<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 33-28809-A
ONE UP CORPORATION
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0125664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 CAMPUS CIRCLE, SUITE 100, WESTLAKE, TEXAS 76262
(Address of principal executive offices)
(817) 962-9500
(Issuer's telephone number, including area code)
Check whether the issuer (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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 13, 1996, the
issuer had 17,130,845 shares of common stock, no par value, outstanding.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at September 30, 1996, and December 31, 1995
Statements of Operations for the three months and nine months
ended September 30, 1996 and 1995
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview: Background and Sales Strategy
Offering of Convertible Debt Securities
Results of Operations:
Comparison of the Three Months Ended September 30, 1996 and 1995
Comparison of the Nine Months Ended September 30, 1996 and 1995
Comparison of the 3rd, 2nd and 1st Quarters of 1996
Liquidity and Capital Resources
Projections
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) A Statement of Computations of Per Share Earnings
SIGNATURES
<PAGE> 3
ONE UP CORPORATION
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 09/30/96 12/31/95
----------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 38,139 $ 713,421
Accounts receivable - billed, net of allowance for
doubtful accounts of $0 and $85,000, respectively 579,466 491,819
Accounts receivable - unbilled 133,695 -
Shareholder advance 2,754 345,035
Income tax refund receivable 1,011,272 -
Prepaid consulting fees 270,000 -
Other current assets 3,445 14,984
----------------------------
Total current assets 2,038,771 1,565,259
PROPERTY AND EQUIPMENT, NET 933,899 1,174,609
OTHER ASSETS
Shareholder advance, net of current portion - 690,072
Other assets 4,091 38,098
----------------------------
Total other assets 4,091 728,170
----------------------------
Total Assets $ 2,976,761 $ 3,468,038
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 104,876 $ 10,932
Accounts payable 989,528 176,685
Accrued expenses 215,211 79,388
Shareholder advances 72,000 -
Current income taxes payable 540,482 603,214
Deferred income taxes, net 73,438 109,287
----------------------------
Total current liabilities 1,995,535 979,506
LONG-TERM LIABILITIES
Long-term portion of note payable - 1,872
Deferred income taxes 22,595 18,269
Other liabilities - 1,840
----------------------------
Total long-term liabilities 22,595 21,981
MINORITY INTEREST 7,357 5,671
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Common stock; no par value; 200,000,000 shares authorized;
17,985,748 and 13,034,800 shares issued of which
854,903 are held in treasury 1,052,845 144,220
Additional paid-in capital 712,185 77,936
Treasury stock, at cost (1,068,629) -
Retained earnings 254,873 2,238,724
----------------------------
Total stockholders' equity 951,274 2,460,880
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,976,761 $ 3,468,038
============================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE> 4
ONE UP CORPORATION
Consolidated Statements of Operations
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1996 1995 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 942,434 $ 665,794 $ 2,024,049 $ 8,607,997
COSTS AND EXPENSES
Salaries and benefits 777,852 721,852 2,214,276 2,269,159
General and administrative 167,870 104,320 499,429 372,861
Advertising and marketing 16,671 4,863 69,368 142,467
Product costs 568 2,003 1,596 13,445
Travel 147,903 59,753 412,713 193,423
Contract labor 317,039 231,402 619,990 513,894
Rent 96,265 139,912 293,117 232,692
Depreciation and amortization 75,495 40,074 220,218 127,234
Insurance 4,509 45,193 11,624 149,317
Legal and professional fees 35,828 8,418 179,841 52,164
Merger, acquisition and consulting expenses 152,847 - 539,461 -
------------------------------------------------------
Total operating expenses 1,792,847 1,357,790 5,061,633 4,066,656
------------------------------------------------------
Income (loss) from operations (850,413) (691,996) (3,037,584) 4,541,341
OTHER INCOME (EXPENSE)
Interest income 451 41,515 40,411 86,967
Interest expense (30,293) 452 (30,625) (328)
Sublease income - 8,354 - 28,160
Other income - 200 - 15,970
Royalty fees - - - (25,000)
------------------------------------------------------
Total other income (expense) (29,842) 50,521 9,786 105,769
Minority interest in income of
consolidated subsidiary (1,208) (7,070) (1,686) (5,844)
------------------------------------------------------
Income (loss) before income taxes (881,463) (648,545) (3,029,484) 4,641,266
Income taxes
Current income tax expense (benefit) (292,400) (151,179) (1,014,110) 1,576,597
Deferred income tax benefit (5,682) - (31,523) -
------------------------------------------------------
(298,082) (151,179) (1,045,633) 1,576,597
------------------------------------------------------
Net income (loss) $ (583,381) $ (497,366) $(1,983,851) $ 3,064,669
======================================================
Net income (loss) per common share $ (0.03) $ (0.04) $ (0.12) $ 0.23
======================================================
Weighted average common shares and common
equivalents outstanding 17,130,845 13,034,800 16,126,025 13,034,800
======================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
ONE UP CORPORATION
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,983,851) $ 3,064,669
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 220,218 127,234
Minority interest 1,686 5,844
Stock compensation expense 67,000 -
Merger, acquisition and consulting expenses 297,250 -
Deferred income tax expense (benefit) (31,523) -
Change in assets and liabilities:
Increase in accounts receivable (87,647) (419,689)
Increase in unbilled revenue (133,695) -
Increase in shareholder advance (33,522) (1,011,143)
Increase in income tax refund receivable (1,011,272) -
(Increase) decrease in other current assets 11,539 (5,421)
Decrease in other assets 25,000 -
Increase (decrease) in accounts payable 812,843 (160,453)
Increase in accrued expenses 135,822 4,997
Increase (decrease) in income taxes payable (62,732) 1,070,966
Increase in customer deposits - 4,177
Increase (decrease) in other liabilities (4,594) 1,998
----------------------------
Total adjustments 206,373 (381,490)
----------------------------
Net cash provided (used) by operating activities (1,771,197) 2,683,179
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (79,866) (1,018,728)
Rebate from lessor for leasehold improvements 109,365 -
----------------------------
Net cash provided (used) in investing activities 29,499 (1,018,728)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 908,625 -
Proceeds from note payable and shareholder advances 172,000 -
Repayment of notes payable (7,928) (7,441)
----------------------------
Net cash provided (used) in financing activities 1,072,697 (7,441)
----------------------------
Net increase (decrease) in cash (675,282) 1,657,010
Cash - beginning 713,421 464,036
----------------------------
Cash - ending $ 38,139 $ 2,121,046
============================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 1,303 $ 328
============================
Income taxes paid $ 59,894 $ 488,245
============================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Settlement of shareholder advances through purchase of treasury stock $ 1,068,629 $ -
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by One Up Corporation (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position as of September 30,
1996, and the results of operations and cash flows for the nine months ended
September 30, 1996 and 1995. The unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements (both for New York Acquisitions, Inc. and for One Up Corporation)
for the period ended December 31, 1995, including the accompanying notes. The
results of operations for the interim periods shown are not necessarily
indicative of the results for the entire fiscal year ending December 31, 1996.
