<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1997
REGISTRATION NO. 333-14055
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STRATEGIA CORPORATION
(Name of Small Business Issuer in its Charter)
KENTUCKY 7379 61-1064606
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification
of Incorporation or Classification Code No.)
Organization) Number)
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)
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COPIES TO:
<PAGE>
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
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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. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE PRICE PER OFFERING REGISTRATION
REGISTERED SECURITY(1) PRICE(1) FEE
<PAGE>
Common Stock, no par value . . $6.94 $34,904,297 $10,577
</TABLE>
(1)Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
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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
<PAGE>
effective on such date as the Commission, acting pursuant to said Section 8 (a)
, may determine.
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<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1997.
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.
[STRATEGIA CORPORATION LOGO]
1,500,000 Shares
Common Stock
Strategia Corporation ("Strategia" or the "Company") is hereby offering
1,500,000 shares (the "Shares") of the Company's common stock (the "Common
Stock")to investment companies registered under the Investment Company Act of
1940 and other institutional investors. The Company reserves the right to
offer Shares to certain persons who qualify as accredited investors under the
rules of the Securities and Exchange Commission, in the Company's sole
discretion. The initial public offering price is expected to range from $6.00
to $8.00 per share. The minimum investment is 50,000 Shares. The Company's
sale of the Shares is not conditioned upon its receipt and acceptance of
subscriptions of a minimum number of shares. See "Plan of Distribution."
The Shares will be sold by the Company on a "best efforts" basis through
one or more officers and directors of the Company who will not receive
compensation in connection with any offers or sales of the shares. The Company
may also retain agents ("Agents") to sell the Shares on a "best efforts" basis.
See "Plan of Distribution."
The Company expects to offer the Shares through March 31, 1997. The
Company reserves the right to extend the offering through June 30, 1997 or to
terminate this offering at any time before the sale of all 1,500,000 Shares.
The Company has registered a total of 4,025,000 shares of Common Stock and
reserves the right to offer and sell more than 1,500,000 Shares.
The Common Stock is quoted on the over-the-counter-market under the symbol
"STGI." The closing bid price for the Common Stock on
<PAGE>
January 24, 1997 was $6.50. See "Price Range of Common Stock." The Company has
applied to have the Common Stock listed on the Nasdaq SmallCap Market under the
symbol "STGI" upon consummation of this Offering.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 7.
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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.
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
Per Unit. . . . . . . . . . . . . . . . $ $ $
Total . . . . . . . . . . . . . . . . .$ $ $
(1) The Shares are being sold directly by the Company on a "best efforts"
basis. However, if the Company retains Agents to sell Shares, the Company
will pay Agents a selling commission of up to 5% of the gross offering
proceeds attributable to Shares sold such Agents. Such potential payments
to Agents are reflected in this table, but are not otherwise reflected in
this Prospectus. See "Plan of Distribution."
(2) Before deducting offering expenses payable by the Company estimated at
<PAGE>
$400,000.
The Shares are being offered by the Company on a "best efforts" basis, on
the terms and subject to the conditions described herein. The Company reserves
the right to withdraw, cancel or modify the offering hereby and to accept or
reject subscriptions, in whole or in part, for any reason.
This prospectus includes trademarks and registered trademarks of the
Company and other companies.
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The date of this Prospectus is , 1997
<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 Common Stock, please refer 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, as amended by Forms 10-KSB/A filed May 10 and
November 14, 1996; and (b)Quarterly Report on Form 10-QSB for the fiscal quarter
ended September 30, 1996, as amended by Form 10-QSB/A filed November 19, 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.
<PAGE>
SMITH, PRESIDENT, STRATEGIA CORPORATION, P.O. BOX 37144, LOUISVILLE, KENTUCKY
40233-7144, TELEPHONE (502) 426-3434.
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. 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
<PAGE>
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 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.
On January 31, 1997, the Tennessee Department of Employment Security
notified the Company of the Department's intent to award the Company the
contract to manage the Department's Year 2000 conversion. The project will
involve the conversion of the Department's systems, applications and files,
which are estimated to contain approximately 1 million lines of computer
code. An established conversion tool vendor will participate in the code
conversion phase of the project in accordance with a preexisting arrangement
with the Company. Following conversion, the Company will test the converted
systems, applications and files for Year 2000 compliance at one of its Year
2000 testing facilities.
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
<PAGE>
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.
THE OFFERING
Securities offered . 1,500,000 Shares
Common Stock to be
outstanding after the
offering . . . . . 4,769,069 Shares (1)
<PAGE>
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 SmallCap "STGI"
Market symbol
- -------------
(1) Assumes all 1,500,000 Shares sold in the offering. See "Risk Factors --
Best Efforts Offering." Includes 258,184 shares issuable upon conversion of
Series AA Preferred. Excludes 269,134 shares of Common Stock issuable upon
exercise of stock options outstanding at January 24, 1997, including options for
192,795 shares issued after September 30, 1996; 36,000 shares issued after
September 30, 1996, including a total of 16,000 shares issuable upon renewals of
a shareholder loan as of October 7, 1996 and January 6, 1997; and 564,546 shares
of Common Stock issuable upon exercise of outstanding warrants as of January 24,
1997, including warrants for 20,000 shares issued after September 30, 1996. See
"Management-Certain Transactions" and "Description of Securities."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1995 1996
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YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
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<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)
--------- --------- --------- ---------
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Net income (loss) per common share (2) . . $(.01) $.00 $.03 $(.25)
--------- --------- --------- ---------
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<PAGE>
Weighted average shares outstanding. . . . 2,418,792 2,493,603 2,489,537 2,523,790
--------- --------- --------- ---------
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</TABLE>
AS
--
ACTUAL ADJUSTED(3)
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SEPTEMBER 30, 1996
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BALANCE SHEET DATA:
Working capital (deficit) . . . . . . . . . . . . . $(2,021) $ 5,779
Total assets. . . . . . . . . . . . . . . . . . . . 12,451 20,251
Total liabilities . . . . . . . . . . . . . . . . . 10,353 9,553
Total stockholders' equity. . . . . . . . . . . . . 2,098 10,698
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(1)Represents provision for French income taxes payable on income of Twinsys
during 1995 and the nine months ended September 30, 1996, which totaled
$1,199,000 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
1,500,000 shares offered hereby at an assumed initial public offering price of
$6.00 per share, the receipt of the estimated net proceeds therefrom before
payment of commissions, if any, to Agents, and the repayment of an $800,000 loan
from a shareholder. See "Use of Proceeds."
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 FACTORS 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
<PAGE>
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 from Bull
systems 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 Shares
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."
BEST EFFORTS OFFERING. The Company is offering the Shares on a best
efforts basis. Therefore, there is no assurance that any of the 1,500,000
Shares will be sold and that the estimated net proceeds that would be generated
from the sale of all the Shares will actually be received by the Company. If
the Company is unable to sell a sufficient number of Shares, the Company will be
unable to fund all of the intended uses for the anticipated net offering
proceeds described in this Prospectus without obtaining funds from alternative
sources or using working capital generated by operations. Alternative sources
of funding may not be available to the Company, and the Company may not generate
working capital from operations sufficient to fund such intended uses. See "Use
of Proceeds," "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources," and "Plan of
Distribution."
<PAGE>
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 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 has
entered into an agreement with one such vendor, which gives the Company an
exclusive right to use the vendor's tool to convert applications on Bull
systems, and, with certain exceptions, gives the vendor an exclusive right to
participate in the Company's conversion projects for Bull systems through 1997.
See "Business-Company Services-Millennium Services." 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 services 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
<PAGE>
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 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
<PAGE>
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 and 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 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
<PAGE>
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 36.9% of
the Company's outstanding Common Stock. This percentage would be higher if the
Company sells fewer than 1,500,000 Shares in the offering. 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.
There can be no assurance that an active trading market for the Common Stock
will develop or be sustained after this offering. The trading price of the
Common Stock 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. Purchasers of the Shares 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 SmallCap Market upon completion of this offering. In order to qualify for
listing and to continue to be listed on the Nasdaq SmallCap 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 SmallCap Market would reduce market interest in
the Common Stock.
<PAGE>
Failure to meet maintenance criteria in the future may result in the delisting
of the Common Stock from the Nasdaq SmallCap 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 4,805,069 shares of Common Stock outstanding.
The Company has also granted options to directors, employees and others to
acquire 269,134 shares of Common Stock, all of which are currently exercisable.
An additional 564,546 shares of Common Stock are issuable upon the exercise of
stock purchase warrants issued and outstanding as of January 24, 1997, which
carry certain registration rights. Immediately following the completion of this
offering, a total of 3,865,885 shares of Common Stock (including the 1,500,000
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 1,500,000 Shares
offered by the Company at an assumed initial public offering price of $6.00
per share are estimated to be $8,600,000 after deducting the estimated
offering expenses payable by the Company and before payment of commissions,
if any, to Agents. There can be no assurance that the Company will sell all
(or any) of the Shares and actually will receive all (or any) of the
anticipated net proceeds from this offering. See "Risk Factors -- Best
Efforts Offering." The principal reasons for this offering are to increase the
<PAGE>
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 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.
<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 1995.
HIGH LOW
---- ---
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. . . . . . . . . . . . . 8.28 6.00
FISCAL YEAR 1997:
Quarter ended March 31, 1997 (through January 24, 1997) . 7.06 6.50
On January 24, 1997, the closing bid price of the Common Stock on the
over-the-counter market was $6.50 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 believed
there were approximately 620 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.
<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 Shares offered hereby at an assumed initial public offering
price of $6.00 per share (and after deducting estimated offering expenses
payable by the Company and an $800,000 loan to be repaid with offering
proceeds). There can be no assurance that the Company will sell all (or any)
of the Shares and actually will receive all (or any) of the anticipated net
proceeds from this offering. See "Risk Factors -- Best Efforts Offering."
ACTUAL AS ADJUSTED
------ -----------
SEPTEMBER 30, 1996
------------------
(IN THOUSANDS)
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 4,769,069 shares as adjusted(1) . . . . . . . . . . 4,254 13,499
Accumulated (deficit). . . . . . . . . . . . . . . . . . (2,801) (2,801)
Total stockholders' equity. . . . . . . . . . . . . . . 2,098 10,698
Total capitalization. . . . . . . . . . . . . . . . . . . 8,020 15,820
- ----------
(1)As adjusted includes 258,184 shares issuable upon conversion of Series AA
Preferred, but excludes 269,134 shares of Common Stock issuable upon exercise of
stock options outstanding at January 24, 1997, including options for 192,795
shares issued after September 30, 1996; 36,000 shares issued after September 30,
1996; and 564,546 shares of Common Stock issuable upon exercise of outstanding
warrants as of January 24, 1997, including warrants for 20,000 shares issued
after September 30, 1996.
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 1,500,000 Shares offered hereby at an
assumed initial public offering price of $6.00 per
<PAGE>
share and the receipt of the estimated net proceeds therefrom (after deducting
estimated offering expenses payable by the Company but before payment of
commissions, if any, to Agents) and (ii) the conversion of the Series AA
Preferred, the net tangible book value of the Company at September 30, 1996
would have been $10,697,734 or $2.24 per share of Common Stock. This represents
an immediate increase in net tangible book value of $1.60 per share to the
existing stockholders (including the holders of Series AA Preferred) and an
immediate dilution of $3.76 per share to new investors, as illustrated by the
table below. There can be no assurance that the Company will sell all (or any)
of the Shares and actually will receive all (or any) of the anticipated net
proceeds from this offering. See "Risk Factors -- Best Efforts Offering."
