capability to provide full application testing,
much less full data center load testing. Consultants frequently rely on the
client's staff to supplement their lack of experience in the operation of large
data centers, large and complex applications systems, and advanced
telecommunications networks. These providers may depend on the client to conduct
full-system testing of the modified code. However, most organizations operate
their large data centers at near 100% capacity and with the smallest possible
staffing, so they may not have the time, the excess computer capacity or the
staff necessary to adequately test their conversions under realistic operating
conditions. These constraints may also force an organization to attempt to
convert, test, and reintegrate only a portion of its applications at a time.
This "piecemeal" approach significantly extends the length of a conversion
project. It may also require the time-consuming design and construction of
"bridge" programs to coordinate converted and unconverted applications, which
may interfere with the day-to-day functioning of the organization's critical
systems.
As an alternative to the inefficient piecemeal approach, the Company's
testing services will enable organizations to test their entire converted system
at one time, thus reducing the length and complexity of both the conversion and
testing processes. After testing is successfully completed, the client can
install the converted and tested applications on its system at one time. The
Company has operated data centers since 1984 and, as part of its customary
disaster recovery services, has assisted its clients in conducting hundreds
28
<PAGE>
of tests of their applications. The Company's methodology involves a variety of
new and proprietary testing scenarios designed specifically to expose Year 2000
problems under realistic operating conditions. Clients will have the opportunity
to conduct rigorous full-system testing at one of the Company's dedicated
testing centers during a short, intensive period using the Company's proprietary
testing methodology and with support from the Company's technical staff.
The Company's testing services will be offered both as part of a
comprehensive conversion project, as well as a separate service. Potential
clients for testing services include millennium consultants with limited testing
capability as well as organizations that undertake their own in-house conversion
projects. As demand increases, the Company intends to establish temporary
testing centers in several metropolitan areas dedicated exclusively to testing.
The Company's testing centers will be located in temporary facilities and will
operate readily available used computer equipment, which the Company's current
staff will install and maintain.
OUTSOURCING
The Company provides data center outsourcing to users of Bull and IBM
computer systems in North America from its Louisville, Kentucky data center.
Depending on client preferences, the Company can operate a client's older
"legacy" computer systems on a permanent basis or during a transition to a new
computing platform. The Company can also provide temporary capacity during
seasonal peak load periods (for example, for a retailer during the holiday
shopping season). As its client base grows, the Company plans to operate one or
more data centers dedicated exclusively to outsourcing, which can be equipped
with readily available used equipment and opened in a relatively short period.
The Company completed its first data center outsourcing contract in the
second quarter of 1996. The Company operated a client's large scale Bull system
from the Louisville data center during the last several months of the client's
migration to a new system. As part of the transaction, the Company acquired the
Bull system at nominal cost. Two new outsourcing contracts are expected to
comence during the fourth quarter of 1996.
The Company can also assume other information management functions that
organizations may elect to outsource. Systems re-engineering, for example,
converts applications developed internally for a legacy system for use in more
versatile "open systems." Applications can also be customized for specialized
business functions. The Company's consultants will also analyze all of an
organization's hardware and software to resolve issues of compatibility and
scaleability and coordination with core legacy system applications.
SALES AND MARKETING
The Company currently maintains marketing personnel in both North America
and Europe. The Company's marketing staff is organized into separate divisions
for disaster recovery, millennium services, outsourcing, and technical services.
Divisions are organized into teams comprised of an industry analyst and multiple
project managers. Industry analysts have responsibility for understanding the
computing environment and special needs of industries targeted by the Company.
Project managers supervise projects for individual clients, managing the
client's internal staff and any participating third party vendors through the
entire project. The Company plans to increase the number of teams in the near
future to accommodate expected demand for millennium services. The Company
relies on its marketing staff to generate new clients as well as to pursue
potential leads. To this end, the staff is encouraged to engage in direct
marketing techniques, including visits to businesses within targeted industries.
The Company's disaster recovery marketing strategy is to focus on industries
where reliance on information technology and consequently the need for backup
services are increasing. In particular, the Company plans to focus on the health
care industry, where the Company has already assisted several providers in
preparing contingency plans, and awareness of the need for disaster recovery
arrangements in
29
<PAGE>
general is increasing. The Company also plans to expand the base of potential
disaster recovery clients by offering new services to reflect changing recovery
needs of organizations as a result of changes in information technology. The
Company plans to add new equipment and upgrade certain of its computer systems
when cost-effective to increase its capacity for interconnecting with a greater
variety of wide and limited area networks.
The Company's millennium services marketing strategy is to increase
recognition of Strategia Corporation as a provider of millennium services as
well as a wide range of computer services. Whenever possible, the Company
intends to capitalize on relationships with past and present customers and
vendors where its contingency planning and operational expertise as well as its
traditional emphasis on customer service may provide a competitive advantage.
As part of its millennium services marketing strategy, the Company intends
to distinguish itself by emphasizing two advantages. First, the Company has the
capacity to execute all phases of a client's conversion project, including the
critical testing phase that few other millennium consultants can provide.
Second, the methodology for designing and implementing a plan for resolving the
Year 2000 problem is substantially similar to that historically used by the
Company to plan for unanticipated interruptions of information processing.
The Company intends to focus initially on both (i) its historic base of
clients and (ii) industries such as insurance, financial services, health care,
government and education, which are already encountering Year 2000 problems and
have committed funding for a resolution. The Company plans to capitalize on its
familiarity with the computing environment of these industries and the
relationships it has established in providing contingency planning services to
insurance, financial services, health care, and educational clients to obtain
millennium and outsourcing business.
When feasible, the Company also plans to explore strategic alliances with
other computer-related suppliers and vendors such as hardware lessors,
maintenance suppliers, outsourcers and limited service millennium providers. For
example, in a venture with a millennium conversion software developer, the
Company could provide impact evaluation and testing while leaving technical
analysis and conversion to its partner. The Company plans to place special
emphasis on its testing services, where it can accommodate a large volume of
high margin testing work in addition to testing the conversion projects it
manages.
The Company's outsourcing marketing strategy will initially focus on
increasing awareness among its disaster recovery clients and among Bull and IBM
data center operators in general that the Company now provides outsourcing
services. In particular, the Company plans to pursue opportunities to provide
outsourcing services if, as expected, users of Bull systems in North America
continue to consider migrating to different computers or otherwise change their
information systems and technologies. The Company believes its familiarity with
client systems and reputation may provide an advantage with this prospective
base of outsourcing customers. The Company also expects that the knowledge of
client systems it acquires through Year 2000 conversion projects will assist in
identifying and developing outsourcing prospects.
CLIENTS
The largest group of the Company's clients are business organizations that
operate large scale Bull computer systems. The Company's IBM clients are
generally medium to large business organizations that back up a limited number
of critical data processing functions. The Company has also prepared and updated
contingency plans for several clients throughout the past twelve years. Twinsys'
customer base includes multi-divisional corporations, regional financial
institutions, and national and local government
30
<PAGE>
agencies, which generally operate large data centers. Representative clients
including the following organizations:
<TABLE>
<CAPTION>
TRANSPORTATION PUBLIC UTILITIES EDUCATION
- ----------------------------------- ------------------------------------ ------------------------------------
<S> <C> <C>
Air Canada Indiana Gas Company *Pennsylvania State University
RATP (Paris Transit Authority) Montana-Dakota Utilities *Rutgers University
*Santa Clara County *Oklahoma Gas & Electric *University of Louisville
Transit District Dayton Power & Light *University of Tennessee
<CAPTION>
FINANCE HEALTHCARE MANUFACTURING
- ----------------------------------- ------------------------------------ ------------------------------------
<S> <C> <C>
School Employees *Bethesda Hospital, Inc. Domino Sugar
Retirement System of Ohio *Blue Cross Blue Shield of MA General Electric
The Ohio Company HCL Hospices Civils de Lyon Rubbermaid, Inc.
<CAPTION>
INSURANCE TELECOMMUNICATIONS GOVERNMENT
- ----------------------------------- ------------------------------------ ------------------------------------
<S> <C> <C>
Settlers Life Insurance US West Smithsonian Institution
*Integon France Telecom U.S. Dept. of Commerce
Secura Insurance Mecklenburg County
OTHER
------------------------------------
Investors Heritage Life (Charlotte, NC)
Insurance Underwriters' Laboratories *Florida Dept. of
Guaranty National Insurance Fred Meyer, Inc. Transportation
Company Pioneer Grain Company, Ltd.
</TABLE>
- ------------------------
* Contingency planning clients.
During 1995 and 1996 the Company and Twinsys provided services to
approximately 170 clients. During 1995, France Telecom and its affiliated
divisions, together accounted for $2,471,000, or 27.7%, of the Company's
consolidated revenue. The Company's ten largest clients in 1995 accounted for
approximately 55.6% of revenue. Most of the Company's contracts with its
alternate site processing clients are for multi-year terms. The loss of any of
the major clients of Twinsys or the Company could materially or adversely affect
the Company's business, operating results and financial condition.
COMPETITION
The markets for the Company's computer services are highly competitive. The
primary competitive factors are availability of equipment and facilities, price,
service, the expertise and experience of the provider's personnel, and the
ability of such personnel to provide the skills and knowledge necessary to solve
information processing problems. The Company believes that its emphasis on
customer service, its experience in contingency planning and data center
operations, and, with respect to millennium services, its ability to offer the
critical testing component, may distinguish its services from those of its
competitors.
The potential size of the market for millennium services is currently
uncertain. Estimates as to the magnitude of the Year 2000 problem, if accurate,
suggest that demand for millennium services could increase substantially as the
time for organizations to implement conversion projects decreases. If such
demand develops, it could mitigate the impact of competition among millennium
vendors by providing a market of sufficient size to take up available capacity.
At the same time, an increase in demand for millennium services on the order of
magnitude predicted by some experts could place a strain on industry capacity to
meet the demand. In that event, competition for millennium services could depend
primarily on access to qualified service providers, effective software tools,
testing capacity and other elements of the supply process.
31
<PAGE>
The principal millennium consulting service providers are Data Dimensions,
Inc., Computer Horizons Corp., ISSC (a subsidiary of IBM), and Cap Gemini
America, Inc. Principal outsourcing providers include Electronic Data Systems
Corporation, Computer Sciences Corporation, ISSC, Fiserv, Inc., Keane, Inc., The
Bisys Group, Inc., and Integris, a subsidiary of Groupe Bull. Principal IBM
disaster recovery providers are IBM, Comdisco Disaster Recovery Services, and
SunGard Recovery Services Group. The principal competitor for Bull disaster
recovery is Integris. Most of the Company's competitors are more established,
benefit from greater name recognition, and have substantially greater financial,
technical and marketing resources than the Company. With respect to consulting
services, and millennium services in particular, there are no significant
proprietary or other barriers to entry into the business other than the need for
technical expertise. As a result, there can be no assurance that competitors
will not develop methodologies that gain more market acceptance than the
Company's methodology. Entry into disaster recovery services and data center
outsourcing involves the acquisition of substantial amounts of computer hardware
to equip data centers plus the technical expertise to operate large scale
computer systems, which reduces the likelihood that new competitors will enter
these fields.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of the methodologies
developed for use in its millennium services, computer backup, and contingency
planning businesses. The Company does not have any patents and relies upon a
combination of trade secret, copyright and trademark laws, contractual
restrictions to establish and protect its ownership of its proprietary
methodologies. The Company generally enters into non-disclosure and
confidentiality agreements with its employees, independent sales agents, and
clients. Despite these precautions, it may be possible for an unauthorized third
party to replicate the Company's methodologies or to obtain and use information
that the Company regards as proprietary.
As the number of competitors providing computer services similar to the
Company increases, the possibility of overlapping methodologies used in such
services will become more likely. Although the Company's methodologies have
never been the subject of an infringement claim, their can be no assurance that
third parties will not assert infringement claims against the Company in the
future, that assertion of such claims will not result in litigation, or that the
Company would prevail in such litigation, or would be able to obtain a license
for the use of any infringed intellectual property from a third party on
commercially reasonable terms. Furthermore, litigation, regardless of its
outcome, could result in substantial costs to and diversion of effort by the
Company. Any infringement claim or litigation against the Company could,
therefore, materially and adversely affect the Company's business, operating
results and financial condition.
PERSONNEL
As of September 30, 1996, the Company had 21 full-time employees in its
North American operations, including 6 persons in marketing, 10 persons on its
consulting and technical staff, and 5 persons in management and administration.
The Company had 12 full-time employees in its European operations in Paris,
France. These employees include 4 persons in marketing, 4 persons on its
technical staff, and 4 persons in management and administration.
PROPERTIES
The Company's corporate offices and its North American computer center are
located at 10301 Linn Station Road, outside Louisville, Kentucky. They are
housed in a two-story, 27,900 sq. ft. building on approximately two acres, which
the Company owns subject to mortgages. The offices of Twinsys and its 1,000
square meter computer center are located in leased space in a commercial office
building in Paris, France. The current term of the lease expires December 31,
1999.
32
<PAGE>
The equipment at the Company's Louisville, Kentucky facility is both owned
and leased. The data center contains an IBM 3090-600 class system, four
large-scale Bull systems consisting of a DPS 8000/82, a DPS 8000/83, a DPS 90/94
and a DPS 8/70, and two DPS 6 minicomputers. The Company also has various
peripherals, support equipment, office furniture, and office equipment.
Substantially all of the equipment at Twinsys' Paris, France facility is
leased. The data center contains six large-scale Bull computer systems
consisting of a newly introduced Escala system, a DPS 9000/92 system, three DPS
7000 systems and a DPS 6000 system, as well as several UNIX-based systems.
Twinsys also has various peripherals, support equipment, office furniture, and
office equipment.
The Company's payments due under its capital leases for its computer
equipment, and its current operating leases for equipment and facilities are set
forth in Notes 6 and 13 of Notes to Consolidated Financial Statements.
LEGAL PROCEEDINGS
The Company is a party in certain routine legal proceedings incidental to
its business. Management believes, after discussion with legal counsel, that the
ultimate resolution of these proceedings will not have a material adverse impact
on its financial status.
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company and their ages as of September 30,
1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- --------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Richard W. Smith................. 42 President and Director
James P. Buren................... 57 Executive Vice President -- Technology and Director
John P. Snyder................... 57 Secretary and Director
John A. Brenzel.................. 56 Director
Roland Esnis..................... 30 Directeur Generale, Twinsys
Francois Domine.................. 30 Sales and Marketing Manager, Twinsys
Bernard Lesne.................... 53 Technology Manager, Twinsys
Dewey D. Minton.................. 41 Manager, Finance and Administration
</TABLE>
Richard W. Smith has been President and a director of the Company since its
inception in September 1984. Mr. Smith previously served as General Manager of
PDW Computer Systems, Inc., which markets computer systems.
James P. Buren has been Executive Vice President-Technology and a director
of the Company since its inception in September 1984. From 1980 to 1984, Mr.
Buren was President and sole shareholder of Buren & Company, Inc., a data
processing consulting firm.
John P. Snyder has been a director of the Company since November 1984 and
Secretary since 1985. During the past five years, Mr. Snyder has served as
President and Chairman of EPI Corporation, which currently operates 20 nursing
homes.
John A. Brenzel, a director of the Company since November 1984, is a
business consultant. From January 1991 until June 1994, Mr. Brenzel was
President and Chief Executive Officer of Commonwealth Bank & Trust Company,
Middletown, Kentucky. From 1984 to 1990, he was Chairman and Chief Executive
Officer of Shelby County Trust Bank, Shelbyville, Kentucky.
33
<PAGE>
Roland Esnis has been Directeur Generale of Twinsys since August 1995, after
having held marketing positions with Twinsys and TSA since July 1993. Mr. Esnis
held marketing positions with Systar, a software company, from November 1991 to
June 1993 and with the disaster recovery division of Telesystemes, a computer
services affiliate of France Telecom, from January 1990 to November 1992.
Francois Domine has been Sales and Marketing Director of Twinsys since
August 1995. He has held marketing positions with Twinsys, TSA and a TSA
subsidiary since 1992, and previously with the disaster recovery division of
Telesystemes from February 1990 to November 1992.
Bernard Lesne has been Technology Manager of Twinsys since August 1995, and
has held sales and operations positions with Twinsys and TSA since December
1993. From 1990 to 1993, Mr. Lesne served as Manager of SSIG, a French disaster
recovery services provider. Mr. Lesne previously served for 27 years in various
sales, operations and technical positions with Groupe Bull.
Dewey D. Minton has served as Manager, Finance and Administration of the
Company since December 1988. He previously served as Corporate Comptroller of
Ransdell Surgical, Inc., a medical equipment company, from 1986 to 1988, and as
a senior manager with KPMG Peat Marwick from 1977 to 1986. Mr. Minton is a
certified public accountant.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation earned for each of the
last three fiscal years by the Company's chief executive officer and its
executive officers whose total salary and bonus exceeded $100,000 during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
--------------------------------------- COMPENSATION
OTHER ANNUAL -------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK OPTIONS#
- --------------------------------- ---- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Richard W. Smith, ............... 1995 $ 103,500 $ 28,437 $6,000 25,000
President 1994 99,000 366 6,000 0
1993 99,000 0 6,000 0
James P. Buren, ................. 1995 $ 93,000 $ 14,788 $6,000 17,500
Executive Vice-President 1994 89,000 0 6,000 0
1993 89,000 6,335 6,000 0
</TABLE>
The Company currently does not have a retirement plan for its officers and
employees.
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table sets forth information relating to stock options granted
during 1995 to the Company's executive officers named in the summary
compensation table. The option exercise price is $1.375, which was the market
price of the Common Stock on October 1, 1995, the date of the grant.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS/ EXERCISE OR
UNDERLYING OPTIONS/ SARS GRANTED TO BASE PRICE EXPIRATION
NAME SARS GRANTED EMPLOYEES IN 1995 ($/SH) DATE
- ------------------------------------------------- ------------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Richard W. Smith................................. 25,000 58.8% $ 1.375 10/1/2005
James P. Buren................................... 17,500 41.2% $ 1.375 10/1/2005
</TABLE>
34
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL AND YEAR-END OPTION VALUES
The following table sets forth as of December 31, 1995 the value of
unexercised options granted to the Company's executive officers named in the
summary compensation table. In 1995, no options were exercised by either officer
under the Company's 1988 Stock Option Plan (the "1988 Plan"). The average of the
closing bid and asked price of the Common Stock on December 31, 1995 was $1.31
per share.
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT
TO UNEXERCISED OPTIONS VALUE OF
---------------------------- UNEXERCISED
NAME EXERCISABLE UNEXERCISABLE IN-THE-MONEY OPTIONS
- ---------------------------------------------------------- ------------- ------------- --------------------
<S> <C> <C> <C>
Richard W. Smith.......................................... 9,336 25,000 $ 788.54
James P. Buren............................................ 7,869 17,500 $ 539.50
</TABLE>
On October 14, 1996, the Company issued options to purchase a total of
170,295 shares of Common Stock under the 1988 Plan to the following officers of
the Company and Twinsys: Richard W. Smith-- 75,664 shares; James P.
Buren--64,631 shares; Roland Esnis--15,000 shares; and Francois Domine-- 15,000
shares. The options are exerciseable immediately at a price of $7.00 per share,
the fair market value on the date of grant. In addition, the Company modified
certain options issued to Mr. Smith and Mr. Buren on October 1, 1995 to make the
options exerciseable immediately.
DIRECTOR COMPENSATION
Under the 1988 Plan, nonemployee directors first elected after May 15, 1989
are awarded options for 2,500 shares of Common Stock on the May 15th following
election to the Board by the Company's shareholders, and each nonemployee
director in office on May 15, 1989 or May 15th of any succeeding year
automatically receives an option for 500 shares of Common Stock. The exercise
price for options granted to nonemployee directors is the fair market value of
the Common Stock on the date of grant, and options for approximately one-third
of the shares become exercisable on May 15th of each of the first three years
following grant. Options granted to nonemployee directors have a term of ten
years.
An automatic grant of options to acquire 500 shares of Common Stock at an
exercise price of $3.00 per share was granted to each of Mr. Brenzel and Mr.
Snyder under the 1988 Plan during 1996. No options were exercised in 1996.
Other than the issuance of stock options, the Company currently does not pay
its directors for attendance at regularly scheduled board meetings. The Company
may modify its director compensation policy upon completion of this offering.
35
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of October 11, 1996
with respect to the shares of Common Stock owned (i) by each person known to the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock (ii) by each of the Company's directors and executive officers, and (iii)
by all directors and officers as a group. As of October 11, 1996, there were
3,018,885 outstanding shares of Common Stock, which is the Company's only class
of voting shares. This table assumes that the over-allotment option granted to
the Underwriters has not been exercised and excludes 150,000 shares of Common
Stock issuable upon exercise of the Representative's Warrant. See
"Underwriting."
<TABLE>
<CAPTION>
PERCENT
DIRECTORS AND NUMBER OF
EXECUTIVE OFFICERS OF SHARES(1) CLASS(2)
- ----------------------------------- ------------- -------
<S> <C> <C>
John P. Snyder..................... 1,346,437(3) 40.8%
Richard W. Smith................... 216,425(4) 6.9%
James P. Buren..................... 194,379(5) 6.2%
John A. Brenzel.................... 83,044(6) 2.7%
Roland Esnis....................... 15,000(7) *
All current directors and officers
as a group (8 persons)........... 1,871,830(8) 52.3%
<CAPTION>
5% BENEFICIAL OWNERS
- -----------------------------------
<S> <C> <C>
H. Joseph Schutte
1410 Hadleigh Place
Louisville, KY40222.............. 279,780(9) 9.0%
EPI Corporation
9707 Shelbyville Rd.
Louisville, KY40223.............. 1,313,903(10) 40.0%
EPI Corporation,
John P. Snyder,
Max G. Baumgardner,
James E. Buchart,
J. Ben Cress,
Robert H. Loeffler,
Henry A. Schumpf,
Grace W. Wilkins
9707 Shelbyville Rd.
Louisville, KY40223.............. 1,524,585(10 (11) 45.6%
</TABLE>
- ------------------------
* Indicates less than 1%.
