<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 March 31, 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 May 10, 1998, the issuer had
42,984,705 shares of common stock, no par value, outstanding.
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INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at March 31, 1998, and December 31, 1997
Statements of Operations for the three months ended
March 31, 1998 and 1997
Statements of Cash Flows for the three months ended
March 31, 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 March 31, 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
March 31, 1998, and December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 03/31/98 12/31/97
----------- -----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 1,146,494 $ 4,076
Accounts receivable - billed, net of allowance for
doubtful accounts of $0 and $123,720, respectively 15,000 394,755
Accounts receivable - unbilled 78,630 --
Shareholder advance 3,766 3,766
Restricted cash -- 28,150
Deferred tax asset 9,024 9,024
Other current assets 24,777 16,600
----------- -----------
Total current assets 1,277,691 456,371
PROPERTY AND EQUIPMENT, NET 403,655 452,555
OTHER ASSETS
Financing fees 93,385 101,382
Other assets 46,548 21,548
----------- -----------
Total other assets 139,933 122,930
----------- -----------
Total Assets $ 1,821,279 $ 1,031,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ -- $ 112,963
Notes payable 475,000 275,000
Transfer liability -- 187,500
Accounts payable 778,063 779,904
Accrued expenses 496,284 404,258
Obligation under capital lease 25,714 25,267
Customer deposits in excess of unbilled receivables -- 171,365
Shareholder advances 5,970 63,276
----------- -----------
Total current liabilities 1,781,031 2,019,533
LONG-TERM LIABILITIES
Long-term portion of notes payable, net of discount of $50,723 1,061,777 1,036,423
Long-term portion of obligation under capital lease 34,047 41,388
Deferred tax liability 9,024 9,024
----------- -----------
Total long-term liabilities 1,104,848 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; 45,417,108 and
30,199,154 shares issued at March 31, 1998,
and December 31, 1997, respectively 5,189,603 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) (5,238,085) (3,996,034)
----------- -----------
Total stockholders' equity (deficit) (1,060,848) (2,070,760)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,821,279 $ 1,031,856
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE> 4
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUES $ 459,029 $ 688,842
COSTS AND EXPENSES
Salaries and benefits 511,276 600,323
Contract labor 300,181 59,218
General and administrative 61,863 54,572
Advertising and marketing 16,968 411
Travel 2,652 14,788
Rent 31,950 21,201
Depreciation and amortization 48,900 72,280
Legal and professional fees 303,541 91,342
Year 2000 program costs 316,044 --
Bad debt expense 1,725 123,720
Loss on release of assets -- 284,573
------------ ------------
Total operating expenses 1,595,100 1,322,428
------------ ------------
Loss from operations (1,136,071) (633,586)
OTHER INCOME (EXPENSES)
Interest income 145 496
Gain on sale of assets -- 892
Interest expense (103,378) (40,169)
Financing fees (7,997) (68,250)
------------ ------------
Total other income (expenses) (111,230) (107,031)
Minority interest in loss of consolidated subsidiary -- (9,384)
------------ ------------
Loss before income taxes and extraordinary item (1,247,301) (750,001)
Provision for income tax expense (benefit) -- --
------------ ------------
Net loss before extraordinary item (1,247,301) (750,001)
Extraordinary income from forgiveness of debt (net of income taxes of $0) 5,250 --
------------ ------------
Net loss $ (1,242,051) $ (750,001)
============ ============
Loss before income taxes and extraordinary item per common share $ (0.04) $ (0.032)
============ ============
Extraordinary income per common share $ -- $ --
============ ============
Net loss per common share (basic and diluted) $ (0.04) $ (0.032)
============ ============
Weighted average common shares and common
equivalents issued and outstanding (basic and diluted) 30,829,925 23,581,413
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Stockholders' Equity (Deficit)
Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Common Preferred Preferred
Stock Stock Stock Stock Treasury
Issued Amount Issued Amount Stock
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 18,002,253 $ 1,166,960 -- $ -- (854,903)