Public offering price per share . . . . . . . . . . . . . $6.00
Net tangible book value per share before the offering . $0.70
Net tangible book value per share before offering,
adjusted for conversion of eries AA Preferred. . . . . $0.64
Increase per share attributable to new investors. . . . 1.60
------
Net tangible book value per share after the offering. . . 2.24
------
Dilution per share to new investors . . . . . . . . . . . $3.76
------
------
<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>
1994 1995 1995 1996
---- ---- ---- ----
NINE MONTHS ENDED
-----------------
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
(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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(IN THOUSANDS)
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
$1,199,000 and $354,000, respectively. North American operations incurred a loss
for the period, thereby reducing income for the period on a
<PAGE>
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.
<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.
<PAGE>
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 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
<PAGE>
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 $51,000. The shareholder loan was
renewed as of October 7, 1996 and January 6, 1997. The value of the shares
issued as of those dates totaled $56,000 and $55,000, respectively, which will
be recorded as interest expense. 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
carryforwards 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 carryforwards 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
carryforwards 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 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.
<PAGE>
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 THREE MONTHS ENDED DECEMBER 31, 1996
The Company expects to record a modest loss or a modest profit for the
fourth quarter of 1996. Final results for the quarter and the year are subject
to accounting adjustments and other considerations that have not been completed,
and which could be material.
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 23% during the nine months
ended September 30, 1996, 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
<PAGE>
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 55% 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. One new outsourcing contract
is expected to commence during the first quarter of 1997.
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 increased approximately 6% in 1996. The increase is
attributable to software licensing fees required for outsourcing services that
began in 1996, which were partially offset by 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 decreased 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
<PAGE>
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 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
$755,000 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 35.2% 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 23.8% in 1995, but was more than offset by the decrease in Bull backup
service revenue. Consulting service revenue for 1995 increased by 62.8% 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 23% 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
<PAGE>
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
NorthAmerica and Europe without the need for any 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."
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net cash provided by operating activities decreased to $2,215,000 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 $302,000 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 $46,000 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.
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
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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
<PAGE>
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 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
<PAGE>
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.
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.
On January 31, 1997, the Tennessee Department of Employment Security
notified the Company of the Department's intent to award the Company the
contract to manage the Department's Year 2000 conversion. The project will
involve the conversion of the Department's systems, applications and files,
which are estimated to contain approximately 1 million lines of computer
code. An established conversion tool vendor will participate in the code
conversion phase of the project in accordance with a preexisting arrangement
with the Company. Following conversion, the Company will test the converted
systems, applications and files for Year 2000 compliance at one of its Year
2000 testing facilities.
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.
<PAGE>
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 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
<PAGE>
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.
In October 1996, the Company entered into an agreement with one such
vendor, ConSyGen, Inc., which has developed software tools for use in Year 2000
magnitude assessment and computer code conversion. The agreement provides that
ConSyGen will provide code conversion and technical assessment services upon
request and at scheduled rates per line of code in connection with the Company's
millennium services projects for IBM, Bull and other computer systems. The
Company's right to use ConSyGen's services on conversion projects for Bull
computer systems in North America, the United Kingdom, France and Scandinavia,
and ConSyGen's right to serve as the Company's vendor on such projects, are
exclusive, with certain limited exceptions. The initial term of the agreement
extends to December 31, 1997, with provisions for renewal. The exclusivity
provisions are subject to attainment of specified minimum bookings.
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
<PAGE>
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 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. At least one new outsourcing
<PAGE>
contract is expected to commence during the first quarter of 1997.
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 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
<PAGE>
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 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
<PAGE>
FINANCE HEALTHCARE MANUFACTURING
- ------- ---------- -------------
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.
INSURANCE TELECOMMUNICATIONS GOVERNMENT
- --------- ------------------ ----------
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 services only.
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.
<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, 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 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,
<PAGE>
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.
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:
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
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 G[*]en[*]erale, Twinsys
Francois Domine . . . . 30 Sales and Marketing Manager, Twinsys
Bernard Lesne . . . . . 53 Technology Manager, Twinsys
Dewey D. Minton . . . . 41 Manager, Finance and Administration
<PAGE>
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.
Roland Esnis has been Directeur G[*]en[*]erale 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
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL STOCK OPTIONS#
- --------------------------- ---- ------ ----- ------------ --------------
COMPENSATION
------------
ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION
------------
<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
</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 $1.375, which was the market
price of the Common Stock on October 1, 1995, the date of the grant.
<TABLE>
<CAPTION>
EXERCISE
--------
OR BASE
------
NUMBER OF SECURITIES % OF TOTAL OPTIONS/ PRICE EXPIRATION
UNDERLYING OPTIONS/ SARS GRANTED TO ----- ----------
NAME SARS GRANTED EMPLOYEES IN 1995 ($/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>
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.
VALUE OF
UNEXERCISED
NAME EXERCISABLE UNEXERCISABLE IN-THE-MONEY OPTIONS
- ---- ----------- ------------- --------------------
NUMBER OF SHARES SUBJECT
TO UNEXERCISED OPTIONS
----------------------
Richard W. Smith. . . . . . . 9,336 25,000 $788.54
James P. Buren. . . . . . . . 7,869 17,500 $539.50
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
<PAGE>
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.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of January 24, 1997
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 January 24, 1997, there were
3,046,885 outstanding shares of Common Stock, which is the Company's only class
of voting shares.
DIRECTORS AND NUMBER PERCENT
EXECUTIVE OFFICERS OF SHARES(1) OF CLASS(2)
- ------------------ ------------ -----------
John P. Snyder . . . . . . . . . . . . . . . 1,358,437(3) 40.8%
Richard W. Smith . . . . . . . . . . . . . . 216,425(4) 6.8%
James P. Buren . . . . . . . . . . . . . . . 194,379(5) 6.2%
John A. Brenzel. . . . . . . . . . . . . . . 83,044(6) 2.7%
Roland Esnis . . . . . . . . . . . . . . . . 15,000(7) *
<PAGE>
All current directors and officers as a group
(8 persons). . . . . . . . . . . . . . . . 1,883,830(8) 52.2%
5% BENEFICIAL OWNERS
- --------------------
H. Joseph Schutte
1410 Hadleigh Place
Louisville, KY 40222 . . . . . . . . . . . . 279,780(9) 9.0%
EPI Corporation
9707 Shelbyville Rd.
Louisville, KY 40223 . . . . . . . . . . . . 1,325,903(10) 40.1%
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, KY 40223 . . . . . . . . . . . . 1,536,585(10)(11) 45.6%
- ------------
*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. (3) Includes 1,325,903
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, 14,840 shares issuable upon the conversion
of 3,710 Series AA Preferred and 3,710 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
<PAGE>
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 1,325,903 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 33,456 shares issuable upon the conversion of 8,364 shares of Series
AA Preferred, 25,870 shares issuable upon the exercise of warrants, and 2,500
shares issuable upon the exercise of options, respectively, held by group
members other than EPI Corporation.
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 April 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 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
<PAGE>
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 and October 1996, the Company issued a total of 500,000 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 $1,250,000.
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 G[*]en[*]erale 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.
<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 January 24, 1997, there were approximately 3,046,885 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 January 24, 1997, 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 $10.575 per
share during 1997, 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
<PAGE>
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.
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
<PAGE>
In September and October 1996, the Company issued warrants to purchase a
total of 500,000 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.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 requirements 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
4,805,069 shares of Common Stock outstanding. Immediately following the
completion of this offering, 3,865,885 shares of Common Stock (including
1,500,000 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 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 48,050 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 SmallCap
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.
<PAGE>
Currently, 111,750 of the Restricted Securities are eligible, and the
remaining Restricted Securities will become eligible from time to time during
the period beginning February 21, 1997, for resale in the public market subject
to compliance with Rule 144.
As of January 24, 1997, options and warrants to purchase a total of
approximately 833,680 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 500,000 issued and outstanding shares of Common Stock, who
also would receive a total of 822,730 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.
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.
<PAGE>
PLAN OF DISTRIBUTION
General
The Company is offering to sell up to 1,500,000 Shares of its Common Stock
to registered investment companies and other institutional investors. The
Company reserves the right to offer Shares to certain persons who qualify as
"accredited investors" under the Commission's rules, in the Company's sole
discretion. The Shares will be sold by the Company on a "best efforts" basis
through one or more of its officers and directors who will not receive
compensation in connection with any offers or sales of Shares. The Company may
also retain Agents to sell Shares of Common Stock on a "best efforts" basis. If
the Company retains Agents to sell Shares, the Company will pay the Agents a
selling commission of up to 5% of the gross offering proceeds attributable to
the Shares sold by such Agents. The Company and the Agents, if any, will, in
all likelihood, agree to indemnify each other again certain liabilities,
including liabilities under the Securities Act of 1933.
The initial public offering price is $ . A subscriber is required to
subscribe for a minimum of 50,000 Shares. The Company's sale of Shares is not
conditioned upon its receipt and acceptance of subscriptions for a minimum
number of Shares. Subscribers will be required to agree not to maintain a short
position in the Common Stock before the issuance of Shares of Common Stock
purchased in this offering, and to make certain other representations and
warranties. See "-Covenants and Warranties of Subscribers." The Company
reserves the right to withdraw, cancel, or modify the terms of the offering as
stated in this Prospectus, and to accept or reject subscriptions, in whole or in
part, for any reason.
Determination of Offering Price
The offering price of the Shares has been determined by the Company and may
not be indicative of the market price of the Common Stock after this offering.
In establishing the offering price, the Company considered such factors as the
Company's business and prospects, the market price of the Common Stock, the
volume of trading and fluctuations in the market price of the Common Stock
during the past twelve months, and the proposed terms of the offering. The
Company makes no representations as to any objectively determinable value of the
Common Stock.
Subscription Procedures
An agreement to purchase Shares of the Common Stock offered hereby (the
"Subscription Agreement") accompanies this Prospectus. Subject to availability
and the Company's right to accept or reject subscriptions, in whole or in part,
for any reason, an investor may subscribe for Shares by completing, executing
<PAGE>
and returning the Subscription Agreement, together with payment for all Shares
subscribed for, to Strategia Corporation, 10301 Linn Station Road, P. O. Box
37144, Louisville, KY 40233-7144. The Company will accept or reject each
Subscription Agreement promptly upon submission. The Company's acceptance of a
subscription will be evidenced solely by the delivery to the subscriber of a
written confirmation of sale. Receipt by the Company of a Subscription
Agreement and/or payment for the subscribed Shares shall not constitute
acceptance of a subscription. Upon acceptance of a subscription, the Company
will deliver a confirmation of sale and authorize the issuance of stock
certificates to the subscriber. Subscribers will not be considered shareholders
of the Company until such time as stock certificates are issued to them. The
Company will promptly refund any monies collected and attributed to a
subscription, or portion thereof, rejected by the Company or which is
incomplete.
Covenants and Warranties by Subscribers
In the Subscription Agreement, each subscriber will make covenants,
representations and warranties relating to sales of Common Stock by the
subscriber, the subscriber's status as a investment company registered under the
Investment Company Act of 1940, as amended, or other institutional investor, and
certain other matters. The subscriber will agree not to maintain a short
position in the Common Stock at any time before the Company issues the Shares of
Common Stock purchased by the Subscriber in this offering. In addition, each
subscriber represents and warrants to the Company that the subscriber has not
maintained a short position in the Common Stock at any time after January 14,
1997. These provisions are intended to discourage investment in the Common
Stock offered hereby primarily for short-term speculative purposes.