(1) Based on information furnished to the Company by the named person, and
information contained in filings with the Commission. Under the rules of the
Commission, a person is deemed to beneficially own shares over which the
person has or shares voting or investment power or has the right to acquire
beneficial ownership within 60 days. Except as otherwise noted, each person
or entity named in the table has sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.
(2) Shares of Common Stock subject to options or warrants that are or will
become exercisable within 60 days or are subject to issuance upon the
conversion of the Company's Series AA Preferred have been deemed outstanding
for computing the percentage of class of the listed person or the group, but
are not deemed outstanding for computing the percentage of class for any
other person.
36
<PAGE>
(3) Includes 1,313,903 shares of Common Stock beneficially owned by EPI
Corporation. (See footnote 8.) Mr. Snyder is President, a director, and the
largest single shareholder of EPI Corporation. Mr. Snyder shares voting and
investment power with respect to, and disclaims beneficial ownership of, the
shares owned by EPI Corporation, which are included once in the shares
beneficially owned by all directors and officers as a group. Mr. Snyder's
total also includes 2,500 shares subject to currently exercisable stock
options, 11,152 shares issuable upon the conversion of 2,788 shares of
Series AA Preferred, and 7,885 shares issuable upon the exercise of
warrants.
(4) Includes 110,000 shares subject to currently exercisable stock options,
14,840 shares issuable upon the conversion of 3,710 shares of Series AA
Preferred, 3,710 shares issuable upon the conversion of warrants, and 500
shares owned individually by Mr. Smith's wife.
(5) Includes 90,000 shares subject to currently exercisable stock options,
14,844 shares issuable upon the conversion of 3,711 Series AA Preferred and
3,711 shares issuable upon the exercise of warrants.
(6) Includes 2,500 shares subject to currently exercisable stock options, 7,420
shares issuable upon the conversion of 1,855 Series AA Preferred and 1,855
shares issuable upon the exercise of warrants.
(7) Includes 15,000 shares subject to currently exerciseable stock options.
(8) Includes 15,950 shares subject to currently exerciseable stock options held
by nonexecutive officers in addition to shares beneficially owned by the
five directors and executive officers listed in the table.
(9) Includes 29,744 shares issuable upon the conversion of 7,436 shares of
Series AA Preferred and 45,403 shares issuable upon the exercise of
warrants.
(10) Includes 108,660 shares issuable upon the conversion of 27,165 shares of
Series AA Preferred and 153,271 shares issuable upon the exercise of
warrants.
(11) Includes 1,692,221 shares of Common Stock beneficially owned by EPI
Corporation, for which the named individuals, as directors of EPI
Corporation, share voting and investment power. The individual members of
this group together own the majority of shares of EPI Corporation. Also
includes 142,116 shares issuable upon the conversion of 35,529 shares of
Series AA Preferred, 235,529 shares issuable upon the exercise of warrants,
2,500 shares issuable upon the exercise of options.
CERTAIN TRANSACTIONS
In 1992, EPI Corporation loaned $300,000 to the Company to finance the
Company's purchase of certain equipment to be installed in its computer center.
On January 17, 1995, EPI extended an additional $500,000 in credit under the
loan to assist in financing the Company's purchase of certain assets of TSA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Twinsys Assets Acquisition." The loan bears interest at an annual
rate of 1.5% above the "prime rate" as published in THE WALL STREET JOURNAL. The
current interest rate is 9.75%. The term of the loan is 90 days, and the loan
has been renewed for additional 90-day terms through January 5, 1997. The
Company granted a second mortgage on its real estate to EPI Corporation to
secure the loan. The preexisting first mortgage is held by a commercial bank.
The Company also issued 15,000 shares of Common Stock to EPI Corporation when
the loan was originally made in 1992, and has issued 1,000 shares of common
stock per $100,000 outstanding principal balance of the loan upon each renewal
of the loan for an additional 90-day term. John P. Snyder, a director of the
Company, is President, a director and the largest shareholder of EPI
Corporation.
On June 30, 1996, the Company issued a total of 64,546 shares of newly
authorized Series AA Preferred and a warrant to purchase one share of Common
Stock ("New Preferred Warrants") in connection with a plan to restructure
certain of its current obligations to founding shareholders and preferred
shareholders, including directors of the Company, EPI Corporation and certain of
EPI's directors. The Company issued one share of Series AA Preferred and a New
Preferred Warrant in payment
37
<PAGE>
of each $10.00 in outstanding principal and interest due on loans made in 1985
by founding shareholders, or a total of 23,427 shares in payment of $234,344 in
principal and interest on the shareholder loans. The interest rate on the
retired shareholder loans was 10% per year. The Company also issued one share of
Series AA Preferred and a New Preferred Warrant to holders of Series A Preferred
Stock ("Series A Preferred") in payment of each $10.00 of accrued, unpaid
dividends payable on the Series A Preferred, or a total of 6,952 shares in
payment of dividend obligations totaling $69,552 as of June 30, 1996. In
addition, the Company issued one share of Series AA Preferred and one New
Preferred Warrant in exchange for each of the 34,167 shares of Series A
Preferred outstanding as of June 30, 1996 and the warrant to purchase one share
of Common Stock that was originally issued with each Series A Preferred share
(an "Old Preferred Warrant").
By restructuring its preferred stock and shareholder loans, the Company
eliminated its outstanding obligations for accrued, unpaid dividends, reduced
the principal balance of loans from shareholders, and reduced the rate of
dividends and interest payable to shareholders in the future. As a result of
these transactions, the Company's preferred shareholders, who have provided
capital necessary for the expansion of the Company's business in past years,
effectively extended the period for converting their preferred stock and
exercising their warrants, and reduced the current exercise price per share on
their warrants. The Series AA Preferred provides for an annual dividend of 8%,
compared to 11.5% on the Series A Preferred. The Series AA Preferred, like the
Series A Preferred, is convertible into 4 shares of Common Stock for 5 years
after issuance. However, the conversion rights of the Series A Preferred would
have expired during December 1996 and January 1997, while the conversion rights
of the Series AA Preferred continue until June 30, 2001. The limitations,
preferences, and relative rights of the Series AA Preferred are otherwise
identical to those of the Series A Preferred. The New Preferred Warrant issued
with each share of Series AA Preferred, like the Old Preferred Warrant
accompanying the Series A Preferred, has initial exercise price of $2.50 per
share of Common Stock, which increases by $.50 per year to $4.50 per share
during the fifth year after issuance. However, the Old Preferred Warrants would
have expired at December 31, 1996, compared to the June 30, 1996 expiration date
of the New Preferred Warrant, and the current exercise price was reduced from
$4.50 to $2.50 per share.
In September 1996, the Company issued a total of 480,000 units comprised of
one share of Common Stock and a warrant to purchase one share of Common Stock at
a price of $3.75 per share (the "1996 Warrants") in a private placement. See
"Description of Securities--Warrants--Other Warrants." The offering price was
$2.50 per unit, and placement proceeds totaled $1,200,000. Directors, five
percent beneficial owners of Common Stock and their affiliates who purchased
units in the placement included John P. Snyder (5,097 units), EPI Corporation
(126,106 units), directors of EPI Corporation other than Mr. Snyder (12,409
units) and H. Joseph Schutte (37,967 units).
Effective as of July 1996, Twinsys began offering disaster recovery and
other services to users of Unix-based computer systems in France through Twin-X
SA, a newly organized subsidiary. Twinsys holds a 59.9% interest in Twin-X, and
Roland Esnis and Francois Domine, Directeur Generale and Sales Manager of
Twinsys, respectively, each holds an approximate 20% interest in Twin-X. Twinsys
and Messrs. Esnis and Domine made proportional cash contributions to Twin-X for
their respective interests in Twin-X.
38
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock and 2,000,000 shares of preferred stock, of which 100,000 shares
have been designated as Series A Preferred and 100,000 shares have been
designated as Series AA Preferred (together, the "Preferred Stock"). The
Articles authorize the Company's Board of Directors to direct the issuance of
the shares of Preferred Stock in one or more series from time to time and to fix
the preferences, limitations, and relative rights of each series, including
dividend rates, terms and conditions of redemption, rights upon liquidation, and
sinking fund provisions.
COMMON STOCK
As of October 11, 1996, there were approximately 3,018,855 shares of Common
Stock issued and outstanding. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders except the election of directors when cumulative voting is
mandatory under Kentucky law. Subject to preferences that may be applicable to
outstanding shares of Preferred Stock, if any, the holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors out of funds legally available therefor. Holders of Common
Stock have no preemptive, subscription or redemption rights, and there are no
redemption, conversion or similar rights with respect to such shares. The
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
As of October 11, 1996, 64,546 shares of Series AA Preferred were issued and
outstanding and none of the shares of Series A Preferred were issued and
outstanding.
SERIES AA PREFERRED
The Company pays a cumulative 8% dividend, payable quarterly, on the Series
AA Preferred. Each Series AA Preferred share is convertible into four shares of
Common Stock, an effective conversion price of $2.50 per share, through June 30,
2001. Series AA Preferred shares are redeemable at the Company's option at a
redemption price that decreases each year. The redemption price is $10.69 per
share during 1996, and decreases annually by $.115 per share to $10.00 per share
in 2002 and thereafter. Upon the liquidation, dissolution or winding up of the
affairs of the Company, holders of Series AA Preferred are entitled to receive
$12.50 per Series AA Preferred share, plus any accrued but unpaid dividends,
before any payment can be made to shareholders of Common Stock or any of the
Company's other securities, if any, junior to the Series AA Preferred. Holders
of Series AA Preferred have no voting rights except when required by law or if
accrued, unpaid dividends total more than $1.15 per outstanding share of Series
AA Preferred or another specified "event of default" occurs. Holders of Series
AA Preferred have a one-time right to register their shares for sale at the
Company's expense upon the demand of holders of 25% of the Series AA Preferred
shares, and "piggy-back" registration rights through June 30, 2001, subject to
certain limitations. The Company anticipates that the outstanding shares of
Series AA Preferred will be called for redemption following completion of this
offering, and that upon such call the holders of Series AA Preferred will elect
to convert their shares into shares of Common Stock.
SERIES A PREFERRED
Holders of Series A Preferred would be entitled to receive a cumulative
11.5% dividend, payable quarterly, on the Series A Preferred. In all other
respects, the preferences, limitations, and relative rights of the Series A
Preferred are substantially the same as those of the Series AA Preferred. On
June 30, 1996, each of the 34,167 shares of Series A Preferred previously issued
by the Company was exchanged for one share of Series AA Preferred.
39
<PAGE>
The Company is authorized to issue up to 1,800,000 additional shares of
undesignated Preferred Stock. The Board of Directors has the authority to issue
the undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock, as well as to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the shareholders. The Board of Directors, without
shareholder approval, may issue Preferred Stock with voting and conversion
rights that could materially adversely affect the voting power of the holders of
Common Stock. The issuance of Preferred Stock could also decrease the amount of
earnings and assets available for distribution to holders of Common Stock. In
addition, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. At present, the
Company has no plans to issue any shares of Preferred Stock.
WARRANTS
REPRESENTATIVE'S WARRANT
In connection with this offering, the Company has authorized the issuance of
the Representative's Warrant and has reserved 350,000 shares of Common Stock for
issuance upon exercise of such warrant (including the warrants issuable upon
exercise of the Representative's Warrant). The Representative's Warrant will
entitle the holder to acquire 175,000 Units at an exercise price of $ per
Unit. The Representative's Warrant will be exercisable at any time from the
first anniversary of the date of this Prospectus until the fifth anniversary of
the date of this Prospectus.
THE WARRANTS
Each Warrant will entitle the holder to purchase one share of Common Stock
at a price of $ per share. The Warrants will, subject to certain conditions,
be exercisable at any time until the fifth anniversary of the date of this
Prospectus, unless earlier redeemed. The Warrants are redeemable by the Company,
at $.25 per Warrant, upon thirty (30) days written notice, if the closing bid
price (as defined in the warrant agreement (the "Warrant Agreement") between the
Company and Chase Mellon Shareholder Services, as Warrant agent (the "Warrant
Agent") described below) per share of the Common Stock for the twenty (20)
consecutive trading days immediately preceding the date notice of redemption is
given equals or exceeds $ . If the Company gives notice of its intention to
redeem, a holder would be forced either to exercise his or her Warrant before
the date specified in the redemption notice or accept the redemption price.
The Warrants will be issued in registered form under the Warrant Agreement.
The shares of Common Stock underlying the Warrants, when issued upon exercise of
a Warrant, will be fully paid and nonassessable, and the Company will pay any
transfer tax incurred as a result of the issuance of Common Stock to the holder
upon its exercise.
The Warrants and the Representative's Warrant contain provisions that
protect the holders against dilution by adjustment of the exercise price. Such
adjustments will occur in the event, among others, that the Company makes
certain distributions to holders of its Common Stock. The Company is not
required to issue fractional shares upon the exercise of a Warrant or the
Representative's Warrant. The holder of a Warrant or the Representative's
Warrant will not possess any rights as a shareholder of the Company until such
holder exercises the Warrant or the Representative's Warrant.
A Warrant may be exercised upon surrender of the Warrant certificate
("Warrant Certificate") on or before the expiration date of the Warrant at the
offices of the Warrant Agent, with the form of "Election To Purchase" on the
reverse side of the Warrant Certificate completed and executed as indicated,
accompanied by payment of the exercise price (by certified or bank check payable
to the order of the Company) for the number of shares with respect to which the
Warrant is being exercised.
40
<PAGE>
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Commission and qualification in effect under
applicable state securities laws (or applicable exemptions from state
qualifications requirements) with respect to the issuance of shares or other
securities underlying the Warrants. The Company has agreed to use all
commercially reasonable efforts to cause a registration statement with respect
to such securities under the Securities Act to be filed and to become and remain
effective in anticipation of and prior to the exercise of the Warrants and to
take such other actions under the laws of various states may be required to
cause the sale of Common Stock (or other securities) upon exercise of Warrants
to be lawful. If a current registration statement is not in effect at the time a
Warrant is exercised, the Company may at its option redeem the Warrant by paying
to the holder cash equal to the difference between the market price of the
Common Stock on the exercise date and the exercise price of the Warrant. The
Company will not be required to honor the exercise of Warrants if, in the
opinion of the Company's Board of Directors upon advice of counsel, the sale of
securities upon exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants and
the Representative's Warrant is qualified in its entirety by reference to the
detailed provisions of the Warrant Agreement and the Representative's Warrant
certificate (the "Representative's Warrant Certificate"), the form of each of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
For the life of the Warrants and the Representative's Warrant, the holders
thereof have the opportunity to profit from a rise in the market price of the
Common Stock without assuming the risk of ownership of the shares of Common
Stock issuable upon the exercise of the Warrants. The Warrant holders may be
expected to exercise their Warrants at a time when the Company would, in all
likelihood, be able to obtain any needed capital by an offering of Common Stock
on terms more favorable than those provided for by the Warrants. Further, the
terms on which the Company could obtain additional capital during the life of
the Warrants may be adversely affected.
OTHER WARRANTS
In September 1996, the Company issued warrants to purchase a total of
480,000 shares of Common Stock at a price of $3.75 per share (the "1996
Warrants"). Subject to certain conditions, the 1996 Warrants will be exercisable
at any time until September 30, 2001 unless earlier redeemed. The 1996 Warrants
are redeemable by the Company, at $.25 per share of Common Stock subject to the
1996 Warrants, upon thirty (30) days written notice, if the closing bid price
per share of the Common Stock for the ten (10) consecutive trading days
immediately preceding the date notice of redemption is given equals or exceeds
$7.50. Holders of the 1996 Warrants have a one-time right to register the shares
issuable upon exercise of the 1996 Warrants for sale at the Company's expense
upon the demand of holders of 50% of the shares subject to the 1996 Warrants,
and "piggy-back" registration rights through September 30, 2001, subject to
certain limitations.
The Company has also issued a warrant to purchase one share of Common Stock
to the holder of each issued and outstanding share of Series AA Preferred (the
"AA Warrants"). The AA Warrants have a five-year term expiring on June 30, 2001.
The AA Warrants are exercisable initially at a price of $2.50 per share of
Common Stock, which price increases by $.50 per share annually to $4.50 per
share during the fifth year after issuance. Like the holders of Series AA
Preferred, holders of the AA Warrants have a one-time right to register their
shares for sale at the Company's expense upon the demand of holders of 25% of
the shares subject to the AA Warrants, and "piggy-back" registration rights
through June 30, 2001, subject to certain limitations.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain federal income consequences,
under current law, relating to the purchase and ownership of the Units and the
Common Stock and Warrants constituting the Units.
41
<PAGE>
The discussion is a summary and does not purport to deal with all aspects of
federal taxation that may be applicable to an investor, nor does it consider
specific facts and circumstances that may be relevant to a particular investor's
tax position. Certain holders (such as dealers in securities, insurance
companies, tax exempt organizations, foreign persons and those holding Common
Stock or Warrants as part of a straddle or hedge transaction) may be subject to
special rules that are not addressed in this discussion. This discussion is
based on current provisions of the Internal Revenue Code of 1986, as amended,
and on administrative and judicial interpretations as of the date hereof, all of
which are subject to change. ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THIS OFFERING, INCLUDING THE
APPLICABILITY OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
ALLOCATION OF PURCHASE PRICE
Each Unit as a whole will have a tax basis equal to the cost of the Unit.
The measure of income or loss from certain transactions described below depends
upon the tax basis in each of the Warrants and the Common Stock comprising the
Unit. The tax basis for each of the Warrants and the Common Stock will be
determined by allocating the cost of the Unit among the securities that comprise
the Unit in proportion to the relative fair market values of those elements at
the time of acquisition.
EXERCISE AND SALE OF WARRANTS
No gain or loss will be recognized by a holder of a Warrant on the purchase
of shares of Common Stock for cash pursuant to an exercise of a Warrant (except
that gain will be recognized to the extent cash is received in lieu of
fractional shares). The tax basis of Common Stock received upon exercise of a
Warrant will equal the sum of the holder's tax basis for the exercised Warrant
and the exercise price. The holding period of the Common Stock acquired upon the
exercise of the Warrant will begin on the date the Warrant is exercised and the
Common Stock is purchased (i.e. it does not include the period during which the
Warrant was held).
Gain or loss from the sale or other disposition of a Warrant (or loss in the
event the Warrant expires unexercised as discussed below), other than pursuant
to a redemption by the Company, will be capital gain or loss to its holder if
the Common Stock to which the Warrant relates would have been a capital asset in
the hands of such holder. Such capital gain or loss will be long-term capital
gain or loss if the holder has held the Warrant for more than one year at the
time of the sale, disposition or lapse. It is unclear whether the redemption of
a Warrant by the Company would generate ordinary or capital gain income.
SALE OF COMMON STOCK
The sale of Common Stock would generally result in the recognition of gain
or loss to the holder thereof in an amount equal to the difference between the
amount realized and such holder's tax basis in the Common Stock. If the Common
Stock constitutes a capital asset in the hands of the holder, gain or loss upon
the sale of the Common Stock will be characterized as long-term or short-term
capital gain or loss, depending on whether the Common Stock has been held for
more than one year.
EXPIRATION OF WARRANTS WITHOUT EXERCISE
If a holder of a Warrant allows it to expire without exercise, the
expiration will be treated as a sale or exchange of the Warrant on the
expiration date. The holder will have a taxable loss equal to the amount of such
holder's tax basis in the lapsed Warrant. If the Warrant constitutes a capital
asset in the hands of the holder, such taxable loss will be characterized as
long-term or short-term capital loss, depending upon whether the Warrant was
held for more than one year.
42
<PAGE>
REGISTRATION RIGHTS
The Representative's Warrant provides certain rights with respect to the
registration under the Securities Act of the 350,000 shares issuable upon
exercise thereof (including the warrants included therein). The Company has
agreed that during the entire period between the first anniversary and fifth
anniversary after the date of this Prospectus it will register the issuance of
such shares upon the exercise of the Representative's Warrant (and, if
necessary, their resale) so as to permit their public resale without
restriction. These registration rights could result in substantial future
expense to the Company and could adversely affect the Company's ability to
complete future equity or debt financings. Furthermore, the registration and
sale of Common Stock of the Company held by or issuable to the holders of
registration rights, or even the potential of such sales, could have an adverse
effect on the market price of the securities offered hereby.