NOTE 2. BUSINESS ACTIVITY
On February 29, 1996, One Up Corporation, a Texas corporation, (One Up) entered
into a reverse acquisition agreement with New York Acquisitions, Inc., a
publicly held "shell" Florida corporation. One Up became a wholly-owned
subsidiary of the public company through the exchange of 9,069,945 shares of
the public company's common stock for all of the outstanding stock of One Up.
The name New York Acquisitions, Inc., was changed to One Up Corporation. For
accounting purposes, the reorganization of One Up and the public company is
regarded as an acquisition by the public company of all of the outstanding
stock of One Up, and is accounted for as a recapitalization of the public
company with One Up as the acquirer (a reverse acquisition). Accordingly, the
historical financial statements are those of One Up.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
Reclassifications
Certain expenses recorded in prior periods have been reclassified to conform to
the current classification.
<PAGE> 7
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1996
(Unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Per Share
Income (loss) per share has been computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
respective periods. Common stock equivalents during 1995 consisted of
convertible preferred stock.
NOTE 4. PREPAID EXPENSES
Prior to July 1, 1996, the Company entered into various consulting agreements
which included the issuance of common shares. The value of each consulting
agreement is being amortized over the life of the individual contract. During
the three months ended September 30, 1996, $116,938 was amortized, resulting in
a remaining balance of prepaid consulting fees of $270,000.
NOTE 5. INCOME TAXES
Deferred tax assets and liabilities at September 30, 1996, and December 31,
1995, consist of the following:
<TABLE>
<CAPTION>
09/30/96 12/31/95
---------- ---------
<S> <C> <C>
Current deferred tax asset $ 1,498 $ 28,900
Current deferred tax liability (74,936) (138,187)
--------- ---------
Net current deferred tax asset $ (73,438) $(109,287)
========= =========
Noncurrent deferred tax asset $ - $ -
Noncurrent deferred tax liability (22,595) (18,269)
--------- ---------
Net noncurrent deferred tax liability $ (22,595) $ (18,269)
========= =========
</TABLE>
The current deferred tax assets result primarily from the timing of
deductibility of the allowance for doubtful accounts, compensation not
currently recorded for federal income tax purposes, and net operating loss
carryforwards. The current deferred tax liability results from the cash basis
of accounting for federal income tax purposes versus the accrual basis for
financial accounting purposes. The noncurrent deferred tax liability arises
from the use of accelerated methods of depreciation of property and equipment
for federal income tax purposes.
<PAGE> 8
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1996
(Unaudited)
NOTE 5. INCOME TAXES (Continued)
At September 30, 1996, the Company owed $539,418 for income taxes, related to
1995 operations, which were due March 15, 1996, and are presently past due. The
Company has not paid this expense, nor has it accrued any interest or penalties
related to this expense, due to anticipating a net operating loss for the year
ended December 31, 1996, which will be carried back to generate a refund
receivable for prior taxes paid (or owed) and be utilized to offset the 1995
tax liability.
As of September 30, 1996, the Company has recorded an income tax refund
receivable of $1,011,272 relating to a net operating loss, generated during the
first nine months of 1996, of approximately $3,000,000, which could be utilized
by carrying back to prior periods or be offset against future taxable income.
Any net operating loss carryforward generated for the year ended December 31,
1996, will expire in 2011.
NOTE 6. COMPENSATION AND TREASURY STOCK
The employment agreement with the Company's President/CEO/majority shareholder,
which, among other provisions, calls for annual compensation of $600,000 from
January 1, 1996 to December 31, 1998, has been set aside and is currently being
renegotiated. For the first nine months of 1996, the President has agreed to
waive the annual compensation as called for in the agreement and to accept as
compensation that which has already been received.
NOTE 7. STOCKHOLDERS EQUITY AND STOCK OPTIONS
Effective July 1, 1996, the Company adopted a stock purchase plan ("Plan")
designed to provide its employees with a proprietary interest in the Company.
The Plan's fiscal year end is June 30. This Plan is available to all employees
meeting certain eligibility requirements, as further described in the Plan
documents. Under this Plan, via semi-monthly payroll deduction eligible
employees may elect to withhold up to 15% of their gross annual salary for the
purpose of purchasing the Company's common stock. At the end of each quarter,
the stock is purchased at the closing trade price on the last date of the last
month of the calendar quarter, and employees are issued their purchased shares
as soon as is administratively feasible, but no later than 45 days after the
end of the quarter. In addition, each participant purchase is matched 50% by
the Company. Participants' vesting in the Company match will increase 20% on
July 1 of each year for the stock purchased during the preceding Plan year, and
stock certificates will be issued after the match for the affected plan year
has become 100% vested.
