SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 1996.
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. Identification No.)
Employer incorporation or organization)
10301 Linn Station Road
P.O. Box 37144
Louisville, Kentucky 40233-7144
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (502)426-3434
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark 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 _____.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1997: Common stock -- $23,515,672.
The number of shares of the registrant's common stock outstanding as of
March 26, 1997 -- 4,412,885 shares.
REFERENCE
Portions of the Corporation's Definitive Proxy Statement is incorporated by
reference into Part III of this Form 10-KSB.
PART I
Item 1. Description of Business.
General
Preliminary Note Regarding Forward-Looking Statements
The information set forth in "Item 1. Description of Business" and in
"Item 6. Management's Discussion and Analysis of Operations and Financial
Condition" includes "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities
Act of 1933, 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 under "Risk Factors"
and in other sections of "Item 1. Description of Business" and in "Item 6.--
Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Strategia Corporation provides disaster recovery, consulting, information
processing and outsourcing services to users of large-scale computer systems
in North America and Europe. For twelve years the Company has specialized in
assisting business organizations and government agencies prepare for and avert
the consequences of unknown, unplanned interruptions in data processing. The
Company has provided its services to more than 200 large and medium-sized
organizations in diverse industries. During the next several years the
Company expects to devote substantial resources to assisting clients in
preparing for and implementing the conversion of their computer systems to
allow those systems to function without interruption on and after January 1,
2000, which is often referred to as the "Year 2000 problem."
The Company has provided alternate site processing to users of large-
scale Bull (formerly Honeywell) computers in North America since 1984, and to
users of IBM computers in North America since 1993. In February 1995, the
Company formed Twinsys Dataguard, SA in Paris, France, and began offering
contingency planning services and alternate site processing to users of Bull
and Unix-based computer systems in Europe. The Company plans to open an
operations facility in the United Kingdom and to offer these services to users
of Bull and Unix-based systems in the United Kingdom within the next twelve
months. Clients are entitled to use the Company's data centers in Louisville,
Kentucky and Paris, France if the client's data center is rendered inoperable
as a result of natural disaster, fire, sabotage or other emergency. The
Company's contingency planning consulting services assess a client's
vulnerability in the event of an unplanned interruption of data processing and
assist the client in preparing a contingency plan to allow critical business
functions to resume as promptly as possible.
Millennium services, which assist a client to assess the magnitude of its
Year 2000 problem and convert its applications to function without disruption
in 2000, represent a natural extension of the Company's historic contingency
planning and information processing services. The Company believes the
expertise and familiarity with client systems that it expects to develop
through Year 2000 conversions would strengthen its capability to provide
outsourcing, application and systems reengineering, and other information
management services after 2000.
Industry Background
Disaster Recovery Services
Disaster recovery services are intended to reduce a business or government
organization's vulnerability to unanticipated interruptions of critical
information processing functions. The day-to-day operations of most business
and government organizations require immediate and continuous access to their
information processing system. In many cases, the failure of such systems or
critical aspects thereof, even for short periods of time, can affect vital
corporate or government functions, with potentially critical losses to the
organization and its clients or constituents. Such dependence on the computer
system makes organizations vulnerable to catastrophic losses if their
centralized information processing operations are significantly interrupted as
a result of natural disasters, fire, sabotage, strike, long-term power outage,
explosion, or other unanticipated event.
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. Although the number of Bull installations in
North America is limited, the number is much greater in Europe, where the
Company believe 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. 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 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.
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.
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.
Company Services
Disaster Recovery Services
The Company provides contingency planning consulting services to users of
IBM, Bull, and other computer systems. Contingency planning includes an
assessment of the vulnerability of the client's business operations to
unanticipated interruptions of critical data processing functions, including
recommendations to minimize both the probability of occurrence and the cost of
those potential data processing disruptions and the loss or destruction of
critical records. The Company will also assist in designing a recovery plan
to structure procedures for restoration of all organizational functions as
well as information processing capabilities, for replacement of needed
supplies and equipment, and for the division of staff responsibilities. The
Company provides these consulting services either on a fixed price or hourly
basis.
Alternate site processing subscribers are entitled to immediate use of
the Company's IBM, Bull or Unix-based computer systems in the event of a
disaster, together with all required peripheral, communications, and support
equipment. Use of certain peripheral and support systems and offices space is
included in the basic service level, and additional peripheral equipment is
available at higher levels of service at additional cost. If a disaster
occurs, the client may process at the hot site for specified periods. Pricing
levels of client contracts depend on the amount of capacity on the large-scale
Bull, IBM, and UNIX computers to be made available to the customer and the
particular configuration of the peripheral and communications equipment
needed. Subscribers are also entitled to a certain amount of testing time at
the Company's hot sites where the Company's technical personnel work with the
client's information services staff to ensure the compatibility of the
organization's applications with the back-up system under various disaster
scenarios.
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 has completed three Year 2000 pilot projects and is currently
managing the Year 2000 conversion project for the Tennessee Department of
Employment Security. 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. The impact and alternatives analysis
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. 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 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 expects to
maintain some internal code conversion capability.
The Company has 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 software tools expected to be used
in such conversions are currently in development, and none has an established
history of successful use. Accordingly, there can be no assurance that the
Company will have access to effective software tools or that it will not have
to resort, to an extent not now contemplated, to manual conversion processes.
Compliance Testing. Industry analysts as well as federal banking
regulatory agencies have publicly emphasized the importance of adequate
testing of Year 2000 conversions because of the need to have compliant systems
operating no later than January 1, 2000. The number and complexity of
interrelated applications typically involved in a business or government
organization's information system, as well as the critical nature of a
substantial number of these applications to the conduct of the business or
government function, increase the importance of thorough testing before the
organization relies on converted applications. The Company believes that few
millennium service providers have the capacity or capability to provide full
application testing, much less full data center load testing. Consultants
frequently rely on the client's staff to supplement their lack of experience
in the operation of large data centers, large and complex applications
systems, and advanced telecommunications networks. These providers may depend
on the client to conduct full-system testing of the modified code. However,
most organizations operate their large data centers at near 100% capacity and
with the smallest possible staffing, so they may not have the time, the excess
computer capacity or the staff necessary to adequately test their conversions
under realistic operating conditions. These constraints may also force an
organization to attempt to convert, test, and reintegrate only a portion of
its applications at a time. This "piecemeal" approach significantly extends
the length of a conversion project. It may also require the time-consuming
design and construction of "bridge" programs to coordinate converted and
unconverted applications, which may interfere with the day-to-day functioning
of the organization's critical systems.
As an alternative to the inefficient piecemeal approach, the Company's
testing services will enable organizations to test their entire converted
system at one time, thus reducing the length and complexity of both the
conversion and testing processes. After testing is successfully completed, the
client can install the converted and tested applications on its system at one
time. The Company has operated data centers since 1984 and, as part of its
customary disaster recovery services, has assisted its clients in conducting
hundreds 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. The Company expects to
open its first Year 2000 code renovation and compliance testing center in the
second quarter of 1997 in Shelbyville, Kentucky.
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). 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." 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. A new outsourcing contract commenced during the first
quarter of 1997.
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'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
emphasizes two advantages. First, the Company has the capacity to execute all
phases of a client's conversion project, including the critical testing phase
that few other millennium consultants can provide. Second, the methodology for
designing and implementing a plan for resolving the Year 2000 problem is
substantially similar to that historically used by the Company to plan for
unanticipated interruptions of information processing.
The Company intends to focus initially on both (i) its historic base of
clients and (ii) industries such as insurance, financial services, health
care, government and education, which are already encountering Year 2000
problems and have committed funding for a resolution. The Company plans to
capitalize on its familiarity with the computing environment of these
industries and the relationships it has established in providing contingency
planning services to insurance, financial services, health care, and
educational clients to obtain millennium and outsourcing business.
The Company also 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 focuses 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.
During 1995 and 1996 the Company and Twinsys provided services to
approximately 170 clients. During 1996, France Telecom and its affiliated
divisions, together accounted for $2,896,000, or 31%, of the Company's
consolidated revenue. The Company's ten largest clients in 1996 accounted for
approximately 56% 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 Company's major clients could materially or adversely affect it'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.
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.
Personnel
As of December 31, 1996, the Company had 24 full-time employees in its
North American operations, including 7 persons in marketing, 12 persons on its
consulting and technical staff, and 5 persons in management and
administration. The Company had 12 full-time employees in its European
operations in Paris, France. These employees include 4 persons in marketing,
4 persons on its technical staff, and 4 persons in management and
administration.
RISK FACTORS
The information set forth in "Risk Factors" below contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. See also "Item 6. 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 report.
Planned Expansion of Services; Contraction of Historic Business Base.
The Company has sought to expand the range of computer services it can offer
to customers in recent years, as the market for its historic business has
contracted. Since its inception in 1984, the Company has specialized in
offering disaster recovery services to data center operators using large-
scale computer systems, including backup services for Bull computer systems
and contingency planning consulting. For more than a decade, the Company has
been the leading provider of computer backup services to users of Bull
computer systems in North America. However, the number of large Bull data
centers in North America has decreased from approximately 700 in 1986 to
approximately 100 in 1996, largely due to the "migration" of data center
operators 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.
Recent Loss and Accumulated Deficit; Need for Additional Working Capital.
The Company incurred a loss of $724,000 for the year ended December 31, 1996
and had an accumulated deficit of $2,938,000 and a working capital deficit of
$2,988,000 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 "Item 6.
Management's Discussion and Analysis of Results of Operations and Financial
Conditions." In the first quarter of 1997, the Company raised net offering
proceeds of approximately $8,800,000 from a public offering of Common Stock.
The net offering proceeds have provided the Company with additional working
capital that is expected to meet the Company's budgeted capital requirements
for at least twelve months. 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 "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources."
Relationship with Automated Tool Vendors. The Company's ability to
manage large Year 2000 conversion projects will depend on the development of
effective automated conversion software tools that can convert large volumes
of code without substantial human involvement, and on the Company's having
access to such tools. The Company does not intend to develop conversion tools
and therefore expects to be dependent on access to effective tools developed
by others. The Year 2000 problem of a typical large organization is expected
to involve the examination and conversion of millions of lines of computer
code. Reliance on manual conversion is not feasible, in the Company's view,
if, as expected, most organizations attempt to complete their conversions
before January 1, 2000 because demand for qualified programmers would likely
exceed the number of available programmers. Should a particular software
conversion 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 in
North America, France, the United Kingdom and Scandinavia 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 "Item 1. Description of 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
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 "Item 1. Description of
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 "Item 1.
Description of 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 "Item 1. Description of Business-Competition" and "-Millennium
Services."
Concentration of Clients. During 1996, Twinsys' largest client, France
Telecom (including several affiliates that contract independently with
Twinsys) accounted for approximately $2,896,000, or 31% of the Company's
revenue. The Company's ten largest clients in 1996 accounted for approximately
56% 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 the Company could materially and adversely affect the Company's
business, operating results and financial condition. See "Item 1.
Description of Business-Clients."
Item 2. Description of Property.
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. In April 1997, the Company expects to open a new 28,000
square foot data center in Shelbyville, Kentucky. This facility will be
totally dedicated to Year 2000 code renovation and compliance testing. This
facility will be leased for an initial term of five years.
