<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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 33-28809-A
MIGRATEC, INC.
(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.)
12801 NORTH STEMMONS FREEWAY, SUITE 710, FARMERS BRANCH, TEXAS 75234
(Address of principal executive offices)
(972) 969-0300
(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 August 14, 1998, the issuer had
43,016,205 shares of common stock, no par value, outstanding.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at June 30, 1998, and December 31, 1997
Statements of Operations for the three months and six months ended
June 30, 1998 and 1997
Statements of Stockholders' Equity (Deficit) for the six months ended
June 30, 1998 and 1997
Statements of Cash Flows for the six months ended
June 30, 1998 and 1997
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview: Introduction, Background and Product Strategy
Results of Operations:
Comparison of the Three Months Ended June 30, 1998 and 1997
Comparison of the Six Months Ended June 30, 1998 and 1997
Liquidity and Capital Resources
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
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<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Balance Sheets
June 30, 1998, and December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 06/30/98 12/31/97
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 619,333 $ 4,076
Accounts receivable, net of allowance for doubtful
accounts of $0 and $123,720, respectively
249,616 394,755
Shareholder advance
3,766 3,766
Restricted cash -- 28,150
Deferred tax asset
9,024 9,024
Other current assets
20,428 16,600
----------- -----------
Total current assets 902,167 456,371
PROPERTY AND EQUIPMENT, NET 347,605 452,555
OTHER ASSETS
Financing fees 69,397 101,382
Other assets 46,548 21,548
----------- -----------
Total other assets 115,945 122,930
----------- -----------
Total Assets $ 1,365,717 $ 1,031,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ -- $ 112,963
Notes payable -- 275,000
Transfer liability -- 187,500
Accounts payable 296,807 779,904
Accrued expenses 250,972 404,258
Obligation under capital lease 25,714 25,267
Customer deposits in excess of unbilled receivables -- 171,365
Shareholder advances 1,356 63,276
----------- -----------
Total current liabilities 574,849 2,019,533
LONG-TERM LIABILITIES
Long-term portion of notes payable, net of discount of $25,369 and
$76,077, respectively 1,087,131 1,036,423
Long-term portion of obligation under capital lease 27,081 41,388
Deferred tax liability 9,024 9,024
----------- -----------
Total long-term liabilities 1,123,236 1,086,835
MINORITY INTEREST (3,752) (3,752)
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE 12% PREFERRED STOCK; $1,000 PAR VALUE; 1,000,000 -- --
SHARES AUTHORIZED; REDEEMABLE AT PAR VALUE PLUS CUMULATIVE DIVIDENDS;
NONE ISSUED OR OUTSTANDING
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; no par value; 200,000,000 shares authorized; 53,271,108 and
30,199,154 shares issued at June 30, 1998, and December 31, 1997,
respectively
6,765,128 2,197,640
Additional paid-in capital 796,263 796,263
Treasury stock, at cost (10,254,903 and 854,903 shares, respectively) (1,808,629) (1,068,629)
Retained earnings (accumulated deficit) (6,081,378) (3,996,034)
----------- -----------
Total stockholders' equity (deficit) (328,616) (2,070,760)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,365,717 $ 1,031,856
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE> 4
ONE UP CORPORATION AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Operations
Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 315,411 $ 23,219 $ 774,440 $ 712,061
Costs and expenses
Salaries and benefits 567,359 441,419 1,078,635 1,041,742
Contract labor 173,256 130,073 473,437 189,291
General and administrative 69,327 142,600 131,190 197,172
Advertising and marketing 43,811 4,665 60,779 5,076
Travel 8,803 4,003 11,455 18,791
Rent 31,950 30,732 63,900 51,933
Depreciation and amortization 48,900 41,274 97,800 113,554
Legal and professional fees 65,464 64,019 369,005 155,361
Year 2000 program costs 321,585 -- 637,629 --
Bad debt expense -- -- 1,725 123,720
Loss on release of assets -- -- -- 284,573
Provision for contract losses -- 182,061 -- 182,061
------------ ------------ ------------ ------------
Total operating expenses 1,330,455 1,040,846 2,925,555 2,363,274
------------ ------------ ------------ ------------
Loss from operations (1,015,044) (1,017,627) (2,151,115) (1,651,213)
Other income (expense)
Interest income 5,385 245 5,530 741
Gain (loss) on sale of assets (2,950) -- (2,950) 892
Interest expense (57,790) (9,002) (161,168) (25,989)
Financing fees (23,988) -- (31,985) (68,250)
------------ ------------ ------------ ------------
Total other income (expense) (79,343) (8,757) (190,573) (92,606)
Minority interest in (income) loss of
consolidated subsidiary -- -- -- 9,384
------------ ------------ ------------ ------------
Loss before income taxes and
extraordinary item (1,094,387) (1,026,384) (2,341,688) (1,734,435)
Provision for income tax expense (benefit) -- -- -- 23,182
------------ ------------ ------------ ------------
Net loss before extraordinary item (1,094,387) (1,026,384) (2,341,688) (1,757,617)
Extraordinary income from forgiveness
of debt (net of income taxes of $0) 251,094 -- 256,344 --
------------ ------------ ------------ ------------
Net loss $ (843,293) $ (1,026,384) $ (2,085,344) $ (1,757,617)
============ ============ ============ ============
Loss before income taxes and extraordinary
item per common share $ (0.026) $ (0.037) $ (0.064) $ (0.068)
