SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21662
Strategia Corporation
(Exact name of registrant as specified in its charter)
Kentucky 61-1064606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6040 Dutchmans Lane, P.O. Box 37144, Louisville, KY 40233-7144
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 502-426-3434
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date - 4,667,677 as of September 30,
1998
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,769,421 $ 3,866,763
Accounts receivable, net 3,370,935 1,509,055
Unbilled revenues 1,348,691 460,254
Other current assets 325,913 148,869
Total current assets 6,814,960 5,984,941
Property and equipment
Cost 21,710,158 19,559,572
Less accumulated depreciation 14,815,769 12,066,617
Net plant and equipment 6,894,389 7,492,955
Other assets 378,090 767,521
$14,087,439 $14,245,417
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 49,356 $ 45,465
Current installments of obligations
under capital leases 693,631 1,101,996
Deferred revenue 1,240,626 375,085
Accounts payable 1,031,955 938,749
Accrued expenses and other liabilities 1,901,631 1,354,632
Accrued income taxes 123,246 (145,603)
Total current liabilities 5,040,445 3,670,324
Long-term debt, excluding current installments 895,614 933,133
Obligations under capital leases,
excluding current installments 369,038 565,495
Customers' deposits 19,062 37,810
Deferred revenue 1,397,658 948,750
Deferred income taxes 264,780 435,499
Minority interest 62,365 30,654
Total liabilities 8,048,962 6,621,665
Stockholders' equity:
Common stock without par value. Authorized
15,000,000 shares; issued and outstanding
4,667,677 shares 13,883,965 13,866,001
Accumulated deficit (7,861,876) (6,095,924)
Accumulated other comprehensive income (loss) 16,388 (146,325)
Total stockholders' equity 6,038,477 7,623,752
$14,087,439 $14,245,417
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Service revenues $ 4,602,841 $ 2,831,072 $ 15,735,140 $ 7,632,330
Operating expenses:
Cost of services 3,907,171 2,247,649 11,451,742 5,608,358
Selling, general and
administrative expenses 2,143,702 1,344,274 5,743,601 3,186,170
6,050,873 3,591,923 17,195,343 8,794,528
Operating loss (1,448,032) (760,851) (1,460,203) (1,162,198)
Other (income) expense:
Interest expense 56,461 101,914 188,906 372,799
Interest income (11,676) (155,511) (63,511) (194,899)
Other (income)expense (38,294) (6,331) 86,358 (45,823)
6,491 (59,928) 211,753 132,077
Loss before income taxes (1,454,523) (700,923) (1,671,956) (1,294,275)
Income tax provision 67,450 33,812 93,996 117,813
Net loss $(1,521,973) $ (734,735) $ (1,765,952) $(1,412,088)
Net loss per share of common stock:
Basic $ (0.33) $ (0.16) $ (0.38) $ (0.35)
Diluted $ (0.33) $ (0.16) $ (0.38) $ (0.35)
Weighted average number of common
shares outstanding 4,667,677 4,664,715 4,667,677 4,070,425
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net loss $(1,521,973) $ (734,735) $(1,765,952) $(1,412,088)
Other comprehensive
income (loss), net of tax:
Foreign currency translation
adjustments 169,726 (12,347) 162,713 (139,115)
Comprehensive loss $(1,352,247) $ (747,082) $(1,603,239) $(1,551,203)
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,765,952) $(1,412,088)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization 2,344,563 1,955,862
Other noncash items (50,454) 6,325
Change in operating assets and liabilities:
Accounts receivable (1,861,880) (571,972)
Unbilled revenue (888,437) -
Other current assets (177,044) (293,455)
Accounts payable 93,206 (16,967)
Accrued expenses and other current
liabilities 546,999 1,317,000
Accrued income taxes 268,849 (12,662)
(Increase) decrease in other assets 389,431 323,626
Increase (decrease) in deferred revenues 1,314,449 758,971
Increase (decrease) in customer deposits (18,748) 3,161
Net cash provided by (used in)
operating activities 194,982 2,057,801
Cash flows from investing activities:
Purchases of property and equipment (1,526,109) (1,625,985)
Net cash used in investing
activities (1,526,109) (1,625,985)
Cash flows from financing activities:
Proceeds from sale of common stock, net - 8,533,982
Proceeds from bank line of credit - 100,000
Payment of note payable to stockholder - (800,000)
Principal payments on long-term debt and
obligations under capital leases, net (695,096) (2,417,856)
Payments of dividends on preferred stock - (25,404)
Net cash provided by (used in)
financing activities (695,096) 5,390,722
Effect of exchange rate on changes in cash (71,119) (36,294)
Net increase (decrease) in cash and cash
equivalents (2,097,342) 5,786,244
Cash and cash equivalents at beginning of
year 3,866,763 338,436
Cash and cash equivalents at end of period $ 1,769,421 $ 6,124,680
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<CAPTION>
Accumulated
Other
Common Accumulated Comprehensive
Stock Deficit Income (Loss) Total
<S> <C> <C> <C> <C>
Balance at
December 31,
1997 $ 13,866,001 $(6,095,924) $(146,325) $ 7,623,752
Net loss for
three months
ended March
31, 1998 - (66,588) - (66,588)
Stock options issued 17,964 - - 17,964
Foreign currency
adjustment - - (10,719) (10,719)
Balance at March
31, 1998 $ 13,883,965 $(6,162,512) $(157,044) $ 7,564,409
Net loss for three months
ended June 30, 1998 - (177,391) - (177,391)
Foreign currency
adjustment - - 3,706 3,706
Balance at June 30, 1998 $ 13,883,965 $(6,339,903) $(153,338) $ 7,390,724
Net loss for three months
ended September 30, 1998 - (1,521,973) - (1,521,973)
Foreign currency
adjustment - - 169,726 169,726
Balance at
September 30, 1998 $ 13,883,965 $(7,861,876) $ 16,388 $ 6,038,477
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
(1) This financial information should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the period ended December 31, 1997.