CERTAIN STATUTORY AND ARTICLES PROVISIONS REGARDING LIMITATIONS OF LIABILITY OF
DIRECTORS
As permitted by the Kentucky Business Corporation Act (Chapter 271B of the
Kentucky Revised Statutes ("KRS")), the Company's Articles of Incorporation
include a provision that eliminates the personal liability of its directors for
monetary damages arising out of the director's breach of his fiduciary duty of
due care. Chapter 271B does not permit a corporation to relieve a director of
his or her liability, monetary or otherwise, for the following actions resulting
in harm to the corporation or shareholders: (i) for any transaction in which the
director has a personal financial interest in conflict with the financial
interest of the corporation or its shareholders; (ii) actions not taken in good
faith or the failure to act in good faith; (iii) actions involving the
intentional misconduct of a director; (iv) actions known by the director to
violate law; (v) actions involving an improper dividend or improper repurchase
of stock in violation of KRS 271B.8-330; and (vi) actions resulting in the
receipt of an improper personal benefit by the director. The limitations of
liability permitted by Chapter 271B extend only to the elimination of a recovery
of a monetary remedy and do not allow for the elimination of the duty of due
care that a director owes to a corporation. Shareholders may still seek
equitable relief, such as injunction, against an action of a director that is
inappropriate.
KRS 271B.8-510 permits the indemnification by a corporation of any director
who is made party to a threatened, pending or completed action, suit or
proceeding because he is or was a director of such corporation. To be eligible
for indemnification, such person must have acted in good faith and reasonably
believed that the conduct, if undertaken in an official capacity with the
corporation, was in the corporation's best interests, and, if not in an official
capacity, was at least not opposed to the corporation's best interests. In the
case of a criminal proceeding, the director must also not have reasonable cause
to believe his conduct was unlawful. A director may not be indemnified in
connection with a proceeding by or in the right of the corporation in which the
director was adjudged liable to the corporation or in connection with any other
proceeding charging improper personal benefit, whether or not involving action
in an official capacity, in which the director was adjudged liable on the basis
that a personal benefit was improperly received. Indemnification permitted under
271B.8-510 in connection with a proceeding by or in the right of the corporation
is limited to reasonable expenses incurred in connection with the proceeding.
Indemnification against reasonable expenses is mandatory when a director has
been wholly successful on the merits or otherwise, in the defense of any
proceeding to which the director was a party due to his or her position with the
corporation. A court of competent jurisdiction may also order indemnification if
the director is fairly and reasonably entitled thereto in view of all relevant
circumstances, whether or not the director met the applicable standard of
conduct or was adjudged liable to the corporation. Section 271B.8-560 of the Act
provides that a Kentucky corporation may indemnify its officers, employees and
agents to the same extent as directors.
The Company's Bylaws require that officers and directors be indemnified and
advanced expenses by the Company with respect to all threatened, pending or
completed actions, suits or proceedings arising
43
<PAGE>
from the director's or officer's conduct in his or her official capacity as an
officer or director of the Company to the extent permitted by the Kentucky
Business Corporation Act.
CERTAIN STATUTORY AND CHARTER PROVISIONS REGARDING CHANGE IN CONTROL.
Certain provisions of law and the Company's Articles of Incorporation, could
make more difficult the acquisition of the company by means of a tender offer, a
proxy contest or otherwise and the removal of incumbent officers and directors.
These provisions include: (i) authorization of the issuance of up to 2,000,000
shares of Preferred Stock, with such characteristics, and potential effects on
the acquisition of the Company, as are described in "Preferred Stock" above, and
(ii) application of the terms and conditions of the Kentucky Business
Combination Act ("KBCA") to certain mergers, asset sales and other transactions
defined as "business combinations" that involve the Company. These provisions
are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to negotiate first with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure the Company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. See "Risk Factors--Anti-Takeover
Effects of Certain Charter Provisions."
The Company's Articles of Incorporation provide that the Company will be
governed by the KBCA, which imposes certain restrictions on a "business
combination" involving a Kentucky corporation. "Business combinations" include
mergers, certain dispositions of assets, certain issuances and transfers of
securities, certain recapitalizations and reorganizations, as well as other
specified transactions involving a corporation and an interested shareholder. An
"interested shareholder" means any person, other than the corporation or any of
its subsidiaries, who is the beneficial owner, directly or indirectly, of 10% or
more of the corporation's voting shares, including through any entity or person
affiliated or associated with the interested shareholder.
The KBCA prohibits a business combination between a corporation and an
interested shareholder for five years from the date such person became an
interested shareholder unless the business combination is approved before the
date the interested shareholder became an interested shareholder by a majority
of the corporation's independent directors (i.e., directors who are not officers
or employees of the corporation nor affiliated or associated with an interested
shareholder or any of its affiliates). In addition, a business combination not
approved by a majority of the independent directors must either (a) be approved
by 80% of the corporation's outstanding voting shares and by two-thirds of the
voting shares held by shareholders other than the interested shareholder who (or
whose affiliate) is a party to the business combination, voting together as a
single voting group; or (b) meet certain minimum price and procedural
require-ments designated to insure equal treatment of all shareholder.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and assuming no exercise of outstanding
options and warrants to purchase Common Stock but assuming conversion of
outstanding shares of Series AA Preferred into Common Stock, there will be
5,027,069 shares of Common Stock outstanding. Immediately following the
completion of this offering, 4,112,885 shares of Common Stock (including
1,750,000 shares sold by the Company in this offering) will be freely tradeable
without restrictions or further registration under the Securities Act, except
for any shares purchased by an "affiliate" of the Company, which are subject to
the limitations imposed on "affiliates" of the Company under Rule 144
promulgated under the Securities Act. The remaining outstanding shares (the
"Restricted Securities") are "restricted securities" within the meaning of Rule
144 and may not be resold except pursuant to a registration statement effective
under the Securities Act or pursuant to an exemption therefrom, including the
exemption provided by Rule 144. An
44
<PAGE>
additional 136,668 shares would become freely tradeable immediately upon the
conversion of 34,167 shares of Series AA Preferred.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 50,207 shares immediately after the
offering, assuming conversion of the Series AA Preferred) or (ii) the average
weekly trading volume of the Company's Common Stock on the Nasdaq National
Market during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are
also subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person who is
not deemed to have been an affiliate of the Company at any time during the 90
days immediately preceding the sale and whose Restricted Shares have been fully
paid for three years since the later of the date they were acquired from the
Company or the date they were acquired from an affiliate of the Company may sell
such Restricted Shares under Rule 144(k) without regard to the limitations and
requirements described above.
In connection with the offering, the Company and certain of its directors,
officers, and stockholders (who beneficially own a total of approximately
2,329,763 shares of Common Stock) agreed with the Representative that, subject
to certain exceptions, they would not offer, sell, contract to sell, grant any
option to purchase, or otherwise dispose of any shares of Common Stock, or any
securities convertible or exercisable or exchangeable for shares of Common Stock
beneficially owned by them until 180 days after the effective date of the
registration statement with respect to this offering without the prior written
consent of the Representative (the "Lock-Up Agreements"). Upon the expiration of
the Lock-Up Agreements approximately 1,440,000 of these shares will become
immediately available for resale.
Currently, 112,000 of the Restricted Securities are eligible, and the
remaining Restricted Securities will become eligible from time to time during
the period beginning January 17, 1997, for resale in the public market subject
to compliance with Rule 144, and, with respect to certain shares, the terms of
the Lock-Up Agreements.
As of October 14, 1996, options and warrants to purchase a total of
approximately 791,180 shares of Common Stock were outstanding. An additional
258,184 shares of Common Stock were issuable upon the conversion of the 64,546
shares of Series AA Preferred issued and outstanding as of October 11, 1996.
The holders of 480,000 issued and outstanding shares of Common Stock, who
also would receive a total of 802,730 shares of Common Stock upon the exercise
of stock purchase warrants and the conversion of Series AA Preferred, are
entitled to demand and piggy-back registration rights with respect to all such
shares of Common Stock. Such rights require the Company, if requested by such
holders, to register such shares for sale under the Securities Act and/or to
include such shares in certain registration statements filed by the Company
during the applicable periods. The Company has also granted the Representative
certain demand and piggy-back registration rights in connection the
Representative's Warrants with respect to 300,000 shares of Common Stock.
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale will have on the prevailing
market price of the Common Stock. Sales of substantial amounts of Common Stock
of the Company in the public market or the perception that such sales might
occur could adversely affect the prevailing market price of the Common Stock.
45
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Paulson
Investment Company, Inc. is acting as Representative, have severally agreed
subject to the terms and conditions of the Underwriting Agreement between the
Company and the several Underwriters (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters the
number of Units set forth in the table below at the price set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Paulson Investment Company, Inc..............................................
---------------
1,750,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase such Units are subject to certain conditions. The Underwriters are
committed to purchase all of the 1,750,000 Units offered by this Prospectus, but
not the 262,500 Units subject to the Underwriters' over-allotment option, if any
are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Units to the public at the initial public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representative, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representative. After
the initial public offering of the Units, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Representative.
The Company has granted the Underwriters an option, expiring at the close of
business 45 days after the date of this Prospectus, to purchase up to 262,500
additional Units from the Company on the same terms as apply to the sale of the
Units set forth above. The Underwriters may exercise the option only to cover
over-allotments, if any, incurred in the sale of Units.
The Company has agreed that if it elects to redeem the Warrants at any time
commencing one year after the date of this Prospectus, it will retain the
Representative as the Company's solicitation agent ("Warrant Solicitation
Agent"). The Company has agreed to pay the Warrant Solicitation Agent for its
services a solicitation fee equal to 3% of the total amount paid by the holders
of the Warrants whom the Warrant Solicitation Agent solicited to exercise the
Warrants. The exercise will be presumed to be unsolicited unless the customer
states in writing that the transaction was solicited by the Warrant Solicitation
Agent and designates in writing the registered representative at the Warrant
Solicitation Agent entitled to receive compensation for the exercise. The fee is
not payable for the exercise of any Warrant held by a Warrant Solicitation Agent
in a discretionary account at the time of exercise, unless the Warrant
Solicitation Agent receives from the customer prior specific written approval of
exercise.
The Representative has informed the Company that it does not expect the
Underwriters to confirm sales of Units offered by this Prospectus to any account
on a discretionary basis.
The Underwriting Agreement provides for indemnification between the Company
and the Underwriters against certain liabilities, including liabilities under
the Securities Act and for contribution by the Company and the Underwriters to
payments that may be required to be made in respect thereof.
The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to 2% of the gross proceeds from the sale of Units offered
hereby.
46
<PAGE>
The Company has agreed to sell to the Representative for $ the
Representative's Warrant to purchase from the Company up to 175,000 Units at an
exercise price per Unit equal to $ . The Representative's Warrant is
exercisable for a period of four years beginning one year from the date of this
Prospectus, and is not transferable for a period of one year from the date of
this Prospectus except to individuals who are either a partner or an officer of
an Underwriter or by will or by operation of law. The Representative's Warrant
is not redeemable by the Company. The Company has agreed to maintain an
effective registration statement with respect to the issuance of securities
underlying the Representative's Warrant (and, if necessary to allow their public
resale without restriction) at all times during the period in which the
Representative's Warrant is exercisable, commencing one year after the date of
this Prospectus.
The Company has agreed that, for a period of 180 days following the closing
of this offering, it will not, subject to certain exceptions, offer, sell,
contract to sell, grant any option for the sale or otherwise dispose of any
securities of the Company without the Representative's consent. The Company's
officers and directors and certain other shareholders have agreed that for a
period of 365 days following the closing of this offering, they will not offer,
sell, contract to sell, grant any option for the sale or otherwise dispose of
any securities of the Company (other than intra-family transfer or transfers to
trusts for estate planning purposes), without the Representative's consent. See
"Shares Eligible For Future Sale."
The offering price has been determined by negotiations between the Company
and the Representative. Among the factors considered in determining the initial
public offering price were the history and the prospects of the Company and the
industry in which it operates, the status and development prospects for the
Company's proposed products and the trends of such results, the experience and
qualifications of the Company's executive officers and the general condition of
the securities markets at the time of the offering.
In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transaction in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales, in
accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of, among other things, displaying bids on the Nasdaq National Market
limited by the bid prices of independent market makers and purchases limited by
such prices and effected in response to order flow. Net purchases by a passive
market maker on each day are limited to a specified percentage of the passive
market maker's average daily trading volume in the Common Stock during a
specified prior period, and all passive market making activity must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Units offered hereby will be passed upon for the Company
by Brown, Todd & Heyburn PLLC, Louisville, Kentucky. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Stoel Rives
LLP, Portland, Oregon.
EXPERTS
The consolidated financial statements of Strategia Corporation (formerly
known as Dataguard Recovery Services, Inc.) at December 31, 1995, and for each
of the two years in the period ended December 31, 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, and the information under the caption "Selected
Consolidated Financial Data" for each of the two years in the period ended
December 31, 1995, appearing in this Prospectus and Registration Statement have
been derived from consolidated financial statements audited by Ernst & Young
LLP, as set forth in their report thereon appearing elsewhere herein.
Such consolidated financial statements and selected consolidated financial
data are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Strategia Corporation and Subsidiary
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets as of September 30, 1996
(Unaudited) and December 31, 1995...................................................................... F-3
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1996 and 1995
(Unaudited), and for the Years Ended December 31,
1995 and 1994.......................................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Nine
Months Ended September 30, 1996 (Unaudited), and for the
Years Ended December 31, 1995 and 1994................................................................. F-5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 (Unaudited),
and for the Years Ended December 31, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Strategia Corporation
We have audited the accompanying consolidated balance sheet of Strategia
Corporation and subsidiary (formerly Dataguard Recovery Services, Inc.) as of
December 31, 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Strategia Corporation and subsidiary at December 31, 1995, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Strategia Corporation and subsidiary will continue as a going
concern. As more fully described in Note 1, the Company has had a significant
working capital deficiency since inception, has incurred significant cumulative
losses from its inception through December 31, 1995, and has had recent adverse
developments with respect to contracts with certain customers. In view of these
conditions, substantial doubt remains as to the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of Strategia Corporation and subsidiary
to continue as a going concern.
Louisville, Kentucky
March 8, 1996
(except for Note 14, as to which the date is
July 29, 1996)
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 170,636 $ 1,364,253
Accounts receivable........................... 1,128,407 1,622,155
Other current assets.......................... 490,124 136,855
-------------- ---------------
Total current assets...................... 1,789,167 3,123,263
-------------- ---------------
Property and equipment.......................... 16,138,011 17,996,238
Less accumulated depreciation and
amortization................................ 7,376,653 9,207,054
-------------- ---------------
8,761,358 8,789,184
Other assets.................................... 237,222 538,284
-------------- ---------------
$ 10,787,747 $ 12,450,731
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt........ $ 304,139 $ 164,360
Current installments of obligations under
capital leases.............................. 1,858,755 1,985,164
Notes payable to stockholders................. 991,176 800,000
Accounts payable.............................. 941,812 968,442
Accrued income taxes.......................... 133,630 110,410
Accrued expenses and other current
liabilities................................. 854,862 1,116,023
-------------- ---------------
Total current liabilities................. 5,084,374 5,144,399
-------------- ---------------
Long-term debt, excluding current
installments.................................. 1,024,356 989,710
Obligations under capital leases, excluding
current installments.......................... 2,179,412 1,983,214
Customers' deposits............................. 58,253 34,327
Deferred revenue................................ 852,146 1,881,784
Deferred income taxes........................... 309,938 319,563
-------------- ---------------
Total liabilities......................... 9,508,479 10,352,997
-------------- ---------------
Stockholders' equity:
Preferred stock--authorized 2,000,000 shares:
Series A Convertible Preferred ($10 stated
value); Authorized
100,000 shares; issued and outstanding 0
shares at September 30,
1996 and 34,167 shares at December 31,
1995........................................ 341,670
Series AA Convertible Preferred ($10 stated
value); Authorized
100,000 shares; issued and outstanding
64,546 shares at
September 30, 1996 and 0 shares at December
31, 1995.................................... 645,460
Common stock without par value. Authorized
15,000,000 shares;
issued and outstanding 3,010,885 shares at
September 30, 1996; 2,506,885 shares at
December 31, 1995........................... 3,029,833 4,253,834
Accumulated deficit............................. (2,119,092) (2,784,933)
Foreign currency translation.................... 26,857 (16,627)
-------------- ---------------
Total stockholders' equity................ 1,279,268 2,097,734
Commitments and contingencies...................
-------------- ---------------
$ 10,787,747 $ 12,450,731
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------ ------------------------
(UNAUDITED)
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service revenue....................... $ 4,615,535 $ 8,927,183 $ 6,691,634 $ 7,007,412
Operating expenses:
Cost of services.................... 3,161,718 5,394,518 3,973,297 5,223,215
Selling, general and
administrative expenses........... 1,053,324 2,434,906 1,732,217 1,764,527
----------- ----------- ----------- -----------
4,215,042 7,829,424 5,705,514 6,987,742
----------- ----------- ----------- -----------
Operating income.................... 400,493 1,097,759 986,120 19,670
Other income (expense):
Interest expense.................... (395,776) (657,410) (512,251) (487,555)
Other income, net................... 1,596 45,186 49,801 14,334
----------- ----------- ----------- -----------
(394,180) (612,224) (462,450) (473,221)
----------- ----------- ----------- -----------
Income (loss) before income taxes..... 6,313 485,535 523,670 (453,551)
Income taxes.......................... 443,568 416,900 129,723
----------- ----------- ----------- -----------
Net income (loss)................... 6,313 41,967 106,770 (583,274)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) per common and common
equivalent share..................... $ (.01) $ -- $ .03 $ (.25)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares
outstanding.......................... 2,418,792 2,493,603 2,489,537 2,523,790
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK FOREIGN
----------------------- COMMON ACCUMULATED CURRENCY
SERIES A SERIES AA STOCK DEFICIT TRANSLATION TOTAL
----------- ---------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1994.................. $ 341,670 $ $ 2,885,833 $ (2,128,844) $ $ 1,098,659
Issuance of common stock......... 112,000 112,000
Net income....................... 6,313 6,313
----------- ---------- ------------ ------------- ----------- ------------
December 31, 1994................ 341,670 2,997,833 (2,122,531) 1,216,972
Issuance of common stock......... 32,000 32,000
Payments of dividends............ (38,528) (38,528)
Net income....................... 41,967 41,967
Foreign currency translation..... 26,857 26,857
----------- ---------- ------------ ------------- ----------- ------------
December 31, 1995................ 341,670 3,029,833 (2,119,092) 26,857 1,279,268
Issuance of common stock......... 1,224,001 1,224,001
Conversion of Series A Preferred
to Series AA Preferred.......... (341,670) 341,670
Conversion of Series A Preferred
dividends in arrears to Series
AA Preferred.................... 69,552 (69,552)
Conversion of stockholders' notes
and interest to Series AA
Preferred....................... 234,238 234,238
Payment of dividends............. (13,015) (13,015)
Net loss for nine months ended
September 30, 1996.............. (583,274) (583,274)
Foreign currency translation..... (43,484) (43,484)
----------- ---------- ------------ ------------- ----------- ------------
September 30, 1996 (unaudited)... $ $ 645,460 $ 4,253,834 $ (2,784,933) $ (16,627) $ 2,097,734
----------- ---------- ------------ ------------- ----------- ------------
----------- ---------- ------------ ------------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SEPTEMBER 30
--------------------------- ----------------------------
1994 1995 1995 1996
------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 6,313 41,967 106,770 (583,274)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 1,068,131 2,113,081 1,508,400 1,930,549
Deferred income taxes.............................. 309,938 291,840 14,657
Other.............................................. 1,390 36,899 2,596 (21,511)
Changes in operating assets and liabilities:
Accounts receivable.............................. 88,961 (1,005,638) (1,688,237) (546,450)
Other current assets............................. (20,821) (390,975) (75,096) 331,306
Accounts payable................................. (159,429) 403,386 317,515 83,446
Accrued income taxes............................. 133,630 125,060 (801)
Accrued expenses and other current liabilities... 106,552 513,477 791,296 308,376
(Increase) decrease in other assets.............. 37,910 (124,202) (20,805) (324,934)
Increase (decrease) in deferred revenue.......... (339,465) 652,691 1,221,606 1,036,560
Increase (decrease) in customers' deposits....... (17,226) 22,258 31,684 (13,110)
------------ ------------- ------------- -------------
Net cash provided by operating activities........ 772,316 2,706,512 2,612,629 2,214,814
------------ ------------- ------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment................ (46,331) (488,735) (595,903) (301,526)
Purchase of Twinsys.................................. (203,856) (50,870)
------------ ------------- ------------- -------------
Net cash used in investing activities............ (46,331) (692,591) (646,773) (301,526)
------------ ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from note payable to stockholder............ 500,000 500,000
Net proceeds from issuance of common stock........... 100,000 1,200,001
Proceeds from bank line of credit.................... 250,000
Proceeds from long-term debt......................... 28,150
Principal payments of long-term debt and obligations
under capital leases............................... (793,366) (2,413,360) (2,123,108) (2,156,657)
Payments of preferred dividends...................... (38,528) (38,528) (13,015)
------------ ------------- ------------- -------------
Net cash used in financing activities............ (665,216) (1,951,888) (1,661,636) (719,671)
------------ ------------- ------------- -------------
Net increase in cash and cash equivalents.............. 60,769 62,033 304,220 1,193,617
Cash and cash equivalents at beginning of period....... 47,834 108,603 108,603 170,636
------------ ------------- ------------- -------------
Cash and cash equivalents at end of period............. $ 108,603 $ 170,636 $ 412,823 $ 1,364,253
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Strategia Corporation (Strategia) and its wholly-owned French subsidiary,
Twinsys Dataguard, S.A. (Twinsys), together referred to herein as "the Company",
is a major provider of hot site services for users of large-scale Bull and IBM
computers in North America and Bull and UNIX computers in Europe. The Company
markets its services to corporate users of large-scale computers in the United
States, Canada and Europe.