============ ============ ============ ============
Extraordinary income per common share $ 0.006 $ -- $ 0.007 $ --
============ ============ ============ ============
Net loss per common share (basic and
diluted) $ (0.020) $ (0.037) $ (0.057) $ (0.069)
============ ============ ============ ============
Weighted average common shares and common
equivalents outstanding 41,987,145 27,452,251 36,442,256 25,527,525
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
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<PAGE> 5
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Stockholders' Equity (Deficit)
Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Common Preferred Preferred
Stock Stock Stock Stock
Issued Amount Issued Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1, 1997 18,002,253 $1,166,960 -- $ --
Issuance of stock to employees under the
Employee Stock Purchase Plan for cash 13,367 5,080 -- --
Issuance of stock in connection with the
conversion of debentures 10,291,534 525,000 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at June 30, 1997 28,307,154 $1,697,040 -- $ --
========== ========== ========== ==========
Balance at January 1, 1998 30,199,154 $2,197,640 -- $ --
Issuance of stock in connection with the
exercise of warrants for cash 22,500 225 -- --
Issuance of stock in connection with
private offerings for cash 22,627,500 4,525,500 -- --
Treasury stock received in exchange for
cash -- -- -- --
Issuance of stock for services rendered 390,454 30,738 -- --
Issuance of stock in connection with the
exercise of options for cash 31,500 11,025 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at June 30, 1998 53,271,108 $6,765,128 -- $ --
========== ========== ========== ==========
<CAPTION>
Retained
Treasury Additional Earnings
Treasury Stock Paid-in (Accumulated
Stock Amount Capital Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 (854,903) $(1,068,629) $ 712,186 $(1,478,428) $ (667,911)
Issuance of stock to employees under the
Employee Stock Purchase Plan for cash -- -- -- -- 5,080
Issuance of stock in connection with the
conversion of debentures -- -- -- -- 525,000
Net loss -- -- -- (1,757,617) (1,757,617)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 (854,903) $(1,068,629) $ 712,186 $(3,236,045) $(1,895,448)
=========== =========== =========== =========== ===========
Balance at January 1, 1998 (854,903) $(1,068,629) $ 796,263 $(3,996,034) $(2,070,760)
Issuance of stock in connection with the
exercise of warrants for cash -- -- -- -- 225
Issuance of stock in connection with
private offerings for cash -- -- -- -- 4,525,500
Treasury stock received in exchange for
cash (9,400,000) (740,000) -- -- (740,000)
Issuance of stock for services rendered -- -- -- -- 30,738
Issuance of stock in connection with the
exercise of options for cash -- -- -- -- 11,025
Net loss -- -- -- (2,085,344) (2,085,344)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 (10,254,903) $(1,808,629) $ 796,263 $(6,081,378) $ (328,616)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 6
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,085,344) $(1,757,617)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 97,800 113,554
Gain (loss) on sale of assets 2,950 (892)
Loss on release of assets -- 284,573
Assets given in lieu of wages -- 14,233
Bad debt expense 1,725 123,720
Financing fees 31,985 68,250
Amortization of discount 50,708 --
Common stock issued for services 30,738 --
Minority interest -- (9,384)
Change in assets and liabilities:
(Increase) decrease in accounts receivable 143,414 (84,568)
Decrease in unbilled revenue -- 163,970
Decrease in income tax refund receivable -- 507,733
Decrease in restricted cash 28,150 --
Increase in other current assets (3,828) (500)
Increase in other assets (25,000) (33,048)
Increase (decrease) in accounts payable (483,097) 247,743
Increase (decrease) in accrued expenses (153,286) 313,679
Decrease in customer deposits in excess of unbilled receivables (171,365) (294,619)
----------- -----------
Total adjustments (449,106) 1,414,444
----------- -----------
Net cash used by operating activities (2,534,450) (343,173)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of property and equipment 4,200 8,200
----------- -----------
Net cash provided in investing activities 4,200 8,200
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash overdraft (112,963) --
Proceeds from notes payable 704,000 350,000
Proceeds from transfer of accounts receivable with recourse 77,500 --
Proceeds from other debt financing -- 100,000
Proceeds from issuance of common stock 4,536,750 5,080
Payments under obligations of capital lease (13,860) --
Repayment of shareholder advances (61,920) (2,053)
Repayment of notes payable (979,000) (200,000)
Repayment of transfer liability (265,000) --
Purchase of treasury stock (740,000) --
----------- -----------
Net cash provided in financing activities 3,145,507 253,027
----------- -----------
Net increase (decrease) in cash 615,257 (81,946)
Cash - beginning 4,076 36,939
----------- -----------
Cash - ending $ 619,333 $ (45,007)
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 119,297 $ 9,797
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock in connection with the conversion of $ -- $ 525,000
debentures
=========== ===========
Equipment obtained under capital lease $ -- $ 101,379
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 7
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by MigraTEC, Inc., 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, 1998, and the results
of operations and cash flows for the six months ended June 30, 1998 and 1997.