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 March 31, 1997 28,307,154 $ 1,697,040 -- $ -- (854,903)
=========== =========== ===== ========= ===========
Balance at January 1, 1998 30,199,154 $ 2,197,640 -- $ -- (854,903)
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 14,805,000 2,961,000 -- -- --
Treasury stock received in exchange for cash -- -- -- -- (9,400,000)
Issuance of stock for services rendered 390,454 30,738 -- -- --
Net loss -- -- -- -- --
----------- ----------- ----- --------- -----------
Balance at March 31, 1998 45,417,108 $ 5,189,603 -- $ -- (10,254,903)
=========== =========== ===== ========= ===========
<CAPTION>
Retained
Treasury Additional Earnings
Stock Paid-in (Accumulated
Amount Capital Deficit) Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $(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 -- -- (750,001) (750,001)
----------- ----------- ----------- -----------
Balance at March 31, 1997 $(1,068,629) $ 712,186 $(2,228,429) $ (887,832)
=========== =========== =========== ===========
Balance at January 1, 1998 $(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 -- -- -- 2,961,000
Treasury stock received in exchange for cash (740,000) -- -- (740,000)
Issuance of stock for services rendered -- -- -- 30,738
Net loss -- -- (1,242,051) (1,242,051)
----------- ----------- ----------- -----------
Balance at March 31, 1998 $(1,808,629) $ 796,263 $(5,238,085) $(1,060,848)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,242,051) $ (750,001)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 48,900 72,280
Gain on sale of assets -- (892)
Loss on release of assets -- 284,573
Assets given in lieu of wages -- 14,233
Bad debt expense -- 123,720
Financing fees 7,997 68,250
Amortization of discount 25,354 --
Common stock issued for services 30,738 --
Minority interest -- 9,384
Change in assets and liabilities:
(Increase) decrease in accounts receivable 379,755 (115,068)
(Increase) decrease in unbilled revenue (78,630) 89,200
Decrease in income tax refund receivable -- 507,733
Decrease in restricted cash 28,150 --
Increase in other current assets (8,177) (8,905)
Increase in other assets (25,000) --
Increase (decrease) in accounts payable (1,841) 90,752
Increase in accrued expenses 92,026 39,284
Decrease in customer deposits in excess of unbilled receivables (171,365) (376,700)
----------- -----------
Total adjustments 327,907 797,844
----------- -----------
Net cash provided (used) by operating activities (914,144) 47,843
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of property and equipment -- 8,200
----------- -----------
Net cash provided (used) in investing activities -- 8,200
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash overdraft (112,963) --
Proceeds from notes payable 704,000 200,000
Proceeds from transfer of accounts receivable with recourse 77,500 --
Proceeds from issuance of common stock 2,961,225 5,080
Payments under obligations of capital lease (6,894) --
Repayment of shareholder advances (57,306) (2,053)
Repayment of notes payable (504,000) (200,000)
Repayment of transfer liability (265,000) --
Purchase of treasury stock (740,000) --
----------- -----------
Net cash provided (used) in financing activities 2,056,562 3,027
----------- -----------
Net increase (decrease) in cash 1,142,418 59,070
Cash - beginning 4,076 36,939
----------- -----------
Cash - ending $ 1,146,494 $ 96,009
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 101,015 $ 8,085
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock in connection with the conversion of debentures $ -- $ 525,000
=========== ===========
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
March 31, 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 March 31, 1998, and the
results of operations and cash flows for the three months ended March 31, 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. GOING CONCERN UNCERTAINTY
As reflected in the accompanying consolidated financial statements, the Company
incurred a loss from continuing operations of $1,247,301 for the three months
ended March 31, 1998, and the Company's current liabilities exceed current
assets in the amount of $503,340. 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.
If the Company is not able to successfully complete the private offerings as
planned, or obtain alternative funding, and generate sufficient sales revenues
in the near term, the Company will be unable to continue as a going concern.