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 Note 7 of Notes to Consolidated Financial Statements.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Strategia's Common Stock trades on the over-the-counter market. At March
26, 1997, the Company had approximately 620 beneficial owners of the Company's
Common Stock. The market makers are: (i) J.J.B. Hilliard, W.L. Lyons, Inc.,
(ii) Carr Securities, (iii) Paragon Capital Corporation, (iv) Troster Singer
Corporation, (v) Nash-Weis & Co., (vi) Wm. V. Frankel & Company, (vii) Hill
Thompson & Magid, and (viii) Russo Securities. The following table sets forth
the ranges of high and low bid quotations per share of the Common Stock for
1996 and 1995, according to National Quotation Bureau, Inc. The stock prices
listed below have been adjusted to reflect the 1-for-2 reverse stock split of
the Common Stock effective July 29, 1996.
<TABLE>
<CAPTION>
1996 1995
Quarter High Low High Low
<S> <C> <C> <C> <C>
First $2.00 $1.50 $ .88 $ .38
Second 5.00 2.00 1.13 .38
Third 8.50 3.50 1.13 .38
Fourth 8.28 6.00 1.25 .38
</TABLE>
These quotations reflect interdealer quotations without retail mark-up,
mark-down, or commissions and do not necessarily represent actual
transactions. On March 26, 1997, the closing bid price quoted for the Common
Stock was $8.00.
Since its inception in 1984, the Company has not paid any dividends on
its Common Stock.
Item 6. Management's Discussion and Analysis.
Preliminary Note Regarding Forward-Looking Statements
The information set forth in "Item 6. Management's Discussion and
Analysis of Results of Operations and Financial Condition" below and under
"Risk Factors" and the other subsections of "Item 1. Description of Business"
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, 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 "Item 6. Management's
Discussion and Analysis of Results of Operations and Financial Condition"
below and in "Item 1. Description of Business--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 in recent years and may decline further in the
future. 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, through its wholly-owned subsidiary, Twinsys Dataguard SA
(Twinsys), 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. In the second quarter of 1997, the Company expects to
open an operations center to support its Year 2000 code renovation and
compliance testing. The Company may open additional testing centers based
on demand for its testing services. Demand for the Company's millennium
services is likely to diminish significantly after 2000.
Revenue from disaster recovery backup and contingency planning services
represented approximately 98% of the Company's revenue in 1996 and 1995.
Twinsys generated approximately 73% of the Company's total service revenues in
1996 and approximately 65% during 1995. Revenue from alternate site
processing is typically generated under multi-year contracts and is recognized
ratably over the life of the contract. The Company's contingency planning
services are rendered for a fixed fee, based on estimated hours required at
each participating consultant's hourly rate, and revenue is recognized at the
time the services are performed. Outsourcing revenue is generated under
contracts at a specified monthly fee. Millennium consulting services will be
offered on a fixed fee basis, while technical assessment and code conversion
charges will be based upon the number of lines of program code. Millennium
testing services will be charged at a per hour rate based on the equipment
needed to test the client's system.
Most of the Company's current cost structure is fixed. Cost of services
relates mainly to computer and peripheral lease and maintenance expenses,
facility lease, maintenance and utility expenses, and data communication
costs. Personnel expenses, such as salaries and wages, along with employee
benefit costs, are also largely fixed.
Gross margins for the Company's computer backup and outsourcing
businesses depend upon volume of service because the costs of these services
are largely fixed. Margins are also affected by depreciation and estimated
useful life of computer equipment. If the useful life of equipment continues
after the equipment is depreciated, margins will typically increase. If the
useful life of equipment ends before it is 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. 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.
Selling, general and administrative 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, office
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 the proceeds
from an $800,000 loan from a shareholder. The Company expects to reduce its
finance costs by reducing or eliminating certain capital lease obligations or
refinancing them at lower rates. There can be no assurance that the Company
will be able to procure less expensive sources of financing for these
obligations. In addition to interest payable in cash on the principal balance
of the shareholder loan, upon each 90-day renewal of the term of the loan, the
Company issues 1,000 shares of Common Stock to the shareholder for each
$100,000 of outstanding principal on the loan. The value of the shares issued
during 1996 totaled $107,000. The shareholder loan was renewed as of
January 6, 1997, and the value of the shares issued as of that date totaled
$55,000, which will be recorded as interest expense during the first quarter
of 1997. The Company intends to pay off this loan in March 1997, with proceeds
from a public offering. See Liquidity and Capital Resources.
Results of Operations
The Company reported a net loss of $724,000 for the year ended
December 31, 1996, after reporting net income of $42,000 in 1995. The
Company's 1996 results were negatively impacted by the additional
depreciation and amortization resulting from new computer equipment added by
Twinsys in 1996, decreases in Bull backup service revenue and consulting
service revenue in North America, and by a nonrecurring charge to operations
of approximately $115,000 to reflect a judgment in a lawsuit by a former
employee of Twinsys.
The Company reported revenue of $9,455,000 for the year ended December
31, 1996, an increase of $528,000 or 5.9% from the comparable period in 1995.
During 1996, Twinsys accounted for approximately 73.1% of consolidated service
revenue. Twinsys' revenues increased by approximately 18.9% in 1996 compared
to the comparable period in 1995, when Twinsys operated for only eleven
months. The increase in Twinsys revenues reflect higher levels of services
provided to its largest customer (and its affiliated companies) as well as the
addition of new backup service customers toward the end of 1995 and
throughout 1996. The increase in European revenues was partially offset
by a decrease in backup service revenue from North American operations of
approximately 20.8% in 1996, compared to 1995. Bull backup service
revenue decreased significantly due to the expiration of one of the Company's
largest contracts on June 1, 1995, and increased competition. The expired
contract generated approximately 7.0% of the Company's annual revenue during
1995. The Company's new contract with this customer provides significantly
less revenue due to the customer's reduced backup service requirements.
In 1994, an affiliate of Groupe Bull began offering backup services to Bull
computer users in North America. 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 21.8% in 1996 compared to 1995, but was
more than offset by the decrease in Bull backup service revenue. 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 began during the first quarter of 1997.
The Company's operating expenses for 1996 increased to $9,306,000, an
increase of $1,477,000 or 18.9% from $7,829,000 in 1995, principally due to
higher maintenance and depreciation expenses that Twinsys incurred in 1996.
The increase in maintenance and depreciation expenses in 1996 resulted
primarily from higher costs of computer equipment whose lease terms were
renegotiated or renewed in 1996. Maintenance and depreciation expenses for
Twinsys are expected to remain at approximately 1996 levels through 1997.
The cost of services for North American operations decreased approximately
20.0% in 1996. The decrease is attributable to reductions in Bull computer
equipment lease and maintenance costs, which was partially offset by software
licensing fees required for outsourcing services that began in 1996. Selling,
general and administrative expenses were $3,003,000 in 1996, a 23.3% increase
compared to $2,435,000 in 1995. The increase reflects growth in the
Company's marketing and technical staffs, and higher expenditures for
promotions and trade shows in North America and Europe in anticipation of
increased demand for millennium services. A nonrecurring charge of
approximately $115,000 was made to operations to reflect a judgement in 1996
in a lawsuit by a former employee of Twinsys. Professional fees attributable
to Twinsys were lower in 1996. However, overall corporate legal and
professional fees were higher for the year as a result of litigation that
was settled during 1996.
Interest expense increased to $715,000 in 1996, a $57,000 or 8.7%
increase compared to 1995. The value of shares of Common Stock issued upon
each renewal of the shareholder loan is recorded as interest expense. The
shares issued upon loan renewals in 1996 were valued at $107,000 compared
to $32,000 in 1995, due to the higher market prices for the Common Stock
during 1996. This loan is expected to be repaid in March 1997. Interest
expense for Twinsys totaled $313,000 for the year ended December 31, 1996,
and is related mainly to additional expense of capital leases for computer
equipment.
The provision for income taxes totaled $158,000 in 1996 and $444,000
in 1995, due to French income taxes on income of Twinsys. The effective tax
rate in France was approximately 37% in both years. 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 December 31, 1996, the Company's consolidated current liabilities
exceeded current assets by $2,988,000. In March 1997, the Company completed a
public offering of its Common Stock that raised approximately $8,800,000,
net of offering expenses. The offering proceeds are expected to be used by
the Company to repay an $800,000 loan and related accrued interest from a
shareholder during the first quarter of 1997, and to pay certain accounts
payable, accrued expenses, and other current liabilities. The Company also
plans to use offering proceeds to increase marketing staff, project
managers, and technical personnel in anticipation of increased demand for
millennium services during the next several months, and to establish and
equip regional testing facilities as Year 2000 conversion projects enter the
implementation phase. Pending use for working capital needs, the Company
expects to invest a portion of the net offering proceeds in short-term,
investment-grade, interest-bearing securities.
Revenues under backup service contracts represent the Company's principal
source of cash from operating activities. Backup services revenue are
generated in most cases under multi-year contracts that typically provide
predictable revenue streams. The addition of new customers for millennium,
outsourcing, backup, and consulting services would generate additional cash
from operations that would also be available to finance the Company's working
capital needs.
Income generated by Twinsys has increased 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 without the
need for any additional material capital expenditure during 1997. 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.
Net cash provided by operating activities decreased to $1,835,000
in 1996 compared to $2,680,000 in 1995. The change was due to the net loss
incurred during 1996 and the decrease in accounts payable, accrued expenses,
and deferred revenue. A part of these decreases was offset by an increase in
depreciation and amortization expense during 1996 as well as cash provided by
the collection of accounts receivable balances.
Net cash used in investing activities was $350,000 in 1996 compared to
$693,000 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 $1,269,000 in 1996 compared to
$1,952,000 in 1995. The use of cash for principal payments on the Company's
capital lease obligations and long term debt were higher in 1996 compared to
1995. However, this increase in cash used for principal payments in 1996 was
offset by $1,250,001 in proceeds of a private placement of securities
completed in October 1996.
