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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, 1997.
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)
Two Paragon Center, Suite 400
6040 Dutchman's Lane
Louisville, Kentucky 40205-3271
(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: Common Stock
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Securities registered pursuant to Section 12(g) of the Act: None
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 December 31, 1998:
Common stock -- $22,875,915.
The number of shares of the registrant's common stock outstanding as of March
27, 1998 -- 4,667,667 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.
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 this report includes
forward-looking statements. For this purpose, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. There are a number of factors that could
cause the Company's actual results to differ materially from those indicated
by the forward-looking statements, including, without limitation, those set
forth under "Certain Factors That May Affect Future Results" and in other
sections of "Item 1. Description of Business" and in "Item 6.-- Management's
Discussion and Analysis."
GENERAL
Strategia Corporation ("Strategia" or the "Company") provides disaster
recovery, consulting, information processing and outsourcing services to users
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of large-scale computer systems in North America and Europe. Since 1984 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 and other systems to allow those systems to
function without interruption on and after January 1, 2000. The problem these
systems may have processing the change in century 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. 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 historical 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
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
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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 two years to continue critical functions without
interruption. Many organizations will be required to analyze and modify their
current systems because it is unlikely that they can abandon substantial
portions of their current systems and complete the transition to new Year
2000-compliant computer systems in the limited time remaining. In addition to
problems arising in its own systems, an organization may be indirectly
affected by the date-dependent computer programs and databases used by other
organizations. For example, suppliers may have software applications that are
directly integrated with a retailer's information processing applications.
The Year 2000 problem is not limited to mainframe computers. Mid range and
personal computers are also susceptible. In addition, there are many medical,
industrial and infrastructure devices which have embedded chip technology that
utilize dates for ensuring proper maintenance and other purposes. These devices
may also fail when the date changes centuries. The effect of failure of these
devices could range from inconveniences (e.g., an elevator in a building might
not function properly) to disastrous (e.g., a process in a petro chemical plant
may go awry causing an explosion)."
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.
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
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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 diminishing, the number is much greater in
Europe, where the Company believes significant opportunities 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.
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 may 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.
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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.
COMPANY SERVICES
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 offers these services separately
or together for organizations that prefer a turnkey solution for their entire
Year 2000 project.
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 addresses 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 conducts 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 preliminary 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 an estimated 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 assists the organization to develop a
comprehensive conversion plan. The plan prioritizes the conversion sequence,
defines the conversion approach, and directs critical elements of the
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conversion such as unit testing, bridging converted applications to
non-converted applications, and managing changes. Second, all programs and
data are systematically converted according to the plan. Following the
conversion, the converted code is validated. The Company may contract to
provide some but not all of these services depending on each customer's needs.
The Company intends to execute conversion projects through its internal
conversion capabilities and through arrangements with third party conversion
specialists, depending on the type of code to be renovated, the relative
costs, risks, availability and other factors. Conversion will be performed
using automated conversion software whenever possible.
Since the Year 2000 problem has become the subject of serious management
planning, several software tools that can be used in such conversion have
been developed. The Company has evaluated several of these tools and is
actively using a number of them in existing engagements. However, in certain
circumstances, tools may prove to be inadequate or third party conversion
specialists may be unavailable. Accordingly, there can be no assurance that
the Company will not have to resort, to an extent not now contemplated, to
manual conversion processes.
EMBEDDED CHIP AND PERSONAL COMPUTERS. The Company offers consulting
services to assist its clients to identify Year 2000 issues with embedded
chips and personal computers and to develop remediation and testing plans to
address the issues.
COMPLIANCE TESTING. Industry analysts as well as federal banking and
securities 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.
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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. In 1997, the Company opened a Year 2000 code renovation
and compliance testing center in Shelbyville, Kentucky. Depending on demand
for testing services, the Company may 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.
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, in the event of a
disaster, to immediate use of the Company's IBM, Bull or Unix-based computer
systems together with all required peripheral, communications, and support
equipment. Use of certain peripheral and support systems and office 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
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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.
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." If its client base grows sufficiently, 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. This contract has since expired. Two new outsourcing
contracts commenced during 1997. Both of these contracts are for transitional
periods and are expected to expire in 1998 or 1999. The Company intends to
continue to pursue opportunities in this area.
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SALES AND MARKETING
The Company currently maintains marketing personnel in both North
America and Europe. In North America the Company has adopted a unified
marketing structure in which each marketing representative sells all of the
Company's services. These representatives are backed by various technical
specialists who provide support related to each of the services. This
approach supports cross selling opportunities and account control. In Europe,
marketing is divided between millennium services and the other services. The
Company intends to explore combining these two functions.
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 Year 2000 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 the methodology historically used by the Company to
plan for unanticipated interruptions of information processing.
The Company intends to continue to focus on both (i) its historical 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 has also identified, and
intends to continue to identify, potential sources of customer referrals such as
conversion tool vendors, consultants, purchasing groups and others. The Company
intends to cultivate relationships with these sources in order to develop
business from referrals.
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
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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.
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.
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 since its inception.
Twinsys' customer base includes multi-divisional corporations, regional
financial institutions, and national and local government agencies, which
generally operate large data centers. The Company's millennium services
customers are a diverse group that include among others, governmental
entities and business organizations in healthcare, utilities, manufacturing,
education, retailing and other areas.
During 1996 and 1997 the Company and its subsidiaries provided services
to approximately 190 clients. During 1997, France Telecom and its affiliated
divisions, together accounted for approximately $2,516,000, or 23%, of the
Company's consolidated revenue. The Company's ten largest clients in 1997
accounted for approximately 48% 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
its 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 end
to end solutions including the critical testing component, may distinguish its
services from those of its competitors.
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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.
Many 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, 1997, the Company had 74 full-time employees in its
North American operations, including 16 persons in marketing, 42 persons on its
consulting and technical staff, and 16 persons in management and administration.
The Company had 24 full-time employees in its European operations in Paris,
France. These employees include 6 persons in marketing, 13 persons on its
technical staff, and 5 persons in management and administration.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking
statements made in this Annual Report and presented by management from time
to time.
VARIATION IN RESULTS. The Company has experienced and expects to
experience fluctuations in its quarterly results. A variety of factors
influence the level of the Company's revenues in a particular quarter,
including the number, requirements, and nature of projects, changes during
the course of projects that may impact the timing and current scope of work
in progress, general economic conditions that may influence decisions by
clients and potential clients to invest in or replace their information
systems, decisions by management to rely on in-house information technology
personnel for some or all of a client's or a potential client's information
systems projects, the ability of certain clients to terminate their
engagements without penalty, competition for engagements, and other factors,
many of which are beyond the Company's control. A significant portion of the
Company's current expense structure does not vary in relation to the
Company's level of revenues. If revenues for a particular quarter do not meet
expectations, operating results will be adversely affected. Gross margins
will vary based upon a number of factors including employee utilization rates
as well as the type and number of millennium engagements performed by the
Company during a particular period. The Company bids a number of Year 2000
projects on a fixed fee basis. Because the provision of Year 2000 services is
a new industry, there is a greater risk on any project that the amount bid
will not provide the anticipated level of profit.
EXPANSION OF SERVICES; CONTRACTION OF HISTORICAL 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 historical business has
contracted. 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 less than 100 in 1997, 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 and resulted in the loss
of some Bull back-up customers. As a result of these factors, the Company's
revenues from its historical 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 inability to expand its millennium services business or to
develop computer services required by clients after 2000 could materially and
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adversely affect the Company's business, operating results and financial
condition.
RECENT LOSS AND ACCUMULATED DEFICIT. The Company incurred a loss of
$3,132,000 for the year ended December 31, 1997 and had an accumulated
deficit of $6,096,000 as of that date. The Company has expended, and expects
to continue to expend significant amounts of cash to support marketing and
other activities related to the establishment of its millennium services
business. See "Item 6. Management's Discussion and Analysis." The chief
source of cash during the last twelve months has been net proceeds of
approximately $8,600,000 from a public stock offering completed during the
first quarter of 1997. The net offering proceeds and revenues under contracts
for millennium services and other computer services are expected to meet the
Company's capital requirements for at least twelve months. The Company may
raise additional capital if necessary (e.g. to support higher than
anticipated growth in its Year 2000 business, acquisitions, or potential
losses). Because of the various business risks described elsewhere in this
discussion of factors that may affect future results, there can be no
assurance that the Company will be consistently profitable. See "Item 6.