<PAGE> 9
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1996
(Unaudited)
NOTE 7. STOCKHOLDERS EQUITY AND STOCK OPTIONS (Continued)
During the third quarter of 1996, employees contributed $11,626 towards the
purchase of 8,455 shares of the Company's common stock. Certificates for these
shares are scheduled to be issued by November 15, 1996.
Effective July 9, 1996, the Company entered into a consulting agreement whereby
in exchange for public relations services the Company will issue, at dates yet
to be determined, common shares valued at $185,000 based on the closing bid
price at the date of issue. At September 30, 1996, no shares had been issued as
a result of this agreement.
Effective July 31, 1996, the Company entered into an agreement with one of its
key employees whereby the employee has the option, expiring December 31, 1996,
to purchase 50,000 shares of restricted common stock at a per share price of
$2.00. Any shares issued as a result of the exercise of this option will be
registered either in a secondary offering or by March 31, 1997, whichever
occurs first. At September 30, 1996, no shares had been issued as a result of
this agreement.
NOTE 8. SUBSEQUENT EVENTS
On October 30, 1996, the Company entered into a Regulation S Offering
Memorandum (the "Offering"). The Offering provides for up to $1,500,000 (plus a
15% over allotment allowance) aggregate principal amount of Convertible
Subordinated Debentures (the "Debentures"). Each Debenture is convertible, at
the option of the holder, at any time after 40 days following the issuance of
such Debenture, and prior to maturity, into shares of the Company's common
stock at a conversion price of 50% of the five day average closing bid price per
share. The Offering shall terminate on November 15, 1996, unless extended for
a period of up to 45 days. The Debentures are being offered by the Placement
Agent on a "best efforts" basis. Once subscriptions in a minimum amount of
$100,000 are received, the Company may begin to accept subscriptions and issue
debentures from time to time, until the offering termination date. As of
November 13, 1996, the Offering has yielded net proceeds to the Company of
$217,500. However, the ultimate success of the Offering being fully funded is
not determinable at this time.
On the final closing date of the Offering, the Company will issue to the
Placement Agent a five year warrant to purchase up to the number of shares of
the Company's common stock into which a Debenture in the amount of 10% of the
aggregate principal amount of the Debentures sold would be convertible.
On November 12, 1996, the Company entered into a financial consulting agreement
(the "Agreement") with the Placement Agent. The Agreement provides for a
monthly fee of $10,000 to be paid by the Company to the Placement Agent for a
duration of 24 months for financial consulting services to be provided by the
Placement Agent, unless the Agreement is terminated under terms stipulated in
the Agreement. The Agreement also provides that the Company shall grant to the
Placement Agent warrants exercisable during a period of five years from
November 12, 1996, to purchase 250,000 shares of the Company's common stock at
an exercise price of $1.00 per share. In addition, the Agreement provides that
the Placement Agent shall have the right of first refusal to act as the
Company's exclusive managing underwriter or placement agent in any offering of
securities without the assistance of any underwriter or placement agent.
As a condition to the Placement Agent entering into the Agreement, on November
12, 1966, Richard G. Dews, the Company and an outside investment group (the
"Group") entered into an option agreement (the "Option Agreement") whereby
Richard G. Dews has granted to the Group the option to purchase up to 6,000,000
shares of the Company's common stock owned by Mr. Dews. The option shall vest
and terminate in increments over time such that the option to purchase between
1,000,000 and up to 4,000,000 shares of common stock shall be exercisable at
any given time during the term of the Option Agreement. The termination date of
the Option Agreement is September 30, 1998, unless extended under terms
stipulated in the Option Agreement. The Option Agreement provides that the
Company shall file a shelf registration statement with the SEC within 45 days
of November 12, 1996, in order to register the 6,000,000 shares underlying the
option.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996
OVERVIEW
Background
The Company was founded January 7, 1991. Throughout 1991 and 1992, its primary
business was performing OS/2 education for IBM customers. By August 1992, the
Company had diversified operations to include application product development,
contract programming and conducting IBM Migration Workshops. By January 1993,
in order to become independent from IBM, the Company restructured the education
line of business by building its own curriculum. The contract programming line
of business diminished as the Company made a decision not to focus on the
consulting/contract programming operations. Product development expanded from
1993, and continues to expand today, evolving from its beginnings in screen
savers and screen capture tools to an expert systems operation supporting
platform migration projects.
The Company first conducted IBM Migration Workshops ("workshops") in August
1992. The workshops program was an operation created by IBM in its OS/2
Development Lab located in Boca Raton, Florida. The intent of the workshop was
to simultaneously offer IBM customers OS/2 programming education and platform
migration assistance (consulting). The week-long workshops were intense
migration "boot camps" which focused on educating software developers as to the
techniques required to manage multi-person-year migration efforts. By November
1992, the Company had become the lead provider of workshops for IBM, and,
shortly thereafter, became IBM's sole source for the workshops operation.
May 1993 marked the beginning of two consecutive one-year contracts with IBM
for OS/2 support for IBM's "Area-10" (a geographical region, or area, for IBM).
This contract called for the Company to provide marketing and technical support
for OS/2 to IBM's customers located in Area-10. Services provided by the
Company under this agreement expired May 31, 1995.
With Workshops as One Up's premier line of business for 1993, the Company
sought to revolutionize the historical processes of platform application
migration. As a first step, platform programming differences between Windows
and OS/2 were categorized and catalogued. Second, a programmer's hyper linking
editor product was acquired. Third, the two were merged to produce the
Company's first proof-of-concept migration expert system, SMART (Source
Migration Analysis Reporting Toolset). Version 1.0 of SMART was released in
December 1993.