Item 7. Financial Statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
FINANCIAL INFORMATION
Consolidated Balance Sheet
<CAPTION>
December 31
Assets 1996
<S> <C>
Current assets:
Cash and cash equivalents $ 338,436
Accounts receivable 1,099,636
Other current assets 57,738
Total current assets 1,495,810
Property and equipment 18,335,606
Less accumulated depreciation and amortization 9,851,977
8,483,629
Other Assets 765,971
$10,745,410
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 63,008
Current installments of obligations under capital leases 1,973,729
Notes payable to stockholder 800,000
Accounts payable 695,079
Accrued income taxes 55,196
Accrued expenses and other current liabilities 896,865
Total current liabilities 4,483,877
Long-term debt, excluding current installments 978,598
Obligations under capital leases, excluding current installments 1,705,724
Customers' deposits 54,117
Deferred revenue 1,072,469
Deferred income taxes 378,312
Total liabilities 8,673,097
Stockholders' equity:
Preferred stock. Authorized 2,000,000 shares: Series AA
Convertible Preferred Stock ($10 stated value); authorized
100,000 shares; issued and outstanding 64,546 shares;
liquidating value $806,825 645,460
Common stock without par value. Authorized 15,000,000 shares;
issued and outstanding 3,038,885 shares 4,386,834
Accumulated deficit (2,938,423)
Foreign currency translation (21,558)
Total stockholders' equity 2,072,313
Commitments and contingencies
$10,745,410
</TABLE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Operations
<CAPTION> Years ended December 31
1996 1995
<S> <C> <C>
Service revenue $ 9,454,693 $ 8,927,183
Operating expenses:
Cost of services 6,302,861 5,394,518
Selling, general and administrative expenses 3,002,918 2,434,906
9,305,779 7,829,424
Operating income 148,914 1,097,759
Other income (expense):
Interest expense (714,550) (657,410)
Other income, net 20 45,186
(714,530) (612,224)
Income (loss) before income taxes (565,616) 485,535
Income taxes 158,132 443,568
Net income $ (723,748) 41,967
Income (loss) per common and common equivalent
share $ (.29) -
Weighted average number of common and common
equivalent shares outstanding 2,650,240 2,493,603
</TABLE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Statements of Stockholders' Equity
<CAPTION>
Series AA Series A Foreign
Preferred Stock Preferred Stock Common Stock Accumulated Currency
Shares Amount Shares Amount Shares Amount deficit translation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1,
1995 34,167 $341,670 2,474,885 $2,997,833 $(2,122,531)$ $1,216,972
Issuance
of common
stock 32,000 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 34,167 341,670 2,506,885 3,029,833 (2,119,092) 26,857 1,279,268
Issuance
of common
stock 532,000 1,357,001 1,357,001
Conversion of
Series A
Preferred to
Series AA
Preferred 34,167 341,670(34,167)(341,670)
Conversion of
Series A
Preferred
dividends in
arrears to
Series AA
Preferred 6,952 69,520 (69,520)
Conversion of
Stockholders'
notes
payable 23,427 234,270 234,270
Payments of
dividends (26,063) (26,063)
Net loss (723,748) (723,748)
Foreign
currency
translation (48,415) (48,415)
December 31,
1996 64,546 645,460 3,038,885 4,386,834 (2,938,423)(21,558)2,072,313
</TABLE>
See accompanying notes to financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Statements of Cash Flows
<CAPTION>
Years ended December 31
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (723,748) $ 41,967
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,614,423 2,113,081
Deferred income taxes 20,422 309,938
Other (71) 10,042
Changes in operating assets and liabilities:
Accounts receivable 28,771 (1,005,638)
Other current assets 432,387 (390,975)
Accounts payable (203,571) 403,386
Accrued income taxes (49,374) 133,630
Accrued expenses and other current liabilities 19,487 513,477
Increase in other assets (560,847) (124,202)
Increase in deferred revenue 270,324 652,691
Increase (decrease) in customers' deposits (12,728) 22,258
Net cash provided by operating activities 1,835,475 2,679,655
Cash flows from investing activities:
Acquisition of property and equipment (350,291) (488,735)
Purchase of Twinsys (203,856)
Net cash used in investing activities (350,291) (692,591)
Cash flows from financing activities:
Proceeds from note payable to stockholder 500,000
Net proceeds from issuance of common stock 1,250,001
Proceeds from bank line of credit 250,000
Principal payments of long-term debt and
obligations under capital leases (2,742,907) (2,413,360)
Payments of preferred dividend (26,063) (38,528)
Net cash used in financing activities (1,268,969) (1,951,888)
Effect of exchange rate changes on cash (48,415) 26,857
Net increase in cash and cash equivalents 167,800 62,033
Cash and cash equivalents at beginning of year 170,636 108,603
Cash and cash equivalents at end of year $ 338,436 $ 170,636
</TABLE>
See accompanying notes to financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business
Strategia Corporation (Strategia), (formerly known as Dataguard Recovery
Services, Inc.) and its subsidiaries, together referred to herein as "the
Company," provides disaster recovery, consulting, information processing and
outsourcing services to users of medium- and large-scale computer systems in
North America and Europe.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation (see Note 4).
(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. Service revenue for
consulting and outsourcing services is recognized when such services are
rendered.
(d) Property and Equipment
Property and equipment are recorded at cost and consist of the
following at December 31, 1996:
<TABLE>
<S> <C>
Land $ 260,800
Building and improvements 3,154,789
Equipment 14,752,082
Other 167,935
$18,335,606
</TABLE>
Depreciation of equipment is computed on the straight-line method
over the estimated useful life of the asset. Leasehold improvements and
equipment under capital leases are amortized on the straight-line method over
the terms of the related leases or over the estimated useful life of the
asset.
(e) Foreign Currency Translation
The financial statements of Twinsys have been translated into U.S.
dollars in accordance with FASB Statement 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Amounts in the statements of operations
have been translated using the average exchange rate for the year. The gains
and losses resulting from the changes in exchange rates during the year have
been reported separately as a component of stockholders' equity.
(f) Income (loss) Per Share
Income (loss) 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.
(g) Reverse Stock Split
In July 1996, the Company announced a 1-for-2 reverse stock split
of its Common Stock. As a result of this reverse stock split, every two of
the Company's common shares outstanding at the effective date were
automatically converted into one new common share. All share data in these
consolidated financial statements have been restated to reflect the reverse
stock split.
(h) Cash Equivalents
Cash equivalents are highly liquid investments with a maturity of
less than three months when purchased.
(i) Financial Instruments
The carrying amounts of the Company's financial instruments
approximate their fair values as of December 31, 1996.
(j) Prior Year Data
Certain prior year data has been reclassified to conform to the 1996
presentation.
(3) Common Stock Offerings
In September and October 1996, the Company raised $1,250,001 in a
private placement of 500,000 Units of Common Stock and warrants to purchase
Common Stock. Each Unit consists of one share of Common Stock and a warrant
to purchase one share of Common Stock for $3.75 per share.
(4) New Ventures and Acquisitions
In July 1996, Strategia's wholly-owned French subsidiary, Twinsys
Dataguard S.A. (Twinsys) began offering disaster recovery and other services
to users of UNIX-based computer systems in France through Twin-X S.A.
(Twin-X), a newly organized subsidiary. At December 31, 1996, Twinsys owns
approximately 60% of the outstanding common shares of Twin-X. The remaining
40% of Twin-X's outstanding shares are owned by two Twinsys employees.
Operating results of Twin-X during 1996 were not significant.
On February 3, 1995, Strategia purchased for approximately $200,000
certain operating assets and assumed certain liabilities of Twinsys, S.A., a
Paris, France-based provider of disaster recovery services in Europe.
Strategia financed the purchase with funds borrowed from EPI Corporation, the
Company's largest stockholder, under an amendment to an existing loan
agreement. John P. Snyder, EPI's President and Chairman, is a director of
the Company. The acquisition was accounted for by the purchase method of
accounting. The results of operations of Twinsys are included in the
Consolidated Statements of Operations since the date of acquisition.
(5) Long-term Debt and Credit Agreements
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Mortgage note $ 1,019,347
Other 22,259
1,041,606
Less current installments 63,008
Long-term debt, excluding current installments $ 978,598
</TABLE>
The mortgage note is payable in equal monthly installments through May 1,
2009; however, the lender has the option to accelerate payment on the entire
outstanding balance of the note at five year intervals throughout the note
term. The next potential note acceleration date is May 1, 1999 and the
current interest rate of 11% is fixed until that date.
The Company has committed revolving credit facilities with a bank. A
$100,000 credit agreement is committed through October 31, 1997, and provides
that borrowings will bear interest at the bank's prime rate plus 2%
(effectively 10.25% at December 31, 1996). Borrowings under this credit
agreement are secured by substantially all domestic company assets, other than
its real property and leased assets.
Aggregate maturities of long-term debt are $63,008 in 1997, $45,465 in
1998 and $933,133 in 1999.
(6) Note Payable to Stockholder
The Company has an $800,000 note payable to a stockholder, in the form of
a second mortgage on the Company's real property. The term of the loan
extends through April 5, 1997. Interest on this amount is payable at an
annual rate equal to the prime rate plus 1.5% (effectively 9.75% at December
31, 1996). Interest expense of $79,800 and $80,242 was charged to 1996 and
1995 operations, respectively. At December 31, 1996, accrued interest
recorded in the consolidated balance sheet related to this note was $190,381.
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 150,000 and
118,000 additional shares had been issued through December 31, 1996 and 1995,
respectively). The value of the shares issued was $107,000 in 1996 and
$32,000 in 1995 and is recorded as interest expense in both years. During
January 1997, 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.
(7) 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, 1996:
<TABLE>
<CAPTION>
<S> <C>
Equipment $ 8,120,119
Less accumulated amortization 3,112,685
$ 5,007,434
</TABLE>
The Company acquired $2,140,775 and $4,831,746 of equipment in exchange
for capital lease obligations during 1996 and 1995, respectively.
The Company also has certain noncancellable operating leases, primarily
for the Twinsys facilities and for computer hardware and software, that expire
over the next four 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, 1996 are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
<S> <C> <C>
Years ending December 31:
1997 2,213,246 778,641
1998 1,423,200 744,556
1999 309,608 744,556
2000 77,314 279,209
Total minimum lease payments 4,023,368 $ 2,546,962
Less amount representing interest
(at rates ranging from 7.0%
to 12.26%) 343,915
Present value of net minimum
capital lease payments 3,679,453
Less current installments 1,973,729
Obligations under capital
leases, excluding current
installments $ 1,705,724
</TABLE>
Total rental expense, including maintenance charges, for operating
leases in 1996 and 1995 was $2,184,458 and $1,947,904, respectively.
(8) Income Taxes
For financial reporting purposes, income (loss) before income taxes
includes the following components:
<TABLE>
<CAPTION>
1996 1995
Pretax income (loss):
<S> <C> <C>
United States $ (996,845) $ (713,298)
Foreign 431,229 1,198,833
$ (565,616) $ 485,535
</TABLE>
The provision for income tax expense is attributable to earnings
from foreign operations, the components of which follows:
<TABLE>
1996 1995
<S> <C> <C>
Foreign - current $137,710 $ 133,630
- deferred 20,422 309,938
$158,132 $ 443,568
</TABLE>
A reconciliation of the income tax expense for the years ended December
31, 1996 and 1995 with the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Tax (benefit) expense at U.S. statutory rates$ (192,309) $165,082
Operating losses in the U.S. generating
no current tax benefit 335,924 240,027
Higher effective income tax rate of
foreign operations 11,514 35,965
Other 3,003 2,494
$ 158,132 $443,568
</TABLE>
Undistributed earnings of the Company's foreign subsidiary amounted to
$1,007,000 at December 31, 1996. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal income
taxes has been provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to France. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculation.
At December 31, 1996, the Company had U.S. net tax operating loss
carryforwards of approximately $3,959,000 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, and $619,000 in
2011.
Significant components of the Company's deferred tax assets (liabilities)
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Net operating loss carryforwards $ 1,504,000
Valuation allowance (1,404,000)
Net deferred tax asset 100,000
Deferred tax liabilities:
Tax over book depreciation (451,000)
Other (27,312)
Total deferred tax liabilities $ (478,312)
Net deferred tax liability $ (378,312)
</TABLE>
(9) Stock Option and Grant Plans
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance
with SFAS 123, the Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations, in accounting for its stock based compensation
because, as discussed below, the alternative fair value accounting principle
provided for under SFAS 123 requires the use of option valuation models that
were not developed for use in valuing stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense
is recognized.