The financial statements have been prepared on the basis of principles
applicable to a going concern. This basis presumes the realization of assets and
a settlement of liabilities in the ordinary course of business. As shown in the
accompanying financial statements, the Company has an accumulated deficit of
$2,119,092 at December 31, 1995. In addition, the Company has financed a large
portion of its computer equipment that is used for backup services under capital
leases. The current installments of obligations under these capital leases were
the most significant cause of current liabilities exceeding current assets by
$3,295,207 at December 31, 1995.
The Company's ability to operate as a continuing business is dependent upon,
among other things, the Company's maintaining profitable operations and being
able to meet its current obligations.
The Company believes access to the European disaster recovery market through
Twinsys, as well as its continued intensified marketing effort, will provide new
opportunities for additional backup, outsourcing, and consulting service
revenues. The Company plans to increase its utilization of its facilities and
computer equipment to support other computer services opportunities.
Management has obtained and will continue to seek more favorable terms for
its lease and maintenance agreements in an effort to reduce the Company's
operating costs and liquidity deficiency. The Company expects to meet its cash
flow needs through payments of service revenues by existing customers, the
addition of new customers for its backup, outsourcing, and consulting services,
as well as the extension of payment terms on certain monthly expenses and other
debt.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Strategia
Corporation and Twinsys. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(b) USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires Company
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
(c) RECOGNITION OF REVENUE
The Company provides backup recovery services through contracts whose terms
are generally for more than one year and require the payment of monthly
subscription fees. Service revenue from contracts is recognized on a
straight-line method over the life of the contract. Deferred revenue represents
cash received in excess of the revenue recorded for multi-year agreements to
provide backup services to customers. The Company also provides consulting
services. Service revenue for consulting is recognized when services are
rendered.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following at
December 31, 1995:
<TABLE>
<S> <C>
Land........................................................... $ 260,800
Building and improvements...................................... 3,154,789
Equipment...................................................... 12,551,702
Other.......................................................... 170,720
----------
$16,138,011
----------
----------
</TABLE>
Depreciation of equipment is computed on the straight-line method over the
estimated useful life of the asset. Leasehold improvements and equipment under
capital leases are amortized on the straight-line method over the terms of the
related leases or over the estimated useful life of the asset.
(e) FOREIGN CURRENCY TRANSLATION
The financial statements of Twinsys have been translated into U.S. dollars
in accordance with FASB Statement 52, FOREIGN CURRENCY TRANSLATION. All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet date. Amounts in the statements of operations have been translated
using the average exchange rate for the year. The gains and losses resulting
from the changes in exchange rates during the year have been reported separately
as a component of stockholders' equity.
(f) INCOME PER SHARE
Income per share is based on net income less preferred dividends divided by
the weighted average number of common and equivalent shares outstanding during
the period. Common stock equivalents outstanding are calculated for stock
options and warrants using the treasury stock method. Fully diluted per share
amounts are not materially different from primary per share amounts.
(g) CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity of less than
three months when purchased.
(h) STOCK INCENTIVE PLANS
The Financial Accounting Standards Board has recently issued FASB Statement
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. FASB 123 encourages, but does not
require, companies to recognize compensation expense related to the grants of
stock or stock options to employees under plans such as the Company's 1988 and
1990 Plans. Companies choosing not to adopt FASB 123 will continue to account
for such grants using the accounting described by APB Statement 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, but will be required to make certain disclosures
about their plans, including pro forma net income and earnings per share under
the new method. The Company is first required to follow the rules of FASB 123 in
1996. The Company expects to continue to follow APB 25 for expense recognition
and to make disclosures required by FASB 123. Accordingly, the Company expects
that FASB 123 will have no effect on the Company's earnings or financial
position.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate
their fair values as of December 31, 1995.
(3) ACQUISITION
On February 3, 1995, Strategia purchased for approximately $200,000 certain
operating assets and assumed certain liabilities of Twinsys, S.A., a Paris,
France-based provider of disaster recovery services in Europe. Strategia
financed the purchase with funds borrowed from EPI Corporation, the Company's
largest stockholder, under an amendment to an existing loan agreement. John P.
Snyder, EPI's President and Chairman, is a director of the Company. The
acquisition was accounted for by the purchase method of accounting.
The results of operations of Twinsys are included in the 1995 Consolidated
Statement of Operations since the date of acquisition. Summarized below are the
unaudited proforma results of operations for the years ended December 31, 1995
and 1994, as though the acquisition had occurred on January 1, 1995 and 1994,
respectively; adjusted to reflect the impact of certain lease terms which have
been renegotiated; reduction of personnel costs as a result of fewer required
Twinsys employees, reduced equipment and office rent expense by combining the
Twinsys office locations; and the borrowing of $500,000 by Strategia from a
stockholder to finance the acquisition of Twinsys and to provide working capital
for its initial operations.
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Service revenue.................................................. $ 9,587,000 $ 10,796,000
Net income (loss)................................................ 135,000 (784,000)
Income (loss) per common and common equivalent share............. $ .05 $ (.32)
------------ -------------
------------ -------------
</TABLE>
(4) LONG-TERM DEBT AND CREDIT AGREEMENTS
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Mortgage note................................................... $1,055,871
Revolving credit agreements..................................... 120,000
Promissory note................................................. 133,526
Equipment notes................................................. 19,098
---------
1,328,495
Less current installments....................................... 304,139
---------
Long-term debt, excluding current installments.................. $1,024,356
---------
---------
</TABLE>
The mortgage note is payable in equal monthly installments through May 1,
2009; however, the lender has the option to accelerate payment on the entire
outstanding balance of the note at five year intervals throughout the note term.
The next potential note acceleration date is May 1, 1999 and the current
interest rate of 11% is fixed until that date.
The Company has committed revolving credit facilities with two banks. A
$100,000 credit agreement is committed through October 31, 1996, and provides
that borrowings will bear interest at the bank's prime rate plus 2% (effectively
10.5% at December 31, 1995). Borrowings under this credit agreement are secured
by substantially all domestic company assets, other than its real property and
leased assets. Credit
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT AND CREDIT AGREEMENTS (CONTINUED)
agreements amounting to $250,000 and $20,000 are committed by another bank. The
$250,000 agreement is committed through May 15, 1996 and is secured by a letter
of credit issued by the Company's bank in France. Other current assets at
December 31, 1995 include approximately $288,000 of restricted cash related to
the letter of credit. This agreement bears interest on borrowings at prime plus
1% (effectively 9.5% at December 31, 1995). No amounts were borrowed under this
agreement at December 31, 1995. The $20,000 agreement is committed through
February 28, 1996, and bears interest at prime plus 1%, and was fully
outstanding at December 31, 1995.
A promissory note was established on May 1, 1994 with a supplier. The note
provides that interest, fixed at an annual rate of 11%, will accrue and compound
monthly on the total unpaid balance. Monthly installments of $26,836 began in
December 1995 and will continue through June 1996 until the entire principal and
interest amounts are paid.
Equipment notes are payable to one bank in monthly installments through
November 1997. Interest rates on these notes range from 10.0% to 10.5% and the
notes are secured by equipment with a net book value of $16,596 as of December
31, 1995.
Aggregate maturities of long-term debt are $304,139 in 1996, $45,610 in
1997, $45,390 in 1998 and $933,356 in 1999.
(5) NOTES PAYABLE TO STOCKHOLDERS
During 1992, the Company entered into a $300,000 second mortgage agreement
with a stockholder. The original term of the agreement was ninety days. The
agreement had been renewed for additional 90-day terms subsequent to the
original term through December 31, 1994. In January 1995, an $800,000 second
mortgage agreement was entered into with this stockholder ($300,000 of which
represents an extension of the original loan as noted above). The term of the
loan extends through April 10, 1996. Interest on this amount is payable at an
annual rate equal to the prime rate plus 1.5% (effectively 10% at December 31,
1995). Interest expense of $80,242 and $25,750 was charged to 1995 and 1994
operations, respectively. At December 31, 1995, accrued interest recorded in the
consolidated balance sheet related to these notes was $110,581. The promissory
note is secured by a second mortgage on the Company's real property. In
consideration of this opportunity to borrow funds, the Company issued 15,000
shares of common stock to the stockholder in connection with the initial
agreement. Additional share increments of common stock (currently 8,000 shares)
have been issued with each renewal (a total of 59,000 and 27,000 additional
shares had been issued through December 31, 1995 and 1994, respectively). During
January 1996, the Company renewed this note at the same terms and conditions as
the original note. An additional 8,000 shares of common stock were issued to the
stockholder in connection with this renewal.
The Company has notes payable of $191,176 to certain stockholders. Interest
is payable quarterly at an annual rate of 10%. Interest expense of $19,118 was
charged to operations for the years ended December 31, 1995 and 1994 for these
notes. The notes were originally due in November 1992 but have been renewed and
are now due in December 1996 at the same terms and conditions as the original
notes.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LEASES
The Company is obligated under various equipment capital leases that expire
over the next four years. Property and equipment include the following amounts
under capital leases at December 31, 1995:
<TABLE>
<S> <C>
Equipment..................................................... $ 7,297,047
Less accumulated amortization................................. 2,083,064
-----------
$ 5,213,983
-----------
-----------
</TABLE>
The Company acquired $4,831,746 and $186,174 of equipment in exchange for
capital lease obligations during 1995 and 1994, respectively.
The Company also has certain noncancellable operating leases, primarily for
computer hardware and software, that expire over the next five years and provide
for purchase or renewal options.
Future minimum lease payments under capital leases and noncancellable
operating leases, and the present value of future minimum capital lease payments
as of December 31, 1995 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
Years ending December 31:
1996............................................................ $ 2,118,554 $ 845,897
1997............................................................ 1,611,728 779,982
1998............................................................ 680,910 745,846
1999............................................................ 25,080 745,846
2000............................................................ -- 279,692
------------ ------------
Total minimum lease payments...................................... 4,436,272 $ 3,397,264
------------
------------
Less amount representing interest (at rates ranging from 7.0% to
11.35%).......................................................... 398,206
------------
Present value of net minimum capital lease payments............... 4,038,167
Less current installments......................................... 1,858,755
------------
Obligations under capital leases, excluding current
installments................................................ $ 2,179,412
------------
------------
</TABLE>
Total rental expense, including maintenance charges, for operating leases in
1995 and 1994 was $1,947,904 and $1,534,976, respectively.
(7) INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
1995 1994
------------ ---------
<S> <C> <C>
Pretax income (loss):
United States......................................................... $ (713,298) $ 6,313
Foreign............................................................... 1,198,833 --
------------ ---------
$ 485,535 $ 6,313
------------ ---------
------------ ---------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The provision for income tax expense in 1995 is attributable to earnings
from foreign operations, the components of which follows:
<TABLE>
<S> <C>
Foreign--current.................................................. $ 133,630
--deferred.................................................. 309,938
---------
$ 443,568
---------
---------
</TABLE>
A reconciliation of the income tax expense for the years ended December 31,
1995 and 1994 with the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Tax expense at U.S. statutory rates..................................... $ 165,082 $ 2,146
Operating losses in the U.S. generating no current tax benefit.......... 240,027 --
Utilization of net operating loss carryforwards......................... -- (3,777)
Higher effective income tax rate of foreign operations.................. 35,965 --
Other................................................................... 2,494 1,631
---------- ---------
$ 443,568 $ --
---------- ---------
---------- ---------
</TABLE>
Undistributed earnings of the Company's foreign subsidiary amounted to
$755,265 at December 31, 1995. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to France.
Determination of the amount of unrecognized deferred U.S. income tax liability
is not practicable because of the complexities associated with its hypothetical
calculation.
At December 31, 1995, the Company had U.S. net tax operating loss
carryforwards of approximately $3,340,000 for federal income tax reporting
purposes. These carryforwards expire as follows: $467,000 in 2000; $658,000 in
2001; $508,000 in 2002; $115,000 in 2004; $26,000 in 2005; $51,000 in 2006;
$435,000 in 2007; $649,000 in 2008; and $431,000 in 2010.
Significant components of the Company's deferred tax assets (liabilities) at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1995
-------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................................. $ 1,269,000
Valuation allowance.......................................................... (1,029,000)
-------------
Net deferred tax assets.................................................... 240,000
Deferred tax liabilities:
Tax over book depreciation................................................... (462,000)
Other........................................................................ (87,938)
-------------
Total deferred tax liabilities............................................. (549,938)
-------------
Net deferred tax liability............................................... $ (309,938)
-------------
-------------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTION AND GRANT PLANS
The Strategia 1988 Stock Option Plan (as amended by stockholders in 1989)
allows for options to be granted to key employees of the Company to purchase no
more than an aggregate of 150,000 shares of common stock at a price not less
than 75% of the fair market value at the time the grant is approved. Options
totaling 42,500 shares of common stock were granted to employees in 1995. No
options were granted to employees in 1994. It also provides automatic grants of
stock options to the Company's directors who are not employees. Options to
purchase 500 shares of common stock are granted annually to each nonemployee
director. In addition, each nonemployee director who was not a director on May
15, 1989 will automatically be granted an option for 2,500 shares of common
stock on May 15 following his subsequent election. Options for nonemployee
directors are granted at the fair market value of the common stock on the grant
date as determined by the Stock Option Committee of the Board of Directors.
Information pertaining to options for 1995 follows:
<TABLE>
<CAPTION>
PRICE RANGE
COMMON SHARES PER SHARE
--------------- --------------
<S> <C> <C>
Options outstanding at January 1, 1995...................... 32,839 $ 1.00 - $3.50
Options granted............................................. 43,500 $ 1.26 - $1.38
------
Options outstanding at December 31, 1995.................... 76,339 $1.22
------
------
Options exercisable--December 31, 1995...................... 31,839 $1.22
------
------
</TABLE>
All options granted under the plan are exercisable over a 10-year period. No
options have been exercised as of December 31, 1995.
The Strategia 1990 Stock Grant Plan authorizes the Company's Stock Option
Committee to grant up to 125,000 shares of common stock to key employees as
restricted or performance stock awards. In 1990, grants of 4,075 shares of
common stock were issued under this plan. No shares have been granted subsequent
to 1990.
(9) PREFERRED STOCK
In 1991, 100,000 shares of Series A Preferred Stock were authorized. The
Company issued 16,667 shares of Series A Preferred Stock in 1992 and 17,500
shares in 1991. This stock provides a cumulative preferred annual dividend of
11.5%, payable on a quarterly basis and before any payment of dividends on
common stock. At December 31, 1995, dividends in arrears totaled $40,056. Each
share of Series A Preferred Stock is convertible into eight shares of common
stock, at an effective price of $2.50 per share of common stock, for a period of
five years following the date of issuance.
The Series A Preferred Stock is also redeemable at the Company's option at a
price of $11.15, if the average bid and asked price of the common stock exceeds
150% of the then-effective conversion price of the Series A Preferred Stock for
twenty of thirty consecutive trading days. No such restriction applies to
redemption after July 1, 1997. This redemption price declines gradually each
year to $10 a share after December 31, 2001.
The Series A Preferred Stock has a liquidation value of $12.50 per share,
plus any accrued but unpaid dividends upon the liquidation, dissolution, or
winding up of the affairs of the Company. Holders of Series A Preferred Stock
have no voting rights except upon the occurrence of an event of default.
The holders of Series A Preferred Stock also received a five-year warrant to
purchase two shares of common stock for each share of Series A Preferred Stock
purchased. At December 31, 1995, warrants to purchase 34,167 shares of common
stock were outstanding at an exercise price of $4.50.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) PREFERRED STOCK (CONTINUED)
Shares of common stock reserved with respect to all of the above options,
convertible preferred stock and warrants were 246,174 at December 31, 1995.
(10) SEGMENT INFORMATION
The Company and its subsidiary are engaged in one industry segment
consisting of providing disaster recovery and other computer related services to
users of large-scale computer systems.
Service revenue, operating income and identifiable assets for the years
ended December 31, 1995 and 1994 pertaining to the two geographic areas in which
the Company operates are presented below.
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Service revenue
United States................................................ $ 3,116,662 $ 4,615,535
Europe....................................................... 5,810,152 --
------------- -------------
$ 8,927,183 $ 4,615,535
------------- -------------
------------- -------------
Operating income (loss)
United States................................................ $ (309,781) $ 400,493
Europe....................................................... 1,407,540 --
------------- -------------
$ 1,097,759 $ 400,493
------------- -------------
------------- -------------
Identifiable total assets
United States................................................ $ 4,717,216 $ 5,703,693
Europe....................................................... 6,070,531 --
------------- -------------
$ 10,787,747 $ 5,703,693
------------- -------------
------------- -------------
</TABLE>
The net assets of Twinsys at December 31, 1995 amounted to approximately
$782,123.
In 1994, the Company had two customers, accounting for approximately 26% and
15%, respectively, of consolidated service revenue, who individually accounted
for more than 10% of the Company's consolidated service revenue for the year.
Neither customer accounted for 10% of the Company's consolidated service revenue
in 1995. The only customer who accounted for 10% of the Company's consolidated
service revenue in 1995 was a group of affiliated companies, which together
accounted for approximately 13% of consolidated service revenue.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
Total amount of interest paid was approximately $650,000 and $393,000 for
the years ended December 31, 1995 and 1994, respectively. No cash payments were
made for income taxes during 1995 or 1994.
(12) COMMITMENTS AND CONTINGENCIES
The Company has an agreement with Copex Limited (a United Kingdom company)
which was established to recognize the assistance provided by Copex in the
acquisition of Twinsys. The Company is to pay Copex 2% of the gross revenues of
Twinsys for the calendar years 1995 through 1999. Other assets include
approximately $74,000 (net of amortization) as of December 31, 1995 related to
the fee earned to date under this agreement.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
A former employee of Twinsys has filed a lawsuit against the Company
claiming certain severance benefits as a result of his dismissal. The total
amount of the claim approximates 800,000 French francs (approximately $160,000).
While the ultimate outcome of this lawsuit cannot be predicted, the Company
believes it has meritorious defenses against the claim and intends to vigorously
contest the lawsuit.
(13) SUBSEQUENT EVENT
On March 7, 1996, Twinsys entered into a capital lease agreement for
computer equipment with the lease having a discounted present value of
approximately 10,000,000 French francs (approximately $2,000,000). The lease is
for a three year term and requires monthly rental payments of approximately
430,000 French francs (approximately $86,000) in 1996 and monthly rental
payments of 250,000 French francs (approximately $50,000) for the remainder of
the lease term. This lease commitment is not included in Note 6.
(14) REVERSE STOCK SPLIT AND CHANGE OF NAME
On July 29, 1996 the Company announced that the 1-for-2 reverse stock split
of its Common Stock and its change of name from Dataguard Recovery Services,
Inc. to Strategia Corporation had taken effect before the opening of business
that day. As a result of the 1-for-2 reverse stock split, every two of the
Company's common shares outstanding at the effective time were automatically
converted into one new common share of Strategia Corporation. The Company's name
change and reverse stock split had been approved by the shareholders at the
Company's 1996 annual meeting on July 12, 1996. All share and per share amounts
have been restated for the reverse stock split.
(15) NOTES RELATED TO 1996 INTERIM FINANCIAL INFORMATION (UNAUDITED)
On May 30, 1996, the Company's Board of Directors authorized the issuance of
Series AA Convertible Preferred Stock (Series AA Preferred) provides for an
annual dividend of 8%, compared to 11.5% on the Series A Convertible Preferred
Stock (Series A Preferred). The Series AA Preferred like the Series A Preferred
is convertible into four shares of common stock for five years after issuance
through June 30, 2001. The limitations, preferences, and relative rights of the
Series AA Preferred are otherwise identical to those of the Series A Preferred.
On June 30, 1996, all holders of Series A Preferred exchanged their shares
(34,167 shares) for the same number of Series AA Preferred Shares. In addition,
all dividends in arrears ($69,552) due to the original holders of Series A
Preferred at June 30, 1996 were converted to Series AA Preferred.
The Company had notes payable ($191,176) and accrued interest payable
($43,062) to certain stockholders at June 30, 1996. These amounts were also
converted to Series AA Preferred as of June 30, 1996.
Approximately 580,000 French francs (approximately $117,000) has been
charged to operations during the quarter ended September 30, 1996 to account for
a judgment rendered in September 1996 by a French court in a lawsuit by a former
employee of Twinsys. The employee had claimed certain severance benefits as a
result of his dismissal.
In September 1996, the Company raised $1,200,001 in a private placement of
Common Stock and warrants to purchase Common Stock. Net proceeds from the sale
of those shares were used to reduce bank line of credit borrowings and accounts
payable.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALERS, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, UNITS IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. SUBJECT TO ANY DUTIES AND OBLIGATIONS UNDER
APPLICABLE SECURITIES LAWS TO UPDATE INFORMATION CONTAINED HEREIN OR
INCORPORATED BY REFERENCE HEREIN, NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 15
Business.................................................................. 21
Management................................................................ 33
Principal Shareholders.................................................... 36
Certain Transactions...................................................... 37
Description of Securities................................................. 39
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 46
Legal Matters............................................................. 47
Experts................................................................... 47
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
1,750,000 UNITS
[LOGO]
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Bylaws require that officers and directors of the Company be
indemnified and advanced expenses by the Company with respect to all threatened,
pending or completed actions, suits or proceedings arising from that person's
conduct in his official capacity as an officer or director of the Company to the
extent permitted by the Kentucky Business Corporation Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the distribution
of the securities being registered, other than fees and commissions of
underwriters and dealers. All such expenses are estimated, except for the SEC
registration fee:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 10,577
NASD application fees............................................. 3,990
Nasdaq listing fee................................................ 30,000
Accounting fees and expenses...................................... 30,000
Legal fees and expenses........................................... 100,000
Printing and engraving expenses................................... 90,000
Transfer agent and registrar fees................................. 5,000
Blue Sky fees and expenses........................................ 25,000
Miscellaneous expenses............................................ 105,433
---------
Total......................................................... $ 400,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On each of January 5, April 5, July 5, and October 3, 1994, the Company
issued EPI Corporation ("EPI") 3,000 shares of Common Stock in consideration for
the renewal of a $300,000 loan by EPI to the Company on July 13, 1992 (the
"Loan").