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<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
NOTE 3. GOING CONCERN UNCERTAINTY (CONTINUED)
Recently, the Company began reengineering its business focus, shifting its
strategic approach to exploiting its technology as a product offering as opposed
to a service offering. 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 4. RELATED PARTY TRANSACTIONS
Effective March 25, 1998, the Company reached an agreement with its former
principal executive officer, Mr. Richard Dews, regarding actions of Mr. Dews as
Chairman and CEO and efforts by Mr. Dews to sell shares of the Company's Common
Stock, originally acquired and restricted pursuant to Rule 144 of the Act, as
well as claims made against the Company by Mr. Dews totaling approximately
$640,000. Pursuant to the agreement, which was finalized on March 31, 1998, (1)
the Company acquired from Mr. Dews 9,400,000 shares of the Company's Common
Stock for $740,000, (2) the Company agreed to file a registration statement or
take other appropriate steps to allow free trading of the remaining shares owned
by Mr. Dews, (3) the Company issued to Mr. Dews a transferable option to
purchase up to 600,000 shares of the Company's unregistered and free trading
Common Stock at $0.25 per share, (4) the Company paid to Mr. Dews $60,000 in
full satisfaction, including principal and accrued interest, of amount
previously loaned to the Company by Mr. Dews, (5) the Company released Mr. Dews
from all claims arising from or relating to the employment of Mr. Dews or the
promissory note from the Company to Mr. Dews, (6) Mr. Dews released the Company
from all claims, estimated by Mr. Dews to total approximately $640,000, arising
from or relating to the employment of Mr. Dews or the promissory note from the
Company to Mr. Dews, including back wages relating to accrued but unused
vacation pay, and (7) pursuant to a promissory note dated March 25, 1998, no
stated interest, the Company agreed to pay to a former employee the amount of
$68,250 in installments of $1,000 for 68 months on the tenth of each month
beginning April 10, 1998, with
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<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
the final payment of $250 being due on December 10, 2003. Attorney fees incurred
by the Company as a result of negotiating the settlement with Mr. Dews were
comprised of (1) the transfer of 390,454 shares of the Company's Common Stock
and (2) $210,523 paid in cash.
NOTE 5. STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS
Pursuant to the terms and conditions of certain short-term loans made to the
Company by certain investor groups, the Company granted 1,810,000 stock
warrants, fully vested at date of grant, to purchase shares of its common stock
with varying exercise prices and terms. On March 9, 1998, the Company issued
22,500 shares of its common stock as a result of the exercise of warrants to
purchase shares at $0.01 per share. On March 26, 1998, the Company issued
1,000,000 shares of its common stock as a result of the exercise of warrants to
purchase shares at $0.20 per share in connection with the first March 1998
private offering by converting the related short-term loans to equity pursuant
to terms and conditions contained in the loan agreements. On March 31, 1998, the
Company issued 375,000 shares of its common stock as a result of the exercise of
warrants to purchase shares at $0.20 per share in connection with the second
March 1998 private offering by converting the related short-term loans to equity
pursuant to terms and conditions contained in the loan agreements. As of the
filing of this report, 412,500 of the aforementioned warrants remain unexercised
and outstanding.
Pursuant to the 1997 Stock Option Plan ("1997 Plan"), during the quarter ended
March 31, 1998, the Company granted stock options four employees to purchase an
aggregate of 226,600 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 granted expire from January 1, 2003,
through March 15, 2003.
Effective February 3, 1998, the Company issued to certain investor groups
125,000 shares of its common stock at $0.20 per share under a private placement
memorandum for total net cash proceeds of $25,000.
On March 9, 1998, the Company commenced the first of two private offerings (the
"Offering #1"). The Offering #1 provided for up to 17,500,000 shares of the
Company's Common Stock for a maximum of $3,500,000. The Offering #1 was offered
on a "best efforts" basis. The Offering #1, which terminated March 26, 1998,
after an eight day extension, yielded gross proceeds to the Company totaling
$2,831,000.
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<PAGE> 10
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
NOTE 5. STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS (CONTINUED)
On March 30, 1998, the Company commenced the second private offering (the
"Offering #2"). The Offering #2 provided for up to 8,500,000 shares of the
Company's Common Stock for a maximum of $1,700,000. The Offering #2 was offered
on a "best efforts" basis. The Offering #2, which terminated May 6, 1998, after
a twenty-one day extension, yielded gross proceeds to the Company totaling
$1,669,500.
The Company expects to pay placement fees by granting to the Placement Agent
warrants for the purchase of the number of shares of the Company's Common Stock
equivalent to 10% of the total number of shares issued as a result of the two
aforementioned private offerings. The exercise price of any warrants granted
will $0.20 per share. The warrants will be exercisable at the grant date, and
will expire three years from the closing date of the Offering #2.
On March 31, 1998, pursuant to the terms and conditions of an agreement reached
with its former principal executive officer, Mr. Richard Dews, effective March
25, 1998 (See Note 4), the Company acquired from Mr. Dews 9,400,000 shares of
the Company's Common Stock for $740,000, and the Company granted to Mr. Dews a
transferable option to purchase up to 600,000 shares of the Company's
unregistered and free trading Common Stock at $0.25 per share. Additionally,
pursuant to an agreement with the Company's legal counsel, the Company satisfied
a portion of the attorney fees incurred by the Company as a result of
negotiating the settlement with Mr. Dews through the transfer of 390,454 shares
of the Company's Common Stock.
