SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21662
Strategia Corporation
(Exact name of registrant as specified in its charter)
Kentucky 61-1064606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
10301 Linn Station Road, P.O. Box 37144, Louisville, KY 40233-
7144
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code 502-426-
3434
Former name, former address, and former fiscal year, if changed
since last
report.
Indicate by check [X] whether the registrant (1) has filed all
reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934
during the preceding 12 months (or for such shorter period that
the registrant
was required to file such reports), and (2) has been subject to
such filing
requirements for the past 90 days. Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of
common stock, as of the latest practicable date - 4,664,893.
STRATEGIA CORPORATION AND
SUBSIDIARIES
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
September 30,
December 31,
1997
1996
(Unaudited)
Assets
<S> <C>
<C>
Current assets:
Cash and cash equivalents $ 6,124,680 $
338,436
Accounts receivable, net 1,935,134
1,099,636
Other current assets 347,530
57,738
Total current assets 8,407,344
1,495,810
Property and equipment 19,952,218
18,335,606
Less accumulated depreciation and amortization 11,282,432
9,851,977
8,669,786
8,483,629
Other assets 373,198
765,971
$17,450,328
$10,745,410
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 102,260 $
63,008
Current installments of obligations under
capital leases 1,369,970
1,973,729
Note payable to stockholder -
800,000
Accounts payable 653,198
695,079
Accrued income taxes 34,027
55,196
Accrued expenses and other current liabilities 2,107,959
896,865
Total current liabilities 4,267,414
4,483,877
Long-term debt, excluding current installments 1,054,022
978,598
Obligations under capital leases,
excluding current installments 614,705
1,705,724
Customers' deposits 40,767
54,117
Deferred revenue 1,649,230
1,072,469
Deferred income taxes 330,484
378,312
Total liabilities 7,956,622
8,673,097
Stockholders' equity:
Preferred stock -- authorized 2,000,000 shares:
Series AA Convertible Preferred ($10 stated value);
authorized 100,000 shares; issued and
outstanding 0 shares at September 30, 1997
and 64,546 shares at December 31, 1996 -
645,460
Common stock without par value. Authorized
15,000,000 shares; issued and outstanding
4,664,893 shares at September 30, 1997 and
3,038,885 shares at December 31, 1996 13,621,276
4,386,834
Accumulated deficit (3,966,897)
(2,938,423)
Foreign currency translation (160,673)
(21,558)
Total stockholders' equity 9,493,706
2,072,313
$17,450,328
$10,745,410
</TABLE>
See notes to unaudited condensed consolidated financial
statements.
STRATEGIA CORPORATION AND
SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended Nine Months
Ended
September 30, September 30,
1997 1996 1997
1996
<S> <C> <C> <C>
<C>
Service revenues $2,567,650 $2,287,694 $8,041,348
$7,007,412
Operating expenses:
Cost of services 2,780,422 1,850,530 6,688,833
5,223,215
Selling, general and
administrative expenses 811,501 636,465 2,105,695
1,764,527
3,591,923 2,486,995 8,794,528
6,987,742
Operating income (loss) (1,024,273) (199,301) (753,180)
19,670
Other income (expense):
Interest expense (107,548) (123,616) (383,831)
(487,555)
Other 167,476 7,574 251,754
14,334
59,928 (116,042) (132,077)
(473,221)
Loss before
income taxes $ (964,345) $(315,343) $ (885,257)
$ (453,551)
Provision for income taxes 33,812 23,636 117,813
129,723
Net loss $ (998,157) $(322,305) $(1,003,070)
$ (583,274)
Net loss per share
of common stock $ (0.21) $ (0.13) $ (0.25)
$ (0.25)
Weighted average number
of common shares
outstanding 4,664,715 2,535,320 4,070,425
2,523,790
</TABLE>
See notes to unaudited condensed consolidated financial
statements.