On July 8, 1994, the Company issued EPI 100,000 shares of Common Stock in
consideration of $100,000 ($1.00 per share).
On January 17, 1995, and on February 21, 1996, the Company issued EPI 5,250
and 2,750 shares of Common Stock, respectively, in consideration of the
extension of an additional $500,000 under, and the renewal of the Loan.
On each of April 17, July 16, and October 14, 1995, and January 16, May 16,
July 10, and October 8, 1996, the Company issued EPI 8,000 shares of Common
Stock in consideration of the renewal of the Loan.
All of the above transactions were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act. The following factors were
relied upon by the Company to establish the availability of this exemption for
the sales of securities described above: (1) the issuances were related to an
arm's length loan transaction between EPI and the Company; (2) EPI has total
assets of more than $5 million; (3) EPI's President is a director of the
Company; (4) share certificates or warrants included legends referring to
restrictions on transfer; (5) shares were issued solely to EPI; and (6) EPI had
full access to all material information regarding the Company and its securities
necessary to make an informed decision.
On June 30, 1996, the Company issued a total of 64,546 shares of Series AA
Preferred Stock and warrants to purchase 64,546 shares of Common Stock to
directors and executive officers of the Company, EPI Corporation and certain of
its directors, and certain other holders of the Company's then-outstanding
II-1
<PAGE>
Series A Preferred Stock and Common Stock. The transactions are described under
"Certain Transactions" in the prospectus included in this registration
statement. The issuance of the Series AA Preferred Stock and warrants exchanged
for outstanding Series A Preferred Stock and warrants was made in reliance upon
the exemption provided by Section 3(a)(9) of the Securities Act. The issuance of
the Series AA Preferred Stock and warrants issued in payment of principal and
interest on shareholder loans to the Company or accrued unpaid dividends on the
Series A Preferred Stock was made in reliance upon the exemption provided by
Section 4(2) of the Securities Act. All but one of the recipients of the Series
AA Preferred Stock and warrants were accredited investors, and the remaining
investor was a business associate of one of the Company's directors.
In September 1996, the Company issued 480,000 Units at an offering price of
$2.50 cash per Unit, each Unit consisting of one share of Common Stock and a
warrant to purchase one share of Common Stock for $3.75 per share, to various
holders of the Company's preferred stock and other "accredited investors" (as
defined in Regulation D of the Act) on the terms and conditions set forth in a
Confidential Private Placement Memorandum dated September 6, 1996.
The sale of Units was made in reliance upon the exemption provided by
Section 4(2) of the Securities Act. The following factors were relied upon by
the Company to establish the availability of this exemption for the sales of
securities described above: (1) the terms of the Units were negotiated on an
arm's length basis between the Company and the investors; (2) certificates for
shares or warrants will include legends referring to restrictions on transfer;
(3) all but one of the investors were accredited investors and the remaining
investor is a business associate of one of the Company's directors and a holder
of the Company's preferred stock; and (4) investors had full access to all
material information regarding the Company and its securities necessary to make
an informed decision.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ----------
<C> <C>
1 -- Form of Underwriting Agreement.
4.1 -- Amended and Restated Articles of Incorporation are incorporated by
reference to Exhibits 3.1 and 4.1 to the Company's 10-Q for the quarter
ended June 30, 1996.
4.2 -- Form of Representative's Stock Purchase Warrant.
4.3 -- Form of Warrant Agreement.
4.4 -- Lock-up Agreements.*
5 -- Legal Opinion of Brown Todd & Heyburn, PLLC.*
10.1 -- 1988 Stock Option Plan is incorporated by reference to Exhibit 10.8 to
the Company's 1994 10-KSB.
10.2 -- 1990 Stock Grant Plan is incorporated by reference to Exhibit 10.8 to
the Company's 1994 10-KSB.
10.3 -- Agreement of Assignment of Mortgage Note dated August 1, 1991, between
Future Federal Savings Bank; Brown, Noltemeyer Co.; Charles A. Brown,
Jr.; Norman V. Noltemeyer; and Dataguard Recovery Services, Inc. is
incorporated by reference to Exhibit 10.7 to the Company's 1995 10-KSB.
10.4 -- Mortgage Note dated April 3, 1984, from Brown, Noltemeyer Co. to Future
Federal Savings Bank, as amended, is incorporated by reference to
Exhibit 10.8 to the Company's 1995 10-KSB.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ----------
<C> <C>
10.5 -- Security Agreement dated July 13, 1992 as amended January 17, 1995
between the Company and EPI Corporation is incorporated by reference to
Exhibit 10.11 to the Company's 1994 10-KSB.
10.6 -- Second Mortgage dated July 13, 1992 as amended January 17, 1995 between
the Company and EPI Corporation is incorporated by reference to Exhibit
10.12 to the Company's 1994 10-KSB.
10.7 -- Promissory Note due January 5, 1997 from the Company to EPI
Corporation.*
10.8 -- Acquisition Assistance Agreement, as amended, among Copex Limited (UK),
Copex Limited (Swiss), Dataguard Limited, and Strategia Corporation.*
11 -- For a statement regarding the computation of per share earnings (loss),
see Notes 2 and 14 to the Consolidated Financial Statements.
21 -- Subsidiaries.
23.1 -- Consent of Ernst & Young LLP, independent auditors.
23.2 -- Consent of Brown, Todd & Heyburn PLLC (included in their opinion filed
as
Exhibit 5).*
24 -- Power of Attorney (included in the Signature Pages to this Registration
Statement).
27 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment.
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the Offering.
(b) The undersigned small business issuer will:
(1) For purposes of determining any liability under the Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the
II-3
<PAGE>
registration statement, and that the offering of such securities at that
time shall be deemed to be the initial bona fide offering of those
securities.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Louisville, Commonwealth of Kentucky, on October 14 , 1996.
STRATEGIA CORPORATION
By: /s/ RICHARD W. SMITH
-----------------------------------------
Richard W. Smith, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard W. Smith, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments, including post-effective amendments, to this registration
statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated, on the respective date set out opposite such person's
name.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President (Principal
/s/ RICHARD W. SMITH Executive Officer)
- ------------------------------ (Principal Financial October 14, 1996
Richard W. Smith Officer) (Principal
Accounting Officer)
/s/ JAMES P. BUREN Executive Vice President -
- ------------------------------ Technology, Treasurer, October 14, 1996
James P. Buren and Director
/s/ JOHN P. SNYDER
- ------------------------------ Secretary and Director October 14, 1996
John P. Snyder
/s/ JOHN A. BRENZEL
- ------------------------------ Director October 14, 1996
John A. Brenzel
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. NUMBER
- ---------- ------
<C> <C> <C>
1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Articles of Incorporation are incorporated by
reference to Exhibits 3.1 and 4.1 to the Company's 10-Q for the
quarter ended June 30, 1996.
3.2 -- Bylaws are incorporated by reference to Exhibit 3.2 to the Company's
1995 10-KSB.
4.1 -- Amended and Restated Articles of Incorporation are incorporated by
reference to Exhibits 3.1 and 4.1 to the Company's 10-Q for the
quarter ended June 30, 1996.
4.2 -- Form of Representative's Stock Purchase Warrant.
4.3 -- Form of Warrant Agreement.
4.4 -- Lock-up Agreements.*
5 -- Legal Opinion of Brown Todd & Heyburn, PLLC.*
10.1 -- 1988 Stock Option Plan is incorporated by reference to Exhibit 10.8
to the Company's 1994 10-KSB.
10.2 -- 1990 Stock Grant Plan is incorporated by reference to Exhibit 10.8
to the Company's 1994 10-KSB.
10.3 -- Agreement of Assignment of Mortgage Note dated August 1, 1991,
between Future Federal Savings Bank; Brown, Noltemeyer Co.; Charles
A. Brown, Jr.; Norman V. Noltemeyer; and Dataguard Recovery
Services, Inc. is incorporated by reference to Exhibit 10.7 to the
Company's 1995 10-KSB.
10.4 -- Mortgage Note dated April 3, 1984, from Brown, Noltemeyer Co. to
Future Federal Savings Bank, as amended, is incorporated by
reference to Exhibit 10.8 to the Company's 1995 10-KSB.
10.5 -- Security Agreement dated July 13, 1992 as amended January 17, 1995
between the Company and EPI Corporation is incorporated by
reference to Exhibit 10.11 to the Company's 1994 10-KSB.
10.6 -- Second Mortgage dated July 13, 1992 as amended January 17, 1995
between the Company and EPI Corporation is incorporated by
reference to Exhibit 10.12 to the Company's 1994 10-KSB.
10.7 -- Promissory Note due January 5, 1997 from the Company to EPI
Corporation.*
10.8 -- Acquisition Assistance Agreement, as amended, among Copex Limited
(UK), Copex Limited (Swiss), Dataguard Limited, and Strategia
Corporation.*
11 -- For a statement regarding the computation of per share earnings
(loss), see Notes 2 and 14 to the Consolidated Financial
Statements.
21 -- Subsidiaries.
23.1 -- Consent of Ernst & Young LLP, independent auditors.
23.2 -- Consent of Brown, Todd & Heyburn PLLC (included in their opinion
filed as Exhibit 5).*
24 -- Power of Attorney (included in the Signature Pages to this
Registration Statement).
27 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment.
<PAGE>
EXHIBIT 1
1,750,000 Units
STRATEGIA CORPORATION
UNDERWRITING AGREEMENT
____________, 1996
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
c/o Paulson Investment Company, Inc.
811 SW Front Avenue
Portland, Oregon 97204
Gentlemen:
Strategia Corporation, a Kentucky corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as Representative (the
"Representative") an aggregate of 1,750,000 Units (the "Firm Units"). Each
Units will consist of one share of the Company's Common Stock ("Common Stock")
and one Common Stock Purchase Warrant substantially in the form filed as an
exhibit to the Registration Statement (hereinafter defined) ("Warrants"). The
respective number of the Firm Units to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto. The
Company also proposes to grant to the Representative an option to purchase in
aggregate up to 262,500 additional Units, identical to the Firm Units, (the
"Option Units") as set forth below.
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as Representative and on
behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm Units
set forth opposite their respective names in Schedule I. The Firm Units and the
Option Units (to the extent the aforementioned option is exercised) are herein
collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form SB-2 (File No. 333-_____) with
respect to the Units has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Units, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Kentucky, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Company, directly or
indirectly wholly owns or has the specified percentage ownership of each of the
corporations or other business entities set forth in Schedule II, attached
hereto (each a "Subsidiary" and, collectively the "Subsidiaries" and, with the
Company, collectively, the "Group") and does not own and never has owned a
controlling interest in any other corporation or other business entity that has
or ever has had any material assets, liabilities or operations. Each Subsidiary
has been duly organized and is validly existing as a corporation or other entity
in good standing under the laws of its jurisdiction of organization, with power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Company and each Subsidiary is duly
qualified to transact business in all jurisdictions in which the conduct of its
business requires such qualification.
(c) The outstanding shares of Common Stock of the Company and each
Subsidiary have been duly authorized and validly issued and are fully paid and
non-assessable and have been issued and sold by the Company or such Subsidiary,
as the case may be, in compliance in all material respects with applicable
securities laws; the issuance and sale of the Units have been duly authorized by
all necessary corporate action and, when issued and paid for as contemplated
herein, the Units will be validly issued, fully paid and non-assessable; and no
preemptive rights of stockholders exist with respect to any security of the
Company or the issue and sale thereof.
2
<PAGE>
Neither the filing of the Registration Statement nor the offering or sale of the
Units as contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the registration
of any shares of Common Stock or other securities of the Company.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. The Common Stock conforms and the Warrants
and the Representative's Warrant will conform to the description thereof
contained in the Registration Statement. The forms of certificates for the
securities comprising the Units conform to the corporate law of Kentucky.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Units nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representative, specifically for use in the
preparation thereof.
(f) The consolidated financial statements of the Company and its
consolidated Subsidiaries, together with related notes and schedules as set
forth in the Registration Statement, present fairly the financial position and
the results of operations and cash flows of the Company and such Subsidiaries at
the indicated dates and for the indicated periods. Such financial statements
and related schedules have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
except as disclosed herein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
consolidated financial and statistical data of the Company and its Subsidiaries
included in the Registration Statement presents fairly the information shown
therein and such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company.
(g) Ernst & Young LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against any member of the Group before any
court or administrative
3
<PAGE>
agency or otherwise which if determined adversely to the Group might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Group or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(i) The Group has good and marketable title to all properties and
assets, tangible and intangible, reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material in amount. All of the leases and
subleases under which the Company or any Subsidiary holds properties are in
full force and effect (with only such exceptions as are commonly accepted by
prudent companies in the computer business) and neither the Company nor any
Subsidiary has received notice of any material claim of any sort that has
been asserted by anyone materially adverse to the rights of the Company or
such Subsidiary under any of such leases or subleases, or affecting or
questioning the rights of the Company or such Subsidiary to the continued
possession of the leased or subleased premises or property under any such
lease or sublease.
(j) Each of the Company and its Subsidiaries has filed all Federal,
State, local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments received
by it to the extent that such taxes have become due and are not being contested
in good faith. All tax liabilities have been adequately provided for in the
consolidated financial statements of the Company and its consolidated
Subsidiaries.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may have been amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise), or prospects of the Group, whether or not occurring in the ordinary
course of business, and there has not been any material transaction entered into
or any material transaction that is probable of being entered into by the Group,
other than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended or
supplemented. The Group has no material contingent obligations which are not
disclosed in the Company's financial statements or elsewhere in the Prospectus
which are included in the Registration Statement.
(l) Neither the Company nor any Subsidiary is, nor, with the giving
of notice or lapse of time or both, will it be, in violation of or in default
under its Charter or By-Laws or under any agreement, lease, contract, indenture
or other instrument or obligation to which it is a party or by which it, or any
of its properties, is bound and which default is of material significance in
respect of the condition, financial or otherwise of the Group or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Group. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which any member of
the Group
4
<PAGE>
is a party, or of the Charter or by-laws of any member of the Group or any
order, rule or regulation applicable to any member of the Group of any court or
of any regulatory body or administrative agency or other governmental body
having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Units for public offering by
the Underwriters under state securities or Blue Sky laws) has been obtained or
made and is in full force and effect.
(n) The Group holds all material patents, patent rights trademarks,
trade names, copyrights, trade secrets and licenses of any of the foregoing
(collectively, "Intellectual Property Rights") that are necessary to the conduct
of its businesses; there is no claim pending or, to the best knowledge of the
Company, threatened against any member of the Group alleging any infringement of
Intellectual Property Rights, or any violation of the terms of any licence
relating to Intellectual Property Rights, nor does the Company know of any basis
for any such claim. The Company knows of no material infringement by others of
Intellectual Property Rights owned by or licensed to any member of the Group.
The Group has obtained, is in compliance in all material respect with and
maintains in full force and effect all material licenses, certificates, permits,
orders or other, similar authorizations granted or issued by any governmental
agency (collectively "Government Permits") required to conduct its business as
it is presently conducted. In particular, and without limiting the generality of
the foregoing, the Group is in compliance with all conditions, limitations,
restrictions or other provisions of all Government Permits related to the
exploration for, development of, extraction, transportation or sale of
hydrocarbons. All applications for additional Government Permits described in
the Prospectus as having been made by the Group have been properly and
effectively made in accordance with the applicable laws and regulations with
respect thereto and such applications constitute, in the best judgment of the
Company's management, those reasonably required to have been made in order to
carry out the Company's business plan as described in the Prospectus. No
proceeding to revoke, limit or otherwise materially change any Government Permit
has been commenced or, to the Company's best knowledge, is threatened against
the Company or any supplier to the Group with respect to materials supplied to
the group, and the Company has no reason to anticipate that any such proceeding
will be commenced against any member of the Group or any such supplier. Except
as disclosed or contemplated in the Prospectus, the Company has no reason to
believe that any pending application for a Government Permit will be denied or
limited in a manner inconsistent with the Company's business plan as described
in the Prospectus.
(o) The Group is in all material respects in compliance with all
applicable Environmental Laws. The Company has no knowledge of any past,
present or, as anticipated by the Company, future events, conditions,
activities, investigation, studies, plans or proposals that (i) would interfere
with or prevent compliance with any Environmental Law by the Group or (ii) could
reasonably be expected to give rise to any common law or other liability, or
otherwise form the basis of a claim, action, suit, proceeding, hearing or
investigation, involving
5
<PAGE>
the Group and related in any way to Hazardous Substances or Environmental Laws.
Except for the prudent and safe use and management of Hazardous Substances in
the ordinary course of the Group's business, (i) no Hazardous Substance is or
has been used, treated, stored, generated, manufactured or otherwise handled on
or at any Facility and (ii) to the Company's best knowledge, no Hazardous
Substance has otherwise come to be located in, on or under any Facility. No
Hazardous Substances are stored at any Facility except in quantities necessary
to satisfy the reasonably anticipated use or consumption by the Group. No
litigation, claim, proceeding or governmental investigation is pending regarding
any environmental matter for which any member of the Group has been served or
otherwise notified or, to the knowledge of the Company threatened or asserted
against any member of the Group, or the officers or directors of any such member
in their capacities as such, or any Facility or the Group's business. There are
no orders, judgments or decrees of any court or of any governmental agency or
instrumentality under any Environmental Law which specifically apply to any
member of the Group, any Facility or any of the Group's operations. No member
of the Group has received from a governmental authority or other person (i) any
notice that it is a potentially responsible person for any Contaminated site or
(ii) any request for information about a site alleged to be Contaminated or
regarding the disposal of Hazardous Substances. There is no litigation or
proceeding against any other person by the Group regarding any environmental
matter. The Company has disclosed in the Prospectus or made available to the
Underwriters and their counsel true, complete and correct copies of any reports,
studies, investigations, audits, analysis, tests or monitoring in the possession
of or initiated by the Company pertaining to any environmental matter relating
to the Company, its past or present operations or any Facility.
For the purposes of the foregoing paragraph, "Environmental Laws" means any
applicable federal, state or local statute, regulation, code, rule, ordinance,
order, judgment, decree, injunction or common law pertaining in any way to the
protection of human health or the environment, including without limitation, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Toxic Substances Control Act, the
Clean Air Act, the Federal Water Pollution Control Act and any similar or
comparable state or local law; "Hazardous Substance" means any hazardous,
toxic, radioactive or infectious substance, material or waste as defined, listed
or regulated under any Environmental Law; "Contaminated" means the actual
existence on or under any real property of Hazardous Substances, if the
existence of such Hazardous Substances triggers a requirement to perform any
investigatory, remedial, removal or other response action under any
Environmental Laws or if such response action legally could be required by any
governmental authority; "Facility" means any property currently owned, leased
or occupied by the Company.
(p) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or intends to take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Units.
(q) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
6
<PAGE>
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s) The Group carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of their respective
businesses and the value of their respective properties and as is customary for
companies engaged in similar industries.
(t) Each member of the Group is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the Company
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported or incorporated by
reference in the Prospectus, if any, concerning the Company's business with Cuba
or with any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(v) Each member of the Group is in material compliance with all laws,
rules, regulations, orders of any court or administrative agency, operating
licenses or other requirements imposed by any governmental body applicable to
it, including, without limitation, all applicable laws, rules, regulations,
licenses or other governmental standards applicable to the Company's business;
and the conduct of the business of the Group, as described in the Prospectus,
will not cause the Company to be in violation of any such requirements.
(w) Each of the Warrants and the Representative's Warrants (as
defined in Paragraph (d) of Section 2 hereof) have been authorized for issuance
to the purchasers thereof or to the
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Representative or its designees, as the case may be, and will, when issued,
possess rights, privileges, and characteristics as represented in the most
recent form of Warrants or Representative's Warrants, as the case may be, filed
as an exhibit to the Registration Statement; the securities to be issued upon
exercise of the Warrants and the Representative's Warrants, when issued and
delivered against payment therefor in accordance with the terms thereof, will be
duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and
issuance of the Warrants and the Representative's Warrants, and the securities
to be issued upon their exercise, have been validly and sufficiently taken.
(x) Except as disclosed in the Prospectus, neither the Company nor any
of its officers, directors or affiliates have caused any person, other than the
Underwriters, to be entitled to reimbursement of any kind, including, without
limitation, any compensation that would be includable as underwriter
compensation under the NASD's Corporate Financing Rule with respect to the
offering of the Units, as a result of the consummation of such offering based on
any activity of such person as a finder, agent, broker, investment adviser or
other financial service provider.
(y) The Company has timely filed with the Commission all reports
required to be filed by it during the last three years under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") and the rules and
regulations thereunder, including, but not limited to, any such reports
incorporated by reference in the Registration Statement. All such reports have
been in proper form and have included all information required to be disclosed
therein. No such report has contained a misstatement of any material fact or
omitted to state any fact necessary to make the statements therein not
materially misleading. During the last three years, the Company has complied in
all material respects with regulations of the NASD applicable to it as a Nasdaq
listed company. The Company has not taken, in anticipation of the offering of
the Units, directly or indirectly, any action designed to cause or result in, or
that has constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the Company.