Management's Discussion and Analysis."
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 ensure access to the tool. 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. 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
15
<PAGE>
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 two to 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 need for millennium
services, and there can be no assurance that the 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 services is uncertain and unpredictable. If the market for
millennium 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
has 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
16
<PAGE>
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 1997, Twinsys' largest client, France
Telecom (including several affiliates that contract independently with
Twinsys) accounted for approximately $2,516,000, or 23% of the Company's
revenue. The Company's ten largest clients in 1997 accounted for
approximately 48% 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 are located at Two Paragon Center, Suite
400, 6040 Dutchman's Lane, Louisville, Kentucky. These offices consist of
approximately 16,000 square feet and are leased for an initial term of six
years. The Company's North American computer center is located at 10301 Linn
Station Road, outside Louisville, Kentucky, in a two-story, 27,900 sq. ft.
building on approximately two acres, which the Company owns subject to a
mortgage. The offices of Twinsys, including its 1,000 square meter computer
center, and Strategia Europe are located in leased space in a commercial
office building in Paris, France. The current term of the lease expires
December 31, 1999. The Company also leases a 28,000 square foot data center
in Shelbyville, Kentucky that is expected to be dedicated to Year 2000 code
renovation and compliance testing. The initial term of the lease is 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. The Company has equipped its Shelbyville, Kentucky facility with
readily available used computer 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.
17
<PAGE>
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.
The 1997 Annual Meeting of the Company's shareholders was held on
December 16, 1997. The Company currently has four directors who are elected
to a one-year term at each annual meeting. At the 1997 Annual Meeting, the
Company's shareholders elected John A. Brenzel, James P. Buren, Richard W.
Smith, and John P. Snyder as directors and approved an amendment to the
Company's 1988 Stock Option Plan. Voting information with respect to the
matters submitted to shareholders is set forth below.
1. ELECTION OF DIRECTORS.
<TABLE>
<CAPTION>
For Withheld Abstain Broker Nonvotes
<S> <C> <C> <C> <C>
Mr. Brenzel 3,885,334 5,799 0 0
Mr. Buren 3,885,959 5,174 0 0
Mr. Smith 3,885,334 5,799 0 0
Mr. Snyder 3,885,959 5,174 0 0
</TABLE>
2. PROPOSAL TO AMEND THE CORPORATION'S 1988 STOCK OPTION PLAN.
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
<S> <C> <C> <C>
2,547,837 29,406 9,704 1,304,186
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Strategia's Common Stock has traded on the American Stock Exchange since
August 6, 1997. Prior to that date the Common Stock traded on the
over-the-counter market. At March 27, 1998, the Company had approximately
1,159 beneficial owners of the Company's Common Stock. The following table
sets forth the quarterly range of high and low closing sale prices per share
reported on the American Stock Exchange from August 6, 1997 through December
31, 1997, and the ranges of high and low bid quotations per share from
January 1, 1996 through August 5, 1997, 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.
18
<PAGE>
<TABLE>
<CAPTION>
1997 1996
Quarter High Low High Low
<S> <C> <C> <C> <C>
First $8.63 $6.50 $2.00 $1.50
Second 15.75 7.50 5.00 2.00
Third 15.38 12.75 8.50 3.50
Fourth 13.75 7.63 8.28 6.00
</TABLE>
The bid and asked quotations prior to August 6, 1997 reflect interdealer
quotations without retail mark-up, mark-down, or commissions and do not
necessarily represent actual transactions. On March 27, 1998, the closing
sale price reported for the Common Stock was $7.75.
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" below as well as other sections of this report includes
forward-looking statements. For this purpose, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. Factors that could cause the Company's
actual results to differ materially from those indicated by the
forward-looking statements are set forth in "Item 6. Management's Discussion
and Analysis" below and in "Item 1. Description of Business--Certain Factors
That May Affect Future Results."
OVERVIEW
Strategia Corporation provides millennium assessment, code renovation,
and testing services, as well as disaster recovery, consulting, information
processing and outsourcing services to users of medium- and large-scale
computers and others 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 historical 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 less than 100 in 1997, largely due to the "migration" of data
centers to other computer systems. As a result, the Company's revenues from
its historical business base in North America have declined in recent years
and
19
<PAGE>
are expected to 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. Demand for the Company's millennium services is expected to increase
during 1998 and 1999, and then is likely to diminish significantly after 2000.
Revenue from disaster recovery backup and contingency planning services
represented approximately 86% and 98% of the Company's revenue in 1997 and
1996, respectively. Twinsys generated approximately 63% of the Company's
total service revenues in 1997 and approximately 73% during 1996. Millennium
consulting services are usually offered on a fixed fee basis, while technical
assessment and code conversion charges have typically been fixed fee or based
upon the number of lines of program code or a combination of both. Revenue on
millennium contracts is computed on a percentage of completion basis
determined in proportion to projected costs incurred to date. Losses on
contracts are recorded when it is determined that the contract will be
unprofitable. Millennium testing services are expected typically to be
charged at a per hour or per day rate based on the equipment needed to test
the client's system plus an amount for any required consulting services.
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.
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 millennium services and contingency planning depend
primarily on the productivity of the Company's technical and consulting
staff. Most of the Company's millennium services and 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. Profitability
may also be affected by the ability of third party contractors and software
tool providers to perform and the amounts they charge.
Gross margins for the Company's computer backup and outsourcing
businesses depend upon the volume of service revenue 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,
20
<PAGE>
margins will typically decrease. Depreciation on equipment currently
installed at the Company's North American facilities has largely been
completed. Assuming no purchases of additional equipment, depreciation
expenses on equipment of Twinsys are believed to have peaked in 1997 and are
expected to decrease thereafter. However, opportunities to acquire new
business that arise from time to time may require additional equipment.
Increased competition has also tended to reduce margins on Bull backup
contracts negotiated in the last two years. An affiliate of Groupe 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.
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. The Company expects these costs to
increase in absolute terms, but 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.
RESULTS OF OPERATIONS
The Company reported net losses of $3,132,000 and $724,000 for the
years ended December 31, 1997 and 1996, respectively.
The losses incurred by the Company in 1997 reflect the early stage of
development of the millennium services business, generally. The Company
expended significant amounts in the United States and Europe during 1997 to
establish its presence in the growing millennium services market and to be in
a position to bid for contracts. The Company added technical, marketing and
support staff and otherwise devoted substantial financial resources to build
infrastructure to support growth in the volume of business expected to
develop in the coming two years. As anticipated, the Company began generating
revenue under Year 2000 contracts in 1997. However, both the number of
millennium services contracts and amount of work performed under those
contracts were limited. Factors limiting work performed included the number
of contacts entered into late in the year, delays in procuring new contracts
due to customer unfamiliarity with evolving industry norms for millennium
services contracts, customers' need for special budgeting approvals, changing
degrees of involvement by in-house customer personnel, technical issues, and
other similar factors attributable to the unique nature and potential impact
of the Year 2000 problem. Although some of the contracts generated positive
gross margins in 1997, the amount of profit was insufficient to overcome
either the losses on two of the Company's initial millennium services
contracts or its increased level of cost of services and selling, general and
administrative expenses. The Company anticipates that its quarterly earnings
could be volatile through at least the first six months of 1998, depending on
the level of work force utilization and the profitability of individual
contracts.
Significant factors contributing to the Company's 1996 results were
the additional depreciation and amortization resulting from new computer
equipment added by Twinsys in 1996, decreases in Bull backup service revenue and
21
<PAGE>
consulting service revenue in North America, and 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 $11,022,000 for the year ended
December 31, 1997, an increase of $1,567,000 or 17% from 1996. Twinsys
accounted for approximately 63% of consolidated service revenue in 1997,
compared to 73% in 1996. European revenues, consisting mainly of backup and
related disaster recovery service revenue, did not change significantly.
Service revenue in North America increased by approximately 59% for the year
due to the additional revenue generated on millennium services contracts,
which in 1997 became the largest component of North American revenues. Bull
backup service revenue continues to decrease in North America due to the
expiration of contracts, the continued decrease in the number of potential
customers using large Bull computer systems, and increased competition.