SMART was revolutionary. It analyzed, in minutes instead of months, an entire
application source base and reported every change required to move the
application from Windows to OS/2. Moreover, SMART could perform many of these
changes automatically, while inserting in-line comments to assist the
programmer with those changes not easily automated. For IBM's Workshop
customers, SMART created a road map report for their migration project in the
first
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
hour of their first day, and it could automatically migrate up to fifty percent
of their application by simply "pushing a button." As a market test, IBM
licensed SMART 1.0 and distributed it to a worldwide audience via their OS/2
Developer Connection CD-ROM (DevCon) during the first half of 1994. It was
extremely well received, but most users had two consistent requests: SMART
should be programmable (extensible), and it should be free. As a result, by
September 1994 the Company had created SMART 2.0 (programmable) and licensed it
exclusively to IBM for marketing and distribution (free to IBM's OS/2
customers).
Soon thereafter, One Up's license agreement with IBM, which included a
non-compete clause, proved to be too restrictive and did not create significant
market opportunity for the Company during its fifteen month exclusivity.
Desiring to broaden and expand its market for migration tools, the Company
began work on its next-generation migration expert systems and methodology --
Commander and the Conversion Factory, respectively, in late 1994.
During 1995, the Company evolved Commander and its Conversion Factory
methodology by performing services-based migrations for large scale customers
between popular desktop platforms. The non-compete clause in the IBM license
agreement prohibited the Company from distributing Commander as a product
during 1995. This restriction caused the Company to evolve from intending to
distribute Commander as a product to using Commander as an internal- use-only
technology supporting its services-based operations, the Conversion Factory.
During the first nine months of 1996, the Company launched a services-based
business model with a highly-evolved, revolutionary technology and methodology.
1996 also marked the birth of the Company's marketing and migration operations
infrastructure, constituting a learning, evolutionary process of applying
Company staff plans and abilities, market perceptions and offerings to an
"unprepared" marketplace. The Conversion Factory has been formalized,
documented and staffed - the latter actually increasing the size of the Company
by more than fifty percent since January 1996.
A press release regarding projections of the Company's bookings and revenues
was released by a prior director and financial advisor of the Company in July
1996. When management of the Company learned of such projections in the day
following such release, it attempted to retrieve those copies of the release
that had not already been published. The Company's financial picture, as
reflected in the Quarterly Report, is substantially different than that set
forth in the release.
Sales Strategy
The Company's sales staff and sales model have undergone extensive evolution
during the first nine months of 1996. While the perception of the magnitude of
the marketplace has not changed,
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
the role that the Company must play in customer migration project business case
development has changed radically. Early in the year, a smorgasbord of
migration services was offered to low-level technical customer contacts.
Customer leadership over migration project decisions typically had little
experience or expertise in business case development, migration methodology,
migration technology and target platform particulars. While the Company was
able to demonstrate its capabilities to a knowledgeable and enthusiastic
technical audience, or to third party vendor channels, it struggled with
selling to the decision maker.
Based on the experiences gained during the first nine months of 1996, the
Company now positions itself early in the migration project cycle, specifically
in the business case development for customer migration projects, as a lead,
co-lead or key influencer. This change in sales approach has streamlined the
sales qualification process and increased the sales closing ratio. Recently the
Company has proven that with its staff, methodology and technology, it may know
the customer's source code environment better than the customer itself within
as little as thirty days. Furthermore, the Company has proven that it can
extend the ability of its point-to-point services offerings to include new
technologies or platforms in ninety days or less. To summarize, business case
development for migration projects should consider the following:
1. Analysis of the current customer source code environment;
2. Analysis of the available technologies/environments considered;
3. Analysis of the possible paths in migrating from or integrating
existing environments with those available.
Once a migration business case is justified, the following must be applied in
moving from source to target:
1. Knowledge of the source platform
2. Knowledge of the source application
3. Expertise/experience in performing migrations
4. Migration project methodology
5. Migration tool technology
6. Knowledge of the target platform
7. Streamline/update/standardize application during project
8. Knowledge of the target application's functional extensions (if
different from source application)
Management believes the Company currently offers one of the most efficient and
effective solutions covering the above two sections of analyzing and performing
migration project business cases. The Company is now employing the sales model
and sales and consulting staff needed to apply the above to existing and new
prospects. The updated sales model has been
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
successful in guiding Fortune 500 customers through the analysis phase of
multi-million dollar projects. The Company has retained Fleishman-Hillard, a
leading international public relations firm, to assist with professional
dissemination of the new sales model and manage its marketing message. During
the fourth quarter of 1996, the Company will continue to refine and update the
sales model.
Offering of Convertible Debt Securities
The Company prepared a Confidential Regulation S Offering Memorandum on October
30, 1996, in connection with an offering of up to $1,500,000 aggregate principal
amount of Convertible Subordinated Debentures (the "Debentures") (or up to
$1,725,000 aggregate principal amount of Debentures if the Placement Agent
exercised its over allotment option to place more Debentures). The Debentures
are being offered in an "offshore transaction," as defined in Regulation S
promulgated pursuant to the United States Securities Act of 1933, as amended,
only to a limited number of prospective purchasers who are not "U.S. Persons,"
as defined in Regulation S. Each of the Debentures is convertible, at the option
of the holder thereof, at any time after 40 days following the issuance of such
Debenture, and prior to maturity, into shares of the Company's common stock, no
par value, at a specified conversion price.
To date, proceeds in the amount of $217,500, net of Placement Agent commissions
and expenses, have been received by the Company. The offering of Debentures will
terminate upon the earlier of the Company's acceptance of subscriptions for all
$1,500,000 aggregate principal amount (or $1,725,000 aggregate principal amount
if the over allotment option is exercised in full) of such Debentures or on
November 15, 1996, unless extended for up to 45 additional days by the mutual
written agreement of the Company and the Placement Agent or terminated earlier,
at any time, by the mutual written agreement of the Company and the Placement
Agent. The Company and the Placement Agent currently intend to extend the
Offering.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
The Company has appointed an exclusive agent (the "Placement Agent") as its
exclusive agent to offer and sell to qualified investors the Debentures on a
"best efforts" basis pursuant to the terms of the placement agent agreement
entered into by the Company and the Placement Agent.