The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1997, including the accompanying notes. The results of operations for the
interim period shown are not necessarily indicative of the results for the
entire fiscal year ending December 31, 1998.
NOTE 2. BUSINESS ACTIVITY
On February 29, 1996, MigraTEC, Inc. (formerly One Up Corporation) ("MigraTEC"),
a Texas corporation, entered into a reverse acquisition agreement with New York
Acquisitions, Inc., a publicly held "shell" Florida corporation. MigraTEC became
a wholly-owned subsidiary of the public company through the exchange of
11,337,432 shares on a post-split basis of the public company's common stock for
all of the outstanding stock of MigraTEC. The name New York Acquisitions, Inc.,
was amended to One Up Corporation.
Effective February 16, 1998, to better reflect its core business, the Company
changed its name from One Up Corporation to MigraTEC, Inc.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes new
guidance for the reporting and display of comprehensive income and its
components. In July 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement expands
certain reporting and disclosure requirements for segments from current
standards. In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not
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<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 1998
(Unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements (Continued)
change the measurement or recognition of those plans. The Company is not
required to adopt these Statements until December 1998 and does not expect the
adoption of these standards to result in material changes to previously reported
amounts.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The accounting
provisions for qualifying hedges allow a derivative's gains and losses to offset
related results on the hedged item in the income statement, and requires that
the Company must formally document, designate, and assess the effectiveness of
transactions that qualify for hedge accounting. The Company is not required to
adopt this Statement until January 2000. The Company has not determined its
method or timing of adopting this Statement or the impact on its financial
statements. However, when adopted this Statement could increase volatility in
reported earnings and other comprehensive income of the Company.
Reclassifications
Certain amounts recorded in prior periods have been reclassified to conform to
the current classification.
NOTE 4. GOING CONCERN UNCERTAINTY
As reflected in the accompanying consolidated financial statements, the Company
incurred a loss from continuing operations of $2,341,688 for the six months
ended June 30, 1998. The Company's continued existence and plans for future
growth are dependent in part upon its ability to obtain the capital necessary to
operate, primarily through the issuance of additional debt or equity, and in
part on its ability to effectively penetrate the market for software migration
services, related products, and Year 2000 software products and services. If the
Company is not able to achieve break-even, obtain additional or alternative
funding, or generate sufficient sales revenues in the near term, the Company
will be unable to continue as a going concern.
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<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 1998
(Unaudited)
NOTE 4. GOING CONCERN UNCERTAINTY (CONTINUED)
Recently, the Company began reengineering its business focus, shifting its
strategic approach to exploiting its technology through the development of
strategic relationships. To continue to fund its operations for 1998, the
Company successfully commenced two private offerings in March 1998 which, in the
opinion of management, yielded gross proceeds to the Company sufficient to fund
operations until such time that product revenues begin to ramp up. Management
anticipates that its efforts will move the Company forward with a focus on
achieving improved operating performance by the end of 1998. The anticipated
increase in revenues coupled with a continued emphasis on controlling costs
should position the Company to achieve improved results for 1999, although no
assurances can be given regarding such increase.
The financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or classification of
liabilities which may result from the inability of the Company to continue as a
going concern.
NOTE 5. STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS
Pursuant to the 1997 Stock Option Plan ("1997 Plan"), during the second quarter
of 1998, the Company has granted stock options to 28 employees to purchase an
aggregate of 447,600 shares of the Company's common stock with varying exercise
prices and terms. The options under the 1997 Plan are all considered
compensatory. The outstanding stock options issued expire from May 1, 2003,
through July 15, 2003.
Effective April 1, 1998, pursuant to the terms of a one year employment
agreement, the Company granted options to purchase 900,000 shares of the
Company's common stock at an exercise price of $0.20 per share to its Chief
Financial Officer. The options vest at the rate of 1/24 per month beginning
April 1, 1998, and are exercisable at vesting at any time during employment.
Effective April 30, 1998, the exercise price of 500,000 warrants (previously
granted to the Placement Agent for the Regulation S Offering, which commenced in
November 1996 to raise debt financing) was reduced from $0.50 to $0.40 per
share.
Effective May 1, 1998, the Company granted stock options to three officers to
purchase an aggregate of 9,000,000 shares of the Company's common stock at $0.20
per share. The options were 50% vested at May 1, 1998, and vest an additional
1/24 at the end of each month thereafter.