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 10% of the common stock outstanding from time to
time, at a price not less than 75% of the fair market value at the time the
grant is approved. Options totaling 170,295 and 42,500 shares of common stock
were granted to employees in 1996 and 1995, respectively, and were fully
exercisable on the date of grant. 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 and
vest and become fully exercisable over a three year period from the grant
date. All options have ten year terms.
All options granted under the plan are exercisable over a 10-year period.
No options have been exercised as of December 31, 1996.
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.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under SFAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.0%; no dividend yields; volatility factor of the expected
market price of the Company's common stock of .831; and weighted-average life
of the option of nine years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Pro forma net loss $ (1,716,000) $ (6,700)
Pro forma loss per share $ (.65) $ -
</TABLE>
Because SFAS 123 is applicable to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity and related information
for year years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
Weighted Weighted
Average Average
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding -
beginning of year 76,339 $1.85 32,839 $2.50
Granted 171,295 $6.98 43,500 $1.37
Outstanding -
end of year 247,634 $5.41 76,339 $1.85
Exercisable -
end of year 245,634 $5.43 74,339 $1.87
Weighted average fair
value of options granted
during the year $ 5.82 $ 1.14
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.00 to $7.00. The weighted-average remaining contractual life of those
options is nine years.
(10) Preferred Stock
On May 30, 1996, the Company's Board of Directors authorized the issuance
of Series AA Convertible Preferred Stock (Series AA Preferred). On June 30,
1996, all holders of Series A Convertible Preferred Stock (Series A Preferred)
exchanged their shares (34,167 shares) for the same number of Series AA
Preferred shares. All dividends in arrears ($69,520) due to the original
holders of Series A Preferred and notes payable ($191,176) and accrued
interest payable ($43,062) to certain stockholders were also converted to
Series AA Preferred. The Series AA Preferred is convertible into four shares
of common stock, at an effective price of $2.50 per share of common stock for
five years after issuance through June 30, 2001. The Series AA Preferred
provides for a cumulative annual dividend of 8% (compared to 11.5% on the
Series A Preferred), payable on a quarterly basis before any payment of
dividends on common stock. The limitations, preferences, and relative rights
of the Series AA Preferred are otherwise identical to those of the Series A
Preferred.
The Series AA Preferred is redeemable at the Company's option at a price
of $10.69, if the average bid and asked price of the common stock exceeds 150%
of the then-effective conversion price of the Series AA Preferred for twenty
of thirty consecutive trading days. This redemption price declines gradually
each year to $10 a share after December 31, 2001.
The Series AA Preferred 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 AA Preferred Stock have
no voting rights except upon the occurrence of an event of default.
The holders of Series AA Preferred also received a five-year warrant to
purchase one share of common stock for each share of Series AA Preferred
purchased. At December 31, 1996, warrants to purchase 64,546 shares of
common stock were outstanding at an exercise price of $2.50.
Shares of common stock reserved with respect to all of the above options,
convertible preferred stock and warrants were 1,069,364 at December 31, 1996.
(11) 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, 1996 and 1995 pertaining to the two geographic areas in
which the Company operates are presented below.
<TABLE>
<CAPTION>
1996 1995
Service revenue
<S> <C> <C>
United States $2,544,097 $ 3,116,662
Europe 6,910,596 5,810,521
$9,454,693 $ 8,927,183
Operating income (loss)
United States $ (597,271) (309,781)
Europe 746,185 1,407,540
$ 148,914 $ 1,097,759
Identifiable total assets
United States $4,490,343 $ 4,717,216
Europe 6,255,067 6,070,531
$ 10,745,410 $ 10,787,747
</TABLE>
The net assets of Twinsys at December 31, 1996 and 1995 amounted to
approximately $1,007,000 and $782,000, respectively.
One customer, composed of a group of affiliated companies, accounted for
approximately 31% and 13% of consolidated service revenue in 1996 and 1995,
respectively.
(12) Supplemental Cash Flow Information
Total interest payments were approximately $713,000 in 1996 and $650,000
in 1995. Total cash payments made for income taxes during 1996 were
approximately $158,000 (none in 1995).
(13) Commitments and Contingencies
Under the terms of an agreement between the Company and Copex Limited (a
United Kingdom company), Copex provided assistance to the Company in the
acquisition of assets by Twinsys and Copex has agreed to assist the Company in
developing new customers for Twinsys. The agreement provides that the Company
is to pay Copex 2% of the gross revenues of Twinsys for the calendar years 1995
through 1999 and an additional percentage of certain revenues received by
Twinsys from customers generated with the assistance of Copex. This fee was
approximately $142,000 in 1996 and $110,000 in 1995. The Company believes
Copex has breached one or more of its covenants in the agreement and the
Company has withheld payment of a portion of the fee. Pending the outcome of
this dispute, the unpaid amount remains a liability in the accompanying
financial statements. Recorded amounts are being capitalized as part of the
Twinsys acquisition and are being amortized over a 20-year period. Other
assets include approximately $240,500 (net of amortization) as of December 31,
1996 related to such fees to date under the agreement.
Approximately $115,000 (586,000 French francs) has been charged to
operations in 1996 relating to a judgement 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.
(14) Subsequent Event
In February 1997, the Company began offering 1,500,000 shares of
its Common Stock (at $7.00 per share) to investment companies, other
institutional investors, and certain other persons who qualify as accredited
investors under the rules of the Securities and Exchange Commission, in the
Company's sole discretion. The shares were sold through March 26, 1997 on a
"best efforts" basis. The Company sold 1,366,000 shares of Common Stock
generating net proceeds of approximately $8,762,000 after deducting offering
costs of approximately $800,000. As of December 31, 1996, approximately
$250,000 of the total estimated offering costs had been incurred, which were
deferred and included in other assets in the Consolidated Balance Sheet. All
offering costs will be charged against the gross proceeds of the offering in
1997.
STRATEGIA CORPORATION AND SUBSIDIARIES
Report of Independent Auditors
The Board of Directors and Stockholders
Strategia Corporation
We have audited the accompanying consolidated balance sheet of Strategia
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended December 31, 1996. 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 subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
March 27, 1997
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information under the caption "Board of Directors" in the Company's
definitive proxy statement for its 1997 annual meeting of shareholders (the
"1997 Proxy Statement") and under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" of the 1997 Proxy Statement are incorporated
herein by reference.
Item 10. Executive Compensation.
The information under the caption "Executive Compensation" of the 1997
Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information under the caption "Principal Shareholders" of the 1997 Proxy
Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information under the caption "Transactions With Management" of the 1997
Proxy Statement is incorporated herein by reference.
Item 13. Exhibits, List, and Reports on Form 8-K.
(a) List of Exhibits Filed.
(3.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June
30, 1996.
(3.2) Bylaws are incorporated by reference to Exhibit 3.2
to the Company's 1995 10-KSB.
(4.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June 30,
1996.
(10.1) 1988 Stock Option Plan is incorporated by reference
to Exhibit 10.8 to the 1994 10-KSB.
(10.2) 1990 Stock Grant Plan is incorporated by reference to
Exhibit 10.8 to the 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. are 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 are 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 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 1994 10-KSB.
(10.7) Promissory note due April 5, 1997 between the Company
and EPI Corporation is incorporated by reference to
Exhibit 10.7 to the Company's Form SB-2/A
Registration Statement (Reg. No. 333-14055) dated
February 4, 1997 (February 1997 SB-2/A).
(10.8) 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").
(10.9) Extension of Revolving Credit Agreement with Star Bank
N.A. dated November 8, 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").
(10.10) 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.
(10.11) 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.
(10.12) 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.
(10.13) 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.
(10.14) 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.
(10.15) Millennium Services Agreement dated as of October 11,
1996 between the Company and ConSyGen, Inc. is
incorporated by reference to Exhibit 10.16 to the
February 1997 SB-2/A.
(10.16) Lease dated March 3, 1997 between Southeastern Group,
Inc. and Strategia Corporation.
(11) For a statement regarding the computations of per
share earnings (loss), see Note 2 of the Notes to
the Consolidated Financial Statements.
(21) Subsidiaries.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STRATEGIA CORPORATION
Date: March 31, 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
Richard W. Smith President and Director March 31, 1997
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ James P. Buren
James P. Buren Executive Vice President- March 31, 1997
Technology, Treasurer, and
Director
/s/ John P. Snyder
John P. Snyder Secretary and Director March 31, 1997
/s/ John A. Brenzel
John A. Brenzel Director March 31, 1997
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Page
Number Description Number
<S> <C> <C>
(3.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June 30,
1996.
(3.2) Bylaws are incorporated by reference to Exhibit 3.2
to the Company's 1995 10-KSB.
(4.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June 30,
1996.
(10.1) 1988 Stock Option Plan is incorporated by reference to
Exhibit 10.8 to the 1994 10-KSB.
(10.2) 1990 Stock Grant Plan is incorporated by reference to
Exhibit 10.8 to the 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. are 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 are 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 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
1994 10-KSB.
(10.7) Promissory note due April 5, 1997 between the Company
and EPI Corporation is incorporated by reference to
Exhibit 10.7 to the Company's Form SB-2/A Registration Statement
(Reg. No. 333-14055) dated February 4, 1997 (February 1997 SB-2/A).
(10.8) 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").
(10.9) Extension of Revolving Credit Agreement with Star Bank
N.A. dated November 8, 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").
(10.10) 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.
(10.11) 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.
(10.12) 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.
(10.13) 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.
(10.14) 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.
(10.15) Millennium Services Agreement dated as of October 11,
1996 between the Company and ConSyGen, Inc. is
incorporated by reference to Exhibit 10.16 to the
February 1997 SB-2/A.
(10.16) Lease dated March 3, 1997 between Southeastern Group,
Inc. and Strategia Corporation.
(11) For a statement regarding the computations of per
share earnings (loss), see Note 2 of the Notes to
the Consolidated Financial Statements.
(21) Subsidiaries.
(27) Financial Data Schedule.
</TABLE>
LEASE
THIS LEASE is entered into on March 3, 1997, between
SOUTHEASTERN GROUP, INC. d/b/a
ANTHEM HEALTH PLANS, a Kentucky corporation
9901 Linn Station Road
Louisville, Kentucky 40223
"Landlord"
and
STRATEGIA CORPORATION
a Kentucky corporation
10301 Linn Station Road
Louisville, Kentucky 40223
"Tenant"
W I T N E S S E T H:
In consideration of the mutual covenants hereinafter contained, and each
act performed hereunder by either of the parties, Landlord and Tenant agree as
follows:
ARTICLE 1
EXHIBITS ATTACHED AND SHORT FORM LEASE
Section 1.1 Exhibits. The following exhibits are attached to and made
a part of this Lease:
(1) Exhibit A. Legal Description of the Demised Premises.
(2) Exhibit B. Specimen Short Form Lease.
(3) Exhibit C. Intentionally Omitted.
(4) Exhibit D. Intentionally Omitted.
(5) Exhibit E. Legal Description of Tract 2.
Section 1.2 Short Form Lease. Landlord and Tenant agree not to place
this Lease of record, but, at either party's option, to execute, acknowledge
and record a short form lease containing the names of Landlord and Tenant, the
specific legal description of the Demised Premises, the Original Term, and the
Renewal Option. Such short form lease shall be substantially in the form of
Exhibit B attached hereto and by reference made a part hereof.