On the final closing date of the Offering, the Company will issue to the
Placement Agent a five year warrant to purchase up to the number of shares of
Common Stock into which a Debenture in the amount of 10% of the aggregate
principal amount of the Debentures sold would be convertible.
On November 12, 1996, the Company entered into a financial consulting agreement
("Financial Consulting Agreement") with the Placement Agent. The Financial
Consulting Agreement provides that the Company shall pay the Placement Agent a
fee equal to $10,000 per month and the Placement Agent will provide financial
consulting services to the Company during a term of 24 months or (i) until such
time as an investment banking firm enters into an agreement with the Company to
effect an offering resulting in gross proceeds to the Company of $12,000,000 or
more or (ii) after December 31, 1996, upon the payment by the Company to the
Placement Agent of the aggregate amount of $300,000. The Financial Consulting
Agreement provides that the Company shall grant to the Placement Agent warrants
exercisable during a period of five years from November 12, 1996, to purchase
an aggregate of 250,000 shares of Common Stock at an exercise price of $1.00
per share. The Financial Consulting Agreement also provides that the Placement
Agent shall have the right of first refusal to act as the Company's exclusive
managing underwriter or placement agent, as the case may be, in any offering of
securities without the assistance of any underwriter or placement agent. The
Financial Consulting Agreement provides that the Placement Agent shall have the
right to nominate one member to the slate of nominees to the Board of Directors
to be voted on by the shareholders of the Company at the next meeting of
shareholders, and the majority shareholder of the Company has agreed to vote in
favor of the election of the Placement Agent's nominee to the Board of
Directors of the Company.
As a condition to the Placement Agent entering into the Placement Agent
Agreement, on November 12, 1996, Richard G. Dews, the Company and an outside
investment group (the "Group") have entered into an option agreement (the
"Option Agreement") pursuant to which Richard G. Dews has granted to the Group
the option to purchase up to 6,000,000 shares of Common Stock owned by Mr. Dews.
The option shall vest and terminate in increments over time such that the option
to purchase between 1,000,000 and up to 4,000,000 shares of Common Stock shall
be exercisable at any given time during the term of the Option Agreement. The
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
termination date of the Option Agreement is September 30, 1998, but the term
of the Option Agreement could be extended in certain circumstances.
The Option Agreement provides that with respect to the unexercised portion of
the option, the Group shall have the right to vote 50% of all of the shares of
Common Stock underlying the unexercised but not yet terminated portion of the
option whether or not such shares are vested and neither Mr. Dews nor the Group
shall vote the remaining 50% of the shares of Common Stock underlying the
option.
The Option Agreement provides that the Company shall file a shelf registration
statement with the SEC within 45 days of November 12, 1996, in order to
register the 6,000,000 shares underlying the option and shall use its best
efforts to cause such shelf registration statement to be declared effective.
As a result of entering into the Option Agreement, Richard G. Dews no longer
controls the voting of more than 50% of the Company's Common Stock.
Results of Operations
The following discussion of the financial condition and results of operations
of One Up should be read in conjunction with the unaudited consolidated
financial statements of One Up included elsewhere herein.
Management believes that, due to the change in the Company's business strategy
subsequent to the expiration of the non-compete agreement with IBM (which
provided IBM with the exclusive marketing rights to SMART), it is difficult to
analyze the comparison of the results of operations for the third quarters
ended September 30, 1996 and 1995, and for the nine months ended September 30,
1996 and 1995. During the first nine months of 1995, revenues posted by the
Company consisted almost entirely of amounts due under the non-compete
agreement with IBM (which expired on December 31, 1995) and from amounts due
under the IBM Area-10 contract (which expired on May 31, 1995). With the
expiration of these contracts, the Company's revenues no longer reflect the
substantial licensing and support fees received from IBM but rather are
generated from sales as the Company offers its conversion services to the
general public.
Therefore, following the discussion comparing results of operations for the
third quarters ended September 30, 1996 and 1995, and for the nine months ended
September 30, 1996 and 1995, management has included a discussion comparing the
third, second and first quarters of 1996. In the opinion of management, it is
important to note the improvement in business operations in the third quarter
relative to the second and first quarters. Management believes this improvement
is
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
reflective of the restructuring activities underway since January 1996 to
expand the Company's marketing and sales program after the expiration of the
IBM contracts. Most notably, One Up posted revenues for the third quarter of
$942,434, an increase of approximately 52% over the second quarter and an
increase of approximately 105% over the first quarter of 1996. Also, the net
loss realized during the third quarter of $583,381 decreased by approximately
32% as compared to the second quarter of 1996.
Management believes that the net losses which continue to be generated by the
Company are due in part to (1) the lack of sales as a result of a longer than
anticipated hiring and training process required to field a marketing and sales
staff capable of successfully selling its migration services to large corporate
clients, (2) a more extended sales cycle of four to six months required to
close a typical large-scale migration contract, rather than the two to three
months originally forecast, (3) increased labor-related costs and expenses as
migration and sales staffing were increased to support the Company's new
business strategy, and (4) the fact that management was occupied for most of
the second and first quarters with the necessary activities required to qualify
the Company's common stock to be traded publicly beginning on June 14, 1996,
and the additional responsibilities of being a public company.
Management believes that, based on (1) market demand for conversion services,
especially in the area of OS/2 to WindowsNT migration, (2) implementation of a
focused sales strategy and model, and (3) increasing average contract sizes,
revenues will continue to increase throughout the remainder of 1996, although
no assurances can be given regarding such increase. In order to minimize
expenses, the Company instituted a comprehensive cost control program early in
the third quarter of 1996. It is expected that this cost control program
coupled with the anticipated growth in revenues will contribute to improved
earnings for the last quarter of 1996, although no assurances can be given
regarding such improvement.