Subscribers will also represent and warrant to the Company, among other
things, that the subscriber is a registered investment company, institutional
investor, or otherwise qualifies as an "accredited investor" within the meaning
of Rule 501 under the Securities Act; (ii) has received this Prospectus and in
subscribing for Shares is relying only on the representations set forth in this
Prospectus, (iii) has such knowledge and experience in financial and business
matters that subscriber, either alone or with advisors, is capable of evaluating
the merits and risks of an investment in Common Stock; and (iv) has indicated
the subscriber's true state of legal domicile.
"Accredited investor," as defined by Rule 501, includes, among other
things:
* Any organization described in IRC Section 501(c)(3), corporation,
Massachusetts or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000;
* Any trust, with total assets in excess of $5,000,000 not formed for
the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) under the Act;
<PAGE>
* Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
* Any natural person who had an individual income in excess of $200,000
in each of the two most recent years, or joint income with that
person's spouse in excess of $300,000 in each of those years, and has
a reasonable expectation of reaching the same income level in the
current year; and
* Any entity in which all of the equity owners are accredited investors.
Each potential investor should carefully read this Prospectus in its
entirety prior to purchasing Shares. The warranty given to the Company by each
subscriber indicating that the subscriber has received this Prospectus and is
only relying on the representations set forth herein provides the Company with
some assurance that each subscriber has read this Prospectus. To the extent
permitted by federal and state securities laws, the Company might assert its
rights under this warranty to rebut a claim that the subscriber relied on any
oral representations or written representations other than those set forth in
this Prospectus.
The warranties given by each subscriber relating to the subscriber's
qualification as an accredited investor, knowledge and experience in business
and financial matters, and state of legal domicile will assist the Company in
complying with state securities laws. The Company is offering the Shares
principally to registered investment companies and other institutional investors
that qualify for exemptions from registrations under the securities laws of most
states. The Company expects to accept subscriptions submitted only by persons
that qualify for exemptions from registration in the states of their domicile.
The Company might assert its rights under these warranties if a representation
by a subscriber resulted in the Company selling Shares in a state in which the
Company was not permitted to sell the Shares in violation of such state's
securities laws.
A subscriber does not waive any rights under the federal securities laws by
executing the Subscription Agreement.
Termination of Offering
The Company expects to offer the Shares through March 31, 1997. The
Company reserves the right to extend the offering through June 30, 1997 or to
terminate this offering at any time before the sale of all 1,500,000 Shares.
The Company has registered a total of 4,025,000 shares of Common Stock and
reserves the right to offer and sell more than 1,500,000 Shares.
<PAGE>
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Brown, Todd & Heyburn PLLC, Louisville, Kentucky.
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.
<PAGE>
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. INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
PAGE
----
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
<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)
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
(UNAUDITED)
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
<PAGE>
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
----------- ------------
----------- ------------
See accompanying notes to consolidated financial statements.
<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.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
COMMON ACCUMULATED CURRENCY
SERIES A SERIES AA STOCK DEFICIT TRANSLATION TOTAL
-------- --------- ----- ------- ----------- -----
PREFERRED STOCK
---------------
<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)
--------- ----------- ----------- ------------ ------------ -----------
<PAGE>
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.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1995 1995 1996
---- ---- ---- ----
YEARS ENDED DECEMBER 31 SEPTEMBER 30
----------------------- ------------
(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
<PAGE>
<CAPTION>
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>
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
<PAGE>
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.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following at
December 31, 1995:
Land. . . . . . . . . . . . . . . . . . . . . . $260,800
Building and improvements . . . . . . . . . . . 3,154,789
Equipment . . . . . . . . . . . . . . . . . . . 12,551,702
Other . . . . . . . . . . . . . . . . . . . . . 170,720
-----------
$16,138,011
-----------
-----------
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.
<PAGE>
(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.
(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.
<PAGE>
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.
1995 1994
---- ----
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)
---------- -----------
---------- -----------
(4) Long-term Debt and Credit Agreements Long-term debt consists of the
following at December 31, 1995:
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
----------
----------
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 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
<PAGE>
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.
<PAGE>
(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:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . $7,297,047
Less accumulated amortization . . . . . . . . . . . . . . 2,083,064
----------
$5,213,983
----------
----------
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:
CAPITAL OPERATING
LEASES LEASES
------- ---------
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
----------
----------
Total rental expense, including maintenance charges, for operating leases
in 1995 and 1994 was $1,947,904 and $1,534,976, respectively.
<PAGE>
(7) Income Taxes For financial reporting purposes, income before income
taxes includes the following components:
1995 1994
---- ----
Pretax income (loss):
United States . . . . . . . . . . . . $(713,298) $6,313
Foreign . . . . . . . . . . . . . . . 1,198,833 _
---------- ------
$485,535 $6,313
---------- ------
---------- ------
The provision for income tax expense in 1995 is attributable to earnings
from foreign operations, the components of which follows:
Foreign-current . . . . . . . . . . . . . . . . . . . . . $133,630
-deferred. . . . . . . . . . . . . . . . . . . . . 309,938
--------
$443,568
--------
--------
A reconciliation of the income tax expense for the years ended December 31,
1995 and 1994 with the federal statutory rate is as follows:
1995 1994
---- ----
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 $
-------- --------
-------- --------
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.
<PAGE>
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:
1995
----
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)
------------
------------
(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:
COMMON SHARES PRICE RANGE
PER SHARE
------------- ---------
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
-----------
-----------
<PAGE>
Options exercisable-December 31, 1995. . . . 31,839 $1.22
-----------
-----------
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 four 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.
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.
<PAGE>
1995 1994
---- ----
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
----------- -----------
----------- -----------
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.
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
<PAGE>
$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). The 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.
<PAGE>
In September and October 1996, the Company raised $1,250,001 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.
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, Shares 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
PAGE
----
Available Information. . . . . . . . . . . . . . . . . . . . . .
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . .
Price Range of Common Stock. . . . . . . . . . . . . . . . . . .
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . .
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . .
Management's Discussion and Analysis of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Shareholders . . . . . . . . . . . . . . . . . . . . .
Certain Transactions . . . . . . . . . . . . . . . . . . . . . .
Description of Securities. . . . . . . . . . . . . . . . . . . .
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . .
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . .
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . .
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Consolidated Financial Statements . . . . . . . . . . . F-1
-----------
1,500,000 Shares
<PAGE>
-----------
PROSPECTUS
-----------
STRATEGIA CORPORATION
February ___, 1997
See accompanying notes to consolidated financial statements.
<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:
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
--------
--------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On each of 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, and January 6, 1997 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
<PAGE>
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
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 and October 1996, the Company issued 500,000 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 the 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.
EXHIBIT NO.
<PAGE>
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 - 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.
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 April 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 is incorporated by reference to Exhibit 10 to the
Company's 10-QSB for the quarter ended September 30, 1996.
10.9 - Revolving Credit Agreement dated July 1, 1992 with Star Bank,
N.A. is incorporated by reference to Exhibit 10.12 to the
Company's 10-KSB/A filed November 14, 1996 ("November 1996
10-KSB/A").
10.10 - Extension of Revolving Credit Agreement with Star Bank, N.A.
dated November 8, 1996, 1996 is incorporated by reference to
Exhibit 10.6 to the Company's 10-QSB/A filed November 19, 1996
("November 1996 10-QSB/A").
10.11 - Term Lease Master Agreement with IBM Credit Corporation dated
October 15, 1995 is incorporated by reference to Exhibit 10.14 to
the November 1996 10-KSB/A.
<PAGE>
10.12 - Revised Term Lease Supplement with IBM Credit Corporation dated
August 21, 1996 is incorporated by reference to Exhibit 10.3 to
the November 1996 10-QSB/A.
10.13 - Computer Lease Agreement dated July 12, 1995 between Twinsys
Dataguard SA and CEPME is incorporated by reference to Exhibit
10.5 to the November 1996 10-KSB/A.
10.14 - Computer Lease Agreement dated March 7, 1996 between Twinsys
Dataguard SA and Bull SA is incorporated by reference to Exhibit
10.4 to the November 1996 10-QSB/A.
10.15 - Form of Stock Purchase Warrant Agreement between the Company and
certain investors (including John P. Snyder and EPI Corporation)
is incorporated by reference to Exhibit 10.5 to the November 1996
10-QSB/A.
10.16 - Millennium Services Agreement dated as of October 11, 1996,
between the Company and ConSyGen, Inc.**
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).*
99.1 - Form of Subscription Agreement and Purchaser Questionnaire
99.2 - Form of Selling Agent Agreement
- ----------
*Previously filed.
**Omitted portions of the document have been submitted to the Commission
subject to a request for confidential treatment.
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 registration statement, and that the offering of
such securities at that time shall be
<PAGE>
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.
SIGNATURES
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 February 3, 1997.
STRATEGIA CORPORATION
By:
/s/ Richard W. Smith, President
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 Executive
Officer) (Principal Financial
Officer) (Principal Accounting
/s/ Richard W. Smith Officer) February 3, 1997
<PAGE>
Executive Vice President
-Technology, Treasurer, and
/s/ James P. Buren Director February 3, 1997
/s/ John P. Snyder Secretary and Director February 3, 1997
/s/ John A. Brenzel Director February 3, 1997
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
- ----------- ----
NUMBER
------
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 - 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.
5 - Legal Opinion of Brown Todd & Heyburn, PLLC.
<PAGE>
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 April 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 is incorporated by reference to Exhibit 10 to the
Company's 10-QSB for the quarter ended September 30, 1996.
10.9 - Revolving Credit Agreement dated July 1, 1992 with Star Bank,
N.A. is incorporated by reference to Exhibit 10.12 to the
Company's 10-KSB/A filed November 14, 1996 ("November 1996
10-KSB/A").
10.10 - Extension of Revolving Credit Agreement with Star Bank,N.A. dated
November 8, 1996, 1996 is incorporated by reference to Exhibit
10.6 to the Company's 10-QSB/A filed November 19, 1996 ("November
1996 10-QSB/A").
10.11 - Term Lease Master Agreement with IBM Credit Corporation dated
October 15, 1995 is incorporated by reference to Exhibit 10.14 to
the November 1996 10-KSB/A.
10.12 - Revised Term Lease Supplement with IBM Credit Corporation dated
August 21, 1996 is incorporated by reference to Exhibit 10.3 to
the November 1996 10-QSB/A.
10.13 - Computer Lease Agreement dated July 12, 1995 between Twinsys
Dataguard SA and CEPME is incorporated by reference to Exhibit
10.5 to the November 1996 10-KSB/A.
10.14 - Computer Lease Agreement dated March 7, 1996 between Twinsys
Dataguard SA and Bull SA is incorporated by reference to Exhibit
10.4 to the November 1996 10-QSB/A.
10.15 - Form of Stock Purchase Warrant Agreement between the Company and
certain investors (including John P. Snyder and EPI Corporation)
is incorporated by reference to Exhibit 10.5 to the November 1996
10-QSB/A.
<PAGE>
10.16 - Millennium Services Agreement dated as of October 11, 1996
between the Company and ConSyGen, Inc.**
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).*
99.1 - Form of Subscription Agreement and Purchaser Questionnaire
99.2 - Form of Selling Agent Agreement
- -------------
*Previously filed.
**Omitted portions of the document have been submitted to the Commission
subject to a request for confidential treatment.