-9-
<PAGE> 10
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 1998
(Unaudited)
NOTE 5. STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS (CONTINUED)
Vested options are exercisable at any time during employment. These new options
replace those which had been previously granted, and have now been canceled,
during the second quarter of 1997 to the three officers at per share prices
ranging from $0.31 to $0.37, and which contained an anti-dilutive clause that
increased the number of options available for exercise upon recapitalization,
stock split, stock dividend, or issuance of stock below fair market value. These
new options contain no such anti-dilutive clause. In addition, the options
previously granted vested over a shorter period of time, and would have been
fully vested by June 13, 1999. At April 15, 1998, the number of options that
would have been available to the three officers pursuant to the canceled second
quarter 1997 grant totaled 6,010,859.
Effective May 1, 1998, the Company granted stock warrants to four directors to
purchase an aggregate of 4,300,000 shares of the Company's common stock at $0.20
per share. The warrants vest 1/24 at the end of each month beginning May 31,
1998, and expire on May 31, 2002. Approximately one-fourth of these new warrants
replace those that had been previously granted to the chairman of the board
during the second quarter of 1997. The warrants previously granted (which were
to purchase 50,000 shares of the Company's common stock at $0.35 per share, were
fully vested at date of grant, and expired after three years) have now been
canceled.
Effective May 29, 1998, the Company issued 31,500 shares of its common stock to
a former employee upon exercise of options previously granted to purchase shares
at $0.35 per share.
NOTE 6. SUBSEQUENT EVENTS
Effective July 1, 1998, the Company granted, to various individuals who had
either been involved as Placement Agents in the two March 1998 private stock
offerings or who had furnished consulting services to the Company, stock
warrants to purchase an aggregate of 2,147,750 shares of the Company's common
stock at $0.20 per share. The warrants are fully vested at the date of grant,
and are exercisable on or before July 1, 2001.
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 1998
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS DISCUSSED IN
THIS QUARTERLY REPORT ON FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF MIGRATEC, INC., AND ITS SUBSIDIARY
(COLLECTIVELY, THE "COMPANY"), MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE DISCUSSED WITH THE FORWARD-LOOKING STATEMENTS THROUGHOUT THIS
REPORT AND ARE SUMMARIZED IN THIS SECTION AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING
STATEMENTS - CAUTIONARY LANGUAGE."
OVERVIEW
INTRODUCTION
MigraTEC, Inc. (formerly New York Acquisitions, Inc.) was organized under the
laws of the state of Florida on February 24, 1989. The company was a development
stage enterprise until it acquired a privately-owned, Texas-based company on
February 29, 1996. At that time, MigraTEC, Inc. ("MigraTEC") (then a
privately-held Texas corporation) entered into a reverse acquisition agreement
with New York Acquisitions, Inc., a publicly-held "shell" Florida corporation.
MigraTEC became a wholly-owned subsidiary of the public company through the
exchange of 11,337,432 shares on a post-split basis of the public company's
common stock for all of the outstanding stock of MigraTEC. The name New York
Acquisitions, Inc., was amended to One Up Corporation and then subsequently to
MigraTEC, Inc. For accounting purposes, the reorganization of MigraTEC and the
public company is regarded as an acquisition by the public company of all of the
outstanding stock of MigraTEC, and is accounted for as a recapitalization of the
public company with MigraTEC as the acquirer (a reverse acquisition).
Accordingly, the historical financial statements are those of MigraTEC.
MigraTEC, Inc. (formerly known as One Up Corporation) (the "Company" or
"MigraTEC"), founded January 7, 1991, by Richard G. Dews, was incorporated in
1991. The initial focus of the business was to provide contract computer
programming education. Subsequently, several software products were developed
and sold, and the Company further diversified into consulting services and
migration assistance for clients wishing to migrate their software from the
Windows operating system to the IBM OS/2 platform. Identifying the need for an
automated migration technique, in 1993 the Company developed its first set of
software tools for that purpose, then, throughout the next three years,
continued to develop more advanced migration technologies and methodologies
designed to automate much of the migration process.
-11-
<PAGE> 12
BACKGROUND
MigraTEC, Inc. (the "Company" or "MigraTEC") is a provider of software products
and services which address both the Year 2000 ("Y2K") challenge and the need for
companies to migrate existing software applications to new and more efficient
hardware and software platforms.
Migration is the process of adapting an organization's current software
applications from an existing operating system to a new target operating system
in order to meet changing business requirements and utilize advancing
technology. Migration allows companies to retain the functionality and business
processes which they have developed in their existing software applications
while gaining the efficiencies which result from moving the software
applications to more advanced platforms. Migration avoids the business
interruption, retraining and re-engineering problems created when a software
application is totally replaced. Thus migration not only extends the productive
life of existing software applications, which have already been developed at
significant cost, but also preserves the logic and consistency of the existing
software application, ensuring continued ease of ongoing maintenance of the
software.