Comparison of the Three Months Ended September 30, 1996 and 1995
Revenues
During the three months ended September 30, 1996, One Up revenues increased to
$942,434 compared to only $665,794 in the three months ended September 30,
1995, primarily due to increased revenues from platform migration projects
brought about by implementation of the Company's new business strategy.
Operating Expenses
One Up's total operating expenses increased approximately 32% to $1,792,847 for
the three months ended September 30, 1996, compared to $1,357,790 for the three
months ended
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
September 30, 1995. However, as a percentage of revenues, total operating
expenses decreased to 190% for the third quarter of 1996, compared to 204% for
the third quarter of 1995.
Labor costs, including benefits and insurance, increased approximately 10% to
$1,099,400 compared to $998,447 for the three months ended September 30, 1996
and 1995, respectively, primarily due to increased labor-related costs and
expenses as migration and sales staffing were increased to support the
Company's new business strategy as well as the addition of upper management
personnel. General and administrative expenses increased to $167,870 from
$104,320, primarily due to increased expenditures for computer-related expenses
(related to hardware and software enhancements), employment fees (related to
recruiting costs for several key positions) and utilities (related to the new
office facilities). Advertising, marketing and product costs increased to
$17,239 from $6,866, primarily due to increased expenditures for public
relations services. Travel increased to $147,903 from $59,753, resulting
primarily from increased sales calls being made as the Company implemented its
new business strategy. Rent expense decreased to $96,265 for the third quarter
of 1996, compared to $139,912 in the third quarter of 1995, primarily due to
expiration of leases for both the former primary office site and a small
out-of-state office located in Louisiana. Depreciation and amortization
increased to $75,495 in the three months ended September 30, 1996, compared to
$40,074 in the three months ended September 30, 1995, attributable to
expenditures in excess of $1,000,000 for leasehold improvements, new furniture
purchases and computer and other equipment purchased primarily during the
second quarter of 1995 (all related to the new office facilities). Legal and
professional fees increased to $35,828 in the three months ended September 30,
1996, compared to $8,418 in the three months ended September 30, 1995,
primarily due to additional accounting and legal services required to properly
fulfill the reporting requirements of being a public company. Merger,
acquisition and consulting expenses totaling $152,847 (which relate to expenses
incurred as a result of the reverse merger in February and becoming a public
company, including the increased management consulting, and additional
accounting and legal work made necessary as a result of the reverse merger and
the various SEC filings related thereto) amounted to approximately 9% of total
operating expenses for the third quarter of 1996.
Income Taxes
The Company recorded an income tax benefit of $298,082 for the three months
ended September 30, 1996. This represents the amount of tax that can be
recaptured for previous income taxes paid based on a net operating loss
carryback of approximately $900,000 for the three months ended September 30,
1996. Any such recapture would only be realized should the Company post a net
operating loss for the year of 1996, which is expected to be the case.
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
Comparison of the Nine Months Ended September 30, 1996 and 1995
Revenues
During the nine months ended September 30, 1996, One Up revenues decreased to
$2,024,049 compared to $8,607,997 in the nine months ended September 30, 1995,
primarily due to the lack of revenues from the non-compete agreement with IBM
and the IBM Area-10 contract, which expired in December and May of 1995,
respectively.
Operating Expenses
One Up's total operating expenses increased approximately 24% to $5,061,633 for
the nine months ended September 30, 1996, compared to $4,066,656 for the nine
months ended September 30, 1995. As a percentage of revenues, total operating
expenses increased to 250% for the first nine months of 1996, compared to only
47% for the first nine months of 1995, primarily due to the lack of revenues
from the non-compete agreement with IBM and the IBM Area-10 contract, which
expired in December and May of 1995, respectively.
Labor costs, including benefits and insurance, decreased by approximately 3% to
$2,845,890 compared to $2,932,370, for the nine months ended September 30, 1996
and 1995, respectively, primarily due to a decrease in the staffing level after
expiration of the IBM Area-10 contract. General and administrative expenses
increased to $499,429 from $372,861, primarily due to increased expenditures
for computer-related expenses (related to hardware and software enhancements),
employment fees (related to recruiting costs for several key positions) and
utilities (related to the new office facilities). Advertising, marketing and
product costs decreased to $70,964 from $155,912, primarily due to the
expiration of a two-year contract with IBM to provide technical and marketing
support for IBM's Area-10 program. Travel increased to $412,713 from $193,423,
resulting primarily from increased sales calls being made as the Company
implemented its new business strategy. Rent expense increased to $293,117 for
the first nine months of 1996, compared to $232,692 in the first nine months of
1995, primarily due to moving the Company's principal offices to a larger
facility in June of 1995. This relocation was prompted as the lease for the
Company's prior facility expired, with new lease rates due to increase over 75%
from $9.00 to $16.00 per square foot. The Company's choice for its new location
offered a better facility for its business purposes at a lower lease rate per
square foot, along with the increased space which will support the additional
staffing required for the Company's changing business strategy and anticipated
growth. Depreciation and amortization increased to $220,218 in the nine months
ended September 30, 1996, compared to $127,234 in the nine months ended
September 30, 1995, attributable to expenditures in excess of $1,000,000 for
leasehold improvements, new furniture purchases and computer and other
equipment purchased during the second quarter of 1995 (all related to the new
office facilities). Legal and
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
professional fees increased to $179,841 in the nine months ended September 30,
1996, compared to $52,164 in the nine months ended September 30, 1995,
primarily due to fees and expenses incurred in connection with the final
resolution of the employment agreement with a former employee. Merger,
acquisition and consulting expenses totaling $539,461 (which relate to expenses
incurred as a result of the reverse merger in February and becoming a public
company, including the increased management consulting, and additional
accounting and legal work made necessary as a result of the reverse merger and
the various SEC filings related thereto) amounted to approximately 11% of total
operating expenses for the first nine months of 1996.