2. PURCHASE, SALE AND DELIVERY OF THE UNITS.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $______ per Unit, the number of Firm
Units set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Units to be sold hereunder is to be made in
New York Clearing House funds and, at the option of the Representative, by
certified or bank cashier's checks drawn to the order of the Company or bank
wire to an account specified by the Company against either uncertificated
delivery of Firm Units or of certificates therefor (which delivery, if
certificated, shall take place in such location in New York, New York as may be
specified by the Representative) to the Representative for the several accounts
of the Underwriters. Such payment is to be made at the offices of the
Representative at the address set forth on the first
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page of this agreement, at 7:00 a.m., Pacific time, on the third business day
after the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon, such time
and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) Except to the extent uncertificated
Firm Units are delivered at closing, the certificates for the Firm Units will be
delivered in such denominations and in such registrations as the Representative
requests in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representative at
least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Representative to purchase the Option
Units at the price per Unit as set forth in the first paragraph of this Section
2. The option granted hereby may be exercised in whole or in part by giving
written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 45 days after the date of this Agreement, by the
Representative to the Company setting forth the number of Option Units as to
which the Representative is exercising the option, the names and denominations
in which the Option Units are to be registered and the time and date at which
certificate representing such Units are to be delivered. The time and date at
which certificates for Option Units are to be delivered shall be determined by
the Representative but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The option with respect to the Option Units granted hereunder may
be exercised only to cover over-allotments in the sale of the Firm Units by the
Underwriters. The Representative may cancel such option at any time prior to its
expiration by giving written notice of such cancellation to the Company. To the
extent, if any, that the option is exercised, payment for the Option Units shall
be made on the Option Closing Date in New York Clearing House funds and, at the
option of the Representative, by certified or bank cashier's check drawn to the
order of the Company for the Option Units to be sold by the Company or bank wire
to an account specified by the Company against delivery of certificates therefor
at the offices of Paulson Investment Company, Inc. set forth on the first page
of this Agreement.
(d) In addition to the sums payable to the Representative as provided
elsewhere herein, the Representative shall be entitled to receive at the
Closing, for itself alone and not as Representative of the Underwriters, as
additional compensation for their services, purchase warrants (the
"Representative's Warrants") for the purchase of up to 175,000 Units at a price
of $_____ per Unit, upon the terms and subject to adjustment and conversion as
described in the form of Representative's Warrants filed as an exhibit to the
Registration Statement.
3. OFFERING BY THE UNDERWRITERS.
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It is understood that the several Underwriters are to make a public
offering of the Firm Units as soon as the Representative deems it advisable to
do so. The Firm Units are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representative may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Units are purchased pursuant
to Section 2 hereof, the Representative will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representative for
the Underwriters in the offering and sale of the Units in accordance with an
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representative containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representative shall not
previously have been advised and furnished with a copy or to which the
Representative shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in endeavoring
to qualify the Units for sale under the securities laws of such jurisdictions as
the Representative may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representative may
reasonably request for distribution of the Units.
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(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary Prospectus
as the Representative may reasonably request. The Company will deliver to, or
upon the order of, the Representative during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may
reasonably request. The Company will deliver to the Representative at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representative such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representative
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution of the
Units as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so that
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representative copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Securities
Exchange Act of 1934, as amended. The Company will deliver to the
Representative similar reports with respect to significant subsidiaries, as that
term is defined in the Rules and Regulations, which are not consolidated in the
Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of one year after the
date of this Agreement, directly or indirectly, by the Company
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<PAGE>
otherwise than hereunder or with the prior written consent of the
Representative, which consent will not be unreasonably withheld.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Units on The Nasdaq National Market.
(j) The Company has caused each officer and director and each person
who owns, beneficially or of record, 5% or more of the Common Stock outstanding
immediately prior to this offering to furnish to you, on or prior to the date of
this agreement, a letter or letters, in form and substance satisfactory to the
Underwriters ("Lockup Agreements"), pursuant to which each such person shall
agree (A) not to offer, sell, sell short or otherwise dispose of any shares of
Common Stock of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or
derivatives of Common Stock owned by such person or request the registration for
the offer or sale of any of the foregoing (or as to which such person has the
right to direct the disposition of) for a period of ninety days after the date
of this Agreement, directly or indirectly, except with the prior written consent
of the Representative, provided, however, that, on or after the 61st day
following the effective date of the date of this Agreement, each such person
may, without restriction imposed hereby, sell or otherwise dispose of a number
of shares not greater than ten percent of the number of shares owned by such
person on the date of this Agreement; and (B) to give prior written notice to
the Representative for a period of one year from the effective date of the
Registration Statement, with respect to any sales of Common Stock of the Company
pursuant to Rule 144 under the Securities Act or any similar rule.
(k) The Company shall apply the net proceeds of its sale of the Units
as set forth in the Prospectus and shall file such reports with the Commission
with respect to the sale of the Units and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Units in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
5. COSTS AND EXPENSES.
(a) The Representative shall be entitled to reimbursement from the
Company, for itself alone and not as Representative of the Underwriters, to a
non-accountable expense allowance equal to 2% of the aggregate initial public
offering price of the Firm Units and any Option
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<PAGE>
Units purchased by the Underwriters. The Representative shall be entitled to
withhold this allowance on the Closing Date related to the purchase of the Firm
Units or the Option Units, as the case may be.
(b) In addition to the payment described in Paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation
Letter, the Listing Application, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees and
expenses (including legal fees and disbursements) incident to securing any
required review by the NASD) of the terms of the sale of the Units; the Listing
Fee of The Nasdaq Stock Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Units under State securities or Blue Sky laws. Any
transfer taxes imposed on the sale of the Units to the several Underwriters will
be paid by the Company. The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of directed Units by the
Underwriters to employees and persons having business relationships with the
Company. The Company shall not, however, be required to pay for any of the
Underwriters' expenses (other than those related to qualification under NASD
regulation and State securities or Blue Sky laws) except that, if this Agreement
shall not be consummated, then the Company shall reimburse the several
Underwriters for accountable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Units or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Units.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Units
on the Closing Date and the Option Units, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representative and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or
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order of any nature by a Federal or state court of competent jurisdiction shall
have been issued as of the Closing Date which would prevent the issuance of the
Units.
(b) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Brown, Todd & Heyburn
PLLC, counsel for the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating that it may
be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Kentucky, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; each Subsidiary has been
duly organized and is validly existing as a corporation or other business entity
in good standing under the laws of its jurisdiction of organization, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company and each
Subsidiary is duly qualified to transact business in all jurisdictions in which
the conduct of its business requires such qualification, or in which the failure
to qualify would have a materially adverse effect upon the business of the
Group.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock have been duly authorized and validly
issued and are fully paid and non-assessable; all of the securities of the
Company conform to the description thereof contained in the Prospectus; the
certificates for the Common Stock and Warrants, assuming they are in the form
filed with the Commission, are in due and proper form; the shares of Common
Stock to be sold by the Company pursuant to this Agreement, including shares of
Common Stock to be sold as a part of the Option Units have been duly authorized
and, upon issuance and delivery thereof as contemplated in this Agreement and
the Registration Statement, will be validly issued, fully paid and
non-assessable; no preemptive rights of stockholders exist with respect to any
of the Common Stock of the Company or the issuance or sale thereof pursuant to
any applicable statute or the provisions of the Company's charter documents or,
to such counsel's best knowledge, pursuant to any contractual obligation. The
Warrants and the Representative's Warrants have been authorized for issuance to
the purchasers of Units or the Representative, as the case may be, and will,
when issued, possess rights, privileges, and characteristics as represented in
the most recent form of Warrants or Representative's Warrants, as the case may
be, filed as an exhibit to the Registration Statement; the securities to be
issued upon exercise of the Representative's Warrants, when issued and delivered
against payment therefor in accordance with the terms of the Representative's
Warrants, will be duly and validly issued, fully paid, nonassessable and free of
preemptive rights, and all corporate action required to be taken for the
authorization and issuance of the Warrants, the Representative's Warrants, and
the securities to be issued upon their exercise, has been validly and
sufficiently taken.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of the
Company convertible or
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exchangeable into or evidencing the right to purchase or subscribe for any
shares of capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of any character obligating the Company
to issue any shares of its capital stock or any securities convertible or
exchangeable into or evidencing the right to purchase or subscribe for any
shares of such stock; and except as described in the Prospectus, to the
knowledge of such counsel, no holder of any securities of the Company or any
other person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of the Units or the
right to have any Common Stock or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and related schedules therein).
(vi) The statements under the captions "Shares Eligible for
Future Sale" and "Description of Capital Stock" in the Prospectus and in Item 15
of the Registration Statement, insofar as such statements constitute a summary
of documents referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or by-laws of the Company, or any
agreement or instrument known to such counsel to which the Company is a party or
by which the Company may be bound.
(x) Each of this Agreement and the Warrant Agreement by and
among the Company, the Warrantholders (defined therein) and ___________, as
trustee, has been duly authorized, executed and delivered by the Company.
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(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than Kentucky or Federal laws on local
counsel in such jurisdictions, provided that in each case such counsel shall
state that they believe that they and the Underwriters are justified in relying
on such other counsel. In addition to the matters set forth above, the opinion
of Brown, Todd & Heyburn PLLC shall also include a statement to the effect that
nothing has come to the attention of such counsel that has caused him to believe
that (i) the Registration Statement, at the time it became effective under the
Act (but after giving effect to any modifications incorporated therein pursuant
to Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein).
(c) The Representative shall have received from Stoel Rives LLP,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In
rendering such opinion Stoel Rives LLP may rely as to all matters governed other
than by the laws of the State of Oregon or Federal laws on the opinion of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel that has caused
them to believe that (i) the Registration Statement, or any amendment thereto,
as of the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) as of
the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact, necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to
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financial statements, schedules and statistical information therein). With
respect to such statement, Stoel Rives LLP may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(d) The Representative shall have received at or prior to the Closing
Date from Stoel Rives LLP a memorandum or summary, in form and substance
satisfactory to the Representative, with respect to the qualification for
offering and sale by the Underwriters of the Units under the State securities or
Blue Sky laws of such jurisdictions as the Representative may reasonably have
designated to the Company.
(e) The Representative, on behalf of the several Underwriters, shall
have received, on each of the dates hereof, the Closing Date and the Option
Closing Date, as the case may be, a letter dated the date hereof, the Closing
Date or the Option Closing Date, as the case may be, in form and substance
satisfactory to the Representative, of Ernst & Young LLP confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or are, to
his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a
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<PAGE>
supplement to or an amendment of the Prospectus which has not been so set forth
in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company or
the earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company, whether or not
arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representative may reasonably have requested.
(h) The Firm Units and Option Units, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(i) The Lockup Agreements described in Section 4(j) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representative and to Stoel Rives LLP,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representative by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of the
Units required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities
18
<PAGE>
(or actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and will reimburse
each Underwriter and each such controlling person upon demand for any legal or
other expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such loss, claim,
damage or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Units, whether or not such
Underwriter or controlling person is a party to any action or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representative specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure
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<PAGE>
to give such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as
20
<PAGE>
any other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bears to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Units purchased by such Underwriter, and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section
8(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Units and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the
21
<PAGE>
Company, shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Units
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representative of the Underwriters, shall use your reasonable efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from the Company such amounts as may be agreed upon and upon the
terms set forth herein, the Firm Units or Option Units, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representative, shall not have procured such other
Underwriters, or any others, to purchase the Firm Units or Option Units, as the
case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of Units with respect to which
such default shall occur does not exceed 10% of the Firm Units or Option Units,
as the case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Units or Option
Units, as the case may be, which they are obligated to purchase hereunder, to
purchase the Firm Units or Option Units, as the case may be, which such
defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of Firm Units or Option Units, as the case may be, with respect
to which such default shall occur exceeds 10% of the Firm Units or Option Units,
as the case may be, covered hereby, the Company or you as the Representative of
the Underwriters will have the right, by written notice given within the next
36-hour period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or of the
Company except to the extent provided in Section 8 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 9, the
Closing Date or Option Closing Date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representative, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Paulson Investment
Company, Inc., 811 SW Front Avenue, Portland, Oregon 97204, Attention: Chester
L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW 5th Avenue, Portland,
Oregon 97204, Attention: John J. Halle; if to the Company, to Strategia
Corporation, 10301 Linn Station Road, P.O. Box 37144, Louisville, Kentucky
40233-7144 Attention: Richard W. Smith; with a copy to Brown, Todd & Heyburn
PLLC, 3200 Providian Center, Louisville, Kentucky 40202, Attention: Alan K.
MacDonald.
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<PAGE>
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Units are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries taken as
a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or crisis
or change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable to market the Units or to enforce contracts for the sale of the
Units, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent or
more from its closing price on the day immediately preceding the date that the
Registration Statement is declared effective by the Commission, (iv) suspension
of trading in securities generally on the New York Stock Exchange or the
American Stock Exchange or limitation on prices (other than limitations on hours
or numbers of days of trading) for securities on either such Exchange, (v) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (vi) declaration of a banking moratorium
by United States or New York State authorities, (vii) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Exchange Act); (viii) the suspension of trading of the Company's common
stock by the Commission on the Nasdaq Stock Market or (ix) the taking of any
action by any governmental body or agency in respect of its monetary or fiscal
affairs which in your reasonable opinion has a material adverse effect on the
securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Units from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
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<PAGE>
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Units under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Oregon. All disputes relating to this Underwriting
Agreement shall be adjudicated before a court located in Multnomah county,
Oregon to the exclusion of all other courts that might have jurisdiction.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
STRATEGIA CORPORATION
By:
-------------------------------
Richard W. Smith, President
The foregoing Underwriting Agreement s hereby confirmed and accepted as of the
date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
24
<PAGE>
By:
-----------------------------------
Authorized Officer
25
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Units
Underwriter to be Purchased
----------- --------------------
Paulson Investment Company, Inc.
Total 1,750,000
---------
26
<PAGE>
SCHEDULE II
LIST OF SUBSIDIARIES
Subsidiary Percent Ownership
- ---------- -----------------
100%
100%
100%
<PAGE>
EXHIBIT 4.2
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
STRATEGIA CORPORATION
PURCHASE WARRANT
ISSUED TO:
PAULSON INVESTMENT COMPANY, INC.
EXERCISABLE TO PURCHASE
_______ UNITS
OF
STRATEGIA CORPORATION
VOID AFTER _________, 2001
<PAGE>
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time on or after _________, 1997 and on or
before___________, 2001, up to _______ Units (hereinafter defined) at the
Exercise Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, no par value, of the Company.
(e) "Company" means Strategia Corporation, a Kentucky corporation.
(f) "Company's Expenses" means any and all expenses payable by the Company
or the Warrantholder in connection with an offering described in Section 6
hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration Statement is
declared effective by the Commission.
(h) "Exercise Date" means the date of the notice of exercise of Warrants
given to the Company by the Warrantholder as provided in Section 2.
(i) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $_____ per Unit. If a Warrant
is exercised for a component of a Unit or Units, then the price payable in
connection with such exercise shall be determined by allocating $0.001 to the
Unit Warrant and the balance of the Exercise Price to the share of Common Stock,
or, in each case, to any securities obtainable in addition to or in lieu of such
share of Unit Warrant or Common Stock by virtue of the application of Section 3
of this Warrant.
(j) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
(k) "Participating Underwriter" means any underwriter participating in the
sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
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<PAGE>
(l) "Registration Statement" means the Company's registration statement
(File No.33-_____) as amended on the Closing Date.
(m) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(n) "Securities" means the securities obtained or obtainable upon exercise
of the Warrant or securities obtained or obtainable upon exercise, exchange, or
conversion of such securities.
(o) "Unit" means, as the case may require, either one of the Units offered
to the Public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant.
(p) "Unit Warrant" means a Common Stock purchase warrant included as a
component of a Unit.
(q) "Warrant Certificate" means a certificate evidencing the Warrant.
(r) "Warrantholder" means a record holder of the Warrant or Securities.
The initial Warrantholder is Paulson Investment Company, Inc.
(s) "Warrantholder's Expenses" means the sum of (i) the aggregate amount
of cash payments made to an underwriter, underwriting syndicate, or agent in
connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholder that
will be paid by the Company.
(t) "Warrant" means the warrant evidenced by this certificate, any similar
certificate issued in connection with the Offering, or any certificate obtained
upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
2. EXERCISE OF WARRANTS. All or any part of the Warrant may be exercised
commencing on the first anniversary of the Effective Date and ending at 5 p.m.
Pacific Time on the fifth anniversary of the Effective Date by surrendering this
Warrant Certificate, together with written notice of exercise and appropriate
instructions, duly executed by the Warrantholder or by its duly authorized
attorney, at the office of the Company, 10301 Linn Station Road, Louisville,
Kentucky 40223, or at such other office or agency as the Company may designate.
Upon receipt of notice of exercise, the Company shall immediately instruct its
transfer agent to prepare certificates for the Securities to be received by the
Warrantholder upon completion of the Warrant exercise. When such certificates
are prepared, the Company shall notify the Warrantholder and deliver such
certificates to the Warrantholder or as per the Warrantholder's instructions
immediately upon payment in full by the Warrantholder, in lawful money of the
United States, of the Exercise Price payable with respect to the Securities
being purchased.
3
<PAGE>
At any time at which the Securities for which the Warrants are exercisable
are publicly traded, in lieu of payment of the Exercise Price described above,
the Warrantholder may elect to make a "cashless exercise" of Warrants. If the
Warrantholder notifies the Company of such election, then (i) the Exercise Price
with respect to such exercise shall not be payable, and (ii) the Company will
reduce the number of Securities issuable upon such exercise by a number equal to
the Exercise Price that would otherwise have been payable upon such exercise
divided by the closing price of such Securities on the Exercise Date.
If the Warrantholder shall represent and warrant that all applicable
registration and prospectus delivery requirements for their sale have been
complied with upon sale of the Securities received upon exercise of the Warrant,
such certificates shall not bear a legend with respect to the Securities Act of
1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are divided
into a greater number of shares or a dividend in stock is paid on the Common
Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest
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thereafter of the Warrantholder, to the end that the provisions set forth herein
will thereafter be applicable, as nearly as reasonably may be, in relation to
any shares of stock or other property thereafter deliverable upon the exercise
of the Warrant. The Company will not permit any change in its capital structure
to occur unless the issuer of the shares of stock or other securities to be
received by the holder of this Warrant Certificate, if not the Company, agrees
to be bound by and comply with the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of shares of
Common Stock, other securities, or the property purchasable upon exercise of the
Warrant, the Company will promptly determine the new number of such shares or
other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will pay,
in lieu of fractional shares, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock in the over-the-counter
market or the closing price on a national securities exchange on the day
immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of the
Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment of
the Common Stock provided in this Section 3 will also apply to the securities to
which the Warrantholder or his assignee is entitled under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant.
4. RESERVATION OF SECURITIES. The Company agrees that the number of shares
of Common Stock, Unit Warrants or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times during
the term of the Warrant be reserved for exercise.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT CERTIFICATE.
5
<PAGE>
(a) The Company will register the Securities with the Commission pursuant
to the Act so as to allow the unrestricted sale of the Securities to the public
from time to time commencing on the first anniversary of the Effective Date and
ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date
(the "Registration Period"). The Company will also file such applications and
other documents necessary to permit the sale of the Securities to the public
during the Registration Period in those states in which the Units were qualified
for sale in the Offering or such other states as the Company and the
Warrantholder agree to. In order to comply with the provisions of this Section
6(a), the Company is not required to file more than one registration statement.
No registration right of any kind, "piggyback" or otherwise, will last longer
than five years from the Closing Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of the
registration, including the contents of the registration, will be entirely in
the control and at the discretion of the Company. The Company will file such
post-effective amendments and supplements as may be necessary to maintain the
currency of the registration statement during the period of its use. In
addition, if the Warrantholder participating in the registration is advised by
counsel that the registration statement, in their opinion, is deficient in any
material respect, the Company will use its best efforts to cause the
registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at least 50
percent of the then outstanding Warrants, (i) furnish an opinion of the counsel
representing the Company for the purposes of the registration pursuant to this
Section 6, addressed to the Warrantholders and any Participating Underwriter,
(ii) furnish an appropriate letter from the independent public accountants of
the Company, addressed to the Warrantholders and any Participating Underwriter,
and (iii) make representations and warranties to the Warrantholders and any
Participating Underwriter. A request pursuant to this subsection (e) may be
made on three occasions. The documents required to be delivered pursuant to
this subsection (e) will be dated within ten days of the request and will be, in
form and substance, equivalent to similar documents furnished to the
underwriters in connection with the Offering, with such changes as may be
appropriate in light of changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will indemnify
and hold harmless each selling Warrantholder, any person who controls any
selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or
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<PAGE>
liabilities, joint or several, to which any Warrantholder, controlling person,
or Participating Underwriter may be subject under the Act or otherwise; and it
will reimburse each Warrantholder, each controlling person, and each
Participating Underwriter for any legal or other expenses reasonably incurred by
the Warrantholder, controlling person, or Participating Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability, or action, insofar as such losses, claims, damages, or liabilities,
joint or several (or actions in respect thereof), arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained,
on the effective date thereof, in any such registration statement or any
preliminary prospectus or final prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; PROVIDED, HOWEVER, that the Company will
not be liable in any case to the extent that any loss, claim, damage, or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in any registration statement,
preliminary prospectus, final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
by a Warrantholder for use in the preparation thereof. The indemnity agreement
contained in this subparagraph (a) will not apply to amounts paid to any
claimant in settlement of any suit or claim unless such payment is first
approved by the Company, such approval not to be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by such Warrantholder for use in the preparation thereof;
PROVIDED, HOWEVER, that the indemnity agreement contained in this subparagraph
(b) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Warrantholder, such approval
not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs (a)
or (b) above of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
notify the indemnifying party of the commencement thereof; but the omission to
notify the indemnifying party will not relieve it from
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<PAGE>
any liability that it may have to any indemnified party otherwise than under
subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the Effective Date except to underwriters of the Offering or to individuals who
are either a partner or an officer of such an underwriter or by will or by
operation of law. The Warrant may be divided or combined, upon request to the
Company by the Warrantholder, into a certificate or certificates evidencing the
same aggregate number of Warrants.
