<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
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 June 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 [ ] No [X]
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 October 18, 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 June 30, 1996, and December 31, 1995
Statements of Operations for the three months and six months
ended June 30, 1996 and 1995
Statements of Cash Flows for the six months ended
June 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
Results of Operations:
Comparison of the Three Months Ended June 30, 1996 and 1995
Comparison of the Six Months Ended June 30, 1996 and 1995
Comparison of the 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
(b) Reports on Form 8-K
SIGNATURES
<PAGE> 3
ONE UP CORPORATION
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 06/30/96 12/31/95
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 169,670 $ 713,421
Accounts receivable - billed, net of allowance for
doubtful accounts of $0 and $85,000, respectively 107,765 491,819
Accounts receivable - unbilled 142,869 -
Shareholder advance 2,356 345,035
Income tax refund receivable 714,968 -
Prepaid consulting fees 386,937
Other current assets 7,458 14,984
----------- ----------
Total current assets 1,532,023 1,565,259
PROPERTY AND EQUIPMENT, NET 989,792 1,174,609
OTHER ASSETS
Shareholder advance, net of current portion - 690,072
Other assets 29,684 38,098
----------- ----------
Total other assets 29,684 728,170
----------- ----------
Total Assets $ 2,551,499 $3,468,038
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 7,576 $ 10,932
Accounts payable 305,798 176,685
Accrued expenses 251,449 79,388
Customer deposits 67,614 -
Current income taxes payable 539,418 603,214
Deferred income taxes, net 80,140 109,287
----------- ----------
Total current liabilities 1,251,995 979,506
LONG-TERM LIABILITIES
Long-term portion of note payable - 1,872
Deferred income taxes 21,575 18,269
Other liabilities - 1,840
----------- ----------
Total long-term liabilities 21,575 21,981
MINORITY INTEREST 6,149 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 789,970 144,220
Additional paid-in capital 712,185 77,936
Treasury stock, at cost (1,068,629) -
Retained earnings 838,254 2,238,724
----------- ----------
Total stockholders' equity 1,271,780 2,460,880
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,551,499 $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 Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1996 1995 1996 1995
------------------------ --------------------------
<S> <C> <C> <C> <C>
REVENUES $ 621,641 $3,740,926 $ 1,081,615 $7,942,203
COSTS AND EXPENSES
Salaries and benefits 792,809 801,268 1,436,424 1,547,307
General and administrative 264,622 169,652 331,559 268,541
Advertising and marketing 46,691 90,606 52,697 137,604
Product costs - 7,080 1,028 11,442
Travel 205,770 91,953 264,810 133,670
Contract labor 192,672 170,647 302,951 282,492
Rent 109,022 44,880 196,852 92,780
Depreciation and amortization 73,538 44,560 144,723 87,160
Insurance 3,471 60,083 7,115 104,124
Legal and professional fees 23,451 25,086 144,013 43,746
Merger, acquisition and consulting expenses 271,617 - 386,614 -
---------- ---------- ----------- ----------
Total operating expenses 1,983,663 1,505,815 3,268,786 2,708,866
---------- ---------- ----------- ----------
Income (loss) from operations (1,362,022) 2,235,111 (2,187,171) 5,233,337
OTHER INCOME (EXPENSE)
Interest income 18,250 32,062 39,960 45,452
Interest expense (148) (232) (332) (780)
Sublease income - 12,531 - 19,806
Other income - (463) - 15,770
Royalty fees - - - (25,000)
---------- ---------- ----------- ----------
Total other income (expense) 18,102 43,898 39,628 55,248
Minority interest in income (loss) of
consolidated subsidiary 327 1,838 (478) 1,226
---------- ---------- ----------- ----------
Income (loss) before income taxes (1,343,593) 2,280,847 (2,148,021) 5,289,811
Income taxes
Current income tax expense (benefit) (466,907) 696,682 (721,710) 1,727,776
Deferred income tax benefit (24,036) - (25,841) -
---------- ---------- ----------- ----------
(490,943) 696,682 (747,551) 1,727,776
---------- ---------- ----------- ----------