NOTE 6. SUBSEQUENT EVENTS
Pursuant to the 1997 Stock Option Plan ("1997 Plan"), subsequent to March 31,
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 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 8,700,000 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.
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<PAGE> 11
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
NOTE 6. SUBSEQUENT EVENTS (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 4,400,000 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.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1ST QUARTER ENDED MARCH 31, 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 One Up Corporation) ("MigraTEC") was incorporated in
1991. On February 29, 1996, MigraTEC entered into a reverse acquisition
agreement with New York Acquisitions, Inc., a publicly held "shell." 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.
BACKGROUND
MigraTEC is a provider of software products and services which address both the
Year 2000 challenge and the need for companies to migrate from existing software
applications to new and more efficient software applications and operating
systems. Migration is the process of adapting an organization's existing
software applications to meet changing business requirements and advancing
technology. Migration allows businesses to retain the functionality and business
processes which they have already developed in their existing software
applications while gaining the efficiencies which result from migrating the
applications to more advanced platforms. Migration not only avoids the business
interruption and retraining problems associated with completely replacing a
software application but also allows companies to continue to extend the
productive life of the software they have already developed at significant cost.
Older software applications typically represent less advanced technology and
frequently are not Year 2000 compliant. MigraTEC uses its own proprietary
software tools and advanced service
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<PAGE> 13
methodologies to provide cost effective solutions for both Year 2000 problems
and the software migration requirements of its customers.
A decision to migrate an organization's information system or software
applications can be driven by a variety of factors including (1) a need for
increased efficiency and productivity, (2) a need for new or additional system
functionality, or (3) the need to address a system problem or deficiency such as
the Year 2000 problem.
Management believes the Company currently offers an efficient and effective
solution for the analysis and performance of software migrations. Through the
development of its own proprietary migration technologies and methodologies, the
Company has automated much of the migration process. The Company has been
involved with many successful migrations for well-known companies such as Bell
Sygma Inc., Duke Power Company, Payless ShoeSource Distribution Inc., Group 1
Software, Policy Management Systems Corporation, AutoTester Inc., Caterpillar
Inc., Ameritech Library Services and USAA. Management believes that the
development of several significant assets, including an experienced technical
team employing state-of-the-art proprietary technology, has positioned MigraTEC
as a leading provider of cross-platform migrations.
The Company's migration methodology using its advanced migration technology, an
automated proprietary migration tool set, has attracted the interest of several
service providers including Keane Inc., CGN and Associates, and others who are
interested in partnering opportunities. MigraTEC's technologies combined with
partner expertise can produce quality results that are measurable, predictable
and accurate. This allows the Company to perform migration projects for
customers, typically resulting in both time and cost savings.
With the rapid changes occurring in today's marketplace, such as the move to
Windows, the development of 64 bit processors and Year 2000 issues, MigraTEC's
migration products and services should be increasingly in demand with growing
opportunities for the Company to sell its products and services. As technology
advances, every company with a computer must make decisions on how to deal with
these changes. In considering the bottom line, it is difficult for companies to
justify abandoning their investment in the large number of custom applications
developed over the last decades. MigraTEC's products and services provide a
solution to leverage corporate investment by extending the life of existing
applications.
PRODUCT STRATEGY
OS/2 TO WINDOWS MIGRATION
Several independent studies have determined that the size of the North American
market for OS/2 to Windows migrations is in excess of $2 billion. The European
and Asian markets collectively are believed to be equally as large. MigraTEC
believes it has the only automated solution for an OS/2 to Windows migration.
MigraTEC believes that companies undertaking an OS/2 to Windows migration have
two principal options: (1) either perform their migration manually or (2)
contract with MigraTEC for an automated solution. Historically, MigraTEC's
automated solution results in both time and cost savings.
-13-
<PAGE> 14
To realize the true potential of this opportunity, MigraTEC has focused on two
objectives:
First, the Company is reengineering its technology to become a product
oriented offering as opposed to a service oriented offering.
Secondly, the Company is repackaging its products and services so they
can be sold and delivered by third party organizations.