ARTICLE 2
DEMISED PREMISES
Section 2.1 Demised Premises. Landlord hereby lets and demises to
Tenant, and Tenant hereby leases from Landlord that real property and
improvements thereon located at 200 Isaac Shelby Drive, Shelbyville, Shelby
County, Kentucky, as more particularly described in Exhibit A attached hereto
and by reference made a part hereof, such premises and the improvements
thereon hereafter referred to as the "Demised Premises." The Demised Premises
contains approximately 28,085.3 square feet.
Section 2.2 Personal Property. In addition to the Demised
Premises, Landlord hereby lets and demises to Tenant, and Tenant hereby
leases from Landlord, the personal property, fixtures and equipment (the
"Personal Property") located at the Demised Premises, with the exception of
the "Excluded Items" (as hereafter defined), including, but not limited to,
the "Included Items" (as hereafter defined). Tenant will be responsible for
maintaining and repairing the Personal Property during the Demised Term.
"Excluded Items" shall mean (a) stored items including furniture, PC's,
lumber, and the unattached condensing unit, (b) metal shelving and rolling
ladders, (c) the unattached refrigerant in large canisters, and (d) the fire
suppression system in the vault area of the first floor. "Included Items"
shall mean (a) the time lapse recorder in the control center, (b) five (5)
carrier heat pumps, (c) two (2) Dell Corporation duct heaters with
autoformers, (d) five (5) Lieberts in computer floor, (e) Liebert chilled
water system, (f) 338 KVA Liebert UPS unit with new Johnson Controls battery
as replacements for the current battery backup, (g) L.E.A. Dynatech serge
suppression system, (h) Liebert site scan system, (i) raised flooring, (j)
Square D enclosed deadfront switchboard, (k) fifteen (15) year single-ply
ballasted roof, (l) lightning protection system, (m) fully sprinklered dry
system, halon fire suppression system, and (n) D600 Johnson Control security
system plus camera monitors.
Section 2.3 Removal and Warranties. Landlord hereby agrees to remove
and dispose of the existing Liebert UPS battery. Landlord further agrees to
provide Tenant with a one year warranty on all work performed by or on behalf
of Landlord in connection with the Included Items.
ARTICLE 3
TERM AND RENEWALS
Section 3.1 Original Term. The "Original Term" of this Lease shall
be for a period of five (5) years beginning on April 1, 1997, (the
"Commencement Date"), unless sooner terminated as provided in this Lease.
Section 3.2 Renewals. Provided Tenant shall not be in default in
performance of any of its obligations under this Lease, Landlord grants to
Tenant an option (the "Renewal Option") to extend the Original Term for one
(1) additional term of five (5) years subject to Tenant's Termination Right
(which shall hereinafter be referred to as the "Renewal Term").
The Renewal Term shall be on the same terms and conditions as herein set
forth, except that the Base Rental for the Renewal Term shall be $6.00 per
square foot per annum, payable on the first day of each month in advance in
equal monthly installments of $14,042.65.
Should Tenant elect to exercise the Renewal Option, it shall do so by
written notice to Landlord at least 180 days prior to the expiration of the
Original Term.
Section 3.3 Demised Term. The Original Term and any Renewal Term
resulting from the exercise of the Renewal Option are collectively referred
to in this Lease as the "Demised Term."
Section 3.4 Holding Over. If, without the execution of a new lease
or written extension and with the consent of Landlord, Tenant shall hold over
after the expiration of the term of this Lease, Tenant shall be deemed to be
occupying the Demised Premises as a tenant from month to month, which tenancy
may be terminated as provided by law, subject to all of the terms, covenants
and conditions as herein specified, as far as applicable; provided however,
that if Tenant fails to surrender the Demised Premises within ninety (90)
days of the end of the Demised Term, Tenant agrees to pay to Landlord one and
one-half (1-1/2) times the rate of Base Rental as set forth herein, and further
provided that if Tenant fails to surrender the Demised Premises upon the
termination of this Lease, in addition to any other liabilities to Landlord
arising therefrom, Tenant shall indemnify and hold Landlord harmless from loss
or liability actually incurred by Landlord resulting from such holding over.
ARTICLE 4
RENT
Section 4.1 Rental During Original Term. In addition to the
additional rental set forth in this Lease, Tenant shall pay to Landlord
throughout the Original Term rental as follows: $5.18 per square foot per
annum (the "Base Rental") throughout the Original Term, payable on the first
day of each month in advance in equal monthly installments of $12,123.49,
provided that the first installment of such rent shall be due as of May 1,
1997.
Section 4.2 Payments. Rental checks are to be made payable to
Landlord and mailed to Landlord at the address shown in the caption of this
Lease, or otherwise as designated by Landlord from time to time in a written
instrument delivered to Tenant.
ARTICLE 5
TAXES
Section 5.1 Real Estate Taxes.
(a) As additional rental hereunder Tenant shall pay and
discharge as they become due, all taxes and assessments on the Demised
Premises.
(b) Tenant shall have the right at its own expense to challenge
any tax or assessment; such challenge will not, however, relieve Tenant's
obligation to pay such taxes promptly when due. If such challenge results in
a reduction of taxes or assessments, Tenant shall be entitled to a refund of
such reduction within fourteen (14) days of the date such refund amount is
received by Landlord. If the challenge results in reduction of a bill prior
to payment by Tenant, Tenant shall not be entitled to a refund, but shall have
its bill appropriately reduced.
(c) If this Lease expires or terminates before a tax or
assessment bill is rendered for the year in which such expiration or
termination occurs, Tenant shall pay to Landlord on the date the last monthly
payment is due, the proportionate amount of the anticipated tax for the entire
calendar year. The said proportional amount shall be computed as a fraction
the numerator of which shall be the number of months of the lease term within
the last calendar year and denominator of which shall be twelve (12).
ARTICLE 6
USE OF DEMISED PREMISES
Section 6.1 Use. Tenant shall not use or allow the Demised Premises
to be used for any unlawful, disreputable or immoral purpose, in any way that
will injure the reputation of the Demised Premises or in violation of any
applicable federal, state or local codes and regulations.
ARTICLE 7
UTILITY SERVICES
Section 7.1 Utilities. Tenant covenants and agrees to pay for
utility services rendered or furnished to the Demised Premises. Such utility
services shall include gas, water, sewer, electricity and trash collection.
Landlord shall not be liable to Tenant in damages or otherwise under any
provision of this Lease in the event any utilities to the Demised Premises
are reduced, terminated or interrupted by reason of events beyond the control
of Landlord, including but not limited to action by a public utility or
governmental agency.
ARTICLE 8
MAINTENANCE
Section 8.1 Tenant's Obligation. Tenant shall keep, maintain and
make replacements within the interior and exterior of the Demised Premises in
good condition and repair, excepting, however, all repairs made necessary by
reason of damage due to fire or casualty. If Tenant refuses or neglects to
commence or complete repairs promptly and adequately, Landlord may, but shall
not be required to do so, make or complete said repairs and Tenant shall pay
the cost thereof to Landlord upon demand. Tenant shall comply with the
directions of proper public officers as to the maintenance of the Demised
Premises and shall comply with all health and police regulations applicable
to or affecting the Demised Premises. Tenant shall deliver the Demised
Premises to Landlord in good condition at the end of the Demised Term,
excepting ordinary wear and tear and damage by fire or casualty.
Landlord shall not be liable for any damage occasioned by Tenant's
failure to keep the premises in repair, and shall not be liable for any damage
to or occasioned by or from plumbing, gas, water, steam or other pipes, or
sewage, or the bursting, leaking or running of such. Tenant shall obtain the
prior written approval of Landlord with respect to vendors and related
maintenance contracts retained by Tenant to maintain any portion of the
Building or any equipment therein.
ARTICLE 9
ALTERATIONS
Section 9.1 Alterations. Tenant shall not alter or add to any part
of the Demised Premises except with Landlord's prior consent which consent
shall not be unreasonably withheld or delayed. Tenant shall make all
alterations and additions to the Demised Premises at its own risk and cost and
in accordance with all applicable laws, and shall indemnify Landlord against
all expenses, liens, claims, or damages to either persons or property or to
the Demised Premises arising out of or resulting from such alterations or
additions. All alterations and additions shall be subject to the approval of
Landlord which shall not be unreasonably withheld or delayed and shall remain
after the termination of this Lease for the benefit of Landlord unless
otherwise provided in said consent. No alterations or additions to the
Demised Premises shall be made unless Tenant uses a general contractor
reasonably approved by Landlord. Notwithstanding the foregoing, (a)(i) the
freight elevator shall not be overloaded beyond the factory certified limits,
(ii) any damage to the elevator shall be repaired at Tenant's expense, and
(iii) Tenant agrees to use Landlord's current contractor for installation,
maintenance, and repairs to the freight elevator; and (b) no modification of
the electrical, HVAC, plumbing, fire sprinkler, fire control and suppression
systems (halon), and building automation systems of the Demised Premises shall
be permitted without Landlord's prior written consent and Landlord's approval
of the contractor.
ARTICLE 10
TRADE FIXTURES
Section 10.1 Trade Fixtures. Tenant may install necessary trade
fixtures at its expense and at any time or at the termination of this Lease
Tenant may remove all trade fixtures owned by Tenant and Tenant shall at its
expense, repair any damage caused by such removal.
ARTICLE 11
INSURANCE
Section 11.1 Fire and Extended Coverage. Tenant shall carry during
the Demised Term fire and extended coverage insurance on the Building
constituting a part of the Demised Premises for not less than eighty percent
(80%) of its insurable value on a reproduction cost basis. Tenant shall
provide Landlord with certificates of insurance showing that all insurance is
effective, payable to Landlord and Tenant (as their respective interests
appear) and not cancelable without ten (10) days' prior written notice to
Landlord. Landlord and Tenant hereby waive and relinquish any and all rights
which either might have against the other arising out of damage to the Demised
Premises or any property therein, resulting from fire or casualty normally
covered by standard fire and extended coverage insurance, whether or not such
damage is caused by any alleged negligence of either Landlord or Tenant, their
employees, customers, invitees or licensees. Landlord and Tenant agree that
the fire and extended coverage insurance policy or policies shall include a
waiver of subrogation endorsement recognizing the release of liability of
Landlord and Tenant as set forth herein.
Section 11.2 Public Liability Coverage. Tenant shall, commencing on
the date it commences occupancy of the Demised Premises, and thereafter
continually during the Demised Term, carry public liability insurance with
respect to the Demised Premises in which both Landlord and Tenant shall be
named as coinsureds. Such insurance policy shall have limits of liability of
not less than $2,000,000 combined single limit for personal injury and
property damage. Tenant shall furnish Landlord with certificates of insurance
showing that such insurance is in force and not cancelable without ten (10)
days' prior written notice to Landlord. On or before one hundred twenty (120)
days prior to the expiration of the first five (5) lease years during the
Demised Term, Landlord may give written notice to Tenant requiring that the
limits of liability set forth in this Section 11.2 be increased for the
renewal period of five (5) lease years to an amount comparable to the then
standard limits of liability contained in public liability insurance policies
for commercial leases in Kentucky. If Landlord and Tenant are unable to agree
on the amount of the increase in the liability for the renewal period, such
increase shall be determined by the majority decision of three arbiters, one
of whom shall be appointed by Landlord, one by Tenant and the third by the
other two arbiters, or if they are unable to agree on a third arbiter, by the
senior Federal District Court judge for the Western District of Kentucky. The
fees and expenses of any arbiters shall be borne equally by Landlord and
Tenant. Pending final determination of the amount of such increase, Tenant
shall continue to carry public liability insurance in an amount not less than
the amount required during the original lease term. However, within sixty (60)
days after the amount of such increase, if any, is finally determined, Tenant
shall carry public liability insurance as provided herein in an amount not
less than the amounts so determined.