Competition from a subsidiary of Groupe Bull is expected to continue to
reduce margins on new Bull backup contracts as the Company's present
contracts expire and new contracts are negotiated. IBM backup service revenue
grew by 16% in 1997 compared to 1996, but was offset by the decrease in Bull
backup service revenue. Revenues from outsourcing services remained a small
percentage of the Company's total consolidated service revenues in 1997.
The Company's cost of services for 1997 increased to $8,847,000,
an increase of $2,544,000 or 40% from $6,303,000 in 1996. In 1997, the Company
made significant investments to develop the infrastructure required to
support millennium services. The investments include (i) significant growth
in the Company's technical staffs in both North America and Europe, (ii)
start-up costs associated with a subsidiary providing millennium services in
Europe, and (iii) establishment of the Company's first compliance testing
center in North America. The Company expects to achieve its minimum level of
staffing for millennium services engagements projects in the first quarter of
1998. Thereafter, it is anticipated that any further additions to its staff
and equipment would be made in response to greater demand for the Company's
services. Cost of services as a percentage of revenue should begin to
gradually decrease from current levels during the first quarter of 1998. In
absolute dollars, cost of services is likely to increase in 1998, based on
the Company's need to add key personnel, facilities and equipment if demand
for Year 2000 services increases as anticipated.
The Company's selling, general and administrative expenses were
$5,123,000 in 1997, a 71% increase compared to $3,003,000 in 1996. The increase
was attributable to growth in direct marketing staff, advertising, promotions,
and participation in trade shows both in North America and Europe relating to
millennium and other computer service offerings. Following the completion of a
public stock offering in March 1997, the Company incurred increases in
professional fees and other expenses related to investor relations services,
initial listing on the American Stock Exchange, and similar post-offering
matters.
Interest expense totaled $452,000 in 1997, a $263,000 or 37% decrease
compared to 1996. Interest expense is related mainly to capital leases for
computer equipment. The reduction is attributable to lower principal balances
22
<PAGE>
of capital lease obligations and the repayment of a stockholder loan from the
offering proceeds received during the first quarter of 1997.
Other income of $348,000 in 1997 principally represents interest
income on investments of offering proceeds.
The provision for income taxes totaled $79,000 and $158,000 in
1997 and 1996, respectively. These amounts reflect French income taxes
resulting from income of Twinsys. No income tax benefits can be recognized
currently for U.S. operating losses or losses incurred by the Company's other
foreign subsidiary, Strategia Europe. The domestic losses are available to
offset any future U.S. taxable income. The foreign losses will be available
to offset future French taxable income generated by Strategia Europe.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital totaling
$2,283,963. In March 1997, the Company completed a public stock offering that
raised $8,592,982, net of offering expenses. Offering proceeds were used to
repay an $800,000 stockholder loan and as a significant source of funds for
the Company's investment in additional personnel, equipment and facilities in
North America and Europe in anticipation of the increased demand for
millennium services during the next two years. In 1997 the Company
established and equipped its first millennium testing facility in North
America and financed the operations of a new subsidiary in France that will
provide millennium and Eurocurrency conversion services.
The Company has developed plans to establish and equip regional
testing facilities over the next two years as millennium conversion
engagements begin to enter the implementation phase and demand for the
Company's testing services is expected to increase. The Company plans
initially to equip its testing centers with readily available used equipment,
which the Company expects to finance with revenues from operations whenever
possible. The Company is also evaluating the additional investment required
to make its Bull back-up and outsourcing operations in North America Year
2000-compliant and the cost effectiveness of such an investment in light of
the anticipated decline in future revenues from Bull back-up services in
North America. The portion of revenue due after 1999 on the Company's current
Bull back-up and outsourcing contacts in North America is not material. The
Company believes its systems are otherwise Year 2000-compliant.
Pending use for working capital needs, the Company maintains funds
raised in its stock offering in short-term, investment-grade,
interest-bearing securities. The Company believes it has adequate capital
resources to support its cash requirements for the next twelve months.
Revenues from backup service contracts as well as revenue from
current millennium services contracts in process represent the Company's
principal sources of cash from operating activities. Backup services revenue
is generated in most cases under multi-year contracts that typically provide
predictable revenue streams. Millennium services contracts normally provide
for cash payments at specified dates during the contract periods or at the
23
<PAGE>
completion of specific tasks required by the contracts. 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.
Net cash used in operating activities was $277,000 in 1997
compared to net cash provided by operating activities of $1,835,000 in 1996.
The change was due to the net loss incurred during 1997 and the increase in
accounts receivable and unbilled revenue. These increases were generated by
the millennium services engagements that were in progress at December 31,
1997.
Net cash used in investing activities was $1,282,000 in 1997
compared to $350,000 in 1996. Expenditures for property and equipment were
higher in 1997 due to the purchase of a computer system to support disaster
recovery operations in Europe and significant investments made in
anticipation of increased demand for millennium services.
Net cash provided from financing activities was $5,019,000 in 1997
compared to net cash used in financing activities of $1,269,000 in 1996. In
March 1997, the Company raised $8,593,000 in a stock offering as described
above. The significant uses of cash from financing activities were repayment
of a stockholder loan and principal payments on the Company's capital lease
obligations and long term debt.
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
STRATEGIA CORPORATION AND SUBSIDIARIES
FINANCIAL INFORMATION
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31
Assets 1997
<S> <C>
Current assets:
Cash and cash equivalents $ 3,866,763
Accounts receivable 1,509,055
Unbilled revenue 460,254
Income tax receivable 145,603
Other current assets 148,869
Total current assets 6,130,544
Property and equipment 19,559,572
Less accumulated depreciation and amortization 12,066,617
7,492,955
Other Assets 767,521
$ 14,391,020
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 938,749
Accrued expenses and other current
liabilities 1,385,286
Deferred revenue 375,085
Current installments of long-term debt 45,465
Current installments of obligations
under capital leases 1,101,996
Total current liabilities 3,846,581
Long-term debt, excluding current installments 933,133
Obligations under capital leases, excluding current
installments 565,495
Customers' deposits 37,810
Deferred revenue 948,750
Deferred income taxes 435,499
Total liabilities 6,767,268
Stockholders' equity:
Preferred stock - Authorized 2,000,000 shares:
Series AA Convertible Preferred Stock
25
<PAGE>
($10 stated value); authorized 100,000 shares;
issued and outstanding 0 shares -
Common stock without par value. Authorized
15,000,000 shares; issued and outstanding
4,667,677 shares 13,866,001
Accumulated deficit (6,095,924)
Foreign currency translation (146,325)
Total stockholders' equity 7,623,752
Commitments and contingencies
$ 14,391,020
</TABLE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
1997 1996
<S> <C> <C>
Service revenue $11,021,972 $ 9,454,693
Operating expenses:
Cost of services 8,846,674 6,302,861
Selling, general and
administrative expenses 5,123,272 3,002,918
13,969,946 9,305,779
Operating income (loss) (2,947,974) 148,914
Other income (expense):
Interest expense (452,264) (714,550)
Other income, net 347,601 20
(104,663) (714,530)
Loss before income taxes (3,052,637) (565,616)
Provision for income taxes 79,259 158,132
Net loss $(3,131,896) (723,748)
Net loss per share of common
Stock - Basic and Diluted $ (.75) (.29)
Weighted average number of common
shares outstanding 4,220,271 2,650,240
</TABLE>
26
<PAGE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series AA Preferred Series A Preferred Stocks Common Stock
Shares Amount Shares Amount Shares Amount
------ ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1996 34,167 $341,670 2,506,885 $3,029,833
Issuance of common stock 532,000 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
Conversion of Stockholders' notes payable 23,427 234,270
Payments of dividends
Net loss
Foreign currency translation
------ ------- ------- -------- --------- ----------
December 31, 1996 64,546 645,460 0 0 3,038,885 4,386,834
Issuance of common stock,
net of offering costs 1,358,000 8,592,982
Payment of dividends
Conversion of Series AA Preferred
to Common Stock (64,546) (645,460) 258,184 645,460
Stock options issued for services 124,317
Other issuances 12,608 116,408
Net loss
Foreign currency translation
------ ------- ------- -------- --------- ----------
December 31, 1997 - $ - - $ - 4,667,677 13,866,001
------ ------- ------- -------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Foreign
Accumulated currency
deficit translation Total
----------- ----------- ----------
<S> <C> <C> <C>
