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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1997
Commission file number 33-28809-A
MIGRATEC, INC.
(Name of Small Business Issuer 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)
Securities registered under Section 12(b) of the Exchange Act: None
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock (no par value)
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation-B contained in this form, and no disclosure will be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $2,045,607
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Common Stock, no par value ("Common Stock") was the only class of
voting stock of the Company outstanding on March 31, 1998. Based on the
closing bid price of the Common Stock on the National Association of
Securities Dealers, Inc., OTC Bulletin Board as reported on March 31,
1998 ($0.59), the aggregate market value of the 16,066,502 shares of
Common Stock held by persons other than officers, directors and persons
known to the Company to be the beneficial owner (as that term is
defined under the rules of the Securities and Exchange Commission) of
more than five percent of the Common Stock on that date was
approximately $9,479,236. By the foregoing statements, the Company does
not intend to imply that any of these officers, directors or beneficial
owners are affiliates of the Company or that the aggregate market
value, as computed pursuant to rules of the Securities and Exchange
Commission, is in any way indicative of the amount which could be
obtained for such shares of Common Stock.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] 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 March 31, 1998, the issuer had
34,787,205 shares of common stock, no par value, outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS DISCUSSED IN
THIS ANNUAL REPORT ON FORM 10-KSB 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."
ALL TRANSACTIONS DESCRIBED HEREIN GIVE EFFECT TO THE COMPANY'S ONE FOR ONE AND
ONE-HALF (1 FOR 1.5) FORWARD STOCK SPLIT THE EFFECTIVE DATE OF WHICH WAS MARCH
25, 1996.
INTRODUCTION
MigraTEC, Inc. (formerly known as One Up Corporation) (the "Company" or
"MigraTEC") was incorporated in 1991. On February 29, 1996, the Company 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 changed One Up Corporation and
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 is the parent of a majority owned foreign subsidiary, One Up Computer
Services, Ltd. One Up Computer Services, Ltd., was incorporated under the laws
of the Province of Ontario, Canada, in October 1992. Its operations primarily
consist of contract computer programming education that compliments the
curriculum of MIGRATEC. The operations of One Up Computer Services, Ltd., in the
past have not been significant to the operations of MigraTEC. Early in the first
quarter of 1997, One Up Computer Services, Ltd., ceased operations.
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BACKGROUND
MigraTEC's core business has been the development and sales of technology for
the migration of strategic application software. The Company believes that there
is a large potential market for these products and services resulting from the
competition between, and widespread business use of, several different operating
systems including IBM's OS/2 and Microsoft's Windows.
Migration is a computer industry term for converting software applications, such
as billing, manufacturing control and consumer applications, from their current
operating system to a new target operating system. 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 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 performing their migration
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manually or (2) contracting with MigraTEC for an automated solution.
Historically, MigraTEC's automated solution results in both time and cost
savings.
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.
Consequently, since October 1997, the focus of the Company has been
concentrating on product development and building a technical marketing
organization under the continuing leadership of Curtis Overstreet, President and
CEO. As MigraTEC approaches accomplishment of this goal, the Company is
negotiating with several large companies to serve as beta sites for its
reoriented technology.
Correspondingly, the Company is now packaging 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 DESKTOP STRATEGY
While continuing its work in application migration, the Company is also entering
the Year 2000 ("Y2K") market for the desktop and client/server environments.
MigraTEC is currently launching a new flagship product for the Y2K analysis and
remediation of desktop applications called MigraTEC2000.
As MigraTEC enters into a critical 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 the Y2K desktop opportunity is in excess of $60
billion. This is a market segment that management believes has yet to be
effectively addressed by corporate America as well as many of the current Y2K
solution providers.
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The Company's studies have estimate that product sales will constitute
approximately 5% of the total industry's Y2K desktop opportunity which equates
to $3 billion. With this in mind, MigraTEC initiated a development effort in
October 1997 with the goal of developing the markets' premier desktop Y2K
product. To achieve this goal, the Company has hired key personnel with
extensive experience in the Y2K industry and the development of Y2K programs for
large software firms.
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 many of Keane's customers could spend an average of
$100,000 for a desktop Y2K product. There are several other potential partners
who are currently evaluating MigraTEC's technology to determine if it is within
their customer set.
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.