<PAGE>
Exhibit 5
[Brown Todd & Heyburn PLLC letterhead]
February 3, 1997
Strategia Corporation
10301 Linn Station Road
P.O. Box 37144
Louisville, Kentucky 40233-7144
Gentlemen:
We have acted as counsel for Strategia Corporation, a Kentucky
corporation (the "Company"), in connection with a Registration Statement on
Form SB-2, Registration No. 33-14055, filed on October 15, 1996, to be
amended by Amendment No. 1 to be filed contemporaneously with this letter
(collectively, the "Registration Statement"), under the Securities Act of
1933, as amended (the "Securities Act"), covering 4,025,000 shares of the
Company's common stock having an aggregate proposed maximum offering price of
$34,904,297 (the "Shares").
In connection with this opinion, we have examined the originals or
copies, certified or otherwise identified to our satisfaction, of the
Company's Articles of Incorporation, as amended, its Bylaws, resolutions of
its Board of Directors, and such other documents as we deemed necessary for
purposes of rendering this opinion.
We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to originals of all copies of all documents
submitted to us. We have relied upon statements and certificates of public
officials and corporate officers with respect to the accuracy of all matters
contained therein.
Based upon the foregoing, and subject to the qualifications hereinafter
set forth, it is our opinion that
1. The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Kentucky;
2. The Shares have been duly authorized, and when issued, delivered and
paid for in accordance with the terms of the offering as set forth in the
"Plan of Distribution" section of the prospectus contained in the
Registration Statement, the Shares will be validly issued, fully paid and
nonassessable by the Company.
This opinion is intended solely for use in connection with the
transactions described herein. We hereby consent to the use of our name in
the Registration Statement and in the Prospectus filed as a part thereof and
to the filing of this opinion as an exhibit to the Registration Statement.
In giving such consent, we do not thereby admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
BROWN, TODD & HEYBURN PLLC
/s/ Alan K. MacDonald, Member
<PAGE>
Strategia Corporation
February __, 1997
Page 2
<PAGE>
Exhibit 10.7
PROMISSORY NOTE
$800,000.00 January 6, 1997
Louisville, Kentucky
For value received, STRATEGIA CORPORATION, a Kentucky corporation (the
"Maker"), hereby promises to pay to the order of EPI CORPORATION, a Kentucky
corporation (the "Lender"), the principal sum of Eight Hundred Thousand
Dollars ($800,000.00), together with interest on the principal balance of
this Note from time to time outstanding at an annual rate equal to the "Prime
Rate," as from time to time in effect, PLUS one and one-half percent (1
1/2%). Interest on this Note shall accrue from the date of this Note until
the entire principal balance of and all accrued interest on this Note have
been paid in full.
The term of this Note shall be ninety (90) days including the date of
this Note. On April 5, 1997, the Maker shall pay to the holder of this Note
the entire outstanding principal balance of, and all accrued but unpaid
interest due under, this Note.
This Note is a renewal promissory note to supersede promissory notes dated
July 13, 1992 (the "Original Note") for $300,000 and an additional $500,000
loan on January 17, 1995 (the "Subsequent Note") extended by Lender to Maker.
The Original Note and the Subsequent Note were issued in connection with a
Security Agreement (the "Security Agreement") and a Second Mortgage (the
"Mortgage"), respectively, between the Maker and the Lender and dated as of
the date of the Original Note and amended as of January 17, 1995. This Note
is secured as provided in the Security Agreement and in the Mortgage, and
references therein to the "Note" shall hereafter relate to this Note. Upon
delivery of this Note, the Subsequent Notes shall terminate and be of no
further force or effect.
All payments of principal and interest on this Note shall be paid to the
holder at EPI Corporation, 9707 Shelbyville Road, Louisville, Kentucky 40223,
or to such other person or entity or at such other place as may be designated
in writing by the holder of this Note.
As used in this Note, "Prime Rate" shall mean the annual interest rate
most recently published in THE WALL STREET JOURNAL, Midwest Edition, from
time to time, which is designated as the Prime Rate. The interest rate of
this Note shall be adjusted, from time to time, on the same day on which the
Prime Rate is published in THE WALL STREET JOURNAL, Midwest Edition. As of
the date of this Note, the Prime Rate is 8.25%, and the annual interest rate
for this Note is 9.75%. All interest on this Note shall be computed on the
basis of the actual number of days elapsed over an assumed year of three
hundred sixty (360) days. Interest shall accrue and shall have accrued from
the date of this Note even if it
<PAGE>
is signed at a later date.
The Maker may prepay, in whole or in part, the principal of this Note
without premium or penalty. All prepayments shall, at the holder's option,
first be applied to applicable costs and penalties, next to accrued interest,
and finally to the principal balance.
Failure of the holder of this Note to exercise any of its rights and
remedies shall not constitute a waiver of any provision of this Note or of
the Security Agreement or the Mortgage, or of any of such holder's rights and
remedies, nor shall it prevent the holder from exercising any rights or
remedies with respect to the subsequent happening of the same or similar
occurrences. All remedies of the holder hereof shall be cumulative to the
greatest extent permitted by law. Time shall be of the essence for payment
of all payments of interest and principal of this Note.
The occurrence of an Event of Default (as defined in the Security
Agreement or in the Mortgage) shall be a default under this Note. Upon any
default under this Note, the holder of this Note may declare the entire
outstanding principal balance of, and all accrued but unpaid interest on,
this Note to be immediately due and payable.
If there is any default under this Note, and this Note is placed in the
hands of an attorney for collection, or is collected through any court,
including, without limitation, any bankruptcy court, the Maker promises to
pay to the order of the holder hereof such holder's reasonable attorney's
fees and court costs incurred in collecting or attempting to collect or
securing or attempting to secure this Note or enforcing the holder's rights
with respect to any collateral securing this Note, to the extent allowed by
the laws of the Commonwealth of Kentucky or any state in which any collateral
for this Note is situated.
This Note has been delivered in, and shall be governed by and construed
in accordance with, the laws (including, without limitation, the conflicts of
law rules) of the Commonwealth of Kentucky.
Except as otherwise expressly provided herein or in the Security
Agreement or in the Mortgage, all parties to this instrument, whether makers,
sureties, guarantors, endorsers, accommodation parties or otherwise, shall be
jointly and severally bound, and jointly and severally waive presentment,
demand, notice of dishonor, protest, notice of protest, notice of nonpayment
or nonacceptance and any other notice and all due diligence or promptness
that may otherwise be required by law, and all exemptions to which they may
now or hereafter be entitled under the laws of the Commonwealth of Kentucky
or of the United States of America or any state thereof. The holder of this
instrument may, with or without notice to any party, and without affecting
the obligations of any maker, surety, guarantor, endorser,
<PAGE>
accommodation party or any other party to this Note (1) extend the time for
payment of either principal or interest from time to time, (2) release or
discharge any one or more parties liable on this Note, (3) suspend the right
to enforce this Note with respect to any persons, (4) change, exchange or
release any property in which the holder has any interest securing this Note,
(5) justifiably or otherwise, impair any collateral securing this Note or
suspend the right to enforce against any such collateral, and (6) at any time
it deems it necessary or proper, call for and should it be made available,
accept, as additional security, the signature or signatures of additional
parties or a security interest in property of any kind or description or both.
STRATEGIA CORPORATION
By /s/Richard W. Smith
-----------------------------------------
Title: President
-------------------------------------
-3-
<PAGE>
Exhibit 10.16
MILLENNIUM SERVICES AGREEMENT
This is a Millennium Services Agreement (this "Agreement"), dated as of
October 11, 1996, between Strategia Corporation ("Strategia"), a Kentucky
corporation, and ConSyGen, Inc. ("ConSyGen"), a Texas corporation.
RECITALS
A. The so-called Millennium problem results from the fact that much
existing computer software stores and computes years based on a 2-digit code.
For example, the year 1996 is stored as 96. The problem will occur in the year
2000 when the computer software will be unable to distinguish the year 2000 from
the year 1900 because, using a 2-digit code, they would both be represented as
00.
B. To avoid the Millennium problem, computer users will have to convert
("Millennium Conversion") their software so that it can properly identify the
correct century associated with the year and properly process information
related to the year.
C. ConSyGen has developed and intends to continue to develop computer
software that can be used to perform or assist in the performance of Millennium
Conversion ("Millennium Software"). ConSyGen has also developed and will
continue to develop software ("Impact Estimate Software") which can be used to
perform or assist in the performance of an estimate of the impact that will
result to certain software from the Millennium problem ("Impact Estimate").
ConSyGen engages in the business of providing Millennium Conversion and Impact
Estimate services.
D. Strategia engages in the business of providing services related to the
Millennium problem.
E. The parties wish to provide Strategia with an exclusive arrangement,
subject to certain terms and conditions, for Millennium Services for software
that is used on Bull mainframe computers in certain designated areas. As used
in this Agreement, Bull mainframe computers shall include those manufactured by
Group Bull and its affiliates and their predecessors, including Honeywell Inc.
F. The purpose of this Agreement is to set forth the terms and conditions
by which Strategia may subcontract to ConSyGen certain Millennium Conversion and
Impact Estimate services.
<PAGE>
AGREEMENT
Intending to be legally bound, ConSyGen and Strategia hereby agree as
follows:
1. PROVISION OF MILLENNIUM SERVICES. ConSyGen shall provide to
Strategia (and its subsidiaries and affiliates) and their customers such
Millennium Conversion and Impact Estimate services (collectively, "Millennium
Services") as Strategia may request in writing (a "Request") from time to
time; provided, however, that ConSyGen shall not be required to provide
Millennium Services pursuant to a Request if (a) ConSyGen reasonably
determines that (i) the software tools ConSyGen has available to it are not
adequate to perform the Millennium Services involved in that particular
Request and (ii) the cost to ConSyGen to acquire or develop such software
tools would be disproportionate relative to the amount ConSyGen would receive
under this Agreement for the provision of such Millennium Services AND (b)
ConSyGen gives Strategia notice of such determination within three business
days of ConSyGen's receipt of the completed project questionnaire (described
in Section 3 of this Agreement) related to that Request (whether the
questionnaire is submitted prior to the actual Request or in connection with
the Request).
2. PRICE; PAYMENT. Strategia shall pay ConSyGen for the services
provided hereunder at the rates set forth on Exhibit A attached to this
Agreement. In addition, Strategia shall reimburse ConSyGen for its reasonable
direct out-of-pocket costs of travel (including transportation, accommodations,
and meals) and communications incurred in providing the Millennium Services
requested by Strategia. Amounts due to ConSyGen in connection with a project
shall be invoiced to Strategia as Strategia receives, and in proportion to,
progress payments received by Strategia from the customer with respect to the
Millennium Services. Strategia shall pay all such invoices within 30 days of
their receipt.
3. PROJECT QUESTIONNAIRES. ConSyGen shall provide to Strategia
ConSyGen's standard form questionnaire in effect from time to time which will
consist of requests for information that ConSyGen might reasonably require in
order to assess the scope of the Millennium Services that might be involved in a
project. In connection with each Request for Millennium Services, Strategia
shall submit to ConSyGen a completed questionnaire. In addition, Strategia may
submit a completed questionnaire to ConSyGen prior to an actual Request (e.g.,
in anticipation of Strategia submitting a bid to a prospective customer).
Promptly upon receipt of each completed questionnaire, ConSyGen shall confirm to
Strategia the scope and price of the project and an estimated time frame for
completion of the project (the "Estimated Time Frame").