9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. NOTICE. Any notices required or permitted to be given hereunder will
be in writing and may be served personally or by mail; and if served will be
addressed as follows:
If to the Company:
10301 Linn Station Road
Louisville, Kentucky 40223
Attn: Comptroller
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
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<PAGE>
11. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this
Warrant Certificate shall be tried before the courts of Oregon located in
Multnomah County, Oregon to the exclusion of all other courts that might have
jurisdiction.
Dated as of _______, 1996
STRATEGIA CORPORATION
By:
----------------------------
---------------------
Agreed and Accepted as of _______ __, 1996
PAULSON INVESTMENT COMPANY, INC.
By:
----------------------------
---------------------
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<PAGE>
EXHIBIT 4.3
WARRANT AGREEMENT
between
STRATEGIA CORPORATION.
and
-----------------------------------
Dated as of ________, 1996
<PAGE>
This Agreement, dated as of ________, 1996, is between Strategia
Corporation, a Kentucky corporation (the "Company"), and
___________________________________, a ______________________________, (the
"Warrant Agent").
The Company, at or about the time that it is entering into this
Agreement, proposes to issue and sell to public investors up to __________ Units
("Units"). Each Unit consists of one share of common stock of the Company
("Common Stock") and one Warrant (collectively, the "Warrants"), each Warrant
exercisable to purchase one share of Common Stock for $____, upon the terms and
conditions and subject to adjustment in certain circumstances, all as set forth
in this Agreement.
The Company proposes to issue to the Representative of the
Underwriters in the public offering of Units referred to above warrants to
purchase up to _______ additional Units.
The Company wishes to retain the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "Warrant Certificates") and the
exercise of the Warrants;
The Company and the Warrant Agent wish to enter into this Agreement to
set forth the terms and conditions of the Warrants and the rights of the holders
thereof ("Warrantholders") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
Section 1. APPOINTMENT OF WARRANT AGENT
The Company appoints the Warrant Agent to act as agent for the Company
in accordance with the instructions in this Agreement and the Warrant Agent
accepts such appointment.
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<PAGE>
Section 2. DATE, DENOMINATION AND EXECUTION OF WARRANT CERTIFICATES
The Warrant Certificates (and the Form of Election to Purchase and the
Form of Assignment to be printed on the reverse thereof) shall be in registered
form only and shall be substantially of the tenor and purport recited in Exhibit
A hereto, and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law, or with any rule or regulation made pursuant thereto, or with any rule or
regulation of any stock exchange on which the Common Stock or the Warrants may
be listed or any automated quotation system, or to conform to usage. Each
Warrant Certificate shall entitle the registered holder thereof, subject to the
provisions of this Agreement and of the Warrant Certificate, to purchase, on or
before the close of business on ________, 2001 (the "Expiration Date"), one
fully paid and non-assessable share of Common Stock for each Warrant evidenced
by such Warrant Certificate, subject to adjustments as provided in Sections 6
hereof, for $____ (the "Exercise Price"). Each Warrant Certificate issued as a
part of a Unit offered to the public as described in the recitals, above, shall
be dated ________, 1996; each other Warrant Certificate shall be dated the date
on which the Warrant Agent receives valid issuance instructions from the Company
or a transferring holder of a Warrant Certificate or, if such instructions
specify another date, such other date.
For purposes of this Agreement, the term "close of business" on any
given date shall mean 5:20 p.m., Eastern time, on such date; provided, however,
that if such date is not a business day, it shall mean 5:20 p.m., Eastern time,
on the next succeeding business day. For purposes of this Agreement, the term
"business day" shall mean any day other than a Saturday, Sunday, or a day on
which banking institutions in _________ are authorized or obligated by law to be
closed.
Each Warrant Certificate shall be executed on behalf of the Company by
the Chairman of the Board or its President or a Vice President, either manually
or by facsimile signature printed thereon, and have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. Each Warrant Certificate shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any Warrant Certificate
shall cease to be such officer of the Company before countersignature by the
Warrant Agent and issue and delivery thereof by the Company, such Warrant
Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and
delivered with the same force and effect as though the person who signed such
Warrant Certificate had not ceased to be such officer of the Company.
Section 3. SUBSEQUENT ISSUE OF WARRANT CERTIFICATES
Subsequent to their original issuance, no Warrant Certificates shall
be reissued except (i) Warrant Certificates issued upon transfer thereof in
accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any
combination, split-up or exchange of Warrant Certificates
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<PAGE>
pursuant to Section 4 hereof, (iii) Warrant Certificates issued in replacement
of mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section
5 hereof, (iv) Warrant Certificates issued upon the partial exercise of Warrant
Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued
to reflect any adjustment or change in the Exercise Price or the number or kind
of shares purchasable thereunder pursuant to Section 22 hereof. The Warrant
Agent is hereby irrevocably authorized to countersign and deliver, in accordance
with the provisions of said Sections 4, 5, 7 and 22, the new Warrant
Certificates required for purposes thereof, and the Company, whenever required
by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates
duly executed on behalf of the Company for such purposes.
Section 4. TRANSFERS AND EXCHANGES OF WARRANT CERTIFICATES
The Warrant Agent will keep or cause to be kept books for registration
of ownership and transfer of the Warrant Certificates issued hereunder. Such
registers shall show the names and addresses of the respective holders of the
Warrant Certificates and the number of Warrants evidenced by each such Warrant
Certificate.
The Warrant Agent shall, from time to time, register the transfer of
any outstanding Warrants upon the books to be maintained by the Warrant Agent
for that purpose, upon surrender of the Warrant Certificate evidencing such
Warrants, with the Form of Assignment duly filled in and executed with such
signature guaranteed by a banking institution or NASD member and such supporting
documentation as the Warrant Agent or the Company may reasonably require, to the
Warrant Agent at its stock transfer office in _____________, __________ at any
time on or before the Expiration Date, and upon payment to the Warrant Agent for
the account of the Company of an amount equal to any applicable transfer tax.
Payment of the amount of such tax may be made in cash, or by certified or
official bank check, payable in lawful money of the United States of America to
the order of the Company.
Upon receipt of a Warrant Certificate, with the Form of Assignment
duly filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered
Warrant Certificate and countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
PROVIDED, HOWEVER, that in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.
Any Warrant Certificate or Certificates may be exchanged at the option
of the holder thereof for another Warrant Certificate or Certificates of
different denominations, of like tenor and representing in the aggregate the
same number of Warrants, upon surrender of such Warrant Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Warrant Agent, at any time or from time to time after the close of business on
the date hereof and prior to the close of business on the Expiration Date. The
Warrant Agent shall promptly
3
<PAGE>
cancel the surrendered Warrant Certificate and deliver the new Warrant
Certificate pursuant to the provisions of this Section.
Section 5. MUTILATED, DESTROYED, LOST OR STOLEN WARRANT CERTIFICATES
Upon receipt by the Company and the Warrant Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
any Warrant Certificate, and in the case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to them
of all reasonable expenses incidental thereto, and, in the case of mutilation,
upon surrender and cancellation of the Warrant Certificate, the Warrant Agent
shall countersign and deliver a new Warrant Certificate of like tenor for the
same number of Warrants.
Section 6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND EXERCISE
PRICE
The number and kind of securities or other property purchasable upon
exercise of a Warrant shall be subject to adjustment from time to time upon the
occurrence, after the date hereof, of any of the following events:
A. In case the Company shall (1) pay a dividend in, or make a
distribution of, shares of capital stock on its outstanding Common Stock, (2)
subdivide its outstanding shares of Common Stock into a greater number of such
shares or (3) combine its outstanding shares of Common Stock into a smaller
number of such shares, the total number of shares of Common Stock purchasable
upon the exercise of each Warrant outstanding immediately prior thereto shall be
adjusted so that the holder of any Warrant Certificate thereafter surrendered
for exercise shall be entitled to receive at the same aggregate Exercise Price
the number of shares of capital stock (of one or more classes) which such holder
would have owned or have been entitled to receive immediately following the
happening of any of the events described above had such Warrant been exercised
in full immediately prior to the record date with respect to such event. Any
adjustment made pursuant to this Subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this Subsection, the
holder of any Warrant Certificate thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the Warrant
Agent) shall determine the allocation of the adjusted Exercise Price between or
among shares of such classes of capital stock.
B. In the event of a capital reorganization or a reclassification of the
Common Stock (except as provided in Subsection A. above or Subsection E. below),
any Warrantholder, upon exercise of Warrants, shall be entitled to receive, in
substitution for the Common Stock to which he would have become entitled upon
exercise immediately prior to such reorganization or reclassification, the
shares (of any class or classes) or other securities or property of the Company
(or cash) that he would have been entitled to receive at the same aggregate
Exercise
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<PAGE>
Price upon such reorganization or reclassification if such Warrants had been
exercised immediately prior to the record date with respect to such event; and
in any such case, appropriate provision (as determined by the Board of Directors
of the Company, whose determination shall be conclusive and shall be evidenced
by a certified Board resolution filed with the Warrant Agent) shall be made for
the application of this Section 6 with respect to the rights and interests
thereafter of the Warrantholders (including but not limited to the allocation of
the Exercise Price between or among shares of classes of capital stock), to the
end that this Section 6 (including the adjustments of the number of shares of
Common Stock or other securities purchasable and the Exercise Price thereof)
shall thereafter be reflected, as nearly as reasonably practicable, in all
subsequent exercises of the Warrants for any shares or securities or other
property (or cash) thereafter deliverable upon the exercise of the Warrants.
C. Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant is adjusted as provided in this Section
6, the Company will promptly file with the Warrant Agent a certificate signed by
a Chairman or co-Chairman of the Board or the President or a Vice President of
the Company and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary of the Company setting forth the number and kind of
securities or other property purchasable upon exercise of a Warrant, as so
adjusted, stating that such adjustments in the number or kind of shares or other
securities or property conform to the requirements of this Section 6, and
setting forth a brief statement of the facts accounting for such adjustments.
Promptly after receipt of such certificate, the Company, or the Warrant Agent at
the Company's request, will deliver, by first-class, postage prepaid mail, a
brief summary thereof (to be supplied by the Company) to the registered holders
of the outstanding Warrant Certificates; PROVIDED, HOWEVER, that failure to file
or to give any notice required under this Subsection, or any defect therein,
shall not affect the legality or validity of any such adjustments under this
Section 6; and PROVIDED, FURTHER, that, where appropriate, such notice may be
given in advance and included as part of the notice required to be given
pursuant to Section 12 hereof.
D. In case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
corporation formed by such consolidation or merger or the corporation which
shall have acquired such assets, as the case may be, shall execute and deliver
to the Warrant Agent a supplemental warrant agreement providing that the holder
of each Warrant then outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, solely
the kind and amount of shares of stock and other securities and property (or
cash) receivable upon such consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock of the Company for which such Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided in this Section. The above provision of this Subsection shall
similarly apply to successive consolidations, mergers, sales or transfers.
5
<PAGE>
The Warrant Agent shall not be under any responsibility to determine
the correctness of any provision contained in any such supplemental warrant
agreement relating to either the kind or amount of shares of stock or securities
or property (or cash) purchasable by holders of Warrant Certificates upon the
exercise of their Warrants after any such consolidation, merger, sale or
transfer or of any adjustment to be made with respect thereto, but subject to
the provisions of Section 20 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants (who may be
the accountants regularly employed by the Company) with respect thereto.
E. Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in the similar Warrant Certificates initially issuable
pursuant to this Warrant Agreement.
F. The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board, and not disapproved by the Warrant Agent, to make any computation
required under this Section, and a certificate signed by such firm shall, in the
absence of fraud or gross negligence, be conclusive evidence of the correctness
of any computation made under this Section.
G. For the purpose of this Section, the term "Common Stock" shall mean
(i) the class of stock designated as Common Stock in the Articles of
Incorporation of the Company, as amended, at the date of this Agreement, or (ii)
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event that at
any time as a result of an adjustment made pursuant to this Section, the holder
of any Warrant thereafter surrendered for exercise shall become entitled to
receive any shares of capital stock of the Company other than shares of Common
Stock, thereafter the number of such other shares so receivable upon exercise of
any Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section, and all other provisions of this
Agreement, with respect to the Common Stock, shall apply on like terms to any
such other shares.
H. The Company may, from time to time and to the extent permitted by law,
reduce the exercise price of the Warrants by any amount for a period of not less
than 20 days. If the Company so reduces the exercise price of the Warrants, it
will give not less than 15 days' notice of such decrease, which notice may be in
the form of a press release, and shall take such other steps as may be required
under applicable law in connection with any offers or sales of securities at the
reduced price.
Section 7. EXERCISE AND REDEMPTION OF WARRANTS
6
<PAGE>
Unless the Warrants have been redeemed as provided in this Section 7,
the registered holder of any Warrant Certificate may exercise the Warrants
evidenced thereby, in whole at any time or in part from time to time at or prior
to the close of business, on the Expiration Date, subject to the provisions of
Section 9, at which time the Warrant Certificates shall be and become wholly
void and of no value. Warrants may be exercised by their holders or redeemed by
the Company as follows:
A. Exercise of Warrants shall be accomplished upon surrender of the
Warrant Certificate evidencing such Warrants, with the Form of Election to
Purchase on the reverse side thereof duly filled in and executed, to the Warrant
Agent at its stock transfer office in __________, _____________, together with
payment to the Company of the Exercise Price (as of the date of such surrender)
of the Warrants then being exercised and an amount equal to any applicable
transfer tax and, if requested by the Company, any other taxes or governmental
charges which the Company may be required by law to collect in respect of such
exercise. Payment of the Exercise Price and other amounts may be made by wire
transfer of good funds, or by certified or bank cashier's check, payable in
lawful money of the United States of America to the order of the Company. No
adjustment shall be made for any cash dividends, whether paid or declared, on
any securities issuable upon exercise of a Warrant.
B. Upon receipt of a Warrant Certificate, with the Form of Election to
Purchase duly filled in and executed, accompanied by payment of the Exercise
Price of the Warrants being exercised (and of an amount equal to any applicable
taxes or government charges as aforesaid), the Warrant Agent shall promptly
request from the Transfer Agent with respect to the securities to be issued and
deliver to or upon the order of the registered holder of such Warrant
Certificate, in such name or names as such registered holder may designate, a
certificate or certificates for the number of full shares of the securities to
be purchased, together with cash made available by the Company pursuant to
Section 8 hereof in respect of any fraction of a share of such securities
otherwise issuable upon such exercise. If the Warrant is then exercisable to
purchase property other than securities, the Warrant Agent shall take
appropriate steps to cause such property to be delivered to or upon the order of
the registered holder of such Warrant Certificate. In addition, if it is
required by law and upon instruction by the Company, the Warrant Agent will
deliver to each Warrantholder a prospectus which complies with the provisions of
Section 9 of the Securities Act of 1933 and the Company agrees to supply Warrant
Agent with sufficient number of prospectuses to effectuate that purpose.
C. In case the registered holder of any Warrant Certificate shall
exercise fewer than all of the Warrants evidenced by such Warrant Certificate,
the Warrant Agent shall promptly countersign and deliver to the registered
holder of such Warrant Certificate, or to his duly authorized assigns, a new
Warrant Certificate or Certificates evidencing the number of Warrants that were
not so exercised.
D. Each person in whose name any certificate for securities is issued
upon the exercise of Warrants shall for all purposes be deemed to have become
the holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Warrant Certificate was duly
surrendered in proper form and payment of the Exercise Price (and of any
applicable taxes or other governmental charges) was made; PROVIDED, HOWEVER,
that if the date
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of such surrender and payment is a date on which the stock transfer books of the
Company are closed, such person shall be deemed to have become the record holder
of such shares as of, and the certificate for such shares shall be dated, the
next succeeding business day on which the stock transfer books of the Company
are open (whether before, on or after the Expiration Date) and the Warrant Agent
shall be under no duty to deliver the certificate for such shares until such
date. The Company covenants and agrees that it shall not cause its stock
transfer books to be closed for a period of more than 20 consecutive business
days except upon consolidation, merger, sale of all or substantially all of its
assets, dissolution or liquidation or as otherwise provided by law.
E. The Warrants outstanding at the time of a redemption may be redeemed
at the option of the Company, in whole or in part on a pro-rata basis, at any
time if, at the time notice of such redemption is given by the Company as
provided in Paragraph F, below, the Daily Price has exceeded $18.00 for the
twenty consecutive trading days immediately preceding the date of such notice,
at a price equal to $0.25 per Warrant (the "Redemption Price"). For the purpose
of the foregoing sentence, the term "Daily Price" shall mean, for any relevant
day, the closing bid price on that day as reported by the principal exchange or
quotation system on which prices for the Common Stock are reported. On the
redemption date the holders of record of redeemed Warrants shall be entitled to
payment of the Redemption Price upon surrender of such redeemed Warrants to the
Company at the principal office of the Warrant Agent in __________,
_____________.
F. Notice of redemption of Warrants shall be given at least 30 days prior
to the redemption date by mailing, by registered or certified mail, return
receipt requested, a copy of such notice to the Warrant Agent and to all of the
holders of record of Warrants at their respective addresses appearing on the
books or transfer records of the Company or such other address designated in
writing by the holder of record to the Warrant Agent not less than 40 days prior
to the redemption date.
G. From and after the redemption date, all rights of the Warrantholders
(except the right to receive the Redemption Price) shall terminate, but only if
(a) no later than one day prior to the redemption date the Company shall have
irrevocably deposited with the Warrant Agent as paying agent a sufficient amount
to pay on the redemption date the Redemption Price for all Warrants called for
redemption and (b) the notice of redemption shall have stated the name and
address of the Warrant Agent and the intention of the Company to deposit such
amount with the Warrant Agent no later than one day prior to the redemption
date.
H. The Warrant Agent shall pay to the holders of record of redeemed
Warrants all monies received by the Warrant Agent for the redemption of Warrants
to which the holders of record of such redeemed Warrants who shall have
surrendered their Warrants are entitled.
I. Any amounts deposited with the Warrant Agent that are not required for
redemption of Warrants may be withdrawn by the Company. Any amounts deposited
with the Warrant Agent that shall be unclaimed after six months after the
redemption date may be withdrawn by the Company, and thereafter the holders of
the Warrants called for redemption for which such funds were deposited shall
look solely to the Company for payment. The Company shall be entitled
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to the interest, if any, on funds deposited with the Warrant Agent and the
holders of redeemed Warrants shall have no right to any such interest.
J. If the Company fails to make a sufficient deposit with the Warrant
Agent as provided above, the holder of any Warrants called for redemption may at
the option of the holder (a) by notice to the Company declare the notice of
redemption a nullity as to such holder, or (b) maintain an action against the
Company for the Redemption Price. If the holder brings such an action, the
Company will pay reasonable attorneys' fees of the holder. If the holder fails
to bring an action against the Company for the Redemption Price within 60 days
after the redemption date, the holder shall be deemed to have elected to declare
the notice of redemption to be a nullity as to such holder and such notice shall
be without any force or effect as to such holder. Except as otherwise
specifically provided in this Paragraph J, a notice of redemption, once mailed
by the Company as provided in Paragraph F shall be irrevocable.
Section 8. FRACTIONAL INTERESTS
The Company shall not be required to issue any Warrant Certificate
evidencing a fraction of a Warrant or to issue fractions of shares of securities
on the exercise of the Warrants. If any fraction (calculated to the nearest
one-hundredth) of a Warrant or a share of securities would, except for the
provisions of this Section, be issuable on the exercise of any Warrant, the
Company shall, at its option, either purchase such fraction for an amount in
cash equal to the current value of such fraction computed on the basis of the
closing market price (as quoted on NASDAQ) on the trading day immediately
preceding the day upon which such Warrant Certificate was surrendered for
exercise in accordance with Section 7 hereof or issue the required fractional
Warrant or share. By accepting a Warrant Certificate, the holder thereof
expressly waives any right to receive a Warrant Certificate evidencing any
fraction of a Warrant or to receive any fractional share of securities upon
exercise of a Warrant, except as expressly provided in this Section 8.
Section 9. RESERVATION OF EQUITY SECURITIES
The Company covenants that it will at all times reserve and keep
available, free from any pre-emptive rights, out of its authorized and unissued
equity securities, solely for the purpose of issue upon exercise of the
Warrants, such number of shares of equity securities of the Company as shall
then be issuable upon the exercise of all outstanding Warrants ("Equity
Securities"). The Company covenants that all Equity Securities which shall be
so issuable shall, upon such issue, be duly authorized, validly issued, fully
paid and non-assessable.