January 1, 1996 $(2,119,092) $ 26,857 $1,279,268
Issuance of common stock 1,357,001
Conversion of Series A Preferred to
Series AA Preferred
Conversion of Series A Preferred dividends
in arrears to Series AA Preferred (69,520)
Conversion of Stockholders' notes payable 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 (2,938,423) (21,558) 2,072,313
Issuance of common stock,
net of offering costs 8,592,982
Payment of dividends (25,605) (25,605)
Conversion of Series AA Preferred
to Common Stock
Stock options issued for services 124,317
Other issuances 116,408
Net loss (3,131,896) (3,131,896)
Foreign currency translation (124,767) (124,767)
----------- ----------- ----------
December 31, 1997 (6,095,924) (146,325) 7,623,752
----------- ----------- ----------
</TABLE>
STRATEGIA CORPORATION AND SUBSIDIARIES
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss (3,131,896) (723,748)
Adjustments to reconcile net
loss to net cash(used in) provided by
operating activities:
Depreciation and amortization 2,775,219 2,614,423
Deferred income taxes 114,959 20,422
Other 124,752 (71)
Changes in operating assets and liabilities:
Accounts receivable (541,925) 12,674
Unbilled revenue (459,150) 16,097
Income tax receivable (145,603) -
Other current assets (90,115) 432,387
Accounts payable 271,454 (203,571)
Accrued expenses and other
current liabilities 549,564 29,887
Increase in other assets (20,818) (560,847)
Increase in deferred revenue 349,929 270,324
Decrease in customers' deposits (13,251) (12,728)
Net cash (used in) provided by
Operating activities (276,881) 1,835,475
Cash flows from investing activities:
Acquisition of property and
equipment (1,282,125) (350,291)
Net cash used in investing
activities (1,282,125) (350,291)
Cash flows from financing activities:
Net proceeds from issuance of
common stock 8,592,982 1,250,001
Proceeds from bank line
of credit 100,000 250,000
Principal payment of note payable
to stockholder (800,000) -
Principal payments on
long-term debt and obligations
under capital leases (2,848,408) (2,742,907)
Payment of dividends on
preferred stock (25,605) (26,063)
Net cash provided by (used in) financing
activities 5,018,969 (1,268,969)
Effect of exchange rate changes
on cash 8,364 (48,415)
Net increase in cash and cash
equivalents 3,528,327 167,800
Cash and cash equivalents at
beginning of period 338,436 170,636
Cash and cash equivalents at
end of year 3,866,763 338,436
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
STRATEGIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
Strategia Corporation (Strategia) and its subsidiaries, together
referred to herein as "the Company," provides disaster recovery
and backup, Year 2000 compliance consulting and program renovation,
information management and networking, and outsourcing services
principally in North America and Europe.
(2) SIGNIFICANT ACCOUNTING POLICIES
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).
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. Significant
estimates made in the preparation of these financial statements
include the percentage of completion of Year 2000 compliance
consulting and program renovation projects and the related
provisions made for contract losses. Due to the limited
experience with millennium services actual results could
materially differ from those estimates.
RECOGNITION OF REVENUE
Disaster recovery and backup contract terms are generally for
more than one year and require the payment of monthly subscription
fees. Service revenue from these contracts is recognized on a
straight-line method over the life of the contract. Long-term
deferred revenue includes cash received in excess of the revenue
recorded for such contracts.
Revenue from certain Year 2000 compliance consulting and program
renovation contracts is recognized as services are provided and
costs are incurred. For fixed-price contracts, revenue is
recognized on the percentage-of-completion method. Costs incurred
to date as a percentage of estimated total contract costs is used
to determine the percentage of completion because management
considers expended costs to be the best available measure of
progress on these contracts. Contract costs include all direct
material and labor costs and those indirect costs related to
contract performance. Selling, general and administrative costs
are charged to expense as incurred. Provisions for estimated
losses on uncompleted contracts are made in the period in which
such losses are determined.
Unbilled revenue represents revenues recognized in excess of
amounts billed. Unbilled revenue generally represents work
currently billable through the normal billing process.
Correspondingly, current deferred revenue represents billings in
excess of revenues recognized which are anticipated to be
recognized as revenue in the next twelve months.
30
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the
following at December 31, 1997:
Land $ 260,800
Building and improvements 3,160,279
Equipment 15,660,796
Other 477,697
-----------------
$ 19,559,572
-----------------
-----------------
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.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations have
been translated into U.S. dollars in accordance with Financial
Accounting Standards Board Statement No. 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.
INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated
to conform to the Statement 128 requirements.
For 1997 and 1996, basic and diluted loss per share is based on
net loss less preferred dividends divided by the weighted average
number of common shares outstanding during each period. In
computing diluted loss per share, the exercise of options and
warrants is not assumed as such would reduce the loss per share
in both years.
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.
31
<PAGE>
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity of
less than three months when purchased.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments
approximate their fair values as of December 31, 1997.
PRIOR YEAR DATA
Certain prior year data has been reclassified to conform to the
1997 presentation.
(3) COMMON STOCK OFFERINGS
In March 1997, the Company completed a public offering of its Common
Stock that raised $8,592,982 net of offering expenses of $913,018. The
Company sold 1,358,000 shares of Common Stock for $7.00 per share.
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.
All warrants related to these units were outstanding at December 31,
1997 and are exercisable through September 2001.
(4) NEW VENTURES
During 1997, Strategia Corporation created a European subsidiary,
Strategia Europe, to provide Year 2000 compliance consulting services
and program renovation to customers in Europe.
Revenues of Strategia Europe were not significant in 1997.
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,
1997, 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 1997 and 1996
were not significant.
(5) LONG-TERM DEBT AND CREDIT AGREEMENTS
At December 31, 1997 the Company had a mortgage note payable of $978,598
($45,465 payable in 1998). 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. This note is secured by land and a building with
a total net book value of $1,188,260 at December 31, 1997.
32
<PAGE>
The Company has a committed revolving credit facility with a bank. A
$500,000 credit agreement is committed through October 31, 1998, and
provides that borrowings will bear interest at the bank's prime rate
plus 1.5% (effectively 10% at December 31, 1997). Borrowings under this
credit agreement are secured by substantially all domestic company
assets, other than its real property and leased assets. No amounts are
outstanding under this facility at December 31, 1997.
(6) NOTE PAYABLE TO STOCKHOLDER
During 1997, the Company paid off an $800,000 note payable to a
stockholder and related accrued interest of $190,381. Interest expense
includes approximately $18,000 in 1997 and $79,800 in 1996 related to
this note.
In consideration for this opportunity to borrow funds, the Company
issued 15,000 shares of common stock to the stockholder in connection
with the initial note agreement. Additional share increments of common
stock (8,000 shares in both 1997 and 1996) were issued with each annual
renewal. The value of the shares issued was approximately $56,000 in
1997 and $107,000 in 1996 and is recorded as interest expense in both
years.
(7) LEASES
The Company is obligated under various equipment capital leases that
expire over the next three years. Property and equipment include the
following amounts under capital leases at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Equipment $ 6,286,362
Less accumulated amortization 4,727,149
-------------
$ 1,559,213
-------------
-------------
</TABLE>
The Company acquired approximately $1,023,900 and $2,140,775 of
equipment in exchange for capital lease obligations during 1997 and
1996, respectively.
The Company also has certain noncancellable operating leases, primarily
for facilities and computer hardware and software, that expire over the
next five years and provide for purchase or renewal options.
Future minimum lease payments under capital leases and noncancellable
operating leases, and the present value of future minimum capital lease
payments as of December 31, 1997 are:
33
<PAGE>
<TABLE>
<CAPTION>
Capital leases Operating Leases
--------------------- -----------------
<S> <S> <S>
Years ending December 31:
1998 $ 1,200,477 $ 935,135
1999 433,031 880,385
2000 172,641 418,273
2001 - 145,476
2002 - 36,369
------------------- ----------------
Total minimum lease payments 1,806,149 $ 2,415,638
----------------
----------------
Less amount representing interest (at 138,658
rates ranging from 7.0% to 12.26%)
---------------------
Present value of net minimum 1,667,491
capital lease payments
Less current installments 1,101,996
---------------------
Obligations under capital leases, 565,495
excluding current installments ---------------------
---------------------
</TABLE>
Total rental expense, including maintenance charges, for operating
leases in 1997 and 1996 was $2,417,401 and $2,184,458, respectively.