EMPLOYEES
As of the date hereof, the Company employs approximately 34 full time persons
and uses ten to fifteen contract programming consultants to expand the staff for
particular projects. None of the Company's employees are covered by collective
bargaining agreements. The Company believes its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The headquarters facility of the Company is located in Farmers Branch, a suburb
of Dallas, Texas, and consists of approximately 15,000 square feet. The lease on
the office space extends through April 2000, and the current annual rental is
approximately $128,000.
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ITEM 3. LEGAL PROCEEDINGS
Currently MigraTEC has pending several suits filed against the Company seeking
payment for unpaid fees relating to the Company's trade accounts payable and
contract obligations related to leased office equipment of approximately
$320,000. These cases are presently in negotiations as the Company attempts to
settle for a lesser amount and/or reach favorable payment terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the NASDAQ Over-The-Counter
("OTC") Bulletin Board since June 14, 1996. The predecessor to the Company was
acquired by an inactive public company on February 29, 1996. The following table
sets forth, for the periods indicated, the high and low closing bid prices for
the Company's Common Stock on the OTC Bulletin Board. On March 31, 1998, the
closing price for the Company's Common Stock on the OTC Bulletin Board was $0.59
per share. At March 31, 1998, the Company had 34,787,205 shares of Common Stock
outstanding.
<TABLE>
<CAPTION>
High Low
---- -----
<S> <C> <C>
First Quarter 1997 $0.594 $0.09
Second Quarter 1997 $0.50 $0.30
Third Quarter 1997 $0.95 $0.30
Fourth Quarter 1997 $0.86 $0.35
First Quarter 1998 $0.70 $0.35
</TABLE>
The Company does not currently pay dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. It is the present policy
of the Company's Board of Directors to retain earnings, if any, to finance the
expansion of the Company's business. The Company's Transfer Agent for its Common
Stock is Interwest Transfer Company, Inc., which is located in Salt Lake City,
Utah.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
MigraTEC should be read in conjunction with the audited consolidated financial
statements of MigraTEC included elsewhere herein.
Although the Company experienced a significant net loss 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 increasing market
demand for migration products and services, especially in the area of OS/2 to
Windows migration as major corporations react to IBM's reduced development and
support for OS/2. Management believes, that by capitalizing on this
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opportunity, revenues and earnings will increase throughout 1998, although no
assurances can be given regarding such increase.
Management believes that the net loss posted for the year ended December 31,
1997, was in part due to reengineering the Company's business and reorienting
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 have an additional migration product line
ready for sale 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.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
During 1997, MigraTEC revenues decreased by approximately 9% to $2,045,607,
compared to $2,259,997 in 1996, due primarily from the reduction in revenues
from the Canadian subsidiary resulting from ceasing its operations and the lack
of Education revenues resulting from discontinuing that portion of the business.
Operating Expenses
MigraTEC's total operating expenses decreased by approximately 37% to $4,500,640
during 1997, compared to $7,149,986 for 1996, resulting primarily from (1)
decreased labor costs primarily due to the layoffs and resignations during the
first quarter of 1997, (2) decreased expenditures for travel due to layoffs in
the sales and marketing area as well as new management's cost containment
efforts, (3) decreased rent expense due to the Company's move from its
facilities located in Westlake, Texas, to a smaller and less costly location in
Farmers Branch, Texas, and (4) no expenses being incurred for merger,
acquisition and consulting expenses (relating to other expenses incurred as a
result of the reverse merger in February 1996), which were nonrecurring after
1996. As a percentage of revenues, total operating expenses decreased to 220%
for 1997, compared to 316% for 1996, primarily attributable to decreased
operating expenses as previously discussed.
Labor costs, including benefits and insurance, decreased by approximately 30% to
$2,756,621 compared to $3,954,015, respectively for 1997 and 1996, primarily due
to decreased labor costs resulting from the layoffs and resignations during the
first quarter of 1997. General and administrative expenses decreased to $340,665
from $723,932, primarily due to cost containment efforts successfully executed
by new management, particularly in the areas of software and computer related
expenditures, employment recruiting fees, and office related expenses (such as
supplies, printing, equipment rental, telephone expenses and utilities).
Advertising, marketing and product costs decreased to $17,086 from $99,633,
primarily due to a reduction of expenditures in the area of public relations.