Income Taxes
The Company recorded an income tax benefit of $1,045,633 for the nine months
ended September 30, 1996. This represents the amount of tax that can be
recaptured for previous income taxes paid based on a net operating loss
carryback of approximately $3,000,000 for the nine months ended September 30,
1996. Any such recapture would only be realized should the Company post a net
operating loss for the year of 1996, which is expected to be the case.
Comparison of 3rd, 2nd and 1st Quarters of 1996
Revenues
During the third quarter of 1996, One Up posted revenues of $942,434,
representing more than 46% of total revenues for the nine months ended
September 30, 1996. Third quarter revenues increased approximately 52% as
compared to the second quarter, and increased approximately 105% as compared to
the first quarter of 1996.
Operating Expenses
One Up's total operating expenses were $1,792,847 for the third quarter of
1996, a decrease of approximately 10% as compared to the second quarter,
attributable primarily to the comprehensive cost control program instituted
early in the third quarter, and an increase of approximately 39% as compared to
the first quarter of 1996. As a percentage of revenues, total operating
expenses decreased significantly to 190% for the third quarter of 1996,
attributable to both increased sales and decreased costs/expenses, compared to
319% and 279% for the second and first quarters of 1996, respectively.
Labor costs, including benefits and insurance, increased by approximately 11%
and 45% to $1,099,400 compared to $988,952 and $757,538 for the second and
first quarters of 1996, respectively, primarily due to increased staffing in
migration support, as well as the addition of sales and upper management
personnel. General and administrative expenses were $167,870, a
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
decrease from $264,622 for the second quarter primarily due to the
comprehensive cost control program instituted early in the third quarter in
addition to a large one-time expenditure for software enhancements during the
second quarter, and an increase from $66,937 for the first quarter primarily
due to increased expenditures for computer-related expenses (related to
hardware and software enhancements), employment fees (related to recruiting
costs for several key positions) and utilities (related to the new office
facilities). Advertising, marketing and product costs were $17,239, a decrease
from $46,691 for the second quarter primarily due to the comprehensive cost
control program instituted early in the third quarter, and an increase from
$7,034 for the first quarter primarily due to increased expenditures in the
area of public relations. Travel was $147,903, a decrease from $205,770 for the
second quarter resulting primarily due to the comprehensive cost control
program instituted early in the third quarter which reduced or eliminated
expenditures for outside sales and management personnel, and an increase from
$59,040 for the first quarter resulting primarily from increased sales calls
being made as the Company continued to carry out its new business strategy.
Rent expense was $96,265, a decrease from $109,022 for the second quarter
primarily due to the comprehensive cost control program instituted early in the
third quarter which eliminated expenditures for temporary living quarters for
key management personnel and for the short-term lease of office space for an
off-site sales force, and an increase from $87,830 for the first quarter
primarily due to the additional expenditures for temporary living quarters for
key management personnel and for the short-term lease of office space for an
off-site sales force. Depreciation and amortization remained relatively flat at
$75,495 and $73,538 and $71,185 for the third, second and first quarters,
respectively. Legal and professional fees were $35,828, an increase from
$23,451 for the second quarter primarily due to fees incurred for preparation
of the Company's 1995 corporate income tax return, and a decrease from $120,562
for the first quarter which consisted primarily of fees and expenses incurred
during March in connection with the final resolution of the employment
agreement with a former employee. Merger, acquisition and consulting expenses,
consisting of fees and expenses related to the reverse merger and the new
offering of stock to the public market, were $152,847, a decrease of
approximately 43% from $271,617 for the second quarter, and an increase from
$114,997 for the first quarter of 1996.
Income Taxes
The Company recorded an income tax benefit of $298,082 for the third quarter,
compared to $490,943 and $256,608 for the second and first quarters of 1996,
respectively. This represents the amount of tax that can be recaptured for
previous taxes paid based on a net operating loss carryback of approximately
$3,000,000 ($900,000, $1,570,000 and $530,000 generated in the third, second
and first quarters, respectively) for the nine months ended September 30, 1996,
and would only be realized should the loss be recognized at the end of the
year, which is expected to be the case.
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
Liquidity and Capital Resources
Net cash used by operating activities was $1,771,197 for the nine months ended
September 30, 1996, which resulted primarily from the operating loss. This
compares to net cash provided by operating activities of $2,683,179, for the
nine months ended September 30, 1995, attributable primarily to net income. At
September 30, 1996, the Company had net working capital of $43,236, a decrease
of $651,804 for the nine months then ended.
At September 30, 1996, the Company had a total of $713,161 in outstanding
accounts receivable ($579,466 billed and $133,695 unbilled), all of which is
considered fully collectible.
At September 30, 1996, the Company had no bank financing or other debt
obligations outstanding, other than the $4,876 note payable related to vehicle
financing which is due to be fully repaid in February 1997. During September
1996, the Company arranged for a short-term loan in the amount of $100,000,
principal payable upon demand plus accrued interest at 12% per annum in
addition to a loan fee in the amount of $27,500.
September 30, 1996, the Company owed $539,418 for income taxes related to 1995
operations which was due March 15, 1996, and is presently past due. The Company
has not paid this expense, nor has it accrued any interest or penalties related
to this expense, due to anticipating a net operating loss for the year ended
December 31, 1996, which will be carried back to generate a refund receivable
for prior taxes paid and utilized to offset the 1995 tax liability.
During the three months ended September 30, 1996, the Company funded its
operations primarily from the collection of $262,875 in connection with the
issuance of common stock, from the collection of accounts receivable
outstanding and the receipt of sales revenues (of $212,899), from the increase
in trade accounts payable (of $683,730), from the receipt of the $100,000
short-term loan, and from the receipt of $72,000 in advances from
officer/shareholders.