Net income (loss) $ (852,650) $1,584,165 $(1,400,470) $3,562,035
========== ========== =========== ==========
Net income (loss) per common share $ (0.05) $ 0.12 $ (0.09) $ 0.27
========== ========== =========== ==========
Weighted average common shares and common
equivalents outstanding 17,321,777 13,034,800 15,618,095 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 Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,400,470) $ 3,562,035
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 144,723 87,160
Minority interest 478 (1,226)
Stock compensation expense 67,000 -
Merger, acquisition and consulting expenses 180,312 -
Deferred income tax expense (benefit) (25,841) -
Change in assets and liabilities:
(Increase) decrease in accounts receivable 384,054 (22,165)
Increase in unbilled revenue (142,869) -
Increase in shareholder advance (35,878) (987,474)
Increase in income tax refund receivable (714,968) -
(Increase) decrease in other current assets 7,527 (3,095)
Decrease in other assets 2,500 -
Increase in accounts payable
129,113 166,124
Increase in accrued expenses
172,061 1,087
Increase (decrease) in income taxes payable (63,796) 1,222,145
Increase in customer deposits 67,614 4,177
Decrease in other long-term liabilities (1,840) (546)
-----------------------------
Total adjustments 170,190 466,187
-----------------------------
Net cash provided (used) by operating activities (1,230,280) 4,028,222
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (63,357) (957,375)
Rebate from lessor for leasehold improvements 109,365 -
-----------------------------
Net cash provided (used) in investing activities 46,008 (957,375)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of stock 645,750 -
Repayment of notes payable (5,229) (3,982)
-----------------------------
Net cash provided (used) in financing activities 640,521 (3,982)
-----------------------------
Net increase (decrease) in cash (543,751) 3,066,865
Cash - beginning
713,421 464,036
Cash - ending $ 169,670 $ 3,530,901
-----------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 332 $ 780
-----------------------------
Income taxes paid $ 55,594 $ 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
June 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 June 30,
1996, and the results of operations and cash flows for the six months ended
June 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)
June 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. INCOME TAXES
Deferred tax assets and liabilities at June 30, 1996, and December 31, 1995,
consist of the following:
<TABLE>
<CAPTION>
06/30/96 12/31/95
-------- ----------
<S> <C> <C>
Current deferred tax asset $ 1,498 $ 28,900
Current deferred tax liability (81,638) (138,187)
-------- ----------
Net cur rent deferred tax asset $(80,140) $ (109,287)
======== ==========
Noncurrent deferred tax asset $ - $ -
Noncurrent deferred tax liability (21,575) (18,269)
-------- ----------
Net noncurrent deferred tax liability $(21,575) $ (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.
At June 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 June 30, 1996, the Company has recorded an income tax receivable of
$714,968 relating to a net operating loss carryforward, generated during the
first six months of 1996, of approximately $2,100,000, which could be utilized
by carrying back to prior periods or be offset
<PAGE> 8
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
June 30, 1996
(Unaudited)
NOTE 4. INCOME TAXES (CONTINUED)
against future taxable income. Any net operating loss carryforward generated
for the year ended December 31, 1996, will expire in 2011.
NOTE 5. 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 six 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.
Effective June 14, 1996, pursuant to a meeting of the Board of Directors, the
Company received into its treasury, from its President/CEO/majority
shareholder, 854,903 common shares, valued at $1.25 per share, in exchange for
retirement of the $1,068,629 shareholder advances (comprised of $984,013
principal advanced to the key employee during the year ended December 31, 1995,
plus $84,616 accrued and unpaid interest earned on the advance through June 14,
1996).