4. TIMING. Upon receipt of a Request for the performance of services
from Strategia, ConSyGen shall use its best efforts to complete the services
within the Estimated Time Frame.
5. DESCRIPTION OF MILLENNIUM CONVERSION SERVICES. There are various
ways to do a Millennium Conversion. For example, two digit year codes can be
converted to four digit year codes, or, for software that only needs to
recognize a limited span of years, a two digit year code can be retained with
logic added to the software to properly determine the appropriate
2
<PAGE>
century associated with a particular two digit year code. Different
solutions will have different advantages and disadvantages to the customer.
Strategia, in consultation with ConSyGen, shall be responsible for working
with the customer to determine the best solution for that customer. ConSyGen
shall implement the Millennium Conversion for that customer using the
solutions specified to ConSyGen by Strategia. Upon the completion by
ConSyGen of Millennium Conversion services, the computer software that has
been converted shall have identical functionality to the software prior to
the Millennium Conversion except that it shall be year 2000 compliant, that
is, the software will recognize and be able to correctly process year codes
even after the turn of the century. ConSyGen shall provide file
repopulation utilities and data dictionary replacements for the
Millennium-compliant data or databases.
6. EXCLUSIVE ARRANGEMENT. For software that is used on Bull mainframe
computers located in North America and those areas designated on or pursuant to
Exhibit B (the "Exclusive Bull Software"), the following special provisions
apply:
(i) Except pursuant to this Agreement, ConSyGen shall not provide any
Millennium Services directly or indirectly with respect to any of the
Exclusive Bull Software nor shall it provide or license to any person
or entity any of the Millennium Software or Impact Estimate Software
in a manner that would permit it to be utilized on or in connection
with any of the Exclusive Bull Software. If ConSyGen receives any
inquiries regarding Millennium Services related to Exclusive Bull
Software, ConSyGen shall refer such inquiries to Strategia.
(ii) Strategia shall not subcontract out to any person or entity other
than ConSyGen any Millennium Services with respect to Exclusive Bull
Software unless ConSyGen is unable to deliver the required Millennium
Services within a reasonable time frame demanded by Strategia's
customer. In addition, Strategia's obligations set forth in this
Section 6(ii) may be suspended by Strategia from time to time if
ConSyGen in connection with providing Millennium Services fails in
Strategia's reasonable opinion to provide requested Millennium
Services in a timely fashion and in a manner consistent with industry
standards. Any such suspension shall continue until ConSyGen has
demonstrated to Strategia that it has eliminated the problem that
resulted in the suspension. Strategia shall not unreasonably withhold
or delay a determination that the problem has been eliminated.
Except for the provisions in this Section 6, the arrangement provided for in
this Agreement shall not result in any exclusive obligations of either Strategia
or ConSyGen to deal with the other in connection with Millennium Services. If
Strategia has not booked (i.e., provided ConSyGen with formal Requests to
perform) the following gross dollar aggregate amounts of services by the
following dates, ConSyGen may, but shall not be required to, terminate the
provisions of this Section 6:
June 30, 1997 US $5,000,000 (at least US $4,000,000 must pertain to
Exclusive Bull Software)
3
<PAGE>
December 31, 1997 US $10,000,000 (at least US $8,000,000 must pertain to
Exclusive Bull Software)
7. SERVICES NOT PROVIDED BY CONSYGEN. Services other than Millennium
Services required in connection with any of the projects (e.g., planning and
testing), will be separately provided by or through Strategia or its customers.
8. MARKETING SUPPORT. Strategia shall be responsible for providing its
own marketing. ConSyGen shall support Strategia as requested in prospect
presentations and provision of standard marketing material. If ConSyGen so
assists at Strategia's request, Strategia shall reimburse ConSyGen for its
reasonable out-of-pocket travel and similar expenses incurred by ConSyGen in
connection with such assistance. In marketing, Strategia may, but shall not be
required to identify ConSyGen as the entity that will be performing the
Millennium Services. Strategia may market the Millennium Services under the
applicable ConSyGen trade names or such other trade names as Strategia may
determine and ConSyGen shall approve (such approval not to be unreasonably
withheld) from time to time. ConSyGen shall have no right in or to such trade
names developed by Strategia. Strategia may request from time to time that the
Millennium Services or the Millennium Conversion Software or the Impact Estimate
Software be customized for Strategia. ConSyGen may, at its discretion, perform
such customization. ConSyGen shall provide to Strategia at no cost an original
set of marketing materials, which Strategia may copy, alter, and distribute;
provided, however, that if the ConSyGen name or logo remains on such materials,
Strategia may not alter the materials without ConSyGen's written consent, which
consent shall not be unreasonably withheld. Strategia and ConSyGen shall each
maintain the confidentiality of the trade secret information (including
methodologies and the like) of the other. Trade secret information shall not
include information in the public domain or known to or learned by the other
party from another source not subject to a confidentiality obligation.
9. TERM AND EFFECT OF TERMINATION. The initial term of this Agreement
shall commence upon the execution and delivery by both parties of this Agreement
and shall continue until December 31, 1997. The term of this Agreement shall
continue thereafter for renewal terms, each of which shall be one year in length
until and unless at least ninety (90) days prior to the end of the initial term
or any renewal term, either party shall give the other written notice that the
term shall not renew. Upon the expiration or termination of this Agreement,
ConSyGen shall complete any Millennium Service Projects that Strategia requests
ConSyGen to complete to the extent that such projects were either commenced by
ConSyGen, or were bid out by Strategia prior to the expiration or termination.
The completion of such Millennium Service Projects shall be on the same terms
and conditions as if the term of this Agreement had not expired or terminated.
For any uncompleted projects at the expiration or termination for which
Strategia does not request ConSyGen to complete, ConSyGen shall cooperate with
Strategia to transition the projects to a new Millennium Service provider and
ConSyGen shall be paid for the Millennium Services based upon the percentage of
the Millennium Services project that ConSyGen has completed.
4
<PAGE>
10. PROJECT ADMINISTRATION. Strategia shall be responsible for overall
Millennium project administration with each of its customers. Such
administration will include all planning and liaison with the customer. The
Millennium Conversion services provided by ConSyGen shall include support to
Strategia's staff in connection with the testing of the converted software.
Unless ConSyGen and Strategia agree otherwise, the Millennium Conversion
services provided by ConSyGen under this Agreement shall not include those set
forth on Exhibit C.
11. TRAINING. ConSyGen shall provide to Strategia at no cost reasonable
training for marketing and project staff. Such training shall be conducted at
ConSyGen's Phoenix Facility. Strategia shall be responsible for its own
expenses associated with attendance at such training.
12. OWNERSHIP OF PRE AND POST CONVERSION SOFTWARE. ConSyGen shall have
no right, title or interest in any of the software on which the Millennium
Services are to be performed or on the software produced pursuant to a
Millennium Conversion. All such right, title and interest shall remain with and
be vested in the owner of the software prior to conversion. ConSyGen shall
treat all such software, both before and after Millennium Conversion, as
confidential and propriety information. ConSyGen shall maintain adequate
security so that such software is accessible only to those of its employees who
require such access in order to perform the services provided for under this
Agreement. ConSyGen shall not in any other way disclose or publish such
software nor shall it use such software for any purpose other than as provided
in this Agreement. The provisions of this paragraph shall survive any
termination of this Agreement.
13. COVENANTS AND WARRANTIES. Except as expressly set forth in this
Agreement, ConSyGen makes no covenants or warranties whatsoever concerning the
Millennium Services to be provided hereunder, including, without limitation, any
implied warranties of merchantability or fitness for a particular purpose.
14. NOTICES. All Notices required to be given under this Agreement shall
be given in writing and shall be deemed to be given when received by the
intended recipient or when mailed by first class mail, postage prepaid, and
addressed as listed below:
If to Strategia: Strategia Corporation
P. O. Box 37144
Louisville, Kentucky 40233-7144
Attention: President
With Copy to: Brown, Todd & Heyburn PLLC
3200 Providian Center
Louisville, Kentucky 40202-3363
Attention: James A. Huguenard
5
<PAGE>
If to ConSyGen: ConSyGen, Inc.
10201 South 51st Street, Suite 140
Phoenix, Arizona 85044
Attention: President
With Copy to: H. Weiss & Associates P.C.
4024 N. Brown Ave.
or such other address as a party may have given to the other by Notice
hereunder.
15. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the internal laws of the Commonwealth of Kentucky.
16. RELATIONSHIP OF THE PARTIES. The relationship of the parties
hereunder shall be that of contractor/subcontractor. This Agreement does not
create a partnership, joint venture, agency, or other entity or relationship.
17. AMENDMENT AND WAIVER. The terms of this Agreement may be amended
and the obligations of the parties under this Agreement may be waived only
pursuant to a writing signed by both parties (or in the case of a waiver, by the
party waiving its rights). No course of dealing under this Agreement shall
constitute any amendment or waiver.
18. ENTIRE AGREEMENT. This document, including Exhibits A ,B, and C,
constitutes the entire agreement, and supersedes all prior and contemporaneous
agreements, between the parties relating to the subject matter hereto (except
that the Mutual Confidentiality and Non-Disclosure Agreement between the parties
dated July 31, 1996, shall not be superseded and shall remain in full force and
effect) .
19. OTHER CONVERSION SERVICES. All conversion services, other than
Millennium Services, generally offered by ConSyGen shall be subject to this
Agreement and be treated as if such services were Millennium Services for all
purposes under this Agreement except that (i) Section 6 of this Agreement shall
not apply to such other services and (ii) project prices for such other services
will be negotiated between the parties based on sizing estimates to be provided
by Strategia on the standard ConSyGen questionnaire.
20. ASSIGNABILITY. Neither Strategia nor ConSyGen may assign this
Agreement without the prior written consent of the other party, which consent
may be withheld at the discretion of the other party.
21. ARBITRATION. Any disputes between the parties under this
Agreement shall be resolved by binding arbitration in Louisville, Kentucky,
pursuant to the rules of the American Arbitration Association.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above, but actually on the date set forth below.
STRATEGIA CORPORATION CONSYGEN, INC.
By /s/ Richard W. Smith By /s/ Robert L. Stewart
Title: President Title: President
Date: October 18, 1996 Date: October 18, 1996
7
<PAGE>
EXHIBIT A
PRICING FOR MILLENNIUM SERVICES
-------------------------------------------------
BULL MILLENNIUM CONVERSION SERVICES
-------------------------------------------------
PRICING BAND STRATEGIA PRICE(1)
-------------------------------------------------
Less than * lines of code *
-------------------------------------------------
* lines of code *
-------------------------------------------------
* lines of code *
-------------------------------------------------
* lines of code *
-------------------------------------------------
* lines of code *
-------------------------------------------------
More than * lines of code *
-------------------------------------------------
The Strategia price for non-Bull Software shall be * per net lines of code;
provided, if ConSyGen provides Millennium Conversion services on non-Bull
Software for any customer other than Strategia at a lower price (after taking
into account all pricing attributes such as add-ons, rebates, etc.), that lower
price will be charged to Strategia rather than the * per net lines of code.
Impact Estimate shall be charged at * per net line, except (i) if the Impact
Estimate is an integral part of a total conversion project, there will be no
charge for the Impact Estimate, and (ii) ConSyGen may, in its discretion, agree
to rebate all or part of the pricing for an Impact Estimate against the price of
Millennium Conversion Services as an inducement to customer closure.
