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 March 31, 1999
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, Suite 400, Louisville, KY 40205-3271
(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 March 31, 1999
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 804,861 $ 761,650
Accounts receivable, net 4,121,795 3,207,375
Unbilled revenues 2,158,181 1,386,810
Other current assets 563,064 491,706
Total current assets 7,647,901 5,847,541
Property and equipment 21,039,057 21,593,384
Less accumulated depreciation 15,677,098 15,500,460
Net property and equipment 5,361,959 6,092,924
Other assets 338,676 381,418
$13,348,536 $12,321,883
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 52,134 $ 50,726
Current installments of obligations
under capital leases 414,819 505,931
Deferred revenue 229,641 395,438
Accounts payable 1,710,438 1,663,736
Accrued expenses and other current liabilities 2,078,539 1,708,408
Accrued income taxes 141,212 42,767
Total current liabilities 4,626,783 4,367,006
Long-term debt, excluding current installments 868,834 882,407
Obligations under capital leases,
excluding current installments 165,314 272,253
Deferred revenue 1,547,859 1,010,547
Deferred income taxes 235,683 352,825
Minority interest 104,484 71,201
Total liabilities 7,548,957 6,956,239
Stockholders' equity:
Common stock without par value. Authorized
15,000,000 shares; issued and outstanding
4,667,677 shares 13,883,965 13,883,965
Accumulated deficit (7,904,571) (8,509,606)
Accumulated other comprehensive loss (179,815) (8,715)
Total stockholders' equity 5,799,579 5,365,644
$13,348,536 $12,321,883
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Service revenues $ 6,421,937 $ 5,404,632
Operating expenses:
Cost of services 3,869,222 3,322,484
Selling, general and administrative expenses 1,809,823 2,020,340
5,679,045 5,342,824
Operating income 742,892 61,808
Other (income) expense:
Interest expense 47,855 77,101
Interest income (2,107) (28,294)
Other expense 34,848 42,206
80,596 91,013
Income (loss) before income taxes 662,296 (29,205)
Income tax provision 57,261 37,382
Net income (loss) $ 605,035 $ (66,587)
Net income (loss) per share of common stock:
Basic $ 0.13 $ (0.01)
Diluted $ 0.13 $ (0.01)
Weighted average number of common
shares outstanding 4,667,677 4,667,677
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Net income (loss) $605,035 ($66,587)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (171,100) (10,719)
Comprehensive income (loss) $433,935 ($77,306)
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 605,035 $ (66,587)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 728,695 837,120
Other noncash items (43,457) 37,432
Change in operating assets and
liabilities:
Accounts receivable (914,420) (2,035,367)
Unbilled revenues (771,371) (1,044,070)
Other current assets (71,358) (50,086)
Accounts payable 46,702 (268,975)
Accrued expenses and other current
liabilities 370,130 809,301
Accrued income taxes 98,445 27,440
Other assets 40,777 442,774
Deferred revenues 371,515 1,205,810
Net cash provided by (used in)
operating activities 460,693 (105,208)
Cash flows from investing activities:
Purchases of property and equipment (183,553) (763,683)
Net cash used in investing
activities (183,553) (763,683)
Cash flows from financing activities:
Principal payments on long-term debt and
obligations under capital leases, net (170,504) (454,689)
Net cash used in
financing activities (170,504) (454,689)
Effect of exchange rate on changes in cash (63,425) 22,932
Net increase (decrease) in cash and cash
equivalents 43,211 (1,300,648)
Cash and cash equivalents at beginning of
year 761,650 3,866,763
Cash and cash equivalents at end of period $ 804,861 $ 2,566,115
</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, 1998 $13,883,965 ($8,509,606) ($8,715) $5,365,644
Net income for three
months ended
March 31, 1999 0 605,035 0 605,035
Foreign currency
translation
adjustment 0 0 (171,100) (171,100)
Balance at March
31, 1999 $13,883,965 ($7,904,571) ($179,815) $5,799,579
</TABLE>
See notes to unaudited condensed consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Notes to March 31, 1999 Condensed Consolidated Financial Statements
(Unaudited)
(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, 1998.
(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 March 31, 1999 and the results of operations and cash flows for the
period then ended. Certain prior year data has been reclassified to conform to
current year presentation.
(3) The Company provides a variety of information technology services,
including Year 2000 services, disaster recovery services, and outsourcing
services; both in the United States and internationally.