NOTE 6. STOCKHOLDERS EQUITY AND STOCK OPTIONS
The Company entered into various consulting agreements which included the
issuance of common shares during the three months ended June 30, 1996, as
follows. The value of each consulting agreement is amortized over the life of
the individual contract.
i) Effective April 10, 1996, pursuant to various consulting agreements
for accounting, financial and legal services provided from February 29,
1996, to February 28, 1997, and valued at $91,000, the Company issued
1,365,000 shares of common stock on a post-split basis (910,000 shares of
common stock on a pre-split basis).
ii) Effective April 10, 1996, pursuant to a consulting agreement for
accounting and financial services provided from March 29, 1996, to March
28, 1997, and valued at $50,000, the Company issued 40,000 shares of common
stock.
iii) Effective April 17, 1996, pursuant to a consulting agreement
for legal services provided from April 15, 1996 to October 15, 1996, and
valued at $12,500, the Company issued 10,000 shares of common stock.
<PAGE> 9
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
June 30, 1996
(Unaudited)
NOTE 6. STOCKHOLDERS EQUITY AND STOCK OPTIONS (CONTINUED)
iv) Effective April 17, 1996, pursuant to a consulting agreement for
services provided from April 8, 1996, to April 7, 1997, and valued at
$13,750, the Company issued 11,000 shares of common stock. In addition,
the Company granted warrants to purchase up to 800,000 common shares at per
share prices ranging from $1.00 to $2.50. Currently, only 400,000 warrants
have been exercised, for which 400,000 shares of common stock were issued.
The remaining 400,000 warrants were not exercised and expired.
v) Effective June 27, 1996, pursuant to a consulting agreement for
services provided from January 5, 1996, to June 30, 1997, and valued at
$375,000, the Company issued 300,000 shares of common stock.
vi) Effective June 27, 1996, pursuant to a consulting agreement for
services provided from January 5, 1996, to December 31, 1996, and valued at
$25,000, the Company issued 20,000 shares of common stock.
Effective April 18, 1996, two employees of the Company purchased 91,000 shares
of restricted common stock at per share prices ranging from $1.50 to $1.75.
NOTE 7. SUBSEQUENT EVENTS
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.
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.
<PAGE> 10
ONE UP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
June 30, 1996
(Unaudited)
NOTE 7. SUBSEQUENT EVENTS (CONTINUED)
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.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 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> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 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 six 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 half of 1996. While the perception of the magnitude of the
marketplace has not changed, 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 is capabilities to a
knowledgeable and enthusiastic technical audience, or to third party vendor
channels, it struggled with selling to the decision maker.
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
Based on the experiences gained during the first six 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 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 third and fourth quarters
of 1996, the Company will continue to refine and update the sales model.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
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 second quarters
ended June 30, 1996 and 1995, and for the six months ended June 30, 1996 and
1995. During the first six 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
second quarters ended June 30, 1996 and 1995, and for the six months ended June
30, 1996 and 1995, management has included a discussion comparing the second
and first quarters of 1996. In the opinion of management, it is important to
note the improvement in business operations in the second quarter relative to
the first quarter. Management believes this improvement is reflective of the
restructuring activities underway since January 1996 to expand the Company's
marketing and sales program after the expiration of the IBM contract. Most
notably, One Up revenues increased approximately 35% to $621,641 for the second
quarter compared to $459,974 for the first quarter of 1996.
Management believes that the increase in net loss to $852,650 during the second
quarter, compared to only $547,820 for the first quarter of 1996, was in part
due to 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. Also,
the Company determined that a more extended sales cycle of four to six months
would be required to close a typical large-scale migration contract, rather
than the two to three months originally forecast. Another factor was increased
labor-related costs and expenses as migration and sales staffing were increased
to support the Company's new business strategy. In addition, management was
occupied for most of the second quarter 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.
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
Although the Company experienced a significant increase in net loss for the
second quarter of 1996, 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 half of 1996, although no
assurances can be given regarding such improvement.