Section 11.3 Subrogation. The fire and extended coverage insurance
policies kept and maintained by the parties shall be endorsed to provide for
or shall otherwise contain a waiver of subrogation by the insurance company or
companies except for intentional or grossly negligent acts of the parties, it
being the intent of the parties that in the event of loss caused by ordinary
negligence, the parties agree to look solely to the proceeds of insurance
policies.
ARTICLE 12
DEFAULT AND REMEDIES
Section 12.1 Tenant Default.
(a) In event of any failure of Tenant to pay any rent due hereunder
within ten (10) days after the same shall be due and notice to Tenant of such
failure, or any failure to perform any other of the terms or conditions of this
Lease to be observed or performed by Tenant for more than thirty (30) days
after notice of such default shall have been given to Tenant, or if Tenant
shall become bankrupt or insolvent or file any debtor proceedings to take or
have taken against Tenant in any court pursuant to any statute either of the
United States or of any state a petition in bankruptcy or insolvency or for
reorganization or for the appointment of a receiver or trustee of all or a
portion of Tenant's property, or if Tenant makes an assignment for the
benefit of creditors or petitions or enters into an arrangement, or if Tenant
shall abandon said Demised Premises with non payment of rent or suffer this
Lease to be taken under any writ of execution, THEN Landlord, in addition to
other rights and remedies it may have, may terminate this Lease or may without
terminating the Lease immediately re-enter the Demised Premises using lawful
means and remove all persons and property therefrom, and such property may be
removed and stored in a public warehouse or elsewhere at the cost and for the
account of Tenant, all without further service or notice or resort to legal
process and without being deemed guilty of trespass or becoming liable for any
loss or damage which may be occasioned thereby except for any damage or loss
sustained by Tenant due to Landlord's willful misconduct. In the event of
default as specified above, Tenant shall remain liable to Landlord for a sum
equal to all fixed and additional rent herein reserved for the balance of the
term herein originally granted.
(b) If Landlord lawfully re-enters the Demised Premises it may let or
relet the Demised Premises or any or all parts thereof for the whole or any
part of the remainder of the Demised Term hereof or for a longer period, in
the Landlord's name, or as the agent of the Tenant, and, out of any rent so
collected or received, the Landlord shall first pay to itself the expense and
cost of retaking, repossessing, repair and/or altering the Demised Premises
and the expense of removing all persons and property therefrom, and second,
pay to itself any cost or expense sustained in securing any new tenant or
tenants, and, third, pay to itself any balance remaining on account of the
liability of the Tenant to the Landlord for the sum equal to the rents
reserved herein and then unpaid by the Tenant for the remainder of the term
originally herein demised. Any lawful entry or re-entry by the Landlord,
whether had or taken under summary proceedings or otherwise, shall not
absolve or discharge the Tenant from liability hereunder.
(c) Should any rent so collected by the Landlord after the payments
aforesaid be insufficient to pay to the Landlord a sum equal to all fixed and
additional rent herein reserved the balance or deficiency shall be paid by the
Tenant on the rent days hereinbefore specified, that is, upon each of such
rent days the Tenant shall pay to the Landlord the amount of the deficiency
then existing; and the Tenant shall be and remain liable for any such
deficiency, and the right of the Landlord to recover from the Tenant the
amount thereof, or a sum equal to the amount of all rent and additional rent
herein reserved, if there shall be no reletting, shall survive the issuance of
any forcible detainer order or any termination hereof.
(d) Suit or suits for the recovery of any such deficiency or damages,
or for a sum equal to any installment or installments of rent or additional
rent payable hereunder, may be brought by the Landlord, from time to time at
the Landlord's election and nothing herein contained shall be deemed to
require the Landlord to await the date whereon this Lease or the term hereof
would have expired by limitation had there been no such default by the Tenant
or no such termination or cancellation.
Section 12.2 Landlord Default. In the event Landlord shall be in
default on any of the terms or conditions of this Lease to be observed or
performed by Landlord and such default continues for thirty (30) days after
notice thereof from Tenant, and Landlord is not diligently pursuing the cure
of such default at the end of such thirty (30) day period, Tenant may perform
any covenant of Landlord as to which Landlord is in default, and Tenant shall
have the right to deduct from the rental provided for herein its costs and
expenses paid out and expended.
ARTICLE 13
DAMAGE
Section 13.1 Damage to the Demised Premises. In the event the Demised
Premises are damaged by fire, explosion or any other casualty to an extent
which is less than twenty five percent (25%) of the cost of replacement of the
Demised Premises, the damage shall promptly be repaired by Landlord at
Landlord's expense within ninety (90) days of the casualty. In no
event shall Landlord be required to repair or replace Tenant's stock in trade,
fixtures, furniture, furnishings, floor coverings and equipment. In the event
the Demised Premises shall be damaged to the extent of twenty five percent
(25%) or more of the cost of replacement, Landlord may elect either to repair
or rebuild the Demised Premises within one hundred twenty (120) days of the
casualty or Landlord may terminate this Lease upon giving notice of such
election in writing to Tenant within thirty (30) days after the occurrence of
the event causing the damage. In the event the Demised Premises shall be
damaged to the extent such that repairs cannot be reasonably repaired, or are
not substantially repaired, within one hundred twenty (120) days, Tenant may
terminate this Lease upon giving notice of such termination to Landlord.
If the casualty, repairing, or rebuilding shall render the Demised Premises
untenantable, in whole or in part, then a proportionate abatement of the rent
due hereunder shall be allowed from the date when the damage occurred until
the date Landlord completes its work, said proportion to be computed on the
basis of the relation which the gross square foot area of the space rendered
untenantable bears to the floor space of the Demised Premises. If
Landlord is required or elects to repair the Demised Premises as herein
provided, Tenant shall repair or replace its stock in trade, fixtures,
furniture, furnishings, floor coverings and equipment, and if Tenant has
closed, Tenant shall promptly reopen for business.
ARTICLE 14
FINANCING
Section 14.1 Subordination. This Lease shall, at all times, be
subject, subordinate and inferior to any first mortgage that may be placed on
the Demised Premises by any bank, trust company, insurance company or other
institutional lender, and the recording of such mortgage shall be deemed prior
to this Lease, regardless of whether or when such mortgage is recorded. Tenant
shall, within twenty (20) days after notice from the requesting
party, execute any instrument reasonably necessary to effect the foregoing
provision. Provided, however, Tenant shall retain all rights under this Lease,
notwithstanding the recording of such mortgages, so long as Tenant has and
continues to abide by the terms of this Lease and/or otherwise cures, in a
timely manner, any event of default which may occur, and further provided, that
so long as Tenant shall not be in default under the terms of this
Lease, said Lease shall not be terminated nor shall any of Tenant's rights and
obligations under this Lease be disturbed by any steps or proceedings taken by
any mortgagee, lessor, or other holder of a right of record affecting the
Demised Premises in the exercise of any of its rights under the instrument
wherein the right is authorized.
Section 14.2 Estoppel Certificate. Within ten (10) days after written
request therefor by Landlord, or in the event that upon any sale, assignment or
hypothecation of the Demised Premises by Landlord an estoppel certificate is
required from Tenant, Tenant agrees to deliver a recordable certificate to
Landlord, or to any proposed mortgagee or purchaser in a form provided by the
requesting party which does not effect a modification of this
Lease, certifying that this Lease is in full force and effect, that there are
no defenses or offsets thereto, if such be the case, or stating those claimed
by Tenant, covenanting that the subject lease shall not be altered without the
prior written approval of the Mortgagee, and such other reasonable provisions
as Mortgagee may reasonably require.
ARTICLE 15
CONDEMNATION
Section 15.1 Condemnation. If the entire Demised Premises or more than
50% of the Demised Premises shall be acquired by any authority having power
of eminent domain, whether directly pursuant to such power or under threat
of use of such power, then either Landlord or Tenant may terminate this Lease
as of the date when possession is taken by the acquiring authority by giving
written notice to the other within thirty (30) days following
the date of the taking provided, however, that Landlord shall have the right
to offer replacement space to Tenant if Landlord shall have comparable space
available. All proceeds and damages resulting from such acquisition shall
belong to and be the property of Landlord. Tenant
shall have no claim against Landlord by reason of such acquisition or
termination, and shall not have any claim or right to any portion of the
proceeds or damages paid to Landlord as a result of such acquisition.
The entire compensation from such acquisition shall belong to
Landlord without any deductions therefrom for any present or future estate or
interest of Tenant, and Tenant hereby assigns to Landlord all Tenant's right,
title, and interest in and to any and all such compensation together with any
and all rights, estate, and interest of Tenant now
existing or hereafter arising in and to the same or any part thereof.
Provided, that Tenant shall have the right to claim and recover from such
acquiring authority, but not from Landlord, such
compensation as may be separately awarded or recoverable by Tenant in its own
right on account of any and all damages to Tenant's business by reason of
such acquisition, business interruption or displacement.
ARTICLE 16
INSPECTION AND ACCESS; SECURITY
Section 16.1 Inspection and Access. Landlord or its agents may at any
reasonable time inspect the Demised Premises and make such repairs thereto as
Landlord deems necessary for its preservation. Any repairs made by Landlord
because of Tenant's failure to repair or maintain the Demised Premises as
required by the terms of this Lease for a period of thirty (30) days
after written notice from Landlord of such failure shall be at Tenant's
expense. Landlord shall have access to the Demised Premises at all reasonable
times and in case of emergency at any time for the purpose of inspecting such
facilities or of making such repairs or changes
thereto as Landlord deems necessary. Tenant shall not install any equipment
which will exceed the capacity of the utility facilities for the Demised
Premises, and any equipment necessary to increase utility capacity shall be
installed at Tenant's expense. Landlord shall have access during the last six
(6) months of the Demised Term for the purpose of exhibiting the Demised
Premises, and Landlord shall have the right to place signs in or on the Demised
Premises advertising the same during the last ninety (90) days prior to the end
of the Original Term or Renewal Term, if not further extended.
ARTICLE 17
ASSIGNMENT, SUBLEASE OR LICENSE
Section 17.2 Assignment, Sublease or License. Tenant shall not assign
or sublease the Demised Premises, or any right or privilege connected
therewith, or allow any other person except agents and employees of Tenant
to occupy the Demised Premises or any part thereof without first obtaining
the written consent of Landlord which consent shall not be unreasonably
withheld or delayed. A consent by Landlord shall not be a consent to a
subsequent assignment, sublease or occupation by any other person. An
unauthorized assignment, sublease or license to occupy by Tenant shall be
void and shall terminate the Lease at the option of Landlord.
Notwithstanding the foregoing, Tenant may assign this Lease or sublease
the Demised Premises, or any portion thereof, without any consent from
Landlord, to (a) any entity resulting from a merger or consolidation of
Tenant, (b) any subsidiary or affiliate of Tenant, or (c) any entity that
acquires all or a portion of Tenant's assets and business and, immediately
following such acquisition, has a net worth equal to or greater than Ten
Million Dollars ($10,000,000.00). In each such case, the transferee or
successor shall assume in writing (or succeed by operation of law to) all of
the obligations thereafter to be performed by Tenant hereunder, as to the
Demised Premises or portion thereof covered by such assignment or sublease.