MigraTEC's software technology has been utilized in over 400 migration projects,
facilitated either directly by the Company or through a license of previous
technology of the Company to IBM. Successful migration projects performed by the
Company include Caterpillar Inc., Ameritech Inc., USAA Insurance, Duke Energy,
Bell Sygma, The Sabre Group Inc., Payless ShoeSource Inc., Group 1 Software
Europe Ltd. and AutoTester Inc., including follow-up projects at Duke Energy,
Bell Sygma, Ameritech and Sabre.
In 1997, a new management team was brought into the Company to implement a
turnaround plan based on further developing MigraTEC's proprietary "core"
software technology and establishing the Company as a "technology partner" of
large strategically positioned companies. Previously, the Company had placed an
emphasis on large-scale migration projects, focusing on migrations from systems
such as OS/2 to Windows and WindowsNT. Currently, however, MigraTEC is focused
on further developing its proprietary technology to serve as the foundation for
a "universal" migration software tool designed to facilitate the transition
between numerous computer languages and operating platforms.
MigraTEC's proprietary technology is designed to automate a significant amount
of the migration process by identifying critical code elements in the fields to
be migrated, thereby automating a high percentage of the changes required. In
June of 1998, the Company submitted a patent application covering the "core"
portion of its proprietary software technology. The Company's new management
group is committed to the further development and redesign of MigraTEC's
proprietary software technology so that it may be sold or utilized by service
organizations, third party resellers and distributors.
-12-
<PAGE> 13
CURRENT PRODUCTS AND SERVICES
MIGRATEC2000
The first "product" to which the Company has applied its redesigned technology
is MigraTEC2000, a Y2K software tool for client/server applications written in C
and C++. The Y2K problem arises from the widespread use of computer programs
which were programmed using two-digit year codes when calculating dates after
December 31, 1999. Many "mission critical" programs do not presently have the
ability to correctly interpret and apply date codes representing the year 2000
and later. "00" may be interpreted as the year 1900 instead of the year 2000
causing potentially massive information processing and reporting mistakes and
the malfunction of systems which are controlled by date codes. Industries and
software applications which may be particularly affected include those related
to financial services, insurance, transportation, health care, billing, planning
and scheduling, and represent billions of lines of code containing date-related
instructions which will need to be checked and remediated. Failure to correct
Y2K problems may result in significant portions of a company's business being
inoperable.
Originally, the Y2K issue was thought to be a "mainframe only" problem. This was
due primarily to the fact that most non-mainframe (client/server) programs had
been written within the past ten years, and, thus, were thought to be Y2K
compliant. However, in reality, a significant percentage of client/server
programs are not Y2K compliant. In that most companies have just recently begun
to recognize the potential for Y2K problems in the client/server area, they have
a limited amount of time in which to bring their programs into compliance.
With rapid technological changes occurring in today's marketplace, such as the
move to Windows and WindowsNT, the development of 64 bit processors, Y2K
compliance issues, and the advent of the introduction of the European Monetary
Unit, management believes that MigraTEC's proprietary software technology
represents an attractive resource for companies seeking access to technology
that will allow them to respond to these challenges. The Company's proprietary
migration software technology, including MigraTEC2000, has attracted the
interest of several service providers including Sun Microsystems, EDS, Keane
Inc. and CGN & Associates, as well as other concerns interested in partnering
opportunities. Recently, Deloitte & Touche, Keane Inc., Ernst & Young, EDS, and
several smaller companies have completed evaluations of "MigraTEC2000," the
Company's newly developed Y2K tool set. Each of these companies has indicated
that MigraTEC2000 is superior to the other tools they have examined which were
also designed for the remediation of client/server applications written in C and
C++.
MigraTEC2000 has been designed so that it can be used: (1) by MigraTEC to
provide a service for its business customers, (2) by individual businesses to
correct their own client/server software applications, or (3) by other service
providers for use in correcting the software applications of their customers.
-13-
<PAGE> 14
The Company's MigraTEC2000 software product utilizes a unique parsing technology
to perform the following: (1) an inventory of the current source code to ensure
that all lines of code in the application are present for analysis and
remediation, (2) an analysis of the code to ensure that all lines of code
containing Y2K date related fields have been identified, and (3) an automated
remediation of the code pursuant to parameters and instructions determined by
the client. The patent application filed by the Company was related to the
parsing technology incorporated into its MigraTEC2000 software product. Parsing
technology, which management believes is superior to scanning technologies, is a
technology that analyzes the structural relationships contained within computer
program code. The superiority that parsing technology achieves is in the
identification of not only the obvious names of program elements but also the
numerous and subtle ways in which those elements interact with each other to
produce secondary effects.
The Company believes that by concentrating on the further development of
"strategic partnerships" with large technology companies and service providers,
the Company can successfully leverage off of such partners' strategic market
positions and growing customer bases.