(8) INCOME TAXES
For financial reporting purposes, income (loss) before income taxes
includes the following components:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pretax income (loss):
United States $ (2,844,117) $ (996,845)
Foreign (208,520) 431,229
-------------- --------------
$ (3,052,637) $ (565,616)
-------------- --------------
-------------- --------------
</TABLE>
The provision for income tax expense (benefit) is attributable to earnings from
foreign operations, the components of which follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Foreign - current $ (35,700) $ 137,710
- deferred 114,959 20,422
------------- ---------------
$ 79,259 $ 158,132
------------- ---------------
------------- ---------------
</TABLE>
A reconciliation of the income tax expense for the years ended December 31, 1997
and 1996 with the federal statutory rate is as follows:
34
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <S> <S>
Tax benefit at U.S. statutory rates $(1,037,897) $ (192,309)
Tax effect of operating losses in the 967,000 335,924
U.S. generating no current tax
benefit
Tax effect of operating losses in 135,531 -
Europe generating no current income
tax benefit
Higher effective income tax rate of 14,581 11,514
foreign operations
Other 44 3,003
----------- --------
$ 79,259 $ 158,132
----------- --------
----------- --------
</TABLE>
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $230,000 at December 31, 1997. 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, 1997, the Company had U.S. net tax operating loss
carryforwards of approximately $6,533,000 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; $431,000 in
2010, $619,000 in 2011; and, $2,574,000 in 2012.
At December 31, 1997 the Company had foreign net tax operating loss
carryforwards of approximately $380,000 which expire in 2003.
Significant components of the Company's deferred tax assets
(liabilities) at December 31, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 2,733,000
Valuation allowance (2,669,000)
---------------
Net deferred tax asset 64,000
Deferred tax liabilities:
Tax over book depreciation (480,000)
Other (19,499)
---------------
Total deferred tax liabilities $ (499,499)
---------------
Net deferred tax liability $ (435,499)
---------------
---------------
35
<PAGE>
(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
and 1997) allows for options to be granted to key employees of the
Company to purchase no more than the greater of 900,000 shares or 15% 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 349,000 and 170,295 shares of common stock were granted to
employees in 1997 and 1996, respectively which generally vest over a
three year term. It also provides automatic grants of stock options to
the Company's directors who are not employees. Beginning in the second
quarter of 1997, options to purchase 1,000 shares of common stock are
granted quarterly 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 on the first anniversary of the grant date.
All options granted under the plan are exercisable over a 10-year period
from the grant date. No options under the plan have been exercised as of
December 31, 1997.
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 .815 in 1997 and .831 in 1996; 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
36
<PAGE>
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>
1997 1996
------------ -------------
<S> <C> <C>
Pro forma net loss $ (3,623,124) $ (1,716,000)
------------ -------------
------------ -------------
Pro forma loss per share-Basic and Diluted $ (.85) $ (.65)
------------ -------------
------------ -------------
</TABLE>
A summary of the Company's stock option activity and related information
for years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Options Weighted Options Weighted
Average Price Average Price
<S> <C> <C> <C> <C>
Outstanding -
beginning of year 247,634 $5.41 76,339 $1.85
Granted 355,000 $11.24 171,295 $6.98
Canceled (3,499) $1.84 - -
---------- ---------
Outstanding -
end of year 599,135 $8.88 247,634 $5.41
---------- ---------
---------- ---------
Exercisable -
end of year 149,504 $4.46 148,504 $4.46
---------- ---------
---------- ---------
Weighted average fair value
of options granted during
the year $9.26 $5.82
---------- ---------
---------- ---------
</TABLE>
The number, weighted-average exercise price and weighted-average
remaining contractual life of options outstanding, and the number and
weighted-average exercise price of options exercisable as of December
31, 1997 follow:
37
<PAGE>
<TABLE>
<CAPTION>
Range of Number of Weighted-Average Weighted-Average
Exercise Prices Options Exercise Price Remaining Life
<S> <C> <C> <C> <C>
Outstanding options: $1.00 - 4.99 73,840 $1.85 5.43
5.00 - 9.99 341,295 7.87 9.20
10.00 - 14.99 149,000 13.08 9.61
15.00 - 15.63 35,000 15.63 9.33
---------
Total 599,135 $8.88 8.30
-------- ------- ------
-------- ------- ------
Exercisable options: $1.00 - 4.99 73,840 $1.85 5.43
5.00 - 9.99 75,664 7.00 8.83
---------
Total 149,504 $4.46 7.15
--------- ------- -----
--------- ------- -----
</TABLE>
(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.
At its option, the Company called all of the outstanding shares of
Series AA Convertible Preferred Stock (Series AA Preferred) for
redemption on June 30, 1997. Holders of all Series AA Preferred elected
to convert their shares to common stock. A total of 258,184 shares of
common stock were issued to them as of June 30, 1997.
The holders of Series AA Preferred also received a five-year detachable
warrant to purchase one share of common stock for each share of Series
AA Preferred purchased. On December 31, 1997, warrants to purchase 2,788
shares of common stock were exercised at a price of $2.50. At December
31, 1997 warrants to purchase 61,758 shares of common stock remained
outstanding at an exercise price of $2.50.
Shares of common stock reserved with respect to all of the above options
and warrants were 1,160,893 at December 31, 1997.
(11) SEGMENT INFORMATION
The Company and its subsidiaries are engaged in one industry segment
consisting of providing disaster recovery and backup, Year 2000
compliance consulting and program renovation, and other computer related
services to users in North America and Europe.
38
<PAGE>
Service revenue, operating income and identifiable assets for the years
ended December 31, 1997 and 1996 pertaining to the two geographic areas
in which the Company operates are presented below.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service revenue
United States $ 4,050,591 $ 2,544,097
Europe 6,971,381 6,910,596
--------------- --------------
$ 11,021,972 $ 9,454,693
--------------- --------------
--------------- --------------
Operating income (loss)
United States $ (2,818,800) $ (597,271)
Europe (129,174) 746,185
--------------- --------------
$ (2,947,974) $ 148,914
--------------- --------------
--------------- --------------
Identifiable total assets
United States $ 9,079,509 $ 4,490,343
Europe 5,311,511 6,255,067
--------------- --------------
$ 14,391,020 $ 10,745,410
--------------- --------------
--------------- --------------
</TABLE>
The net assets of the Company's European operations at December 31, 1997
and 1996 amounted to approximately $927,000 and $1,007,000,
respectively.
One customer, comprising a group of affiliated companies, accounted for
approximately 23% and 31% of consolidated service revenue in 1997 and
1996, respectively.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Total interest payments were approximately $471,000 in 1997 and $713,000
in 1996. Total cash payments made for income taxes during 1997 and 1996
were approximately $165,000 and $158,000, respectively.
(13) SUBSEQUENT EVENT
On January 20, 1998 the Company and Copex Limited (a United Kingdom
company) reached a Settlement Agreement (the Agreement) related to a
dispute regarding an acquisition assistance agreement that was entered
into in December 1994. The Agreement provides that the Company will pay
Copex 1% of the gross revenues of Twinsys for the calendar years 1995
through 1999. This fee was approximately $70,000 in 1997 and $71,000 in
1996. Recorded amounts are being capitalized as part of the Twinsys
acquisition and are being amortized over a 5-year period. Other assets
include approximately $157,000 (net of amortization) as of December 31,
1997 related to such fees to date under the Agreement.
39
<PAGE>
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, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997.
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, 1997,
and the consolidated results of their operations and their cash flows
for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 26, 1998
40
<PAGE>
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 1998 annual meeting of shareholders (the
"1998 Proxy Statement") and under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" of the 1998 Proxy Statement are incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information under the caption "Executive Compensation" of the 1998 Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
41
<PAGE>
The information under the caption "Principal Shareholders" of the 1998 Proxy
Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Transactions With Management" of the 1998
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 as amended and restated as of
November 13, 1997, is incorporated by reference to
Appendix A of the Company's definitive proxy
statement filed November 20, 1997.