In the United States, Strategia primarily provides Year 2000 services and
disaster recovery services. During the three months ended March 31, 1999,
approximately 91% of the $3.2 million U.S. revenues were Year 2000 service
revenues; compared to 86% of U.S. revenues in the year ended December 31, 1998.
Internationally, the Company provides its services through three French
companies. Twinsys Dataguard S.A. ("Twinsys"), a wholly-owned subsidiary of
Strategia, provides disaster recovery and contingency planning services to
users of Bull computers. Twin-X S.A. (Twin-X"), a 60% owned subsidiary of
Twinsys, provides similar services to users of Unix-based computer systems.
Strategia Europe S.A.S. ("Strategia Europe"), a wholly-owned subsidiary of
Strategia, provides Year 2000 services in France. Approximately 61% of the
$3.2 million Foreign revenues were from disaster recovery services and 39%
from Year 2000 services during the first three months of 1999.
Revenues and pretax income (loss) are shown below by geographical component:
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
Service revenues:
<S> <C> <C>
United States $3,229,273 $3,472,480
Foreign 3,192,664 1,932,152
$6,421,937 $5,404,632
Pretax income (loss):
United States $ 570,924 $ 378,574
Foreign 91,372 (407,779)
$ 662,296 $ (29,205)
</TABLE>
(4) Revenues from fixed price Year 2000 and other consulting engagements were
recognized on the percentage-of-completion method. Actual costs incurred to
date, as a percentage of estimated total contract costs, were 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
included all direct costs related to contract performance. Provisions for
estimated losses on uncompleted contracts, when required, are made in the
period in which such losses are determined. Revenue from non-fixed-price
contracts were recognized as services were provided and costs were incurred.
Selling, general and administrative costs were charged to expense as incurred.
The provision for income tax expense is principally attributable to earnings
from foreign operations. The Company had U.S. net operating loss carry-forwards
of approximately $8.1 million, at December 31, 1998, which virtually eliminated
the requirement for a Federal income tax provision.
(5) Basic and diluted income (loss) per share is based on net income (loss)
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, "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
market for Year 2000 services, the availability of technical personnel, the
Company's relationship with automated tool vendors, the limited time in which a
market for Year 2000 services is expected to exist, the Company's need to expand
the services it offers beyond Year 2000 services, 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,
1998, under the heading "Certain Factors that May Affect Future Results."
Results of Operations
The Company generated revenues of $6.4 million for the three months ended March
31, 1999, a 19% increase over the $5.4 million for the comparable three-month
period in 1998. Net income was $605 thousand for the three months ended March
31, 1999, compared to a net loss of $67 thousand for the three months ended
March 31, 1998.
The significant increase in 1999 revenues is attributable principally to an
increase in Year 2000 services revenues in France. During the first three
months of 1999, approximately 50% of consolidated revenues were generated in
the United States and 50% in France.
Operations in the United States contributed pretax profits of $571 thousand in
the first three months of 1999, as compared to a pretax profit of $379 thousand
in the comparable 1998 period. The French companies had a combined pretax
income of $91 thousand for the three months ended March 31, 1999, as compared
to a $408 thousand pretax loss for the prior year three-month period ended
March 31, 1998. The prior year pretax loss was primarily due to Strategia
Europe being in the start-up phase of providing Year 2000 services.
Consolidated disaster recovery revenues were $2.2 million for the three months
ended March 31, 1999. An increase of nearly $200 thousand in France was offset
by a decline in the U.S. The Company incurred a loss from disaster recovery
services in both of the three-month periods ended March 31, 1999 and 1998.
Consolidated Year 2000 service revenues increased to approximately $4.2 million
in the three months ended March 31, 1999, versus $3.2 million in the comparable
1998 period. This increase occurred in France as the Strategia Europe business
increased its Year 2000 revenues from less than $200 thousand in 1998 to $1.2
million in the first three months of 1999. U.S. revenues from Year 2000
services were approximately the same in both 1999 and 1998 periods. The
profit contribution from Year 2000 services improved in the first three months
of 1999 due to improved revenues and contribution margins in France and
improved contribution margins in the U.S. The majority of the Year 2000
engagements were fixed-price engagements (contribution margins each period may
be impacted by how effectively certain engagements are managed, as well as
whether or not costs were appropriately estimated when the proposals were
submitted to the customers). Contribution margins also improved in the first
three months of 1999 as a result of actions taken in December 1998 to bring
staffing and other costs in line with the current level of revenues.