Currently, the Company is experiencing very serious cash flow difficulties
which could present a going concern problem if it is not rectified in the short
term. One Up intends to continue funding its operating activities through the
issuance of stock, through the collection of outstanding accounts receivable,
and through the receipt of customer deposits as large-scale migration contracts
are closed. One Up is actively working with trade creditors to postpone the
payment of accounts payable, or offset a portion of certain payables by issuing
stock to a select group of trade creditors, and has obtained short-term loans
from both officer/shareholders and other outside sources. Also, in an effort to
minimize expenses, the Company instituted a comprehensive cost control program
early in the third quarter of 1996, which included reducing the annual salaries
of the president and two other employees from a combined total of over $395,000
to only $36,000 for the remainder of 1996. In addition, One Up is actively
discussing
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
and negotiating with various outside sources for bank financing, private
placement, venture capital, investment capital and other financing
alternatives. There is no assurance from any entity that, if the Company seeks
additional financing from any of these sources, such financing would be
available upon acceptable terms, if at all.
The cash flow difficulties currently being experienced by the Company have been
alleviated somewhat by the Regulation S Offering (the "Offering") for which a
partial closing occurred on November 12, 1996. To date, the Company has received
proceeds in the amount of $217,500, net of Placement Agent commissions and
expenses, relating to the issuance of Debentures. The Company has been informed
by the Placement Agent that further subscriptions are likely, although no
assurances can be given regarding such additional subscriptions. Furthermore,
the Company anticipates that the Offering closing date will be extended past
November 15, 1996.
Of the proceeds received to date, the Company will use approximately $115,000
for the November 15, 1996, employee payroll with the balance to be used to pay
off a short-term loan, including accrued fees and interest expense related
thereto. In addition, the Company has needs for $600,000 to pay outstanding
accounts payable (approximately $500,000 of which have been due for more than
60 days), $480,000 to put towards ongoing operations, and $35,000 to put
towards the hiring of solution architects. The Company plans to use any
additional proceeds received relating to the issuance of Debentures for the
aforementioned expenditures; however, no assurances can be given regarding the
receipt of such additional proceeds. If the company does not receive the full
subscription amount for $1,500,000 aggregate principal amount of Debentures,
the cash flow difficulties as previously discussed will remain.
It is probable that, based upon current levels of operations and revenues, the
Company will require additional capital some time during the first six months
of 1997 to continue such operations. A portion of the net proceeds of the
Offering will be used to recruit solutions architects. Management believes that
by hiring qualified solutions architects, the Company will be able to increase
its revenue stream to the point that additional financing is not necessary, but
there can be no assurances that such increase in revenues will occur. In order
to support growth and to open new markets, the Company anticipates that it will
require additional capital beyond that provided through the Offering and beyond
that anticipated by the first sentence of this paragraph. Accordingly, the
Company may offer other securities, including debt or equity, with terms,
conditions and preferences different from those offered pursuant to the
Offering. No assurances can be given concerning the terms or conditions of a
future financing, or whether financing will be available on favorable terms or
at all when required by the Company.
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1996 (CONTINUED)
Projections
This Form 10-QSB contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in or incorporated by reference into
this Form 10-QSB, are forward-looking statements. In addition, when used in
this document, the words "anticipate," "estimate," "project" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove to have
been correct.
Among the key factors that could cause actual results to differ materially from
expectations, estimates of costs, projected results or anticipated results are
that the Company will be unable to generate sufficient cash flows to fund
operations or to obtain additional financing on favorable terms, the risk that
the Company will be unable to effectively penetrate the large corporate market
for migration services, and risk of unfavorable changes in economic and
industry conditions, as well as changes in regulatory requirements. The Company
has also made certain assumptions relating to the outcome of various
commercial, price and incentive items relating to its operations and the
industry generally. All subsequent written or oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the factors described above.
As a result of recently closing several contracts totaling $1,500,000, two of
which are with Fortune 100 companies, the Company estimates that it will post
revenues of approximately $1,100,000 for the fourth quarter of 1996. This
represents an increase of over $150,000 (or more than 16%) from the third
quarter, $475,000 (or 76%) over the second quarter, and $640,000 (or 139%) over
the first quarter of 1996. The revenue estimate for the fourth quarter of 1996
is based solely on current business for which contracts have already been
executed and the sale is closed.
Included in the aforementioned estimates are several contracts for the initial
sizing and analysis phase projects, which will result in formal proposals being
tendered. These proposals represent potential large-scale migration efforts
exceeding $7,500,000. Additionally, the aggregate value of all opportunities
currently being pursued through the Company's new sales strategy and process
currently exceeds $15,000,000.
While the Company is aggressively pursuing this sales potential, there is no
guarantee that any of these opportunities will result in a closed/booked sale.
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) A Statement of Computations of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1996 1995 1996 1995
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (583,381) $ (497,366) $(1,983,851) $ 3,064,669
========================================================
Weighted average number of common
shares outstanding during the period 17,130,845 12,997,781 16,126,025 12,997,781
Net effect of conversion of convertible preferred
shares outstanding during the period - 37,019 - 37,019
--------------------------------------------------------
Shares used for computation 17,130,845 13,034,800 16,126,025 13,034,800
========================================================
Net earnings (loss) per common share $ (0.03) $ (0.04) $ (0.12) $ 0.23
========================================================
</TABLE>
Note: Fully diluted and primary calculations are the same.
<PAGE> 25
SIGNATURES
Pursuant with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ONE UP CORPORATION
(Registrant)
BY: /s/ RICHARD G. DEWS
---------------------------------
Richard G. Dews, President
Dated: November 14, 1996
-----------------------
<PAGE> 26
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ONE UP
CORPORATION INTERIM CONSOLIDATED FINANCIAL STATEMENTS, SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 38,139
<SECURITIES> 0
<RECEIVABLES> 713,161
<ALLOWANCES> 0
<INVENTORY> 0
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0
0
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</TABLE>