(10.2) 1990 Stock Grant Plan is incorporated by reference to
Exhibit 10.8 to the Company's 1994 10-KSB.
(10.3) Agreement of Assignment of Mortgage Note dated August
1, 1991, between Future Federal Savings Bank, Brown,
Noltemeyer Co., Charles A. Brown, Jr., Norman V.
Noltemeyer, and Dataguard Recovery Services, Inc. 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) 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.
(10.6) 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.
42
<PAGE>
(10.7) 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.
(10.8) 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.
(10.9) 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.
(10.10) Lease dated March 3, 1997 between Southeastern Group,
Inc. and Strategia Corporation is incorporated by
reference to Exhibit 10.16 to the Company's 1996 10-
KSB.
(10.11) Agreement between James P. Buren and Strategia
Corporation dated as of October 24, 1997.
(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.
(23) Consent of Ernst & Young LLP, independent
auditors.
(27.1) Financial Data Schedule for the year end 12/31/97.
(27.2) Financial Data Schedule Restated for the year end
12/31/96.
(b) Reports on Form 8-K.
None.
43
<PAGE>
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, 1998
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, 1998
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ James P. Buren
- ---------------------------
James P. Buren Director March 31, 1998
/s/ John P. Snyder
- ---------------------------
John P. Snyder Secretary and Director March 31, 1998
/s/ John A. Brenzel
- ---------------------------
John A. Brenzel Director March 31, 1998
</TABLE>
44
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <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 as amended and restated as of
November 13, 1997 is incorporated by reference to
Appendix A to the Company's definitive proxy statement filed
November 20, 1997.
(10.2) 1990 Stock Grant Plan is incorporated by reference to Exhibit 10.8 to
the Company's 1994 10-KSB.
(10.3) Agreement of Assignment of Mortgage Note dated August 1, 1991, between
Future Federal Savings Bank, Brown, Noltemeyer Co., Charles A. Brown,
Jr., Norman V. Noltemeyer, and Dataguard Recovery Services, Inc. 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) 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.
(10.6) 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.
(10.7) 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.
(10.8) 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.
45
<PAGE>
(10.9) 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.
(10.10) Lease dated March 3, 1997 between Southeastern Group,
Inc. and Strategia Corporation is incorporated by
reference to Exhibit 10.16 to the Company's 1996 10-KSB.
(10.11) Agreement between James P. Buren and Strategia Corporation dated
as of October 24, 1997.
(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.
(23) Consent of Ernst & Young LLP, independent auditors.
(27.1) Financial Data Schedule for the year end 12/31/97.
(27.2) Financial Data Schedule Restated for the year end 12/31/96.
</TABLE>
46
<PAGE>
Exhibit 10.11
AGREEMENT
This is an agreement (this "Agreement") dated as of October 24, 1997, between
James P. Buren ("Buren") and Strategia Corporation ("Strategia").
RECITALS
A. Buren is an Employee, Executive Vice President, Member of
the Board of Directors, and Founder of Strategia. Buren has
provided years of loyal service to Strategia since its
inception.
B. Buren is the record holder of 92,799 shares (the "Shares")
of Strategia Common Stock ("Strategia Stock"), options to
purchase 90,000 shares of Strategia Stock (the "Options"),
and warrants to purchase 3,710 shares of Strategia Stock
(the "Warrants"). The Shares and the stock issuable upon
the exercise of the Options and Warrants are referred to in
this Agreement as the ("Aggregate Shares").
47
<PAGE>
C. Buren wishes to retire from his employment with Strategia,
but wishes to continue his involvement with Strategia
through a consulting arrangement.
D. Strategia wishes to permit Buren to retire while retaining
regular services from him through a consulting arrangement.
E. Strategia and Buren wish to enter into this Agreement to
provide the terms and conditions of the foregoing.
In consideration of the terms and conditions and covenants set forth herein,
Buren and Strategia agree as follows:
1. RETIREMENT. Buren hereby retires from all of his positions with
Strategia and all of its subsidiaries and affiliates, including his positions as
an employee, officer, and director (but not including his position as a member
of the Board of Directors of Strategia). This retirement is effective
immediately. Buren shall promptly sell to Strategia all of his stock in Twinsys
Dataguard, S.A. ("Twinsys") for an amount in cash equal to the stockholders'
equity of Twinsys as of September 30, 1997, divided by the number of shares of
Twinsys outstanding as of that date.
2. EFFECT OF RETIREMENT ON OPTIONS. For all purposes under the
Options and the Plan pursuant to which the Options were granted, Buren shall be
deemed to retire as of the date of this Agreement.
3. CONSULTING SERVICES. From the date of this Agreement, through
March 31, 2000, Buren shall provide such consulting services as Strategia may
request from time to time on the following terms and conditions:
a. MINIMUM AVAILABILITY. Buren shall make himself available to
provide services hereunder a minimum of (the "Minimum Availability") (i) 3
days per week from October 1, 1997, to December 31, 1998, and (ii) 2 days per
week from January 1, 1999, to March 31, 2000. The services to be provided
hereunder may require overseas travel from time to time. In connection with
overseas travel, the Minimum Availability shall be 5 days per week, but any
number of days in excess of the otherwise applicable Minimum Availability
shall be subtracted from to reduce the Minimum Availability for the week(s)
immediately after his return to the United States.
b. COMPENSATION. Strategia shall pay Buren $300 ($350 for time
after December 31, 1998) per half day of services. Strategia shall compensate
Buren for a half day if he provides up to 4 hours of services in a day and
for a full day if he provides more than 4 hours of services in a day.
Strategia shall compensate Buren for no less than the Minimum Availability
minus one day (the "Minimum Compensation") for each week through March 31,
2000 so long as Buren has made himself available to provide services for that
week for the Minimum Availability. At the end of each two week period, Buren
will submit to Strategia an invoice detailing the work performed and the
basis for determining the amount owed to him under this Agreement. Strategia
shall pay such invoice within five business days of its receipt.
c. SCHEDULING. It is anticipated that a great deal of the
services hereunder will be performed independently by Buren on his own
schedule. However, some of the services will involve scheduled meetings with
Strategia representatives, customers, and others. Buren shall be obligated to
provide services on any particular day only if Strategia has given him at
least one week notice of its requirement that he work that day. If Buren
48
<PAGE>
requests and Strategia consents, Buren may spread one day's worth of services
over more than a day, but for purposes of Minimum Availability and
Compensation, Buren will be treated as if the services were all performed on
a single day.
d. PROJECT SPECIFICATION. At the outset of any project to be
performed by Buren hereunder, Buren may request that specifications for the
project be provided in writing. Strategia may request that Buren prepare such
specifications as part of the services to be provided hereunder. Strategia
shall have the final authority to approve or revise all such specifications.
e. EXPENSES. Strategia shall reimburse Buren for all travel
and similar expenses Buren reasonably incurs in connection with the provision
of services hereunder in accordance with its expense reimbursement policies
in effect from time to time. Unless Strategia gives Buren notice to the
contrary, Buren shall not be required to obtain Strategia's approval prior to
incurring expenses to be reimbursed.
f. INDEPENDENT CONTRACTOR. Buren's relationship with
Strategia hereunder shall be that of an independent contractor and not that
of an officer or employee. Buren shall have no right to act as an agent of,
or otherwise obligate, Strategia. Buren understands that he will not be
entitled to any benefits to which Strategia's employees are entitled, nor
will Strategia withhold taxes or pay social security or other payroll taxes
with respect to Buren's compensation hereunder (unless Strategia is required
to do so under applicable law). To the extent that Strategia may do so
without incurring additional cost, Strategia shall permit Buren to continue
his coverage under Strategia's health and disability insurance. Buren shall
reimburse Strategia for the cost of continuing such coverage.
g. NONCOMPETE. During the term of this engagement, and for
the one year period thereafter (the "Noncompete Period"), Buren shall not
directly or indirectly, as an employee, independent contractor, agent,
partner, shareholder, owner, or in any other capacity, engage in any
activities that are in competition with those activities that Strategia (i)
engages in as of the date of this Agreement or (ii) engages in from time to
time after the date of this Agreement to the extent that Buren provides
consulting services under this Agreement with respect to such activities.