The Company covenants that if any equity securities, required to be
reserved for the purpose of issue upon exercise of the Warrants hereunder,
require registration with or approval of any governmental authority under any
federal or state law before such shares may be issued upon exercise of Warrants,
the Company will use all commercially reasonable efforts to cause such
securities to be duly registered, or approved, as the case may be, and, to the
extent practicable, take all such action in anticipation of and prior to the
exercise of the Warrants, including, without limitation, filing any and all
post-effective amendments to the Company's
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Registration Statement on Form SB-2 (Registration No. 333-476-LA) necessary to
permit a public offering of the securities underlying the Warrants at any and
all times during the term of this Agreement, PROVIDED, HOWEVER, that in no event
shall such securities be issued, and the Company is authorized to refuse to
honor the exercise of any Warrant, if such exercise would result in the opinion
of the Company's Board of Directors, upon advice of counsel, in the violation of
any law; and PROVIDED FURTHER that, in the case of a Warrant exercisable solely
for securities listed on a securities exchange or for which there are at least
two independent market makers, in lieu of obtaining such registration or
approval, the Company may elect to redeem Warrants submitted to the Warrant
Agent for exercise for a price equal to the difference between the aggregate low
asked price, or closing price, as the case may be, of the securities for which
such Warrant is exercisable on the date of such submission and the Exercise
Price of such Warrants; in the event of such redemption, the Company will pay to
the holder of such Warrants the above-described redemption price in cash within
10 business days after receipt of notice from the Warrant Agent that such
Warrants have been submitted for exercise.
Section 10. REDUCTION OF CONVERSION PRICE BELOW PAR VALUE
Before taking any action that would cause an adjustment pursuant to
Section 6 hereof reducing the portion of the Exercise Price required to purchase
one share of capital stock below the then par value (if any) of a share of such
capital stock, the Company will use its best efforts to take any corporate
action which, in the opinion of its counsel, may be necessary in order that the
Company may validly and legally issue fully paid and non-assessable shares of
such capital stock.
Section 11. PAYMENT OF TAXES
The Company covenants and agrees that it will pay when due and payable
any and all federal and state documentary stamp and other original issue taxes
which may be payable in respect of the original issuance of the Warrant
Certificates, or any shares of Common Stock or other securities upon the
exercise of Warrants. The Company shall not, however, be required (i) to pay
any tax which may be payable in respect of any transfer involved in the transfer
and delivery of Warrant Certificates or the issuance or delivery of certificates
for Common Stock or other securities in a name other than that of the registered
holder of the Warrant Certificate surrendered for purchase or (ii) to issue or
deliver any certificate for shares of Common Stock or other securities upon the
exercise of any Warrant Certificate until any such tax shall have been paid, all
such tax being payable by the holder of such Warrant Certificate at the time of
surrender.
Section 12. NOTICE OF CERTAIN CORPORATE ACTION
In case the Company after the date hereof shall propose (i) to offer
to the holders of Common Stock, generally, rights to subscribe to or purchase
any additional shares of any class of its capital stock, any evidences of its
indebtedness or assets, or any other rights or options or (ii) to effect any
reclassification of Common Stock (other than a reclassification involving
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merely the subdivision or combination of outstanding shares of Common Stock) or
any capital reorganization, or any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, or any sale, transfer or other disposition of its property and assets
substantially as an entirety, or the liquidation, voluntary or involuntary
dissolution or winding-up of the Company, then, in each such case, the Company
shall file with the Warrant Agent and the Company, or the Warrant Agent on its
behalf, shall mail (by first-class, postage prepaid mail) to all registered
holders of the Warrant Certificates notice of such proposed action, which notice
shall specify the date on which the books of the Company shall close or a record
be taken for such offer of rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up
shall take place or commence, as the case may be, and which shall also specify
any record date for determination of holders of Common Stock entitled to vote
thereon or participate therein and shall set forth such facts with respect
thereto as shall be reasonably necessary to indicate any adjustments in the
Exercise Price and the number or kind of shares or other securities purchasable
upon exercise of Warrants which will be required as a result of such action.
Such notice shall be filed and mailed in the case of any action covered by
clause (i) above, at least ten days prior to the record date for determining
holders of the Common Stock for purposes of such action or, if a record is not
to be taken, the date as of which the holders of shares of Common Stock of
record are to be entitled to such offering; and, in the case of any action
covered by clause (ii) above, at least 20 days prior to the earlier of the date
on which such reclassification, reorganization, consolidation, merger, sale,
transfer, other disposition, liquidation, voluntary or involuntary dissolution
or winding-up is expected to become effective and the date on which it is
expected that holders of shares of Common Stock of record on such date shall be
entitled to exchange their shares for securities or other property deliverable
upon such reclassification, reorganization, consolidation, merger, sale,
transfer, other disposition, liquidation, voluntary or involuntary dissolution
or winding-up.
Failure to give any such notice or any defect therein shall not affect
the legality or validity of any transaction listed in this Section 12.
Section 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANT CERTIFICATES, ETC.
The Warrant Agent shall account promptly to the Company with respect
to Warrants exercised and concurrently pay to the Company all moneys received by
the Warrant Agent for the purchase of securities or other property through the
exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by Warrantholders during normal business hours at its stock transfer
office. Copies of this Agreement may be obtained upon written request addressed
to the Warrant Agent at its stock transfer office in __________, _____________.
Section 14. WARRANTHOLDER NOT DEEMED A STOCKHOLDER
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No Warrantholder, as such, shall be entitled to vote, receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Warrants
represented thereby for any purpose whatever, nor shall anything contained
herein or in any Warrant Certificate be construed to confer upon any
Warrantholder, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting stockholders (except as provided in Section
12 hereof), or to receive dividend or subscription rights, or otherwise, until
such Warrant Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Exercise Price and any other amounts
payable upon such exercise by the Warrant Agent.
Section 15. RIGHT OF ACTION
All rights of action in respect to this Agreement are vested in the
respective registered holders of the Warrant Certificates; and any registered
holder of any Warrant Certificate, without the consent of the Warrant Agent or
of any other holder of a Warrant Certificate, may, in his own behalf for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company suitable to enforce, or otherwise in respect of, his right
to exercise the Warrants evidenced by such Warrant Certificate, for the purchase
of shares of the Common Stock in the manner provided in the Warrant Certificate
and in this Agreement.
Section 16. AGREEMENT OF HOLDERS OF WARRANT CERTIFICATES
Every holder of a Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent and with every other holder of a
Warrant Certificate that:
A. the Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in this Agreement;
and
B. the Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute owner of the
Warrant (notwithstanding any notation of ownership or other writing thereon made
by anyone other than the Company or the Warrant Agent) for all purposes whatever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary.
Section 17. CANCELLATION OF WARRANT CERTIFICATES
In the event that the Company shall purchase or otherwise acquire any
Warrant Certificate or Certificates after the issuance thereof, such Warrant
Certificate or Certificates shall thereupon be delivered to the Warrant Agent
and be canceled by it and retired. The Warrant
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<PAGE>
Agent shall also cancel any Warrant Certificate delivered to it for exercise, in
whole or in part, or delivered to it for transfer, split-up, combination or
exchange. Warrant Certificates so canceled shall be delivered by the Warrant
Agent to the Company from time to time, or disposed of in accordance with the
instructions of the Company.
Section 18. CONCERNING THE WARRANT AGENT
The Company agrees to pay to the Warrant Agent from time to time, on
demand of the Warrant Agent, reasonable compensation for all services rendered
by it hereunder and also its reasonable expenses, including counsel fees, and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Warrant Agent for, and to hold it harmless against,
any loss, liability or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Warrant Agent, arising out of or in
connection with the acceptance and administration of this Agreement.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor warrant agent
under the provisions of Section 21 hereof. In case at the time such successor
to the Warrant Agent shall succeed to the agency created by this Agreement, any
of the Warrant Certificates shall have been countersigned but not delivered, any
such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrant Certificates so countersigned;
and in case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrant Certificates so countersigned; and in case at that time
any of the Warrant Certificates shall not have been countersigned, the Warrant
Agent may countersign such Warrant Certificates either in its prior name or in
its changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.
Section 20. DUTIES OF WARRANT AGENT
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The Warrant Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the holders of Warrant Certificates, by their acceptance thereof,
shall be bound:
A. The Warrant Agent may consult with counsel satisfactory to it (who may
be counsel for the Company or the Warrant Agent's in-house counsel), and the
opinion of such counsel shall be full and complete authorization and protection
to the Warrant Agent as to any action taken, suffered or omitted by it in good
faith and in accordance with such opinion; PROVIDED, HOWEVER, that the Warrant
Agent shall have exercised reasonable care in the selection of such counsel.
Fees and expenses of such counsel, to the extent reasonable, shall be paid by
the Company.
B. Whenever in the performance of its duties under this Agreement, the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by a Chairman or co-Chairman of the Board or
the President or a Vice President or the Secretary of the Company and delivered
to the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
C. The Warrant Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
D. The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
E. The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Warrant Certificate; nor shall
it be responsible for the making of any change in the number of shares of Common
Stock for which a Warrant is exercisable required under the provisions of
Section 6 or responsible for the manner, method or amount of any such change or
the ascertaining of the existence of facts that would require any such
adjustment or change (except with respect to the exercise of Warrant
Certificates after actual notice of any adjustment of the Exercise Price); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock to be
issued pursuant to this Agreement or any Warrant Certificate or as to whether
any shares of Common Stock will, when issued, be validly issued, fully paid and
non-assessable.
F. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or
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more registered holders of Warrant Certificates shall furnish the Warrant Agent
with reasonable security and indemnity for any costs and expenses which may be
incurred. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent, and any recovery of judgment
shall be for the ratable benefit of the registered holders of the Warrant
Certificates, as their respective rights or interests may appear.
G. The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to or
otherwise act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
H. The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from a
Chairman or co-Chairman of the Board or President or a Vice President or the
Secretary or the Controller of the Company, and to apply to such officers for
advice or instructions in connection with the Warrant Agent's duties, and it
shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.
I. The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
J. The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys, agents or employees and the Warrant Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys, agents or employees or for any loss to the Company resulting from
such neglect or misconduct; PROVIDED, HOWEVER, that reasonable care shall have
been exercised in the selection and continued employment of such attorneys,
agents and employees.
K. The Warrant Agent will not incur any liability or responsibility to
the Company or to any holder of any Warrant Certificate for any action taken, or
any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument reasonably
believed by the Warrant Agent to be genuine and to have been signed, sent or
presented by the proper party or parties.
L. The Warrant Agent will act hereunder solely as agent of the Company in
a ministerial capacity, and its duties will be determined solely by the
provisions hereof. The Warrant Agent will not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own negligence, bad faith or willful conduct.
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Section 21. CHANGE OF WARRANT AGENT
The Warrant Agent may resign and be discharged from its duties under
this Agreement upon 30 days' prior notice in writing mailed, by registered or
certified mail, to the Company. The Company may remove the Warrant Agent or any
successor warrant agent upon 30 days' prior notice in writing, mailed to the
Warrant Agent or successor warrant agent, as the case may be, by registered or
certified mail. If the Warrant Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Warrant Agent and shall, within 15 days following such appointment, give
notice thereof in writing to each registered holder of the Warrant Certificates.
If the Company shall fail to make such appointment within a period of 15 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent,
then the Company agrees to perform the duties of the Warrant Agent hereunder
until a successor Warrant Agent is appointed. After appointment and execution
of a copy of this Agreement in effect at that time, the successor Warrant Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Warrant Agent without further act or deed; but
the former Warrant Agent shall deliver and transfer to the successor Warrant
Agent, within a reasonable time, any property at the time held by it hereunder,
and execute and deliver any further assurance, conveyance, act or deed necessary
for the purpose. Failure to give any notice provided for in this Section,
however, or any defect therein shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be.
Section 22. ISSUANCE OF NEW WARRANT CERTIFICATES
Notwithstanding any of the provisions of this Agreement or the several
Warrant Certificates to the contrary, the Company may, at its option, issue new
Warrant Certificates in such form as may be approved by its Board of Directors
to reflect any adjustment or change in the Exercise Price or the number or kind
of shares purchasable under the several Warrant Certificates made in accordance
with the provisions of this Agreement.
Section 23. NOTICES
Notice or demand pursuant to this Agreement to be given or made on the
Company by the Warrant Agent or by the registered holder of any Warrant
Certificate shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
Strategia Corporation
10301 Linn Station Road
P.O. Box 37144
Louisville, Kentucky 94608
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Subject to the provisions of Section 21, any notice pursuant to this
Agreement to be given or made by the Company or by the holder of any Warrant
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class or registered mail, postage prepaid, addressed (until
another address is filed in
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writing by the Warrant Agent with the Company) as follows:
---------------------------
--------------------------------
,
---------- ------------- -----
Attention: Corporate Trust Department
Any notice or demand authorized to be given or made to the registered
holder of any Warrant Certificate under this Agreement shall be sufficiently
given or made if sent by first-class or registered mail, postage prepaid, to the
last address of such holder as it shall appear on the registers maintained by
the Warrant Agent.
Section 24. MODIFICATION OF AGREEMENT
The Warrant Agent may, without the consent or concurrence of the
Warrantholders, by supplemental agreement or otherwise, concur with the Company
in making any changes or corrections in this Agreement that the Warrant Agent
shall have been advised by counsel (who may be counsel for the Company) are
necessary or desirable to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained, or to make any other provisions in regard to matters or questions
arising hereunder and which shall not be inconsistent with the provisions of the
Warrant Certificates and which shall not adversely affect the interests of the
Warrantholders. As of the date hereof, this Agreement contains the entire and
only agreement, understanding, representation, condition, warranty or covenant
between the parties hereto with respect to the matters herein, supersedes any
and all other agreements between the parties hereto relating to such matters,
and may be modified or amended only by a written agreement signed by both
parties hereto pursuant to the authority granted by the first sentence of this
Section.
Section 25. SUCCESSORS
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.
Section 26. KENTUCKY CONTRACT
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Kentucky and for all
purposes shall be construed in accordance with the laws of said State.
Section 27. TERMINATION
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This Agreement shall terminate as of the close of business on the
Expiration Date, or such earlier date upon which all Warrants shall have been
exercised or redeemed, except that the Warrant Agent shall account to the
Company as to all Warrants outstanding and all cash held by it as of the close
of business on the Expiration Date.
Section 28. BENEFITS OF THIS AGREEMENT
Nothing in this Agreement or in the Warrant Certificates shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent, and their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Warrant Agent, their respective
successors and assigns hereunder and the registered holders of the Warrant
Certificates.
Section 29. DESCRIPTIVE HEADINGS
The descriptive headings of the several Sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
Section 30. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but such counterparts shall together constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
19
<PAGE>
be duly executed, all as of the day and year first above written.
STRATEGIA CORPORATION
By:
-------------------------
Title:
-----------------------------------
By:
-------------------------
Title:
20
<PAGE>
EXHIBIT A
VOID AFTER 5 P.M. EASTERN TIME ON _______, 2001
WARRANTS TO PURCHASE COMMON STOCK
W_____ _________ Warrants
STRATEGIA CORPORTAION
CUSIP ___________
THIS CERTIFIES THAT
or registered assigns, is the registered holder of the number of Warrants
("Warrants") set forth above. Each Warrant entitles the holder thereof to
purchase from Strategia Corporation, a corporation incorporated under the laws
of the State of Kentucky ("Company"), subject to the terms and conditions set
forth hereinafter and in the Warrant Agreement hereinafter more fully described
(the "Warrant Agreement") referred to, one fully paid and non-assessable share
of Common Stock, $0.001 par value, of the Company ("Common Stock") upon
presentation and surrender of this Warrant Certificate with the instructions for
the registration and delivery of Common Stock filled in, at any time prior to
5:20 P.M., Eastern time, on __________, 2001 or, if such Warrant is redeemed as
provided in the Warrant Agreement, at any time prior to the effective time of
such redemption, at the stock transfer office in __________, _____________, of
___________________________________, Warrant Agent of the Company ("Warrant
Agent") or of its successor warrant agent or, if there be no successor warrant
agent, at the corporate offices of the Company, and upon payment of the Exercise
Price (as defined in the Warrant Agreement) and any applicable taxes paid either
in cash, or by certified or official bank check, payable in lawful money of the
United States of America to the order of the Company. Each Warrant initially
entitles the holder to purchase one share of Common Stock for $9.00. The number
and kind of securities or other property for which the Warrants are exercisable
are subject to further adjustment in certain events, such as mergers, splits,
stock dividends, recapitalizations and the like, to prevent dilution. The
Company may redeem any or all outstanding and unexercised Warrants at any time
if the Daily Price has exceeded $18.00 for twenty consecutive trading days
immediately preceeding the date of notice of such redemption, upon 30 days
notice, at a price equal to $0.25 per Warrant. For the purpose of the foregoing
sentence, the term "Daily Price" shall mean, for any relevant day, the closing
bid price on that day as reported by the principal exchange or quotation system
on which prices for the Common Stock are reported. All Warrants not theretofore
exercised or redeemed will expire on ________, 2001.
i
<PAGE>
This Warrant Certificate is subject to all of the terms, provisions
and conditions of the Warrant Agreement, dated as of ________, 1996 ("Warrant
Agreement"), between the Company and the Warrant Agent, to all of which terms,
provisions and conditions the registered holder of this Warrant Certificate
consents by acceptance hereof. The Warrant Agreement is incorporated herein by
reference and made a part hereof and reference is made to the Warrant Agreement
for a full description of the rights, limitations of rights, obligations, duties
and immunities of the Warrant Agent, the Company and the holders of the Warrant
Certificates. Copies of the Warrant Agreement are available for inspection at
the stock transfer office of the Warrant Agent or may be obtained upon written
request addressed to the Company at 10301 Linn Station Road, P.O. Box 37144,
Louisville, Kentucky 94608, Attention: Controller.
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
In certain cases, the sale of securities by the Company upon exercise
of Warrants would violate the securities laws of the United States, certain
states thereof or other jurisdictions. The Company has agreed to use its best
efforts to cause a registration statement to continue to be effective during the
term of the Warrants with respect to such sales under the Securities Act of
1933, and to take such action under the laws of various states as may be
required to cause the sale of securities upon exercise to be lawful. However,
the Company will not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful. In certain cases, the Company
may, but is not required to, purchase Warrants submitted for exercise for a cash
price equal to the difference between the market price of the securities
obtainable upon such exercise and the exercise price of such Warrants.
This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.
No holder of this Warrant Certificate, as such, shall be entitled to
vote, receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any matter submitted to stockholders at any meeting
thereof, or give or withhold consent to any merger, recapitalization, issuance
of stock, reclassification of stock, change of par value or change of stock to
no par value, consolidation, conveyance or otherwise) or to receive notice of
meetings
ii
<PAGE>
or other actions affecting stockholders (except as provided in the Warrant
Agreement) or to receive dividends or subscription rights or otherwise until the
Warrants evidenced by this Warrant Certificate shall have been exercised and the
Common Stock purchasable upon the exercise thereof shall have become deliverable
as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock or
other class of stock purchasable upon the exercise of the Warrants evidenced by
this Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.
Every holder of this Warrant Certificate by accepting the same
consents and agrees with the Company, the Warrant Agent, and with every other
holder of a Warrant Certificate that:
(a) this Warrant Certificate is transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and
(b) the Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary.
The Company shall not be required to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate until any tax which may be payable in
respect thereof by the holder of this Warrant Certificate pursuant to the
Warrant Agreement shall have been paid, such tax being payable by the holder of
this Warrant Certificate at the time of surrender.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
WITNESS the facsimile signatures of the proper officers of the Company
and its corporate seal.
Dated:
STRATEGIA CORPORATION
By:
----------------------
Chief Executive Officer
Attest:
-------------------------
iii
<PAGE>
Secretary
Countersigned
- ----------------------------------------
By:
-------------------------
Authorized Officer
iv
<PAGE>
EXHIBIT 21
Subsidiaries
- ------------
Twinsys Dataguard SA (France)
Twin-X SA (France)
Dataguard Limited (Kentucky)
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form SB-2 and related Prospectus of Strategia
Corporation (formerly known as Dataguard Recovery Services, Inc.) for the
registration of 2,012,500 Units, and to the inclusion and incorporation by
reference therein of our report dated March 8, 1996 (except for Note 14, as to
which the date is July 29, 1996), with respect to the consolidated financial
statements of Strategia Corporation included in its Annual Report (Form 10-KSB,
as amended) for the year ended December 31, 1995, filed with the Securities and
Exchange Commission.
Louisville, Kentucky
The foregoing consent is in the form that will be signed upon the Company's
amending its Annual Report on Form 10-KSB for the year ended December 31, 1995.
Ernst & Young LLP
October 14, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,364,253
<SECURITIES> 0
<RECEIVABLES> 1,622,155
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,123,263
<PP&E> 17,996,238
<DEPRECIATION> 9,207,054
<TOTAL-ASSETS> 12,450,731
<CURRENT-LIABILITIES> 5,144,399
<BONDS> 989,710
4,253,834
0
<COMMON> 645,460
<OTHER-SE> (2,784,933)
<TOTAL-LIABILITY-AND-EQUITY> 12,450,731
<SALES> 0
<TOTAL-REVENUES> 7,007,412
<CGS> 0
<TOTAL-COSTS> 6,987,742
<OTHER-EXPENSES> 473,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (453,551)
<INCOME-TAX> 129,723
<INCOME-CONTINUING> (583,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (538,274)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