Strategia and ConSyGen may, but shall not be obligated to, agree to different
pricing than set forth on this Exhibit A from time to time for any project or
group of projects. Such agreement shall be set forth in writing and signed by
the party making the concession (or both parties if the concessions go both
ways).
* Represents omitted information submitted to the Securities and Exchange
Commission subject to a request for confidential treatment.
- -----------------------------
(1)Price is per "net" lines of code. Net lines of code is the total number
of lines of code minus all blank lines and comment lines.
<PAGE>
EXHIBIT B
ADDITIONAL AREAS FOR EXCLUSIVITY PROVISION OF SECTION 6
United Kingdom
France
Scandinavia
And such other areas that ConSyGen and Strategia may agree to in writing from
time to time.
<PAGE>
EXHIBIT C
MAJOR PROJECT RESPONSIBILITIES NOT ASSUMED BY CONSYGEN
ConSyGen is not require to perform any of the following services unless
Strategia and ConSyGen subsequently agree that ConSyGen will provide some or all
of these services for one or a group of projects. Any such agreement shall be
in writing and shall specify, among other things, the amount of consideration to
be received by ConSyGen for providing such services.
1. Customer initial planning
2 The following project activities:
* Project planning (ConSyGen will provide a standard Project Work
Plan to assist this activity)
* Project administration
* Client liaison and support, including, as required:
* delivery to ConSyGen of all required client code
* definition of work units (specifically including the
verification work unit)
* preparation of work unit test plans (specifically including
the verification work unit)
* preparation of a test environment
* client response to date origin and cross-reference reports
* client response to procedure issues
3. Testing
* verification of test plan results
* performance of testing on delivered work units (ConSyGen will
provide support)
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 8, 1996 (except for Note 14, as to which the
date is July 29, 1996), in Amendment No. 1 to the Registration Statement (Form
SB-2 No. 333-14055) and related Prospectus of Strategia Corporation for the
registration of 1,500,000 shares of its common stock.
Ernst & Young LLP
Louisville, Kentucky
January 29, 1997
<PAGE>
Exhibit 99.1
SUBSCRIPTION AGREEMENT AND PURCHASER QUESTIONNAIRE
1. SUBSCRIPTION. Subject to acceptance hereof by Strategia Corporation
(the "Company"), a Kentucky corporation, as more fully described in the
Prospectus dated February , 1997 (including any amendments and supplements
thereto, collectively, the "Prospectus"), the undersigned (the "Subscriber")
hereby subscribes to purchase _____________ Shares (the "Shares") of the
Corporation's common stock ("Common Stock")for an aggregate purchase price of
$___________________ ($____ per Share). The minimum subscription amount is
50,000 Shares or $______. The Subscriber encloses a check payable to
"Strategia Corporation" for the full amount of the purchase price. The
Subscriber understands and acknowledges that this subscription may be
rejected by the Company, in its sole and absolute discretion. The Subscriber
further understands and acknowledges that by executing this Subscription
Agreement and Purchaser Questionnaire (the "Subscription Agreement"),
Subscriber is agreeing to all the terms of this Subscription Agreement.
Terms used but not defined herein shall have the meanings set forth in the
Prospectus.
2. REPRESENTATIONS AND WARRANTIES. As a material inducement to the
Company to accept this subscription, the Subscriber represents and warrants
to the Company as follows:
(a) The Subscriber acknowledges that it has received and reviewed
a copy of the Prospectus. In making its decision to purchase the Shares, the
Subscriber has relied on an independent investigation made by the Subscriber
and/or on the advice given to the Subscriber by its own counsel, accountants
or other advisors. The Subscriber and its advisors have been supplied with
or have sufficient access to all information, including financial statements
and other financial information of the Company, and have the opportunity to
ask questions and receive answers concerning the terms and conditions of the
offering and any other information to which a reasonable investor would
attach significance in making investment decisions, so that as a reasonable
investor the Subscriber has been able to make its decision to purchase the
Shares. No oral representations have been made or oral information furnished
to the Subscriber in connection with the purchase of the Shares that were in
any way inconsistent with the Prospectus.
(b) The Subscriber acknowledges that the purchase of the Shares
involves a high degree of risk. The Subscriber has such knowledge and
experience in financial and business matters that Subscriber is capable of
evaluating the merits and risks of an investment in Shares. The Subscriber
has evaluated the risks of investing in Shares in light of the foregoing and
is satisfied that the investment is appropriate.
(c) The Subscriber (i) has adequate means of providing for its
current needs and possible personal contingencies; (ii) has no need for
liquidity in an investment in the Shares; (iii) is able to bear the economic
risks of an investment in the Shares for an indefinite period; and (iv) at
the present time could afford a complete loss of such investment.
(d) The Subscriber has full right and power to perform pursuant to
this Subscription Agreement and make an investment in the Company and, if the
Subscriber is a corporation, partnership, trust or other entity, is
authorized and otherwise duly qualified to purchase and hold the Shares and
to enter into this Subscription Agreement.
(e) Neither the Subscriber nor any of its affiliates or agents has
maintained a short position in the Common Stock since January 14, 1997.
Neither the undersigned nor any of its affiliates or agents will, directly or
indirectly, maintain any short position in the Common Stock before the Shares
are issued to the Subscriber.
<PAGE>
(f) The Subscriber understands that the Shares are being offered
and sold to it in reliance on specific registration requirements of federal
and state securities laws or exemptions therefrom and that the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of the Subscriber set forth
herein in order to determine the suitability of the Subscriber to acquire the
Shares. The representations, warranties and agreements contained herein are
true and correct as of the date hereof and may be relied upon by the Company,
and the Subscriber will notify the Company immediately of any adverse change
in any such representations and warranties which may occur prior to the
acceptance of the subscription and will promptly send the Company written
confirmation thereof. The representations, warranties and agreements of the
Subscriber contained herein shall survive the execution and delivery of this
Subscription Agreement and the purchase of the Shares.
3. INDEMNIFICATION. The Subscriber agrees to indemnify and hold
harmless the Company and its agents, attorneys, accountants and employees from
and against all damages, losses, costs and expenses (including reasonable
attorneys' fees) that any of them may incur by reason of the Subscriber's
failure to fulfill any of the terms or conditions of this Subscription
Agreement or by reason of the material breach of any of the representations
and warranties made by the Subscriber herein.
4. SUBSCRIBER INFORMATION. The following information is furnished in
order for the Company and its counsel to determine whether the Subscriber
will be a qualified purchaser for purposes of certain state securities laws.
(Please print or type. Attach additional information on separate sheets if
necessary.)
A. Name(s) of Subscriber(s)*:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
B. Address*:
-----------------------------------------------------------
- -------------------------------------------------------------------------------
City: State: Zip:
----------------------- ---------------- -----------------------
Telephone:
------------------
*If joint tenants or tenants in common, provide information for each
investor.
C. Date of organization, formation or incorporation (year of birth, if
an individual):
D. Profession or business (and title, if applicable):
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
E. State of legal domicile:
-----------------------------------------------
5. ACCREDITED INVESTOR STATUS. The Subscriber represents and warrants
as indicated below by the undersigned's initials:
(a) PARTNERSHIPS, CORPORATIONS, TRUSTS OR OTHER ENTITIES: (Initial
all of the following statements that are applicable)
-2-
<PAGE>
(i) The Subscriber hereby certifies that it is:
(A) a registered broker-dealer, bank, savings
-------- institution, trust company, insurance company,
investment company as defined in the Investment
Company Act of 1940, pension or profit-sharing
trust, or other financial institution or
institutional buyer (including, but not limited
to, any "qualified institutional buyer" as defined
in SEC Rule 144A), whether Subscriber is acting
for itself or in some fiduciary capacity;
(B) an employee benefit plan whose total assets exceed
-------- $5,000,000;
(C) an employee benefit plan whose investment
-------- decisions are made by a plan fiduciary which is
either a bank, savings and loan association or an
insurance company (as defined in Section 3(a) of
the Securities Act) or an investment adviser
registered as such under the Investment Advisers
Acts of 1940;
(D) a self-directed employee benefit plan, including
-------- an Individual Retirement Account, with investment
decisions made solely by persons that are
accredited investors;
(E) an organization described in Section 501(c)(3) of
-------- the Internal Revenue Code of 1986, as amended (the
"IRS"), not formed for the specific purpose of
acquiring the Shares with total assets in excess
of $5,000,000;
(F) any corporation, partnership or Massachusetts or
-------- similar business trust, not formed for the
specific purpose of acquiring the Shares, with
total assets in excess of $5,000,000; or
(G) a trust with total assets in excess of $5,000,000,
-------- not formed for the specific purpose of acquiring
the Shares, whose purchase is directed by a person
who has such knowledge and experience in financial
and business matters that he is capable of
evaluating the merits and risks of an investment
in the Shares.
(ii) The Subscriber hereby certifies that it is an
-------- accredited investor because it is an entity in which
each of the equity owners qualifies as an accredited
investor under item (a)(i)or items (b)(i), (ii) or
(iii) below.
(b) INDIVIDUAL INVESTORS: (Initial one or more of the following
three statements)
-3-
<PAGE>
(i) ____ I certify that I am an accredited investor because I
have had individual income (exclusive of any income earned by my
spouse) of more than $200,000 in each of the most recent two years and
I reasonably expect to have an individual income in excess of $200,000
for the current year.
(ii) ____ I certify that I am an accredited investor because I
have had joint income with my spouse in excess of $300,000 in each of
the two most recent years and I reasonably expect to have joint income
with my spouse in excess of $300,000 for the current year.
(iii) ____ I certify that I am an accredited investor
because I have an individual net worth, or my spouse and I have a
joint net worth, in excess of $1,000,000.
6. MISCELLANEOUS.
(a) REMEDIES. Notwithstanding any of the representations,
warranties, acknowledgments or agreements made herein by the Subscriber, the
Subscriber does not hereby or in any other manner waive any rights granted to
the Subscriber under federal or state securities laws.
(b) ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Subscription Agreement and any other agreements executed on the
date hereof by the parties hereto embody the complete agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, that may have related
to the subject matter hereof in any way.
(c) SURVIVAL OF REPRESENTATION AND WARRANTIES. All representations
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Subscription
Agreement.
(d) JOINT AND SEVERAL OBLIGATIONS; SUCCESSORS AND ASSIGNS. The
Subscriber agrees that (i) if the Subscriber is more than one person, the
obligations of the Subscriber under this Subscription Agreement shall be joint
and several; and (ii) all covenants and agreements contained in this
Subscription Agreement by or on behalf of any of the parties hereto shall bind
the respective successors and assigns of such parties, whether so expressed or
not.
(e) GOVERNING LAW. The laws of the Commonwealth of Kentucky shall
govern all issues concerning the construction, validity and interpretation of
this Subscription Agreement.
(f) NOTICES. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Subscription
Agreement shall be in writing and shall be delivered in person or sent by
certified or registered mail, return receipt requested and postage and charges
prepaid, to the recipient, and shall be deemed to have been given when so
delivered or 48 hours after the same is deposited in a regularly maintained
receptacle for the United States mail, addressed and sent as herein provided.
Such notices, demands and other communications shall be sent to the Subscriber
at the address indicated on this Subscription Agreement, and to the Company at
its principal executive office, or to such other address or to the attention of
such other person as the recipient party has specified by prior written notice
to the sending party.
-4-
<PAGE>
(g) DEFAULT. Neither party hereto shall be deemed to be in default
of any covenant, agreement, representation or warranty contained in the
Subscription Agreement, unless such default, if curable, shall remain uncured 30
days after the defaulting party has received a written notice specifying such
default or breach, requiring that the default be remedied and stating that such
notice is a "Notice of Default" hereunder.