Notwithstanding the forgoing, Buren may (i) engage in activities related to
training individuals to use personal computers and software products that
utilize them, (ii) engage individually (or in conjunction with no more than
one full time equivalent) in providing system integration (including
programming, but not Year 2000 or disaster recovery) consulting so long as he
provides those services solely and directly to the end user of the services
and not as a subcontractor or to or in conjunction with other providers of
such services. During the Noncompete Period, Buren shall not directly or
indirectly offer employment (or an independent contractor position or similar
engagement) to any employee or independent contractor of Strategia or any of
its subsidiaries or affiliates (a "Strategia Employee"), or otherwise
encourage or entice any Strategia Employee to leave Strategia. The geographic
scope of this covenant not to compete shall include the United Sates, Canada,
and Europe. Buren acknowledges that the scope of this covenant is reasonable
in that it protects the vital interests of Strategia, while at the same time
permits Buren the opportunity to earn a living in the many areas of his
expertise that are not covered by this covenant.
4. TRADE SECRETS. Buren has been given access to, and, pursuant to
his obligations under this Agreement, will continue to be given access to
49
<PAGE>
proprietary information of Strategia. Buren shall keep all such proprietary
information confidential and shall not use such information for any purpose
other than pursuant to the terms of this Agreement. For the purpose of this
Agreement, proprietary information shall include all information of Strategia
and its subsidiaries, affiliates, and customers that is not publicly known and
shall include, without limitation, customer and contact lists, know how and
methodologies, technical information, and policies. Proprietary information
shall also include such information developed by Buren either prior to the date
of this Agreement or pursuant to the terms of this Agreement.
5. LIMITATION ON EXERCISING OPTIONS. Buren was granted an Option
in October 1996 for 64,631 shares (the "October Option"). Because it was
anticipated that Buren would remain an officer and employee of Strategia for
an indefinite period of time, there is no provision in the October Option
causing it to vest over a period of time. The October Option does provide
for the option to lapse on voluntary termination of employment other than
retirement. Under Strategia's policies, Buren does not have the right at his
current age to retire. To accommodate Buren's desire to terminate his
employment and retain his Options and while trying to ensure that Buren will
provide the services required under this Agreement, the October Option is
modified as follows:
(i) The October Option may only be exercised for the
following number of shares on or after the following dates:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
On or After Number of Shares Cumulative Total
- ------------------------------------------------------------------
<S> <C> <C>
April 1, 1998 8,079 8,079
July 1, 1998 8,079 16,158
October 1, 1998 8,079 24,237
January 1, 1999 8,079 32,316
April 1, 1999 8,079 40,395
July 1, 1999 8,079 48,474
October 1, 1999 8,079 56,553
January 1, 2000 8,078 64,631
- ------------------------------------------------------------------
</TABLE>
(ii) Notwithstanding the foregoing, (A) the October Option shall
be fully exercisable upon a Change in Control or upon
Buren's death or permanent disability and (B) Buren's right
to exercise the other Options shall not be restricted by
this Agreement. Change in Control shall have the same
meaning in this Agreement as it has in the Plan (as in
effect on the date of this Agreement) pursuant to which the
Options were granted.
(iii) If Buren shall breach this Agreement (A) by failing to provide
services when and as required and in a professional and competent
manner or by violating the noncompete covenant, and such breach
is not cured within 15 days after Strategia has given Buren
written notice specifying in detail the particulars of the breach
or (B) by repeatedly materially violating the noncompete covenant
or failing to provide services when and as required and in a
professional and competent manner, then those shares of the
October
50
<PAGE>
Option which are not then exercisable shall never become
exercisable. If Buren shall dispute Strategia's determination
regarding the above, the matter shall be submitted to binding
arbitration at which the burden of proof shall be on Strategia.
6. LIMITATION ON SELLING SHARES. Buren shall not sell any of the
Aggregate Shares (nor shall he sell any Strategia shares short) except as
follows:
(i) If Strategia engages in an underwritten public offering of its common
stock that is consummated prior to March 31, 1998 (a "Qualified
Offering"), Buren will be permitted to sell up to 30,000 of his
Aggregate Shares in the Qualified Offering; provided, that Buren shall
(A) be obligated to comply with all applicable securities laws in
connection with the Qualified Offering, (B) be subject to all
limitations imposed by the underwriter in connection with the
inclusion of Buren's shares, (C) execute all documents required by the
underwriter in connection with including his shares, and (D) not be
permitted to include his shares to the extent that the underwriter
determines that to include them may have an adverse impact on the
Qualified Offering (if other persons with registration rights also
wish to participate in the Qualified Offering and the underwriter
excludes shares, the shares, if any, that will be included for Buren
and these other participants will be determined pro rata based on the
respective amount of shares each such participant would otherwise be
entitled to include in the underwriting). Promptly after the
consummation of a Qualified Offering in which any of Buren's shares
are sold, Buren will be paid the offering price of the shares, net of
his pro rata portion of commissions and expenses;
(ii) If Strategia does not engage in a Qualified Offering, or if
Buren is not permitted to sell all of his shares in a
Qualified Offering because of an underwriter's
determination (a "Cut Back"), Buren may sell 30,000 (or, in
the case of a Cut Back, the number of Buren's shares that
were Cut Back) of his Aggregate Shares after March 31,
1998; and
(iii) In addition to the foregoing, Buren may sell up to 5,000
(10,000 beginning in the third quarter of 1998) of his
Aggregate Shares per calendar quarter.
In connection with all sales of Aggregate Shares, Buren shall comply with all
applicable securities laws.
7. PAYMENT OF SALARY, ETC. Promptly after the execution of this
Agreement, Strategia shall pay Buren $12,446.18 (minus any applicable
withholding) for all accrued but unpaid salary, bonus and unused vacation
time (this amount also includes an additional $100 for the release set forth
in Section 9 (iv) of this Agreement). Strategia shall also reimburse Buren
under its medical reimbursement plan up to $416.67 (minus any reimbursements
already taken by Buren with respect to 1997 under the plan) for expenses that
qualify under the plan and were incurred on or prior to the date of this
Agreement. Such reimbursement shall be subject to the terms and conditions of
the plan.
8. SERVICE ON BOARD OF DIRECTORS. Buren agrees that so long as he is
renominated and reelected each year, he will continue to serve on the
51
<PAGE>
Board of Directors of Strategia; provided, that Buren shall immediately
resign from the Board of Directors of Strategia (and shall thereafter not
seek reelection) upon the adoption of a resolution requesting that he do so
approved by a majority of the other members of the Board of Directors then in
office. For the period through March 31, 2000, Buren shall be compensated for
his service on the Board of Directors pursuant to the terms of Section 3(b)
of this Agreement. Buren hereby waives his right to receive any and all other
compensation (including cash, stock, options, and other forms of
compensation) to which he would otherwise be entitled for his service as a
member of the Board of Directors during this period.
9. RELEASE. Buren agrees as follows (for the purposes of this Section
9, the term Strategia shall include Strategia and its subsidiaries and
affiliates):
(i) Buren agrees not to file, pursue or prosecute any suit, action,
charge or claim, of any nature whatsoever, against Strategia, including any
suit, action, charge or claim arising out of Buren's employment with Strategia
or his separation from employment with Strategia, and further hereby assigns to
Strategia, without reservation, individually and collectively, for and on behalf
of himself, his estate, agents, attorneys, successors, heirs, executors,
administrators and assigns, all suits, actions, charges or claims, of any nature
whatsoever, accrued or unaccrued, against any party whatsoever, arising out of
his employment with Strategia or his separation from employment with Strategia.