Tenant shall give Landlord written notice of any such assignment or sublease,
or transaction resulting in the same, within thirty (30) days thereafter,
setting forth in such notice all information necessary to establish that the
provisions of this Section are satisfied.
ARTICLE 18
NOTICE
Section 18.1 Notices and Payments. All notices, consents, waivers,
releases, certifications, statements, requests, payments, and other
communications of any kind hereunder shall be in writing and shall be
addressed and sent to the parties at their addresses shown in the caption of
this Lease, subject to thirty (30) days' notice of change. Such
communications shall be deemed to be delivered when actually received after
(a) being sent by Federal Express or some other recognized bonded
national courier service; (b) deposited in the United States mail, postage
prepaid, certified mail, return receipt requested; (c) personally delivered; or
(d) sent by telecommunication ("Fax") during normal business hours in
which case it shall be deemed delivered on the day sent, provided an
original is sent to the addressee by a nationally recognized overnight courier
within one business of the Fax, at the address specified on the first page of
this Lease or at such other address as specified by written notice by either
party. Rejection or refusal to accept, or inability to deliver because of
changed addresses or because no notice of changed address was given, shall
be deemed a receipt of such notice.
ARTICLE 19
SIGNS
Section 19.1 Signs. Tenant may erect, maintain, permit and remove
such signs on or about the Demised Premises as may be consented to in
writing by Landlord which consent shall not be unreasonably withheld or
delayed. Landlord agrees to execute promptly such consents or applications
to erect such signs as may be required by any governmental authorities.
ARTICLE 20
TIME OF ESSENCE
Section 20.1 Time of Essence. Time shall be deemed of the essence
in all matters pertaining to this Lease.
ARTICLE 21
INDEMNIFICATION
Section 21.1 Indemnification by Tenant. Tenant covenants at all
times to save the Landlord harmless from all loss, cost or damage which
may occur or be claimed with respect to any person or persons, corporation,
property or chattels on or about the Demised Premises, or to the property
itself resulting from the acts or omissions of Tenant, its agents, employees,
invitees or customers.
ARTICLE 22
COMMISSIONS
Section 22.1 Leasing Commissions. Landlord shall pay to
Commercial Kentucky, Inc. ("CKI") a leasing commission (the "Leasing
Commission") of 6% of the amount of Base Rent paid by Tenant over the
Demised Term (including increases in such Base Rent as a result of the
exercise by Tenant of the Renewal Option or any other expansion or
renewal). The Leasing Commission due under the Original Term is due
50% upon execution of this Lease and 50% upon the commencement of
this Lease. Payments of the Leasing Commission under the Renewal Term
or any expansion option pursuant to Section 3.2 shall be due within thirty
(30) days after the exercise of the Renewal Option by Tenant. The parties
hereto agree and acknowledge that the Leasing Commission will be paid by
Landlord directly to CKI, with any fees or commissions due any other
broker as a result of this Lease being paid by separate agreement with CKI
or otherwise, and Tenant and Landlord further agree to and do hereby
indemnify and hold the other harmless for all costs, including reasonable
attorney's fees, associated with the payment of any commissions or fees
other than the Leasing Commission to CKI.
In the event (a) Tenant or (b) any entity having as one of its principals
a member of Tenant's Board of Directors, purchases the Demised Premises
from Landlord during the Demised Term, Landlord shall pay a commission
of 6% of the total sale price to CKI less any commission paid for the
unexpired term of this Lease.
ARTICLE 23
MISCELLANEOUS
Section 23.1 Covenant of Title. Landlord covenants, represents and
warrants that it has full right and power to execute and perform its
obligations under this Lease and to grant the estate demised herein and
that Tenant, on payment of the rent herein reserved and performance of
the covenants and agreements herein contained, shall peaceably and quietly
have, hold and enjoy the Demised Premises during the Demised Term
without molestation or hindrance by any person, and, if at any time during
the Demised Term, the title of Landlord shall fail or it shall be discovered
that its title does not enable Landlord to grant the term hereby demised, or
action is taken by governmental authority which prevents Tenant from
using the Demised Premises for the use contemplated by it, Tenant shall
have the option at Landlord's expense to correct or contest such defect or
action, or to annul and void this Lease with full reservation of its rights to
damages, if any, against Landlord.
Section 23.2 Option to Purchase.
(a) For and in consideration of the mutual promises of the
parties hereto, Landlord grants to Tenant the option to purchase the
Demised Premises for $1,700,000 at the end of the Demised Term or
during the period thereof, on the conditions that: (a) Tenant give
Landlord six (6) months' prior written notice of the exercise of this option,
(b) this Lease shall not have previously been terminated, (c) Tenant has
observed and complied with all terms and conditions of this Lease, up to
the time of exercise of the option, and (d) payment is made of the
purchase price in the manner hereafter provided. In the event Tenant
exercises such option to purchase the Demised Premises, and subject to
the prior sale of Tract 2 by Landlord pursuant to Section 23.2(b), Tenant
shall have the option to also purchase the property adjacent to the
Demised Premises ("Tract 2") as more particularly described on Exhibit E
attached hereto and made a part hereof, for $100,000. The purchase price
shall be paid in full at closing, at which time Landlord shall convey the
Demised Premises (and Tract 2, if applicable) by General Warranty Deed,
free and clear of all encumbrances except easements, restrictions and
zoning laws affecting said property and liens of taxes not due and payable.
On the delivery of the above-described deed, this Lease shall, if Tenant has
fulfilled all of its obligations, become void. Tenant shall have the right to
assign this option to any entity having as one or more of its principals a
member of Tenant's Board of Directors.
(b) In the event Landlord receives a bona fide offer (the "Tract 2
Offer") to sell Tract 2, and the Tract 2 Offer is acceptable to Landlord,
Landlord shall give Tenant the right (the "Right of First Refusal") to
purchase Tract 2 at the price and on the terms of the Tract 2 Offer. The
Right of First Refusal shall be extended by Landlord's giving Tenant
written notice of the Tract 2 Offer, requiring Tenant to accept the Tract 2
Offer in writing within ten days of the Landlord's giving of such notice. If
Tenant does not accept the Tract 2 Offer, Landlord may sell Tract 2 to the
original offeror.
Section 23.3 Waiver. No waiver of any covenant or condition or the
breach of any covenant or condition of this Lease shall be deemed to
constitute a waiver of subsequent breach of such covenant or condition,
nor to justify or authorize the nonobservance on any other occasion of the
same or of any other covenant or condition hereof, nor shall the
acceptance of rent by Landlord at any time when Tenant is in default
under any covenant or condition hereof be construed as a waiver of such
default, nor the failure of Landlord to pay any monies due Tenant
hereunder be construed as a waiver of such default, nor shall any waiver
or indulgence granted by Landlord or Tenant to the other be taken, as an
estoppel against either party during the continuance of such default. The
failure of either Landlord or Tenant promptly to avail itself of such other
rights or remedies as Landlord or Tenant may have shall not be construed
as a waiver of such default, but Landlord or Tenant may at any time
thereafter, if such default continues, exercise all its rights arising from such
default in the manner provided in this Lease or any other manner provided
at law or in equity.
Section 23.4 Remedies Cumulative. The remedies of Landlord and
Tenant shall be cumulative, and no one of them shall be construed as
exclusive of any other or of any remedy provided by law.
Section 23.5 Relationship of Parties. Nothing herein contained shall
be deemed or construed by the parties hereto, nor by any third party, as
creating the relationship of principal and agent, or of partnership, or of
joint venture, between the parties hereto, it being agreed that neither the
method of computation of rents nor any other provisions named herein,
nor any acts of the parties herein, shall be deemed to create any
relationship between the parties hereto other than the relationship of
Landlord and Tenant.
Section 23.6 Governmental Regulation. Tenant shall comply with all
of the requirements of all county, municipal, state, federal and other
applicable governmental authorities, (collectively, the "Law") pertaining to
the specific nature of Tenant's use and occupancy of the Demised
Premises. Landlord shall comply with the Law pertaining generally to the
Building and the Property.
Section 23.7 Construction. Whenever a word appears herein in its
singular form, such word shall include the plural; and the neuter gender
shall include the masculine and feminine genders. This Lease shall be
construed without reference to titles of Articles, Sections or Clauses, which
are inserted for reference only.
Section 23.8 Consent. Whenever any consents, approvals or
authorizations are required by either Landlord or Tenant, such shall not
be unreasonably withheld, delayed or denied.
Section 23.9 Litigation. In the event Landlord shall be made a party
to any litigation commenced by or against Tenant as a result of the alleged
actions or omissions of Tenant, and Landlord is ultimately agreed or
adjudged to have no liability therein, Tenant shall pay all expenses,
including reasonable attorneys' fees, incurred by Landlord in connection
therewith. Tenant shall also pay all expenses, including reasonable
attorneys' fees, incurred by Landlord in enforcing the covenants and
conditions of this Lease against Tenant, and Landlord shall pay all
expenses, including reasonable attorneys' fees, incurred by Tenant in
enforcing the covenants and conditions of this Lease against Landlord.
Section 23.10 Successors. This Lease shall inure to the benefit of
and be binding upon the parties hereto, their respective successors and
assigns.
Section 23.11 Attornment. Tenant shall, in the event of any sale,
assignment, or foreclosure of Landlord's rights in the Demised Premises,
attorn to and recognize such assignee or purchaser thereof as the Landlord
under this Lease, provided such successor to Landlord shall assume the
responsibilities and obligations of the Landlord under the Lease.
Section 23.12 Entirety, Severability and Law. This Lease shall
constitute the entire agreement between the parties and shall not be
modified in any manner except by written instrument executed by both of
the parties. The invalidity or unperformability of any provision hereof shall
not affect or impair any other provision hereof. Each term and provision
hereof shall be performed and enforced to the fullest extent permitted by
and in accordance with Kentucky law.
Section 23.13 Law of Kentucky. This Lease shall be governed by
the Laws of the Commonwealth of Kentucky.
Section 23.14 Use of Hazardous Material.
(A) Tenant shall (i) not cause or permit any Hazardous Material
to be brought upon, kept or used in or about the Demised Premises by
Tenant, its agents, employees, contractors or invitees without the prior
written consent of Landlord, which Landlord shall not unreasonably
withhold as long as Tenant demonstrates to Landlord's reasonable
satisfaction that such Hazardous Material is necessary or useful to Tenant's
business and will be used, kept, stored and disposed of in a manner that
complies with all laws regulating any such Hazardous Material so brought
upon or used or kept in or about the Demised Premises. If Tenant
breaches the obligations stated in the preceding sentence, or if the presence
of Hazardous Material on the Demised Premises caused or permitted by
Tenant, its agents, employees, contractors or invitees results in
contamination of the Demised Premises, of if contamination of the
Demised Premises by any Hazardous Material otherwise occurs for which
Tenant is legally liable to Landlord for damage resulting therefrom, then
Tenant shall indemnify, defend and hold Landlord harmless from any and all
claims, judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Demised Premises,
damages for the loss or restriction on use of rentable or usable space or of
any amenity of the Demised Premises, damages arising from any adverse
impact on marketing of space, and sums paid in settlement of claims,
attorney's fees, consultant fees and expert fees) which arise during or after
the lease term as a result of such contamination. This indemnification of
Landlord by Tenant includes, without limitation, costs incurred in
connection with any investigation of site conditions or any clean-up,
remedial, removal or restoration work required by any federal, state or
local governmental agency or political subdivision because of any
Hazardous Material introduced by Tenant and present in the soil or
ground water on or under the Demised Premises. Without limiting the
foregoing, if the presence of any Hazardous Material on the Demised
Premises caused or permitted by Tenant, its agents, employees, contractors,
or invitees results in any contamination of the Demised Premises, Tenant
shall promptly take all actions at its sole expense as are necessary to return
the Demised Premises to the condition existing prior to the introduction of
any such Hazardous Material to the Demised Premises; provided that
Landlord's approval of such actions shall first be obtained, which approval
shall not be unreasonably withheld. The foregoing indemnity shall survive
the expiration or earlier termination of this Lease.