NEW PRODUCTS AND MARKET STRATEGY
The Company believes that the parsing technology, for which a patent application
has been filed, can be used as the nucleus for many "best of breed" software
products. To maximize the opportunity that this "core" technology presents, the
Company formulated and has begun to execute a plan that allows it to assess
market opportunities and bring new products to market quickly at a relatively
low cost. The key components of this plan have been:
1. In April 1998 the Company retained Deloitte & Touche (D&T) to conduct
an in-depth analysis of the Company's "core" technology and to
recommend potential "best of breed" products that can be developed from
the "core" technology. This analysis confirmed that MigraTEC has
valuable technology from which many software products or "tools" can be
developed. The D&T analysis further identified over a dozen market
needs which can be addressed with further development of MigraTEC's
"core" technology.
2. In May 1998 the MigraTEC research team developed high-level project
plans for seven of the potential products identified by D&T. The
Company is currently in discussions with several large companies about
possible joint ventures to develop the new products.
The Company believes that the further development of its technology will create
the following revenue opportunities:
1. Payments for further development of the Company's core technology
pursuant to the specifications of "strategic partners."
-14-
<PAGE> 15
2. Royalties/revenue sharing produced from licensing the enhanced
technology to "strategic partners."
3. Revenues from software sales to "end user" customers.
4. Revenues from expanded services opportunities.
Large companies such as Sun Microsystems, Oracle and EDS are seeking out smaller
technology companies like MigraTEC to form development partnerships to address
emerging market opportunities. MigraTEC is currently discussing co-development
opportunities with these companies and anticipates that with its "core"
technology there will be other opportunities for other strategic relationships.
The Company believes that its co-development opportunities will provide:
1. "Partners" that can direct development efforts towards emerging markets.
2. "Partners" with enormous sales and marketing resources and a vested
interest in getting the end product into the market.
3. Cash necessary to retain key development personnel.
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
MigraTEC should be read in conjunction with the consolidated financial
statements of MigraTEC included elsewhere herein.
Although the Company experienced significant losses for the six months ended
June 30, 1998, and for both 1997 and 1996, management believes it is important
to note the growing opportunity for MigraTEC to sell its automated migration
products and services based on the rapid growth and changes occurring in today's
marketplace, as well as the increasing market demand for migration products and
services. Management believes, that by capitalizing on this opportunity,
revenues and earnings will increase during the remainder of 1998, although no
assurances can be given regarding such increase.
Management believes that the net loss posted for the six months ended June 30,
1998, was in part due to expenditures for reengineering the Company's business
and shifting its strategic approach to exploiting its technology as a product
offering as opposed to a service offering. The Company now has a new product
line (MigraTEC2000) to sell and intends to introduce an additional migration
product line in mid 1998. This leads management to believe that profitability
can be achieved by the fourth quarter of 1998, although no assurances can be
given regarding such increase.
-15-
<PAGE> 16
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues
During the second quarter of 1998, the Company's sales revenues increased
significantly to $315,411, compared to only $23,219 for the second quarter of
1997, primarily attributable to an adjustment made during the second quarter of
1997 to decrease revenues (which are recognized on the percentage of completion
method based on estimated hours to complete) after a thorough evaluation of the
status of the various projects resulted in an increased but more realistic
estimation of the effort to complete, pushing out the project completion dates.
Operating Expenses
The Company's total operating expenses increased by approximately 28% to
$1,330,455 during the second quarter of 1998, compared to $1,040,846 for the
second quarter of 1997, resulting primarily from (1) increased labor costs
resulting from expansion of the Company's software development, administrative,
and sales and marketing staff, (2) increased expenditures for advertising and
marketing, including public relations, and (3) costs relating to the Company's
Year 2000 program in connection with the development and marketing of the
Company's Year 2000 tool set. As a percentage of revenues, total operating
expenses decreased to 422% for the second quarter of 1998, compared to 4,483%
for the second quarter of 1997, primarily attributable to the increase in
revenues as previously discussed.
Labor costs, including benefits and employee-related insurance, increased by
approximately 30% to $740,615 compared to $571,492, for the six months ended
June 30, 1998 and 1997, respectively, resulting primarily from expansion of the
Company's software development, administrative, and sales and marketing staff.
General and administrative expenses decreased to $66,327 from $142,600,
primarily due to a lack of expenditures during the second quarter of 1998 for
employee recruiting fees and moving expenses (related to relocating the
Company's principal offices). Advertising and marketing increased to $43,811
from $4,665 primarily due to increased expenditures in the areas of advertising
and marketing as well as public relations resulting from expansion of the
Company's sales and marketing staff. Year 2000 program costs of $321,855
consists of labor costs and various other expenses related to the development
and marketing of the Company's Year 2000 tool set.
Other Income and Expenses
Interest income of $5,385 relates to the interest earned on cash balances
invested by the Company in short term certificates of deposit. Interest expense
(which includes loan origination fees) increased to $57,790 from $9,002,
primarily due to (i) interest on the Senior Secured Promissory Notes, including
the amortized portion of the related discount and (ii) interest and loan fees
connected with obtaining short-term financing. Financing fees of $23,988 relate
to the amortized portion of fees paid in 1997 to the placement agent in
connection with the issuance of the Senior Secured Promissory Notes.