(ii) In addition, Buren hereby, individually and collectively, for
himself, his estate, agents, attorneys, successors, heirs, executors,
administrators and assigns, irrevocably and unconditionally releases and
discharges, Strategia and its agents, directors, shareholders, parent and
subsidiary corporations, officers, employees, representatives, attorneys,
predecessors and successors (hereinafter, collectively referred to as "the
Releasees") from any and all actions, causes of action, suits, debts,
charges, complaints, claims, liabilities, obligations, promises, agreements,
controversies, damages and expenses (including attorneys' fees and costs
actually incurred) of any nature whatsoever, in law or equity, whether known
or unknown, which he ever had, now has or may have had against Releasees
since the beginning of time to the date of execution of this Agreement. This
release and discharge includes, but is not limited to, any and all claims
arising under Federal, State or local statutes, ordinances, resolutions,
regulations or constitutional provisions prohibiting discrimination in
employment on the basis of sex, race, religion, national origin, age,
disability and/or veterans' status, including but not limited to claims
arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Sections
1981, 1981a, 1983 and 1985, KRS Chapter 344, the Americans With Disabilities
Act, the Age Discrimination in Employment Act, the Federal Rehabilitation Act
of 1973, the Older Workers' Benefits Protection Act, Executive Order 11246,
each as amended, and all other similar such statutes. This release and
discharge also includes, but is not limited to, any and all tort or contract
claims. Buren further hereby agrees that if any such released and/or
discharged claim referenced herein is filed, pursued or otherwise prosecuted
by him, individually or collectively, or by persons or entities acting by or
through him, individually or collectively, Buren waives his right to relief
from such claim, including the right to attorneys' fees, costs and any other
relief, whether legal or equitable, sought in such claim.
(iii) Buren further agrees that he will not seek hiring, employment,
rehiring, or reemployment with Strategia.
52
<PAGE>
(iv) Buren further agrees and acknowledges that the payment provided to
him from Strategia pursuant to Section 7 of this Agreement includes a
specific payment of ONE HUNDRED DOLLARS, in exchange for the waiver of his
rights, if any, to assert or allege discrimination on the basis of age
pursuant to the Age Discrimination in Employment Act, as amended, and/or KRS
Chapter 344, as amended, (collectively, "Age Claim Waiver"), and that this
ONE HUNDRED DOLLARS designated by Buren constitutes separate and adequate
consideration to which he is not otherwise entitled in exchange for his Age
Claim Waiver. Buren further agrees that he has been instructed by Strategia
that he may and should consult the attorney of his choice regarding the terms
of this Agreement, specifically including the Age Claim Waiver, and that he
shall have up to twenty-one (21) days to consider the terms of this Agreement
and the Age Claim Waiver, and whether to sign this Agreement, regardless of
whether he chooses to execute this Agreement prior to the expiration of the
twenty-one (21) day period provided. Buren further agrees that he has been
instructed by Strategia that, following his execution of this Agreement, he
shall have up to seven (7) days in which to withdraw or rescind his Age Claim
Waiver, and only his Age Claim Waiver, but if he exercises his right to
withdraw or rescind his Age Claim Waiver, Buren shall be deemed to have left
the employ of Strategia by resignation and not retirement and Strategia's
duty to pay him the Minimum Compensation stated in Paragraph 2(b) above shall
become immediately void and Buren shall thereafter remain bound by the
remaining provisions of this Agreement.
(v) Buren agrees that the fact and the terms of this Agreement shall be
strictly confidential and that he shall not divulge, directly or indirectly,
explicitly or implicitly, the fact or terms of this Agreement to any person
other than his spouse, attorney(s) and tax advisor(s) or as otherwise
required by law or to assure compliance with the terms of this Agreement, and
in the event of disclosure to these persons, will inform such persons of the
terms of this Paragraph 9(v) and take all necessary actions to obtain such
persons agreement to comply with the terms of this paragraph so as to protect
and ensure the confidentiality of this Agreement. Buren further agrees that
for the purposes of this paragraph, his spouse, attorney(s) and tax
advisor(s) are his agents and that a breach of these terms of confidentiality
by them, or any of them, constitute a breach by Buren.
10. The Parties represent and certify that they have carefully read and
fully understand all of the provisions of the Agreement, that they have had
ample and adequate opportunity to thoroughly discuss all aspects of this
Agreement with legal counsel of their own choosing, that they are voluntarily
entering into this Agreement and that no representations have been made other
than those set forth explicitly herein.
11. The Parties understand and agree that this Agreement shall in all
respects be interpreted, enforced and governed under the laws of the
Commonwealth of Kentucky and that the language of this Agreement shall in all
cases be interpreted as a whole, according to its fair meaning and not
strictly for or against either of the Parties, regardless of which is the
drafter of this Agreement.
12. The Parties further acknowledge and agree that this Agreement is
executed in settlement of disputed claims and that neither it, nor the fact
of settlement, constitutes an admission of or is to be used as evidence of
any liability, violation or wrongdoing of any kind or nature whatsoever on
the part of the Parties or either of them.
53
<PAGE>
13. The Parties agree that in any event a provision of this Agreement
or any application thereof shall be judged by any court of competent
jurisdiction to be invalid, illegal or unenforceable in any respect, unless
such provision or application thereof is of the essence of this Agreement,
the validity, legality or enforceability of all other applications of that
provision, and of all other provisions and applications of this Agreement,
shall not in any way be affected and that such invalid, illegal or
unenforceable provision or application shall be deemed not to be a part of
this Agreement, and that this Agreement shall then be enforced to the maximum
extent allowed by the applicable law.
14. The Parties agree that this Agreement sets forth the entire
agreement between the Parties hereto relating to the subject matter hereof
and fully supersedes any and all prior agreements or understandings between
them. This Agreement may be amended or superseded only by a subsequent
writing, executed by the party against whom enforcement is sought.
15. This Agreement shall not be assignable by Buren, but shall be
binding on Buren and his estates, agents, attorneys, successors, heirs,
executors, administrators, insurers and assigns, and shall inure to the
benefit of Strategia, and its subsidiary companies, agents, directors,
shareholders, parent and sister corporations, affiliates, officers,
employees, representatives, attorneys, insurers, predecessors and successors.
IN WITNESS WHEREOF, and intending to be legally bound thereby,
Buren and Strategia have executed the foregoing Agreement on the dates
indicated.
I UNDERSTAND AND AGREE THAT THIS AGREEMENT
CONSTITUTES A FULL AND FINAL RELEASE OF CLAIMS.
/s/James P. Buren
Buren
Date: 10/23/97
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF JEFFERSON )
Subscribed and sworn to before me this 23rd day of October, 1997.
Notary Public /s/ Rebecca L. Jolly
Commission expires: July 3, 2001
STRATEGIA
By: /s/ Richard W. Smith
Title: President
54
<PAGE>
Date: 10/23/97
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF JEFFERSON )
Subscribed and sworn to before me by Richard W. Smith, President, on
behalf of Strategia this 23rd day of October, 1997.
Notary Public /s/Rebecca L. Jolly
Commission expires: July 3, 2001
<PAGE>
Exhibit 21
SUBSIDIARIES OF STRATEGIA CORPORATION
Dataguard Limited (Kentucky)
Twinsys Dataguard SA (France)
Twin-X SA (France)
Strategia Europe SAS (France)
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-36233) pertaining to the 1988 Stock Option Plan of Strategia
Corporation of our report dated March 26, 1998, with respect to the consolidated
financial statements of Strategia Corporation included in the Annual Report
(Form 10-KSB) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,866,763
<SECURITIES> 0
<RECEIVABLES> 1,969,309
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,130,544
<PP&E> 19,559,572
<DEPRECIATION> 12,066,617
<TOTAL-ASSETS> 14,391,020
<CURRENT-LIABILITIES> 3,846,581
<BONDS> 933,133
0
0
<COMMON> 13,866,001
<OTHER-SE> (6,242,249)
<TOTAL-LIABILITY-AND-EQUITY> 14,391,020
<SALES> 0
<TOTAL-REVENUES> 11,021,972
<CGS> 0
<TOTAL-COSTS> 13,969,946
<OTHER-EXPENSES> (347,601)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 452,264
<INCOME-PRETAX> (3,052,637)
<INCOME-TAX> 79,259
<INCOME-CONTINUING> (3,131,896)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,131,896)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 338,436
<SECURITIES> 0
<RECEIVABLES> 1,099,636
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,495,810
<PP&E> 18,335,606
<DEPRECIATION> 9,851,977
<TOTAL-ASSETS> 10,745,410
<CURRENT-LIABILITIES> 4,483,877
<BONDS> 978,598
0
645,460
<COMMON> 4,386,834
<OTHER-SE> (2,959,981)
<TOTAL-LIABILITY-AND-EQUITY> 10,745,410
<SALES> 0
<TOTAL-REVENUES> 9,454,693
<CGS> 0
<TOTAL-COSTS> 9,305,779
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<CHANGES> 0
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<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