(h) EFFECT OF HEADINGS. The headings in this Subscription Agreement
are for convenience only and shall not affect the construction hereof.
(i) NON-TRANSFERABILITY. The Subscriber agrees not to transfer or
assign this Subscription Agreement, or any of the Subscriber's interests herein,
and further agrees that the transfer or assignment of the Common Stock will be
made only in accordance with all applicable laws.
(j) AMENDMENT. This Subscription Agreement may be amended only by a
writing executed by both the Subscriber and the Company.
(k) ADDITIONAL INFORMATION. Within five days after receipt of a
written request from the Company, the Subscriber agrees to provide such
additional information and to execute and deliver such additional documents as
may reasonably be necessary to comply with any and all laws, regulations and
ordinances to which the Company is, or may become, subject.
-5-
<PAGE>
CORPORATIONS ONLY
SIGNATURE PAGE FOR CORPORATE SUBSCRIBERS
- -------------------------------------------------------------------------------
Name of Corporation (print or type)
By: *
--------------------------------------------------------------------------
(Signature of authorized agent)
Title:
-------------------------------------------------------------------------
Taxpayer Identification No.:
---------------------------------------------------
Executed at:
-------------------------------------------------------------------
City State
on __________________________, 1996.
Acknowledged, Accepted and Agreed to:
STRATEGIA CORPORATION
By:
-------------------------------------
Name:
----------------------------
Title:
---------------------------
Date:
-----------------------------------
- --------------------
* Please furnish corporate enabling resolution
-6-
<PAGE>
PARTNERSHIPS ONLY
SIGNATURE PAGE FOR PARTNERSHIP SUBSCRIBERS
- -------------------------------------------------------------------------------
Name of Partnership (print or type)
By:*
---------------------------------------------------------------------------
(Signature of a general partner)
By:
----------------------------------------------------------------------------
(Signature of additional general partner if required by
partnership agreement)
Taxpayer Identification No.:
---------------------------------------------------
Executed at:
-----------------------------------------,-------------------------
City State
on , 1996
---------------------------
Acknowledged, Accepted and Agreed to:
STRATEGIA CORPORATION
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
Date:
-----------------------------------
- -----------------------
* Please provide a copy of the executed partnership agreement. All partners
should sign this Subscription Agreement or indicate the authority of the partner
who signs on behalf of the partnership.
-7-
<PAGE>
TRUSTS ONLY
SIGNATURE PAGE FOR TRUSTS
- -------------------------------------------------------------------------------
Name of Trust (print or type)
- -------------------------------------------------------------------------------
Name of Trustee (print or type)
- -------------------------------------------------------------------------------
Date Formed
By:*
---------------------------------------------------------------------------
Trustee's signature
Taxpayer Identification No.:
---------------------------------------------------
Executed at:
-------------------------------,-----------------------------------
City State
on , 1996
-----------------------
Acknowledged, Accepted and Agreed to:
STRATEGIA CORPORATION
By:
-----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
---------------------------------------
- ------------
* Please provide a copy of the executed trust agreement if a trustee executes
this page.
<PAGE>
INDIVIDUALS ONLY
SIGNATURE PAGE FOR INDIVIDUAL SUBSCRIBERS
Investor #1 Investor #2
- ----------------------------- ------------------------------
Signature Signature
- ----------------------------- ------------------------------
Social Security Number Social Security Number
- ----------------------------- ------------------------------
Print or Type Name Print or Type Name
Executed at: Executed at:
- ----------------------------- ------------------------------
City City
- ----------------------------- ------------------------------
State State
, 1996 , 1996
- ----------------------- ------------------------
Acknowledged, Accepted and Agreed to:
STRATEGIA CORPORATION
By:
--------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Date:
------------------------------------
<PAGE>
STRATEGIA CORPORATION
$
----------------------------------------
1,500,000 SHARES
COMMON STOCK
$ PER SHARE
----------------------------------------
SUBSCRIPTION AGREEMENT AND
PURCHASER QUESTIONNAIRE
----------------------------------------
February , 1997
<PAGE>
Exhibit 99.2
STRATEGIA CORPORATION
COMMON STOCK
1,500,000 SHARES
-------------
SELLING AGENT AGREEMENT
-------------
February , 1997
- ------------------------
- ------------------------
- ------------------------
Gentlemen:
The undersigned, Strategia Corporation, a Kentucky corporation (the
"Company"), appoints____________________________________ as selling agent
(the "Sales Agent"), on a nonexclusive, best efforts basis, to sell the
shares of the Company described below and hereby confirms its agreement (this
"Agreement") with the Sales Agent as follows:
1. DESCRIPTION OF THE SHARES. The Company proposes to issue and sell up
to 1,500,000 shares of its common stock (the "Shares"). The Shares and the
terms of the offering are more fully described in the Prospectus contained in
the Company's Form SB-2 Registration Statement (Reg. No. 333-14055) (the
"Registration Statement") filed with the United States Securities and Exchange
Commission (the "Commission").
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Sales Agent that:
(a) The Company has prepared the Registration Statement 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
Commission thereunder and has filed the Registration Statement with the
Commission. Copies of the 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 made available by the Company to you. The Registration Statement,
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained
<PAGE>
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 (i) the form of
prospectus first filed with the Commission pursuant to Rule 424(b) or (ii)
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 Sales Agent for
delivery to purchasers of the Shares, together with the term sheet or
abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7)
under the Act.
(b) The Company is offering the Shares to be sold through the efforts
of selling agents solely pursuant to exemptions from registration under the
securities laws of each state in which the offering is being made for
offers and sales to registered broker-dealers, banks, savings institutions,
trust companies, insurance companies, investment companies as defined in
the Investment Company Act of 1940, pension or profit-sharing trusts, or
other financial institutions or institutional buyers (including, but not
limited to, any "qualified institutional buyer" as defined in SEC Rule
144A), whether acting for itself or in some fiduciary capacity.
(c) No action, suit or proceeding for the purpose of preventing or
suspending the use of the Prospectus has been initiated or, to the
knowledge of the management of the Company, threatened by any governmental
agency or body nor has any such agency or body notified the Company of any
objections to the use of the Prospectus.
(d) As of the date hereof and at all times thereafter during the
Offering Period (as hereinafter defined), neither the Prospectus nor any
amendment or supplement thereto will include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing representations and warranties shall not apply
to information, if any, contained in or omitted from the Prospectus or any
such amendment or supplement in reliance upon, and in conformity with,
written information furnished to the Company by the Sales Agent
specifically for use in the preparation thereof.
(e) The Company is duly organized and validly existing and in good
standing under the laws of the Commonwealth of Kentucky and has full power
and authority (corporate and other) to conduct its business as described in
the Prospectus. The Company has all such power, authority, authorizations,
approvals, orders, licenses, certificates and permits necessary to enter
into this Agreement, to carry out the provisions and conditions hereof, and
to commence the offering. This Agreement has been duly and validly
authorized, executed and delivered by the Company and is a valid and
binding agreement and obligation of the Company.
(f) Except as contemplated in the Prospectus, after the respective
dates as of which information is given in the Prospectus, the Company has
not incurred any
2
<PAGE>
liabilities or obligations, direct or contingent, or entered into any
transactions which are material to the Company (except as may be described
in reports filed with the Commission pursuant to the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (together,
the "Exchange Act") and incorporated by reference into the Registration
Statement and the Prospectus), and there has not been any material change
in the capital stock, short-term debt or long-term debt of the Company, or
any material adverse change, or, to the knowledge of the management of the
Company, any development involving a prospective material adverse change, in
the condition (financial or other), net worth or results of operations of
the Company.
(g) The Company has conducted its business so as to comply in all
material respects with applicable statutes, rules, regulations, decisions,
directives and orders, and there is not pending or, to the knowledge of the
management of the Company, threatened, any action, suit or proceeding to
which the Company is or may be a party, before or by any court or
governmental agency or body, which might result in any material adverse
change in the condition (financial or other), business, prospects, net
worth or results of operations of the Company or might materially and
adversely affect the properties or assets thereof.
(h) The Registration Statement contains a list of agreements,
instruments, or understandings to which the Company or its subsidiaries is
a party or by which they or their properties may be bound and which may be
material to the Company ("Material Agreements"). The Company is not in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any Material Agreement, nor is the
Company in violation of any term or provision of its Articles of
Incorporation or Bylaws. The execution and delivery of this Agreement and
the incurrence of the obligations herein set forth will not conflict with,
or constitute a breach of or default under, the Articles of Incorporation
or the Bylaws of the Company or any Material Agreement or any statute
regulating the business of the Company, or any rule, regulation, decision,
directive or order of any court or governmental agency or body having
jurisdiction over the Company or any of its activities or properties; and
except as expressly set forth herein and in the Prospectus, no consent,
approval, authorization or order of any court or governmental agency or
body is required for the consummation of the transactions contemplated
hereby.
(i) The Company's authorized and issued capital stock is stated in
the Prospectus. The Shares being sold by the Company pursuant to this
Agreement, when issued and delivered in accordance with this Agreement,
will be duly and validly issued and outstanding and fully paid, and the
Company's Common Stock conforms to all statements in relation thereto
contained in the Prospectus.
3. EMPLOYMENT OF SALES AGENT; SALES AND DELIVERY OF THE SHARES. On the
basis of the representations and warranties herein contained, and subject to the
terms and conditions and covenants and agreements set forth herein, the parties
hereto agree as follows:
3
<PAGE>
(a) The Sales Agent will act as selling agent for the Company on a
nonexclusive, "best efforts" basis to sell for the account of the Company
up to 1,500,000 Shares at a price of $_____ per Share, and the Sales Agent
agrees to use its best efforts to effect such sales. However, the Sales
Agent makes no commitment to purchase all or any of the Shares. The Sales
Agent's engagement hereunder will terminate on the earlier of (a) March 31,
1997, or such later date not beyond June 30, 1997, to which the Company may
extend the offering; (b) the sale of all of the Shares; or (c) termination
of the Sales Agent's engagement by the Company in accordance with the
provisions of Section 10 hereof. The period from the Effective Date (as
defined in Section 10(a)) to such termination of the Sales Agent's
engagement shall be referred to as the "Offering Period."
(b) The Sales Agent will offer Shares solely to registered
broker-dealers, banks, savings institutions, trust companies, insurance
companies, investment companies as defined in the Investment Company Act of
1940, pension or profit-sharing trusts, or other financial institutions or
institutional buyers (including, but not limited to, any "qualified
institutional buyer" as defined in SEC Rule 144A), whether acting for
itself or in some fiduciary capacity. The Sales Agent will deliver a copy
of the Prospectus and a subscription agreement in the form accompanying the
Prospectus (the "Subscription Agreement") to each prospective investor.
(c) All subscribers will be instructed to execute a Subscription
Agreement and to make their remittances payable to the Company, in
accordance with the instructions contained in the Prospectus and the
Subscription Agreement. All completed Subscription Agreements and proceeds
received by the Sales Agent shall promptly be transmitted to the Company,
and the Company will accept or reject each Subscription Agreement promptly
upon submission. The Company's acceptance of a subscription will be
evidenced solely by the delivery to the subscriber of a written
confirmation of sale. Receipt by the Company of a Subscription Agreement
and/or payment for the subscribed Shares shall not constitute acceptance of
a subscription. Upon acceptance of a subscription, the Company will deliver
a confirmation of sale and, promptly after the subscriber's check is
cleared, authorize the issuance of stock certificates to the subscriber.