STRATEGIA CORPORATION AND
SUBSIDIARIES
<TABLE>
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<CAPTION>
Series AA Foreign
Preferred Common Accumulated Currency
Stock Stock Deficit Translation
Total
<S> <C> <C> <C> <C>
<C> Balance at
December 31,
1996 $ 645,460 $ 4,386,834 $(2,938,423) $ (21,558)
$ 2,072,313
Issuance of
1,366,000
shares of
Common Stock,
Net of
offering costs - 8,583,256 - -
8,583,256
Net income for
three months
ended March
31, 1997 - - 18,490 -
18,490
Payments of
dividends - - (12,731) -
(12,731)
Translation
adjustment at
March 31, 1997 - - - (84,005)
(84,005)
Balance at March
31, 1997 645,460 12,970,090 (2,932,664) (105,563)
10,557,323
Conversion of
Series AA
Preferred Stock (645,460) 645,460 - -
- -
Net loss for
Three months ended
June 30, 1997 - - (23,403) -
(23,403)
Payments of
Dividends - - (12,673) -
(12,673)
Translation
adjustment at
June 30, 1997 - - - (42,763)
(42,763)
Balance at June
30, 1997 $ - $13,615,550 $(2,968,740) $(148,326)
$10,498,484
Net loss for
Three months ended
September 30, 1997 - - (998,157) -
(998,157)
Translation
adjustment at
September 30, 1997 - - - (12,347)
(12,347)
Adjustment for final
offering costs - 5,726 - -
5,726
Balance at September
30, 1997 $ - $13,621,276 $(3,966,897) $(160,673)
$ 9,493,706
</TABLE>
See notes to unaudited condensed consolidated financial
statements.
STRATEGIA CORPORATION AND
SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months
Ended
September
30,
1997
1996
<S> <C>
<C>
Cash flows from operating activities:
Net loss $(1,003,070)
$ (583,274)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,955,862
1,960,793
Deferred income taxes -
15,033
Other 6,325
(2,244)
Change in operating assets and liabilities:
Accounts receivable (980,990)
(562,409)
Other current assets (293,455)
340,701
Accounts payable (16,967)
78,879
Accrued expenses 1,317,000
298,222
Accrued income taxes (12,662)
(21,590)
Increase (decrease) in other assets 323,626
(329,878)
Increase in deferred revenue 758,971
1,099,577
Increase (decrease) in customers' deposits 3,161
(13,110)
Net cash provided by operating activities 2,057,801
2,280,700
Cash flows from investing activities:
Acquisition of property and equipment (1,625,985)
(308,713)
Net cash used in investing activities (1,625,985)
(308,713)
Cash flows from financing activities:
Proceeds from sale of common stock, net 8,533,982
1,200,000
Proceeds from bank line of credit 100,000
250,000
Payment of note payable to stockholder (800,000)
- -
Principal payments on long-term debt and
obligations under capital leases (2,417,856)
(2,192,452)
Payment of dividends on preferred stock (25,404)
(13,015)
Net cash provided by (used in) financing
activities 5,390,722
(755,467)
Effect of exchange rate changes on cash (36,294)
(22,903)
Net increase in cash and cash equivalents 5,786,244
1,193,617
Cash and cash equivalents at beginning of period 338,436
170,636
Cash and cash equivalents at end of period $6,124,680
$1,364,253
</TABLE>
See notes to unaudited condensed consolidated financial
statements.
STRATEGIA CORPORATION AND
SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1997
(1) In the opinion of the Company, the accompanying unaudited
condensed
consolidated financial statements contain all adjustments
(consisting of only
normal recurring accruals) necessary to present fairly the
financial position
as of September 30, 1997 and the results of operations for the
three and nine
months then ended and cash flows for the nine months then ended.
Certain reclassifications of amounts in the condensed
consolidated
financial statements have been made to reflect comparability.
(2) This financial information should be read in conjunction with
the
financial statements and the notes thereto included in the
Company's Annual
Report on Form 10-KSB for the period ended December 31, 1996.
(3) For financial reporting purposes, loss before
income taxes for
the three and nine months ended September 30, 1997 and 1996,
includes the following
components:
<TABLE>
<CAPTION>
Three months Nine
months
ended September 30, ended
September 30,
Pretax income (loss): 1997 1996 1997
1996
<S> <C> <C> <C>
<C>
United States $(1,056,549) $ (334,329) $(1,206,536)
$(807,310)
Foreign 92,204 18,986 321,279
353,759
$ (964,345) (315,343) $ 885,257
$(453,551)
</TABLE>
The provision for income tax expense is attributable to earnings
from foreign
operations.
(4) Income (loss) per share is based on net income (loss) 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.
(5) The Company called its Series AA Preferred Stock on June 30,
All preferred shares were converted to Common Stock.
(6) Generally, revenues related to Year 2000 engagements are
recognized on a percentage of completion basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This quarterly report contains forward -looking statements. For
this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements.
There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated
by such forward-looking statements. These factors include,
without limitation, factors described in the narrative below or
under the caption "Certain Factors That May Affect Future
Results."