Correspondingly, the Company is now beginning to market its products and related
services so that they can be sold and delivered by resellers and other third
party organizations. In the judgment of management, the market for migration
programs is too large and evolving too rapidly for any small organization to
capture a large percentage of the opportunity by itself. Consequently, strategic
alliances or teaming will be necessary to more effectively exploit the Company's
technology. Currently, MigraTEC has entered into a teaming agreement with CGN
and Associates, is working to finalize an agreement with Keane Inc., and has
undertaken discussions regarding strategic agreements with other large service
companies for potential partnering opportunities. Each of these companies has
one or more customers that has identified a migration project where MigraTEC's
technology is applicable. The efforts that the Company expends in these projects
will help to better define the role MigraTEC will play in a partnering
environment.
YEAR 2000 CLIENT/SERVER STRATEGY
While continuing its work in application migration, the Company is also entering
the Year 2000 ("Y2K") market for the client/server environment. MigraTEC
anticipates launching a new flagship product for the Y2K analysis and
remediation of client/server applications called MigraTEC2000 by the end of the
second quarter of 1998.
The Y2K problem stems from the widespread use of software applications 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 beyond.
"00" may be interpreted as the year 1900 instead of the year 2000, causing
potentially massive information processing and reporting mistakes as well as the
malfunction of systems which are controlled by date codes. The 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 literally billions of lines of code containing
date-related instructions which will need to be checked and remediated. The
failure to correct Y2K problems inherent in a company's software may render
significant aspects of the company's business virtually inoperable.
As MigraTEC enters into this new arena of automated Y2K solutions, the Company
will continue its commitment to provide innovative, top-quality products that
allow its customers to preserve corporate investment by extending application
life.
Most market analysts agree that spending to remediate Y2K problems in the
client/server environment will be in excess of $60 billion. This is a market
segment that management believes
-14-
<PAGE> 15
has yet to be effectively addressed by corporate America as well as many of the
current Y2K solution providers.
The Company's studies have estimated that product sales will constitute
approximately 5% of total Y2K spending in the client/server environment, which
equates to $3 billion. With the goal of capturing a portion of this market,
MigraTEC began an effort in October 1997 to develop the market's premier
client/server Y2K product. To help to achieve this goal, the Company hired key
personnel with extensive experience in the Y2K industry and the development of
Y2K programs for large software firms. The Compan anticipates that revenues from
its Y2K software products will begin ramping up during mid-1998.
In December of 1997, Keane Inc., one of the most successful Y2K providers,
conducted an evaluation of the Company's proprietary MigraTEC2000 software
product, which is currently configured to address the C and C++ markets, and
concluded that MigraTEC2000 represented potentially the best technology of its
kind in the market. As a result, Keane has agreed to recommend MigraTEC2000.
Management believes that a growing number of Keane's customers will choose
MigraTEC's Y2K solution. There are several other potential partners who are
currently evaluating MigraTEC's technology to determine if it serves the needs
of their client base.
NEW PRODUCT STRATEGY
MigraTEC has established a research group that is responsible for developing
technology that will be the foundation of future products. In order to maximize
the productivity of this group, MigraTEC has established two policies that the
group must adhere to:
No development will take place unless in involves the Company building
upon its core technology, thereby preventing the need to support
multiple technology disciplines which increases maintenance and
training costs.
No development will take place without a customer or potential partner
supporting the development effort, thereby preventing work on
technology that does not have a potential market identified and a
potential sales and marketing partner to quickly turn the finished
product into revenue.
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 three months ended
March 31, 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
-15-
<PAGE> 16
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 three months ended March
31, 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.
THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues
During the first quarter of 1998, the Company's sales revenues decreased by
approximately 33% to $459,029, compared to $688,842 for the first quarter of
1997, primarily due to reengineering the Company's business and shifting its
strategic approach to exploiting its technology as a product offering as opposed
to a service offering.
Operating Expenses
The Company's total operating expenses increased by approximately 21% to
$1,595,100 during the first quarter of 1998, compared to $1,322,428 for the
first 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 legal fees resulting from various
litigation in which the Company was involved, 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 increased to 347% for the first quarter of 1998, compared to 192% for
the first quarter of 1997, primarily attributable to the decrease in revenues
and the increase in operating expenses as previously discussed.
Labor costs, including benefits and employee-related insurance, increased by
approximately 23% to $811,457 compared to $659,541, for the three months ended
March 31, 1998 and 1997, respectively, resulting primarily from expansion of the
Company's software development, administrative, and sales and marketing staff.