Comparison of the Three Months Ended June 30, 1996 and 1995
Revenues
During the three months ended June 30, 1996, One Up revenues decreased to
$621,641 compared to $3,740,926 in the three months ended June 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 32% to $1,983,663 for
the three months ended June 30, 1996, compared to $1,505,815 for the three
months ended June 30, 1995. As a percentage of revenues, total operating
expenses increased to 319% for the second quarter of 1996, compared to only 40%
for the second quarter 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 4% to
$988,952 compared to $1,031,998, respectively for the three months ended June
30, 1996 and 1995, primarily due to a decrease in the staffing level after
expiration of the IBM Area-10 contract. General and administrative expenses
increased to $264,622 from $169,652, 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 $46,691 from $97,686, 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
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
$205,770 from $91,953, resulting primarily from increased sales calls being
made as the Company implemented its new business strategy. Rent expense
increased to $109,022 for the second quarter of 1996, compared to $44,880 in
the second quarter 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
$73,538 in the three months ended June 30, 1996, compared to $44,560 in the
three months ended June 30, 1995, attributable to expenditures in excess of
$900,000 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 professional fees decreased to $23,451 in
the three months ended June 30, 1996, compared to $25,086 in the three months
ended June 30, 1995. Merger, acquisition and consulting expenses totaling
$271,617 (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 14% of total operating expenses for the second quarter of 1996.
Income Taxes
The Company recorded an income tax benefit of $490,943 for the three months
ended June 30, 1996. This represents the amount of tax that can be recaptured
for previous income taxes paid based on a net operating loss carryforward of
approximately $1,570,000 for the three months ended June 30, 1996. Any such
recapture would only be realized should the Company post a net operating loss
for the year of 1996.
Comparison of the Six Months Ended June 30, 1996 and 1995
Revenues
During the six months ended June 30, 1996, One Up revenues were $1,081,615
compared to $7,942,203 in the six months ended June 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.
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
Operating Expenses
One Up's total operating expenses increased approximately 21% to $3,268,786 for
the six months ended June 30, 1996, compared to $2,708,866 for the six months
ended June 30, 1995. As a percentage of revenues, total operating expenses
increased to 302% for the first half of 1996, compared to only 34% for the
first half 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 10%
to $1,746,490 compared to $1,933,923, respectively for the six months ended
June 30, 1996 and 1995, primarily due to a decrease in the staffing level after
expiration of the IBM Area-10 contract. General and administrative expenses
increased to $331,559 from $268,541, primarily due to 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
$53,725 from $149,046, 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 $264,810 from $133,670, resulting primarily from increased
sales calls being made as the Company implemented its new business strategy.
Rent expense increased to $196,852 for the first half of 1996, compared to
$92,780 in the first half 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 $144,723 in the six months ended June 30, 1996,
compared to $87,160 in the six months ended June 30, 1995, attributable to
expenditures in excess of $900,000 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 professional
fees increased to $144,013 in the six months ended June 30, 1996, compared to
$43,746 in the six months ended June 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 $386,614 (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 12% of total operating expenses for the first half of
1996.
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
Income Taxes
The Company recorded an income tax benefit of $747,551 for the six months ended
June 30, 1996. This represents the amount of tax that can be recaptured for
previous income taxes paid based on a net operating loss carryforward of
approximately $2,100,000 for the six months ended June 30, 1996. Any such
recapture would only be realized should the Company post a net operating loss
for the year of 1996.
Comparison of 2nd Quarter 1996 to 1st Quarter 1996
Revenues
During the second quarter of 1996, One Up revenues increased approximately 35%
to $621,641 compared to $459,974 for the first quarter of 1996.
Operating Expenses
One Up's total operating expenses increased approximately 54% to $1,983,663
during the second quarter of 1996, compared to $1,285,123 for the first quarter
of 1996. As a percentage of revenues, total operating expenses increased to
319% for the second quarter of 1996, compared to 279% for the first quarter of
1996.