Results of Operations
The Company reported revenue of $2,567,650 and $8,041,348 for the
three and
nine months ended September 30, 1997, respectively. This compares
to revenue of $2,287,694 and $7,007,412 for the comparable periods
in 1996. The Company
reported net losses of $998,157 and $1,003,070 for the three and
nine months ended September 30, 1997 after reporting net losses of
$322,305 and $583,274 for the same periods in 1996.
The losses incurred by the Company during the third quarter and
the year to date reflect the early stage of development of the
Year 2000 business, generally. To establish its presence in the
growing Year 2000 market and to be in a position to bid for
contracts, the Company has added technical, marketing and support
staff and otherwise devoted substantial financial resources to
build infrastructure to support growth in the volume of business
expected to develop in the coming two years. The Company's
quarterly revenues during the year have been affected by the
number and timing of its Year 2000 contracts in process. The
Company entered into three Year 2000 contracts during the first
half of 1997 and numerous other contracts since September 1, 1997,
and currently has many proposals pending. During the first nine
months of 1997, the number of contracts in process has been
limited, and events that have affected the timing of revenue
generated under specific contracts have resulted in significant
variations in quarterly revenue. Factors contributing to the delay of
the Company's generation of revenues during the third quarter
include the limited number of contracts
in process, delays in procuring new contracts due to customer
unfamiliarity with evolving industry norms for Year 2000
contracts, customers' need for special budgeting approvals,
changing degrees of involvement by in-house customer personnel,
technical issues, and other similar factors attributable to the
unique nature and potential impact of the Year 2000 problem. The
Company expects Year 2000 services to make a meaningful
contribution to revenues during the fourth quarter. The impact of
delays in revenue generation from specific contracts will diminish
as the number of contracts in process continues to increase.
Consolidated service revenue increased $279,956 and $1,033,936 for
the three and nine month periods ended September 30, 1997 compared
to the same periods in 1996. Most of the revenue growth occurred
during the first two quarters of 1997 when the Company began its
first Year 2000 service engagements. Revenue from Year 2000
service contracts totaled approximately 30% of the Company's North
American revenues recorded for the nine months ended September 30,
1997.
The Company's foreign subsidiary, Twinsys Dataguard S.A.
(hereinafter referred to as "Twinsys") accounted for approximately
75% and 65% of consolidated service revenue, respectively, for the
three and nine month periods ended September 30, 1997. Revenue
recorded by Twinsys for the three and nine months ended September
30, 1997 was comparable to the revenue recorded for the same
periods in 1996. It is expected that the percentage of the
Company's consolidated service revenue generated by Twinsys will
continue to decrease over the next year due to the anticipated
growth of revenues from Year 2000 and outsourcing services in
North America. The Year 2000 services market is expected to
develop more slowly in Europe than in North America. The Company
currently has outsourcing contracts in process in North America
and Year 2000 service contracts in process in both North America
and Europe.
The Company's operating expenses increased to $3,591,923 from
$2,486,995 and $8,794,528 from $6,987,742 for the three and nine
months ended September 30, 1997 when compared to the same periods
in 1996, respectively. Operating expenses have increased during
1997 as the Company develops the infrastructure required to
support anticipated increases in demand for Year 2000 services.
The changes include (i) significant growth in the Company's
technical and direct marketing staffs in both North America and
Europe, (ii) establishment of a subsidiary to provide Year 2000
services in Europe, (iii) establishment of the Company's first
compliance testing center in North America, and (iv) increases in
advertising, promotions, and participation in trade shows both in
North America and Europe relating to Year 2000 and other computer
services offerings. Operating expenses, in absolute dollars, are
expected to increase for the remainder of 1997 as the Company
continues to add key personnel, facilities and equipment to meet
the expected demand for Year 2000 services. The Company expects
to achieve its targeted level of staffing for Year 2000 projects
by the first quarter of 1998. Further additions to its staff and
equipment will only be made in response to greater demand for the
Company's services. Operating expenses as a percentage of revenue
should begin to gradually decrease from current levels during the
fourth quarter of 1997.
The Company's selling, general and administrative expenses for the
three and nine month periods ended September 30, 1997 increased
approximately 28% and 19%, respectively, compared to the same
periods in 1996. Following the completion of a public stock
offering on March 31, 1997, the Company incurred increases in
professional fees and other expenses related to investor relations
services, stock market listing, and similar post-offering matters.
Interest expense totaled $107,548 and $383,831 for the three and
nine months ended September 30, 1997, respectively, as compared to
$123,616 and $487,555 for the same periods last year. Interest
expense is related mainly to capital leases for computer
equipment. The reduction is attributable to a pay down in capital
lease obligations and the repayment of a stockholder loan from the
offering proceeds received during the first quarter of 1997.