(2) In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
as of September 30, 1998 and the results of operations and cash flows for the
periods then ended.
(3) The Company provides a variety of information technology services,
including millennium consulting, disaster recovery, and outsourcing services,
both in the United States and internationally. Services are provided
internationally through two French subsidiaries. One of the subsidiaries,
Twinsys Dataguard S.A. (hereinafter referred to as "Twinsys"), principally
provides disaster recovery services, while Strategia Europe S.A.S.
(hereinafter referred to as "Strategia Europe"), principally provides
millennium consulting services. Revenues and pretax income (loss) are shown
below by geographical component:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
Service revenues: 1998 1997 1998 1997
<S> <C> <C> <C> <C>
United States $ 2,075,985 $ 893,856 $ 8,953,621 $ 2,430,967
Foreign 2,526,856 1,937,216 6,781,519 5,201,363
$ 4,602,841 $2,831,072 $15,735,140 $ 7,632,330
Pretax income (loss):
United States $(1,570,554) $ (793,127) $(1,180,379) $(1,615,554)
Foreign 116,031 92,204 (491,577) 321,279
$(1,454,523) $ (700,923) $(1,671,956) $(1,294,275)
</TABLE>
(4) Revenue, for fixed price millennium and other consulting engagements, is
recognized on the percentage-of-completion method. Actual costs incurred to
date, as a percentage of estimated total contract costs, is used to determine
the percentage-of-completion, since management considers expended costs to be
the best available measure of progress on these contracts. Contract costs
include all direct and indirect costs related to contract performance.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Revenue from non-fixed-price
contracts is recognized as services are provided and costs are incurred.
Selling, general and administrative costs are charged to expense as incurred.
The provision for income tax expense is attributable to earnings from foreign
operations.
(5) Basic and diluted loss per share is based on net loss less preferred
dividends divided by the weighted average number of common and equivalent
shares outstanding during the period.
STRATEGIA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Preliminary Note Regarding Forward Looking Information
The information set forth below in "Management's Discussion and Analysis"
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 include the uncertain
and undeveloped market for millennium services, the availability of technical
personnel, the Company's relationship with automated tool vendors, the
Company's plan to expand the services it offers, the limited time in which a
market for millennium servies is expected to exist, events that affect the
timing of the Company's recognition of service revenues, the Company's
financial resources, and competitive factors. These and other factors are set
forth below in "Management's Discussion and Analysis" and described in
greater detail in the Company's annual report on Form 10-KSB for the year
ended December 31, 1997, under the heading "Certain Factors that May Affect
Future Results."
Results of Operations
The Company generated revenues of $4.6 million for the three months ended
September 30, 1998, versus revenues of $2.8 million for the comparable three-
month period in 1997. For the nine months ended September 30, 1998, the
Company recorded revenues of $15.7 million. This was a 106% increase over
the irst nine months of 1997 and exceeded revenues for the entire 1997 fiscal
year by $4.7 million.
The Company incurred a net loss of $1.5 million for the three months ended
September 30, 1998, compared to a net loss of $735 thousand for the three months
ended September 30, 1997. For the nine-month period ended September 30, 1998,
the Company incurred a net loss of $1.8 million, as compared to a net loss of
$1.4 million for the comparable period in 1997.
The significant increase in 1998 revenues is attributable principally to an
increase in North American millennium services revenue, as compared to the
prior year. North American millennium services revenues were approximately
49% of the Company's consolidated service revenues for the nine-month period
ending September 30, 1998. In the 1997 period, the comparable percentage was
approximately 11%. The majority of the North American millennium services
revenues were generated from consulting services, with a much smaller
percentage from code renovation and compliance testing services.
The Company's two principal French subsidiaries accounted for approximately
43% of the Company's consolidated service revenue for the nine-month period
ending September 30, 1998, compared to approximately 63% for the full year
1997. This decrease in relative contribution is primarily due to the increase
in North American millennium services revenue as described above. The French
companies had a combined pretax income of $116 thousand for the three months
ended September 30, 1998, and $492 thousand pretax loss for the nine-month
period ended September 30, 1998. The nine-month pretax loss was primarily due
to Strategia Europe being in the start-up phase of providing millennium
services.