(b) As used herein, the term "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes
regulated by any local government authority, the Commonwealth of
Kentucky or the United States government. The term "Hazardous
Material" includes, without limitation, any material or substance which is:
(i) listed in the United States Department of Transportation Hazardous
Materials Table (49 CFR S. 172.101, including the appendix to S. 172.101);
(ii) identified by the Environmental Protection Agency as a hazardous
substance in 40 CFR Part 302; (iii) designated as a "hazardous substance"
pursuant to Section 311 of the Federal Water Pollution Control Act (33
U.S.C. S. 1317); (iv) defined as a "hazardous waste" pursuant to Section
1004 of the Federal Resource Conservation and Recovery Act, 41 U.S.C. S.
6901 et seq. (42 U.S.C. S. 6903;) (v) defined as a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. S. 9601 et seq. (49 U.S.C. S.
9601); (vi) an asbestos containing material; (vii) any petroleum product or
material in any way derived from or containing any petroleum product;
(viii) defined as a "hazardous waste," a "hazardous material" a "hazardous
substance," a "contaminant" or as a "waste" under any Kentucky Statute or
administrative rule; or (ix) defined as "hazardous wastes" or "hazardous
material" or any similar term under any county or municipal code in which
the Demised Premises is located; or under any amendments, revisions,
supplements or replacements of any of the above or any regulations
implementing any of the above.
(c) Disclosure. At the commencement of this Lease, and on
January 1 of each year thereafter (each such date being hereafter called
"Disclosure Dates"), including January 1 of the year after the termination
of this Lease, Tenant shall disclose to Landlord the names and amounts of
all Hazardous Materials, or any combination thereof, which were stored,
used or disposed of on the Demised Premises, or which tenant intends to
store, use or dispose of on the Demised Premises.
(d) Inspection. Landlord and its agents shall have the right, but
not the duty, to inspect the Demised Premises at any time to determine
whether Tenant is complying with the terms of this Lease. If Tenant is not
in compliance with this Lease, Landlord shall have the right, but not the
duty, to immediately enter upon the Demised Premises to remedy any
contamination caused by Tenant's failure to comply notwithstanding any
other provision of this Lease. Landlord shall use its best efforts to
minimize interference with Tenant's business but shall not be liable for any
interference caused thereby.
(e) Landlord's Representation. Landlord hereby represents and
warrants to Tenant, that to Landlord's knowledge, Landlord has not caused
or permitted any Hazardous Substance to be located at or on the Demised
Premises, nor has any part thereof ever been used by Landlord as a dump
site, either permanent or temporary, for any Hazardous Substance.
(f) Default. Any default under this Paragraph shall be a material
default enabling Landlord to exercise any of the remedies set forth in this
Lease.
Section 23.15 Compliance with Disability Laws:
(a) Landlord represents and warrants to Tenant that as of the
date of Landlord's delivery of the Demised Premises to Tenant, the
Demised Premises complies fully with all applicable federal, state, county
or local statutes, laws, regulations, rules, ordinances, codes, standards,
guidelines, or orders, as now in effect, relating to use, enjoyment, or
access to the Demised Premises by persons with a disability, or to
discrimination of such persons ("Disability Laws") as such terms are defined
by the Disability Laws, including, without limitation, the Americans with
Disabilities Act of 1990, 42 U.S.C. 12101 et. seq.; the Fair Housing Act of
1968, 42 U.S.C. 3601 et. seq.; and the Kentucky Civil Rights Act, KRS
344.010 et. seq.
(b) Tenant warrants and represents that Tenant will not violate,
in connection with the use, alteration, occupation, maintenance or
operation of the Premises and the conduct of the business related thereto,
any Disability Law.
(c) Tenant hereby agrees to indemnify the Landlord and hold
the Landlord harmless from and against any and all losses, liabilities,
damages, injuries, expenses, including the cost of alterations to the
Demised Premises to comply with any Disability Law, architectural,
engineering, and accounting costs, reasonable attorneys' fees, claims for
owed penalties, costs of any settlement or judgment and claims of any and
every kind whatsoever paid, incurred or suffered by, or asserted against,
the Landlord by any person or entity or governmental agency for, with
respect to, or as a direct or indirect result of violation of Disability Laws
(a "Disability Laws Violation").
(d) If Tenant receives any notice of any complaint, inspection by
any governmental agency which lists any noncompliance, order, citation or
notice with regard to a Disability Law Violation from any person or entity
(including without limitation the United States Department of Justice) then
Tenant shall immediately notify Landlord orally and in writing of said
notice.
Section 23.16 Safes or Heavy Articles. Tenant shall not overload
any floor of the Demised Premises. Landlord shall have the right to direct
the routing and placement of safes and other heavy articles. Safes,
furniture and all large articles shall be brought into the Demised Premises
or removed therefrom at such times and in such manner as the Landlord
shall direct and at the Tenant's sole risk and responsibility unless any
damage is due to Landlord's direction.
Section 23.17 Force Majeure. Neither Landlord nor Tenant shall be
deemed to be in default of this Lease if such default is due to acts of
God, acts of the public enemy, acts of governmental authority, or any other
circumstances which are not within such party's control.
Section 23.18 Parties Bound. The preparation and submission of a
draft of this Lease by either party to the other party shall not constitute
an offer, nor shall either party be bound to any terms of this Lease or the
entirety of this Lease, until both parties have fully executed a final
document and an original signature document has been provided to both
parties. Until such time as described in the previous sentence, either party
is free to terminate negotiations without any obligation to the other party.
To indicate their understanding of and consent to the foregoing terms,
the parties have executed this Lease on the date first above written.
LANDLORD:
SOUTHEASTERN GROUP, INC. d/b/a
ANTHEM HEALTH PLANS
BY:________________________________________
NAME:______________________________________
TITLE:_____________________________________
DATE:______________________________________
TENANT:
STRATEGIA CORPORATION
BY:________________________________________
NAME:______________________________________
TITLE:_____________________________________
DATE:______________________________________
Page 1
EXHIBIT "A"
Legal Description of the Demised Premises
BEING Tract No. 2, containing 5.14 acres, as shown
on Amended Plat of Shelby Business Park, a record
in the Shelby County Clerk's Office in Plat Cabinet 1,
Slide 1-8 and Slide 1-168.
BEING a part of the same property conveyed to
Lessor by Deed dated December 7, 1989 of record in
Deed Book 260, Page 441 in the office aforesaid.
Page 1
EXHIBIT B
SHORT FORM LEASE
THIS SHORT FORM LEASE, executed by
SOUTHEASTERN CROUP, INC. d/b/a
ANTHEM HEALTH PLANS, a Kentucky corporation
9901 Linn Station Road
Louisville, Kentucky 40223
"Landlord"
and
STRATEGIA CORPORATION
a Kentucky corporation
10301 Linn Station Road
Louisville, KY 40223
"Tenant"
W I T N E S S E T H:
In consideration of the premises, the mutual covenants and agreements
set forth in a certain lease (the "Lease") dated March 3, 1997, by and
between Landlord and Tenant, Landlord has leased, and hereby lets and
demises to Tenant, and Tenant has leased, and hereby lets and demises
from Landlord, the real property located in Shelby County, Kentucky, as
described on Exhibit "A" attached hereto and made a part hereof (such real
estate is hereinafter referred to as the "Demised Premises"), for a term of
five (5) years beginning on or before April 1, 1997, subject to an option to
renew for one (1) additional term of five (5) years.
The Lease provides, among other things, that the Tenant has an
option to purchase the subject real estate and the real property located
adjacent to the Demised Premises as described on Exhibit "B" attached
hereto and made a part hereof on terms more specifically set out in the
Lease at any time during the term of said Lease.
This Short Form Lease is executed for the purpose of giving notice of
the existence of the Lease and the terms thereof. Reference is made to
the Lease for the full description of the rights and duties of Landlord and
Tenant, and this Short Form Lease shall in no way affect the terms and
conditions of the Lease or the interpretation of rights and duties of
Landlord and Tenant thereunder.
IN WITNESS WHEREOF, Landlord and Tenant have caused this
Short Form Lease to be executed on this 3d day of March, 1997.
SOUTHEASTERN GROUP, INC. d/b/a
ANTHEM HEALTH PLANS
BY_________________________________________
TITLE______________________________________
("Landlord")
STRATEGIA CORPORATION
BY_________________________________________
TITLE______________________________________
("Tenant")
COMMONWEALTH OF KENTUCKY )
)
COUNTY OF ______________ )
The foregoing Short Form Lease was acknowledged before me on this
_____________, 1997, by _____________________ as ______________ of
SOUTHEASTERN GROUP, INC. d/b/a ANTHEM HEALTH PLANS, a
Kentucky corporation, on behalf of the corporation.
My commission expires:
_______________________________________________________________
_______________________________________________________________
NOTARY PUBLIC
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF ______________ )
The foregoing Short Form Lease was acknowledged before me on this
___________, 1997, by ____________ ________________ as ____________
of STRATEGIA CORPORATION, a Kentucky corporation, on behalf of
the corporation.
My commission expires:
_______________________________________________________________
_______________________________________________________________
NOTARY PUBLIC
THIS INSTRUMENT PREPARED BY:
______________________________
LORI R. HOLLIS
STITES & HARBISON
400 West Market Street
Suite 1800
Louisville, Kentucky 40202-3352
(502) 587-3400
EXHIBIT B
Legal Description of Tract 2
BEING Tract No. 1, containing 2.57 acres, as shown
on Amended Plat of Shelby Business Park, of record
in the Shelby County Clerk's Office in Plat Cabinet
1, Slide 1-8 and Slice 1-168.
BEING a part of the same property conveyed to Lessor
by Deed dated December 7, 1989 of record in Deed Book
260, Page 441 in the office aforesaid.
EXHIBIT C
INTENTIONALLY DELETED
EXHIBIT D
INTENTIONALLY DELETED
EXHIBIT E
Legal Description of Tract 2
Page 2
EXHIBIT "B"
Legal Description of Tract 2
BEING Tract No. 1, containing 2.57 acres, as shown
on Amended Plat of Shelby Business Park, of record
in the Shelby County Clerk's Office in Plat Cabinet 1,
Slide 1-8 and Slide 1-168.
BEING a part of the same property conveyed to
Lessor by Deed dated December 7, 1989 of record in
Deed Book 260, Page 441 in the office aforesaid.
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