Selling, general and administrative expenses decreased 10% to $1.8 million,
or 28% of revenues, in the first three months of 1999, as compared to
$2.0 million, or 37% of revenues, in the three-month period ended March 31,
1998.
Interest expense decreased as a number of capitalized leases in France have
come to an end. Interest income declined due to reduced short-term investments
as a result of the negative cash flow incurred in the fiscal year ended
December 31, 1998.
Income tax provisions principally relate to the French companies. In the
United States, the company has substantial net operating loss carry-forwards
that eliminate virtually any Federal income tax provision.
Financial Condition, Liquidity and Capital Resources
The Company has an accumulated deficit of $7.9 million, having incurred $5.5
million in losses during the two years ended December 31, 1998. Those losses
were primarily due to the cost of establishing and maintaining an
infrastructure to market and deliver Year 2000 services. The market did not
develop as anticipated and in December 1998 the Company implemented a
restructuring plan that included a U.S. workforce reduction of approximately
30% from the level at the beginning of the 1998 fourth quarter. The Company
continues to investigate other steps that can be taken to reduce costs in
order to more properly align costs with its current level of business.
Additionally, as the demand for Year 2000 services declines, the Company needs
to replace Year 2000 service revenues with other IT service revenues. The
ability of the Company to continue as a going concern is dependent on
management's ability to successfully achieve consistently profitable
operations.
At March 31, 1999, the Company had working capital totaling $3.0 million as
compared to $1.5 million at December 31, 1998 and $3.6 million at March 31,
1998. Accounts receivable and unbilled revenues have increased a combined
$1.7 million since December 31, 1998. The increase is attributable to the
$535 thousand increase in revenues in the first three months of 1999 vs the
last three months of 1998, and also due to the timing of collections of billed
receivables.
Net property and equipment declined by $731 thousand to $5.4 million since
December 31, 1998. This was due primarily to the depreciation expense
exceeding assets purchased and leases capitalized for accounting purposes.
Cash flow in the first three months of 1999 was a positive $107 thousand
(before the effect of exchange rates on change in cash) as compared to a cash
outflow of $1.3 million in the first three months of 1998. This improvement
was primarily a result of a $566 thousand improvement in net cash provided by
operating activities, reduced capital expenditures of $580 thousand, and a net
reduction in long-term debt and capitalized lease payments of $284 thousand.
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. Assuming the Company continues to
be profitable for the remainder of 1999, the Company believes it has adequate
resources to support its cash requirements for the remainder of the year.
Should the Company, however, sustain significant net losses during the next
twelve months, there would be a need for additional cash resources.
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, with the majority of these revenues being generated in France. The
Company has made a review of all of its critical systems, including revenue
generating computers, in both the United States and France. It believes all
critical equipment and systems to be Year 2000 compliant, with the exception
of the Bull mainframe computer systems utilized for disaster recovery backup
service in the U.S. Although the Company has leased a Bull 9000 mainframe
computer, which is Year 2000 compliant in and of itself, additional equipment
must be acquired in order to make this system Year 2000 compliant. The
Company has not yet decided as to whether or not it will make this investment.
Revenues from Bull Disaster Recovery services in the U.S. totaled $830 thousand
in 1998 and are expected to decline to approximately $500 thousand in 1999.
All other critical systems are believed to be 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
None.
Item 5. Other Events.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused its quarterly report to be signed on its behalf by the undersigned,
hereunto duly authorized.
STRATEGIA CORPORATION
Date: May 14, 1999 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 May 14, 1999
Richard W. Smith (Chief Executive Officer)
/s/ Paul E. Phillips, Jr. Vice President & May 14, 1999
Paul E. Phillips, Jr. Chief Financial Officer
(Principal Financial
and Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> $ 804,861
<SECURITIES> 0
<RECEIVABLES> 6,279,976
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,647,901
<PP&E> 21,039,057
<DEPRECIATION> 15,677,098
<TOTAL-ASSETS> 13,348,536
<CURRENT-LIABILITIES> 4,626,783
<BONDS> 0
<COMMON> 13,833,965
0
0
<OTHER-SE> (8,084,386)
<TOTAL-LIABILITY-AND-EQUITY> 13,348,536
<SALES> 0
<TOTAL-REVENUES> 6,421,937
<CGS> 0
<TOTAL-COSTS> 5,679,045
<OTHER-EXPENSES> 34,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,748
<INCOME-PRETAX> 662,296
<INCOME-TAX> 57,261
<INCOME-CONTINUING> 605,035
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 605,035
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