The consolidated operating loss for the three months ended September 30, 1998,
increased to $1.4 million from a $761 thousand loss in 1997. The operating
loss for the nine-month period was $1.5 million, as compared to $1.2 million
in the comparable 1997 period. The increased operating losses in 1998, as
compared to 1997, were primarily due to losses generated by the millennium
services operations in both North America and France. During the three-month
and nine-month periods ended September 30, 1998, the Company's costs increased
significantly over the prior year as expenditures were incurred in
anticipation of the demand for millennium services in both North America and
Europe. Selling, general and administrative expenses of $2.1 million for the
three months ended September 30, 1998, increased over the quarterly rate or
$1.8 million established in the first two quarters of 1998, primarily due
to the establishment of a provision for bad debts of $200,000 in the third
quarter. The consolidated operating loss of $1.4 million for the third
quarter, as compared to a breakeven for the first six months, was due to
revenues being approximately $1.0 million lower in the third quarter than in
the first two quarters of 1998, and the $200 thousand bad debt provision taken
in the third quarter.
Other income (expense), net was worse in the three-month period
ended September 30, 1998, versus the comparable period in 1997. This was
primarily due to less interest income being earned on short-term investments
in 1998 due to the increased investment in working capital and costs incurred
to develop the millennium services business. Interest expense was principally
related to capital leases and a mortgage on the U.S. data center.
The provision for income taxes principally related to French income taxes
resulting from the income of Twinsys and its majority-owned subsidiary that
can not be offset by operating losses elsewhere.
Financial Conditions, Liquidity and Capital Resources
At September 30, 1998, the Company had working capital totaling $1.8 million.
Accounts receivable and unbilled revenues have increased a combined $2.7
million since December 31, 1997, with the combined balance at September 30,
1998, being $4.7 million. The increase is attributable to the 1998 increase
in revenues and the larger number of millennium services engagements in
progress at September 30, 1998.
Net property and equipment of $6.9 million declined slightly since
December 31, 1997. This was due primarily to the depreciation expense
exceeding assets purchased and leases capitalized for accounting purposes.
The Company maintains any excess cash balances in short-term, investment-grade,
interest-bearing securities. The Company has no present plans to make
significant capital expenditures this year and it believes it has adequate
resources to support its cash requirements for the remainder of the year.
Should the Company continue to sustain operating losses of the magnitude
sustained in the three months ended September 30, 1998, there would be a need
for additional cash resources during the next twelve months to sustain
operations.
Year 2000 Compliance Status
The Company is an information technology services company, the majority of its
current revenues being derived by providing Year 2000 consulting and project
management services. The Company also provides disaster recovery backup
services. The Company has previously made a review of all of its revenue
generating mainframe computers, both in the United States and France. It
believes all equipment to be Year 2000 compliant, with the exception of one
Bull mainframe computer, which has been replaced. All other critical internal
systems are also believed to be Year 2000 compliant.
However, in order to reconfirm and formally document compliance, the Company
is currently engaged in the formal process of determining compliance utilizing
its professional staff that provides similar services to the Company's
customers. It is anticipated that this formal process will be completed by
the end of March 1999. Corrective actions required will be determined at that
time. It is not anticipated that there will be a requirement to incur any
material costs or make significant capital expenditures in order to become
Year 2000 compliant.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders
The 1998 Annual Meeting of the Company's shareholders was held on
September 16, 1998. Four directors were elected to a term lasting until
the next annual shareholders meeting: John A. Brenzel, James P. Buren,
Richard W. Smith, and John P. Snyder. Voting information with respect to
the matters submitted to shareholders is set forth below.
Election of Directors
For Withheld
Mr. Brenzel 3,917,254 8,374
Mr. Buren 3,917,254 8,374
Mr. Smith 3,916,629 8,999
Mr. Snyder 3,917,254 8,374
Item 5. Other Events.
On September 28, 1998, the Registrant announced that James P. Buren
resigned from the Board of Directors. Mr. Buren retired from his position
as Executive Vice President in October 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed October 8, 1998
Item 4. Changes in Registrant's Certifying Accountants
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused its quarterly report to be signed on its behalf by the undersigned,
hereunto duly authorized.
STRATEGIA CORPORATION
Date: November 16, 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 President and Director November 16, 1998
Richard W. Smith (Chief Executive Officer)
/s/ Paul E. Phillips, Jr. Vice President and Chief Financial Officer
Paul E. Phillips, Jr. (Chief Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $ 1,769,421
<SECURITIES> 0
<RECEIVABLES> 4,719,626
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,814,960
<PP&E> 21,710,158
<DEPRECIATION> 14,815,769
<TOTAL-ASSETS> 14,087,439
<CURRENT-LIABILITIES> 5,040,445
<BONDS> 0
<COMMON> 13,883,965
0
0
<OTHER-SE> (7,845,488)
<TOTAL-LIABILITY-AND-EQUITY> 14,087,439
<SALES> 0
<TOTAL-REVENUES> 15,735,140
<CGS> 0
<TOTAL-COSTS> 17,195,343
<OTHER-EXPENSES> 86,358
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,395
<INCOME-PRETAX> (1,671,956)
<INCOME-TAX> 93,996
<INCOME-CONTINUING> (1,765,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,765,952)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