-16-
<PAGE> 17
Income Taxes
The net operating loss incurred for the three months ended June 30, 1998, was
approximately $840,000. Any net operating loss incurred for the year ended
December 31, 1998, eligible to be carried forward to future years will expire in
2013.
Extraordinary Item
Forgiveness of debt of $251,094 relates to reductions in amounts due to various
vendors through negotiation of terms.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues
During the first six months of 1998, the Company's sales revenues increased by
approximately 9% to $774,440, compared to $712,061 for the first six months of
1997, primarily attributable to an adjustment made during the second quarter of
1997 to decrease revenues (which are recognized on the percentage of completion
method based on estimated hours to complete) after a thorough evaluation of the
status of the various projects resulted in an increased but more realistic
estimation of the effort to complete, pushing out the project completion dates.
Operating Expenses
The Company's total operating expenses increased by approximately 24% to
$2,925,555 during the first six months of 1998, compared to $2,363,274 for the
first six months of 1997, resulting primarily from (1) increased labor costs
resulting from expansion of the Company's software development, administrative,
and sales and marketing staff, (2) increased expenditures for advertising and
marketing, including public relations, (3) increased legal fees resulting from
various litigation in which the Company was involved, and (4) costs relating to
the Company's Year 2000 program in connection with the development and marketing
of the Company's Year 2000 tool set. As a percentage of revenues, total
operating expenses increased to 378% for the first six months of 1998, compared
to 332% for the first six months of 1997, primarily attributable to the increase
in operating expenses as previously discussed.
Labor costs, including benefits and employee-related insurance, increased by
approximately 26% to $1,552,072 compared to $1,231,033, for the six months ended
June 30, 1998 and 1997, respectively, resulting primarily from expansion of the
Company's software development, administrative, and sales and marketing staff.
General and administrative expenses decreased to $131,190 from $197,172,
primarily due to a lack of expenditures during the second quarter of 1998 for
employee recruiting fees and moving expenses (related to relocating the
Company's principal offices). Advertising and marketing increased to $60,799
from $5,076 primarily due to increased expenditures in the areas of advertising
and marketing as well as public relations resulting from expansion of the
Company's sales and marketing staff. Legal and professional
-17-
<PAGE> 18
fees increased to $369,005 from $155,361, primarily due to increased legal costs
resulting from various litigation in which the Company was involved. Year 2000
program costs of $637,629 consists of labor costs and various other expenses
related to the development and marketing of the Company's Year 2000 tool set.
Other Income and Expenses
Interest income of $5,530 relates to the interest earned on cash balances
invested by the Company in short term certificates of deposit. Interest expense
(which includes loan origination fees) increased to $161,168 from $25,989,
primarily due to (i) interest on the Senior Secured Promissory Notes, including
the amortized portion of the related discount, (ii) interest and loan fees
connected with obtaining short-term financing, (iii) interest on shareholder
loans, and (iv) finance charges assessed by trade creditors for late payment of
accounts payable. Financing fees of $31,985 relate to the amortized portion of
fees paid in 1997 to the placement agent in connection with the issuance of the
Senior Secured Promissory Notes.
Income Taxes
The net operating loss incurred for the six months ended June 30, 1998, was
approximately $2,085,000. Any net operating loss incurred for the year ended
December 31, 1998, eligible to be carried forward to future years will expire in
2013.
Extraordinary Item
Forgiveness of debt of $256,344 relates to reductions in amounts due to various
vendors through negotiation of terms.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $2,534,450 for the six months ended
June 30, 1998, which resulted primarily from the net operating loss, offset
primarily by the net change in assets and liabilities. This compares to net cash
used by operating activities of $343,173 for six months ended June 30, 1997,
which resulted primarily from the operating loss offset by the receipt of the
income tax refund. At June 30, 1998, the Company had net working capital of
$327,318, compared to a net working capital deficit of $1,563,162 at December
31, 1997, an increase of $1,890,480 for the six months then ended.
At June 30, 1998, the Company had a total of $249,616 in outstanding accounts
receivable ($249,616 billed and $0 unbilled, both net of $0 allowance for
doubtful accounts), all of which is considered fully collectible.
-18-
<PAGE> 19
At June 30, 1998, the Company's outstanding debt obligations included (i)
$1,087,131 in Senior Secured Promissory Notes (net of $25,369 unamortized
discount) and (ii) $1,356 in advances from a shareholder.
During the first six months of 1998, the Company funded its operations primarily
from the collection of $4,536,750 in connection with the issuance of common
stock, from the receipt of $781,500 in proceeds from short-term loans from a
bank and various outside investment groups, and from the collection of accounts
receivable outstanding and the receipt of sales revenues and customer deposits
totaling $746,489.