The provision for income taxes totaled $117,813 and $129,723 for
the nine month periods ended September 30, 1997 and 1996,
respectively. These amounts reflect French income taxes resulting
from income of Twinsys. No income tax benefits can be recognized
currently for U.S. operating losses, but these losses are
available to offset any future U.S. taxable income.
Liquidity and Capital Resources
At September 30, 1997, the Company had working capital totaling
$4,139,930. In March 1997, the Company completed a public stock
offering that raised $8,528,256, net of offering expenses. The
Company has used a portion of these offering proceeds to repay an
$800,000 stockholder loan and to pay certain accounts payable,
accrued expenses, and other current liabilities. The Company has
also used offering proceeds to add marketing staff, project
managers, and technical personnel in North America and Europe in
anticipation of the increased demand for millennium services
during the next several months. In addition, the Company plans to
use offering proceeds to establish and equip regional testing
facilities as Year 2000 conversion projects enter the
implementation phase. The Company established one such facility in
North America during the second quarter of 1997, and expended
funds to capitalize and finance a new subsidiary based in Paris,
France that will provide Year 2000 and Euro currency conversion
services.
Pending use for working capital needs, the Company maintains funds
raised in its stock offering in short-term, investment-grade,
interest-bearing securities. The Company believes it has adequate
capital resources to support its cash requirements for the next
twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS:
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-
looking statements made in this Quarterly Report and presented by
management from time to time.
The Company has experienced and expects to experience fluctuations
in its quarterly results. A variety of factors influence the
level of the Company's revenues in a particular quarter, including
the number, requirements, and nature of projects, changes during
the course of projects that may impact the timing and current
scope of work in progress, general economic conditions that may
influence decisions by clients and potential clients to invest in
or replace their information systems, decisions by management to
rely on in-house information technology personnel for some or all
of a client's or a potential client's information systems
projects, the ability of certain clients to terminate their
engagements without penalty, competition for engagements, and
other factors, many of which are beyond the Company's control. A
significant portion of the Company's current expense structure
does not vary in relation to the Company's level of revenues. If
revenues for a particular quarter do not meet expectations,
operating results will be adversely affected. Gross margins will
vary based upon a number of factors including employee utilization
rates as well as the type and number of millennium engagements
performed by the Company during a particular period. The Company
bids a number of Year 2000 projects on a fixed fee basis. Because
the provision of Year 2000 services is a new industry, there is a
greater risk on any project that the amount bid will not provide
the anticipated level of profit.
The Company also believes that its future success will depend in
large part on its ability to continue to attract and retain highly-
skilled technical and management personnel. There can be no
assurance that the Company will be able to attract and obtain
qualified personnel needed for the development of its business.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
During the third quarter, the Company granted employee stock
options to purchase a total of 129,000 shares of Common Stock
to 29 employees under the terms of its 1988 Stock Option Plan.
The exercise price of the options granted under the Plan is
the market price of the Common Stock on the date of the grant,
and ranged from $8.00 to $14.625 per share for the options
granted during the quarter. The options are subject to
vesting and certain other conditions set forth in the Plan.
The options granted under the Plan were issued in reliance
upon the exemption from registration pursuant to Section 4 (2)
of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
Item 5. Other Events.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934,
the registrant
has caused this amendment to its quarterly report to be signed on
its behalf by
the undersigned, hereunto duly authorized.
STRATEGIA CORPORATION
Date: November 10, 1997 By: \s\ Richard W.
Smith
Richard W. Smith,
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this
report has been signed by the following persons in the capacities
and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title
Date
<S> <C>
<C>
\s\ Richard W. Smith President and Director
November 10, 1997
Richard W. Smith (Chief Executive Officer)
(Chief Financial Officer)
(Chief Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 6,124,680
<SECURITIES> 0
<RECEIVABLES> 1,935,134
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,407,344
<PP&E> 19,952,218
<DEPRECIATION> 11,282,432
<TOTAL-ASSETS> 17,450,328
<CURRENT-LIABILITIES> 4,267,414
<BONDS> 1,054,022
<COMMON> 13,621,276
0
0
<OTHER-SE> (4,127,570)
<TOTAL-LIABILITY-AND-EQUITY> 17,450,328
<SALES> 0
<TOTAL-REVENUES> 8,041,348
<CGS> 0
<TOTAL-COSTS> 8,794,528
<OTHER-EXPENSES> 132,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (885,257)
<INCOME-TAX> 117,813
<INCOME-CONTINUING> (1,003,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,003,070)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