Depreciation and amortization decreased to $48,900 from $72,280 primarily
resulting from asset retirements. Legal and professional fees increased to
$303,541 from $91,342, primarily due to increased legal costs resulting from
various litigation in which the Company was involved. Year 2000 program costs of
$316,044 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 expense (which includes loan origination fees) increased to $103,378
from $40,169, primarily due to (i) interest on the Senior Secured Promissory
Notes, including the amortized
-16-
<PAGE> 17
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 $7,997 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 three months ended March 31, 1998, was
approximately $1,250,000. 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 $5,250 relates to reductions in amounts due to various
vendors through negotiation of terms.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $914,144 for the three months ended
March 31, 1998, which resulted primarily from the net operating loss, offset
primarily by the net change in assets and liabilities. This compares to net cash
provided by operating activities of $47,843 for three months ended March 31,
1997, attributable primarily to receipt of the income tax refund. At March 31,
1998, the Company had a net working capital deficit of $503,340, a decrease of
$1,059,822 for the three months then ended.
At March 31, 1998, the Company had a total of $93,630 in outstanding accounts
receivable ($15,000 billed and $78,630 unbilled, both net of $0 allowance for
doubtful accounts), all of which is considered fully collectible.
At March 31, 1998, the Company's outstanding debt obligations included (i)
$475,000 in short-term loans from outside investment groups, (ii) $1,061,777 in
Senior Secured Promissory Notes (net of $50,723 unamortized discount), and (iii)
$5,970 in advances from a shareholder.
During the first quarter of 1998, the Company funded its operations primarily
from the collection of $2,961,225 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 $587,064.
The Company continues to actively work with trade creditors to negotiate
settlements regarding such outstanding accounts payable on terms favorable to
the Company. As of the filing of this report, the Company has been successful in
settling $427,823 in outstanding accounts payable for approximately $178,000,
thereby saving the Company just under $250,000. In addition to the
aforementioned settlements, subsequent to March 31, 1998, the Company has
reduced its debt by
-17-
<PAGE> 18
(1) paying off $475,000 in short-term notes payable and (2) further reducing
outstanding accounts payable, which were past due, of approximately $36,000.
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 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 reengineer the Company's
business focus, shifting its strategic approach to exploiting its technology as
a product offering as opposed to a service offering, should 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. However, there can be no assurance that the Company will generate an
increase in revenues or earnings, or achieve improved operating performance or
results.
While much remains to be accomplished, the Company has made significant progress
towards stabilization. Management anticipates that its efforts will move the
Company forward with a focus on achieving profitability by the end of 1998.
Management believes that the anticipated increase in revenues for 1998 coupled
with a continued emphasis on controlling costs will position the Company to
achieve improved earnings for 1999, although no assurances can be given
regarding such increase.
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
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.
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<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) A Statement of Computations of Per Share Earnings
19
<PAGE> 20
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: 5/20/98
----------------------
BY: /s/ MARK C. MYERS
--------------------------
Mark C. Myers, Principal
Financial Officer
Dated: 5/20/98
----------------------
-20-
<PAGE> 21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 A Statement of Computations of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
For the three months ended
1998 1997
------------ ------------
<S> <C> <C>
Net loss $ (1,242,051) $ (750,001)
============ ============
Weighted average number of common shares issued at January 1 30,199,154 18,002,253
Less weighted average number of common shares
held in treasury at January 1 (854,903) (854,903)
------------ ------------
Weighted average number of common shares
issued and outstanding at January 1 29,344,251 17,147,350
Issuance of stock in connection with the conversion of debentures -- 6,434,063
Issuance of stock in connection with the exercise of warrants 5,750 --
Issuance of stock in connection with private offerings 2,186,500 --
Treasury stock received in exchange for cash (731,111) --
Issuance of stock for services rendered 30,369 --
------------ ------------
Shares used for computation 30,835,759 23,581,413
============ ============
Net loss per common share $ (0.04) $ (0.031)
============ ============
</TABLE>
Note: Basic and diluted calculations are the same.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,146,494
<SECURITIES> 0
<RECEIVABLES> 15,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,277,691
<PP&E> 1,036,253
<DEPRECIATION> 632,598
<TOTAL-ASSETS> 1,821,279
<CURRENT-LIABILITIES> 1,781,031
<BONDS> 0
0
0
<COMMON> 5,189,603
<OTHER-SE> (6,250,451)
<TOTAL-LIABILITY-AND-EQUITY> 1,821,279
<SALES> 0
<TOTAL-REVENUES> 459,029
<CGS> 0
<TOTAL-COSTS> 1,595,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,375
<INCOME-PRETAX> (1,247,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,247,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,250
<CHANGES> 0
<NET-INCOME> (1,242,051)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