The Company continues to actively work with trade creditors to negotiate
settlements regarding outstanding accounts payable on terms favorable to the
Company. As of the filing of this report, the Company has been successful in
settling $503,018 in outstanding accounts payable for approximately $246,000,
thereby saving the Company just over $256,000. In addition to the aforementioned
settlements, subsequent to June 30, 1998, the Company has further reduced its
debt by paying, and thereby reducing, outstanding accounts payable of
approximately $73,000.
To continue to fund its operations for 1998, the Company successfully commenced
two private offerings in March 1998 which, in the opinion of management, yielded
gross proceeds to the Company sufficient to fund operations until such time that
product revenues begin to ramp up. While much remains to be accomplished, the
Company has made significant progress towards stabilization. While the success
of the Company will in part depend upon its ability to market and sell its
products and services, management believes that the recent implementation of its
plan to shift the Company's strategic approach to exploiting its technology
through strategic relationships, should move the Company forward with a focus on
achieving profitability by the end of 1998. The anticipated increase in revenues
coupled with a continued emphasis on controlling costs should position the
Company to achieve improved results for 1999. However, there can be no assurance
that the Company will generate an increase in revenues or earnings, or achieve
improved operating performance or results.
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.
-19-
<PAGE> 20
Among the key factors that could cause actual results to differ materially from
expectations, estimates of costs, projected results or anticipated results are
the risk 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 its target markets for
migration products and services and Y2K product sales, the risk that new
untested management will be unable to successfully implement the business plan
and sales strategy, and the 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 its operations and the industry in general.
All written or oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by, but
not limited to, the factors described above.
-20-
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) A Statement of Computations of Per Share Earnings
(27) Financial Data Schedule
Note: Basic and diluted calculations are the same.
-21-
<PAGE> 22
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.
MIGRATEC, INC.
(Registrant)
BY: /s/ W. CURTIS OVERSTREET
-----------------------------------
W. Curtis Overstreet, President and
Principal Executive Officer
Dated: August 19, 1998
-----------------
BY: /s/ MARK C. MYERS
------------------------------------
Mark C. Myers, Principal Financial
Officer
Dated: August 19, 1998
-----------------
-22-
<PAGE> 23
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(11) Statement of Computation of Per Share Earnings.
(27) Financial Data Schedule
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (843,293) $(1,026,384) $ (2,085,344) $ (1,757,617)
============ =========== ============ ============
Weighted average number of common shares
issued at January 1 30,199,154 18,002,253 30,199,154 18,002,253
Less weighted average number of common
shares held in treasury at January 1 (854,903) (854,903) (854,903) (854,903)
------------ ----------- ------------ ------------
Weighted average number of common shares
issued and outstanding at January 1 29,344,251 17,147,350 29,344,251 17,147,350
Issuance of stock to employees under the
Employee Stock Purchase Plan for cash -- 13,367 -- 6,720
Issuance of stock in connection with the
conversion of debentures -- 10,291,534 -- 8,373,455
Issuance of stock in connection with the
exercise of warrants 22,500 -- 14,171 --
Issuance of stock in connection with
private offerings 21,618,517 -- 11,956,188 --
Treasury stock received in exchange for
cash (9,400,000) -- (5,089,503) --
Issuance of stock for services rendered 390,454 -- 211,406 --
Issuance of stock in connection with the
exercise of options 11,423 -- 5,743 --
------------ ----------- ------------ ------------
Shares used for computation 41,987,145 27,452,251 36,442,256 25,527,525
============ =========== ============ ============
Loss before income taxes and
extraordinary item per common share $ (0.026) $ (0.037) $ (0.064) $ (0.068)
============ =========== ============ ============
Extraordinary income per common share $ 0.006 $ -- $ 0.007 $ --
============ =========== ============ ============
Net loss per common share (basic and
diluted) $ (0.020) $ (0.037) $ (0.057) $ (0.069)
============ =========== ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1998, FILED AS
PART OF FORM 10-QSB QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB QUARTERLY REPORT FOR
THE QUARTER ENDED JUNE 30,1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 619,333
<SECURITIES> 0
<RECEIVABLES> 249,616
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 902,167
<PP&E> 1,016,752
<DEPRECIATION> (669,147)
<TOTAL-ASSETS> 1,365,717
<CURRENT-LIABILITIES> 574,849
<BONDS> 0
0
0
<COMMON> 6,765,128
<OTHER-SE> (7,093,744)
<TOTAL-LIABILITY-AND-EQUITY> 1,365,717
<SALES> 0
<TOTAL-REVENUES> 774,440
<CGS> 0
<TOTAL-COSTS> 2,925,555
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,153
<INCOME-PRETAX> (2,341,688)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,341,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 256,344
<CHANGES> 0
<NET-INCOME> (2,085,344)
<EPS-PRIMARY> (0.057)
<EPS-DILUTED> (0.057)
</TABLE>