Labor costs, including benefits and insurance, increased by approximately 31%
to $988,952 compared to $757,538, respectively for the second and first
quarters of 1996, primarily due to increased staffing in migration support, as
well as the addition of sales and upper management personnel. General and
administrative expenses increased to $264,622 from $66,937, primarily due to
increased expenditures for computer-related expenses (related to hardware and
software enhancements) and employment fees (related to recruiting costs for
several key positions). Advertising, marketing and product costs increased to
$46,691 from $7,034, primarily due to increased expenditures in the area of
public relations. Travel increased to $205,770 from $59,040, resulting
primarily from increased sales calls being made as the Company continued to
carry out its new business strategy. Rent expense increased to $109,022 from
$87,830, 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 $73,538 and $71,185, respectively. Legal and professional
fees decreased to $23,451 from $120,562, primarily due to 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
increased approximately 136% to $271,617 from only $114,997 for the second and
first quarters of 1996, respectively, due to
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
the extraordinary fees and expenses related to the reverse merger and the new
offering of stock to the public market.
Income Taxes
The Company recorded an income tax benefit of $490,943 for the second quarter
and $256,608 for the first quarter of 1996. This represents the amount of tax
that can be recaptured for previous taxes paid based on a net operating loss
carryforward of approximately $2,100,000 ($1,570,000 generated in the second
quarter and $530,000 generated in the first quarter) for the six months ended
June 30, 1996, and would only be realized should the loss be carried forward to
the end of the year.
Liquidity and Capital Resources
Net cash used by operating activities was $1,230,280 for the six months ended
June 30, 1996, which resulted primarily from the operating loss. This compares
to net cash provided by operating activities of $4,028,222, for the six months
ended June 30, 1995, attributable primarily to net income. At June 30, 1996,
the Company had net working capital of $280,028, a decrease of $305,725 for the
six months, then ended.
At June 30, 1996, the Company had a total of $250,634 in outstanding accounts
receivable ($107,765 billed and $142,869 unbilled), all of which is considered
fully collectible.
At June 30, 1996, the Company had no bank financing or other debt obligations
outstanding, other than the $7,576 note payable related to vehicle financing
which is due to be fully repaid in February 1997.
At June 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 June 30, 1996, the Company funded its operations
primarily from the collection of $366,750 in connection with the issuance of
common stock, from the receipt of a $109,365 rebate from its lessor for
leasehold improvements, from the collection of accounts receivable outstanding
and the receipt of sales revenues (of $609,245), and from the increase in trade
accounts payable (of $201,316) and accrued expenses (of $20,786).
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
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 officer/shareholders. 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 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.
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.
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1996 (CONTINUED)
The Company currently has a contract backlog of approximately $850,000 for the
third quarter of 1996 and $850,000 for the fourth quarter of 1996, which
includes provisions for contract incentives of approximately $800,000. The
Company estimates that it will post revenues of approximately $890,000 for the
third quarter of 1996, which represents an increase of over $268,000 (or more
than 43%) from the second quarter of 1996 and an increase of over $430,000 (or
more than 93%) from the first quarter of 1996. For the fourth quarter of 1996,
the Company anticipates to continue this trend, estimating revenues for the
fourth quarter will exceed $900,000. These revenue estimates for the third and
fourth quarters of 1996 are based only on current business for which contracts
have already been executed and the sale is closed.
Included in the aforementioned backlog 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 $9,000,000. 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> 22
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 Six Months Ended
1996 1995 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (852,650) $ 1,584,165 $(1,400,470) $ 3,562,035
==========================================================
Weighted average number of common
shares outstanding during the period 17,321,777 12,997,781 15,618,095 12,997,781
Net effect of conversion of convertible
preferred shares outstanding during the period - 37,019 - 37,019
----------------------------------------------------------
Shares used for computation 17,321,777 13,034,800 15,618,095 13,034,800
==========================================================
Net earnings (loss) per common share $ (0.05) $ 0.12 $ (0.09) $ 0.27
==========================================================
</TABLE>
Note: Fully diluted and Primary Calculation are the same.
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
(I) Form 8-K Current Report dated June 4, 1996, changing
registrant's certifying accountant.
(II) Form 8-K-A Amendment to Current Report dated June 18, 1996,
pertaining to change in registrant's certifying accountant.
<PAGE> 24
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, PRESIDENT
---------------------------------
Richard G. Dews, President
Dated: October 28, 1996
------------------
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