The Company will promptly refund any monies collected and attributed to a
subscription, or portion thereof, rejected by the Company or which is
incomplete. If any subscription delivered to the Company is rejected by the
Company and returned with the proceeds therefor to the Sales Agent, the
funds from the rejected subscription shall be promptly returned to the
subscribers.
(d) As compensation for its efforts, the Sales Agent shall be paid by
the Company a commission of 5% of the proceeds of the Shares sold through
the efforts of the Sales Agent. The commission shall be paid to the Sales
Agent promptly upon the Company's authorization of the issuance of stock
certificates for Shares sold through the Sales Agent's efforts.
4
<PAGE>
4. ADDITIONAL COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Sales Agent that:
(a) The Company will notify the Sales Agent promptly of any request
by the Commission or any other governmental body or agency that the
Prospectus be amended or supplemented.
(b) The Company will advise the Sales Agent, promptly after it shall
receive notice or obtain knowledge thereof, of the initiation or
threatening of any action, suit or proceeding for the purpose of preventing
or suspending the use of the Prospectus and that it will use its best
efforts to prevent the issuance of any order or ruling preventing or
suspending the offering or to obtain its withdrawal if such an order or
ruling should be issued.
(c) The Company will furnish to the Sales Agent, as soon as
available, copies of the Prospectus and all amendments and supplements
thereto in such quantities as the Sales Agent may from time to time
reasonably request.
(d) The Company will apply the net proceeds from the offering
received by it substantially in the manner set forth under "Use of
Proceeds" in the Prospectus.
(e) During the three-year period after the Effective Date, the
Company or its successors or assigns will comply with all registration,
filing and reporting requirements of the Securities Act and the Exchange
Act.
5. COVENANTS OF THE SALES AGENT. The Sales Agent covenants and agrees
with the Company that:
(a) The Sales Agent will maintain an accurate record of all orders to
purchase Shares and funds received, including the name, address and social
security or taxpayer identification number of each prospective purchaser
and the manner in which the stock certificate is to be issued.
(b) The Sales Agent is registered with the Commission as a
broker-dealer and is a member in good standing with the National Association
of Securities Dealers, Inc. (the "NASD"), and the Sales Agent and all its
agents and representatives have or will have all required licenses and
registrations to perform its obligations under this Agreement; and such
registrations, membership and licenses will remain in effect during the
term of this Agreement. The Sales Agent agrees that, in performing its
obligations under this Agreement, the Sales Agent will comply with all
applicable statutes and the rules and regulations of the NASD and any other
federal or state governmental agency that are applicable to it. This
Agreement has been duly and validly authorized, executed and delivered by
the Sales Agent and is its valid and binding agreement and obligation.
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(c) The Selling Agent agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind which, in the opinion
of the Company, requires the amendment or supplementation of the
Prospectus, the Selling Agent will forthwith discontinue offering Shares
until the Selling Agent receives copies of the supplemented or amended
Prospectus, or until it is advised in writing by the Company that the use
of the Prospectus may be resumed, and has received copies of any additional
or supplemental filings which are incorporated by reference in the
Prospectus, and, if so directed by the Company, the Selling Agent will
deliver to the Company all copies, other than permanent file copies then in
the Selling Agent's possession, of the Prospectus before such
supplementation or amendment.
6. RESPONSIBILITY FOR PAYMENT OF EXPENSES. The Company covenants and
agrees to pay the costs and expenses typically borne by issuers of securities in
a public offering, including, without limitation (i) the costs and charges of
any transfer agent or registrar and the cost of preparing stock certificates;
(ii) the qualification of the Shares under state securities laws (if necessary),
including filing fees and the reasonable fees and disbursements of counsel in
connection therewith; (iii) the filing fee of the NASD; and (iv) the printing
and delivery to the Sales Agent of copies of the Prospectus and any amendments
or supplements thereto.
7. CONDITIONS TO OBLIGATIONS. The obligations of each of the parties as
provided herein shall be subject to the continuing accuracy, as of the date
hereof and as of the date of the Company's acceptance of any subscription for
Shares obtained through the efforts of the Sales Agent, of the representations
and warranties of the other party herein.
8. INDEMNIFICATION.
(a) The Company agrees to indemnity and hold harmless the Sales
Agent, each of its agents, attorneys, officers, directors, and employees,
and any person who controls the Sales Agent within the meaning of the
Securities Act of 1933 against any and all losses, claims, lawsuits,
damages, or liabilities to which the Sales Agent or its agents, attorneys,
officers, directors or control persons may become subject insofar as such
losses, claims, lawsuits, damages, or liabilities (including awards and/or
judgments) arise out of or are in connection with the Prospectus or any
amendment or supplement thereto, or any representations, statements or
other acts by the Company, its officers, directors, employees, agents, or
control persons, and will reimburse the Sales Agent, its officers,
directors, employees, agents, attorneys and any person who controls the
Sales Agent for any and all costs and expenses, including reasonable
counsel fees incurred by them in connection with the investigation or
defense of any such loss, claim, lawsuit, damage or liability; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, lawsuit, or liability arises out of or is based
upon an untrue statement or omission made in the Prospectus or any
amendment or supplement
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thereto or in reliance upon and in conformity with written information
furnished to the Company, if any, by or on behalf of the Sales Agent
specifically for use with reference to the Sales Agent in preparation
thereof.
(b) The Sales Agent will indemnity and hold harmless the Company,
each of its agents, attorneys, officers, directors, and employees, and any
person who controls the Company within the meaning of the Securities Act of
1933 against any and all losses, claims, lawsuits, damages, or liabilities
to which the Company or any such person may become subject insofar as such
losses, claims, lawsuits, damages or liabilities (including awards and/or
judgments) arise out of or in connection with or result from any statements
furnished to the Company in writing by the Sales Agent that are included in
the Prospectus or any amendment or supplement thereto and which are
furnished specifically for use with reference to the Sales Agent in
preparation thereof, and will reimburse any and all costs and expenses,
including reasonable counsel fees incurred by the Company or other
indemnified person in connection with investigating or defending any such
loss, claim, lawsuit, damage, or liability.
(c) If the indemnification of a person specified above is for any
reason held unenforceable, the indemnifying party agrees to contribute to
the losses, claims, damages and liabilities for which such indemnification
is held unenforceable, (i) in such proportion as is appropriate to reflect
the relative benefits to the Company, on one hand, and the Sales Agent, on
the other hand, of the transaction as contemplated (whether or not the
transaction is consummated) or (ii) if (but only if) the allocation
provided for in clause (i) is for any reason held unenforceable, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) but also the relative fault of the Company, on
the one hand, and the Sales Agent, on the other hand, as well as any other
relevant equitable considerations. The Company agrees that, for the
purposes of this paragraph, the relative benefits to the Company and the
Sales Agent of the transaction as contemplated hereby shall be deemed to be
in the same proportion that the total value paid or contemplated to be paid
to or by the Company, any affiliate of the Company, or any of its
shareholders, as the case may be, as a result of or in connection with the
transaction bears to the fees paid or to be paid to the Sales Agent under
this Agreement; provided however, that, to the extent permitted by
applicable law, in no event shall the Sales Agent be required to contribute
an aggregate amount in excess of the aggregate fees actually paid to it
under this Agreement.
(d) If an indemnified party is requested or required to appear as a
witness in any action brought by or on behalf of or against the
indemnifying party or any affiliate of the indemnifying party in a
transaction contemplated by this Agreement in which such indemnified party
is not named as a defendant, the indemnifying party shall reimburse the
indemnified party for all expenses incurred by it in connection with such
indemnified party's appearing and preparing to appear as such a witness,
including, without limitation, reasonable fees and disbursements of its
legal counsel.
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(e) Neither party shall, without the other party's prior written
consent, which consent shall not be unreasonably withheld, settle,
compromise, or consent to the entry of any judgment in any pending or
threatened claim, action, or proceeding in respect of which indemnification
could be sought against it under the indemnification provisions of this
Agreement, whether or not any indemnified party is an actual or potential
party to a 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.
(f) The foregoing reimbursement, indemnity, and contribution
obligations shall be in addition to any liabilities which the indemnifying
party may otherwise have. The reimbursement and indemnity obligations of
the indemnifying party under such subparagraphs shall extend upon the same
terms and conditions to any affiliate of the indemnified party, and the
shareholders, directors, officers, employees, attorneys and control persons
(if any), as the case may be, of the indemnified party and any of its
affiliates.
(g) Prior to any proposed sale, distribution, or liquidation of all
or a significant portion of a party's assets or any significant
recapitalization of its outstanding securities in a transaction pursuant to
which such party's ability to honor its obligations hereunder might be
adversely affected, such party will notify the other party in writing
thereof and, if requested by the other party, shall arrange alternative
means for providing for the obligations of the parties set forth in this
Section 8, including the assumption of such obligations by a third party or
the issuance or creation of an escrow, in each case in an amount and upon
terms and conditions satisfactory to the indemnified part). The provisions
of Section 8 shall survive any termination of the authorization provided by
this Agreement.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company and the Sales Agent
herein, or in certificates delivered pursuant hereto, and the indemnity
agreements contained in Section 8 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
Sales Agent or any controlling persons, or the Company or any of its officers,
directors or any controlling persons, and shall survive the issuance of the
Shares.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective (the "Effective Date") upon
the later to occur of (i) the time the Registration Statement shall be
declared effective by the Commission; and (ii) the execution and delivery
of this Agreement by the Company and the Sales Agent.
(b) Either the Company or the Sales Agent may terminate this
Agreement by giving notice to the other as provided in Section 11 at any
time. Any such termination
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shall not terminate the obligations of the parties pursuant to Sections 3,
6, and 8 of this Agreement.
11. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be hand delivered
or sent by U. S. certified mail, return receipt requested, or other form of
delivery requiring signature by the person receiving the delivery, or telecopied
and confirmed to the following addresses:
To the Sales Agent:
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To the Company: Strategia Corporation
P. O. Box 37144
10301 Linn Station Road
Louisville, Kentucky 40232-7144
With a copy to: Brown, Todd & Heyburn PLLC
3200 Providian Center
Louisville, Kentucky 40202-3363
Attn: Alan K. MacDonald
502/589-5400
All notices shall be deemed delivered upon the earlier of the date the receiving
party signs the return receipt or five days after the notice is postmarked. Any
party to this Agreement may change such address for notices by sending to the
parties to this Agreement written notice of a new address for such purpose.
12. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the Sales Agent, the Company and their respective successors and assigns.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person or corporation, other than the parties hereto and
their successors and assigns and the persons referred to in Section 8, any legal
or equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained; this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective successors and assigns and such indemnified
persons and for the benefit of no other person or corporation. No purchaser of
any of the Shares from the Sales Agent shall be construed a successor or assign
merely by reason of such purchase.
13. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Kentucky.
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14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. The validity of this Agreement shall
not be impaired if each party does not execute the same counterpart so long as
the execution of each party appears on the counterparts taken as a whole.
If the foregoing correctly sets forth the understanding between the
Company and the Sales Agent, please so indicate by signing in the space provided
below for that purpose, whereupon this Agreement shall constitute a binding
agreement between the Company and the Sales Agent.
STRATEGIA CORPORATION
By:
---------------------------------
Name: Richard W. Smith
Title: President
ACCEPTED as of the date first above
written.
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(Name of Sales Agent)
By:
---------------------------------
Name:
Title:
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