Travel decreased to $39,749 from $465,530, resulting primarily from decreased
expenditures for travel due to layoffs in the sales and marketing area as well
as new management's cost containment efforts. Rent expense decreased
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to $186,899 for 1997, compared to $386,106 in 1996, attributable primarily to
decreased monthly office rent due to the Company's move from its facilities
located in Westlake, Texas, to a smaller and less costly location in Farmers
Branch, Texas. Depreciation and amortization decreased to $233,962 in 1997,
compared to $317,036 in 1996, as a result of asset retirements. Legal and
professional fees decreased to $211,936 in 1997, compared to $315,486 in 1996,
primarily due to the legal fees incurred in 1996 related to the Reg S offering.
Year 2000 program costs of $293,604 consists of labor costs and various other
expenses related to the development and marketing of the Company's Year 2000
tool set. Provision for contract losses of $6,800 relates to the excess of the
remaining estimated contract costs over contract revenues (which are recognized
on the percentage of completion method based on estimated hours to complete).
Bad debt expense of $123,720 relates to doubtful collection of a trade accounts
receivable. Loss on release of assets of $284,573 relates to the write-off of
the net book value of the Company's leasehold improvements on its Westlake
offices which were released to the landlord effective March 31, 1997, upon a
successful negotiation of early termination of the lease for those facilities.
(In April 1997, the Company moved from its facilities located in Westlake,
Texas, to a smaller and less costly location in Farmers Branch, Texas). Merger,
acquisition and consulting expenses (which relate to other expenses incurred as
a result of the reverse merger in February 1996 and becoming a public company,
including the increased management consulting, and additional accounting and
legal work made necessary as a result of the reverse merger and the various SEC
filings related thereto) decreased to $0 from $871,586, amounting to 0% and
approximately 12% of total operating expenses for the years ended December 31,
1997 and 1996, respectively.
Other Income and Expenses
Interest income decreased approximately 82% to $1,281 in 1997, compared to
$7,312 in 1996, primarily due to the steady depletion of cash balances resulting
from declining sales revenues coupled with increased operating expenses and
costs and expenditures relating to the reverse merger and various fund raising
activities throughout 1996. Interest income on shareholder advance decreased to
$0 in 1997, compared to $33,522 in 1996, due to payoff of the loan during the
second quarter of 1996. Interest expense (which includes loan origination fees)
increased to $156,175 in 1997, compared to only $45,263 in 1996, primarily due
to (1) interest and loan fees connected with obtaining short-term financing, (2)
interest on convertible debentures, senior secured promissory notes and
shareholder loans, (3) finance charges assessed by trade creditors for late
payment of accounts payable, and (4) interest and penalties related to the 1995
income tax liability. Financing fees of $108,806 relate to (1) the amortized
portion of fees paid in 1997 to the placement agent in connection with the
issuance of the Senior Secured Promissory Notes, (2) the expensing of fees paid
in 1996 to the placement agent in connection with the issuance of convertible
debentures, and (3) fees paid in connection with two private sales of shares in
the fourth quarter of 1997.
Income Taxes
The Company generated losses for income tax purposes of approximately $2,100,000
during the year ended December 31, 1997. The total net operating loss at
December 31, 1997, of
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approximately $3,400,000 has a valuation allowance against the deferred tax
asset due to uncertainty of generating future taxable income. The net operating
loss carryover generated for the year ended December 31, 1997, will expire in
2012.
Extraordinary Item
Forgiveness of debt of $183,351 relates to reductions in amounts due to various
vendors through negotiation of terms.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $2,153,297 for 1997, which resulted
primarily from the operating loss, partially offset by receipt of the income tax
refund. This compares to net cash used by operating activities of $2,304,344 for
1996, attributable primarily to the operating loss, offset partially by net
increases in accounts payable balances. At December 31, 1997, the Company had a
net working capital deficit of $1,563,162, an increase of $415,342 for the year
then ended.
At December 31, 1997, the Company had a total of $394,755 in outstanding
accounts receivable ($518,475 billed, net of $123,720 allowance for doubtful
accounts, and $0 unbilled), the net amount of which is considered fully
collectible.
At December 31, 1997, the Company's outstanding debt obligations included (i)
$462,500 in short-term loans from a bank and outside investment groups, (ii)
$1,112,500 in Senior Secured Promissory Notes related to the private placements
and (iii) $63,276 in advances from shareholders.
During 1997, the Company funded its operations primarily from the collection of
$505,680 in connection with the issuance of common stock, from the receipt of
$1,112,500 in connection with the Senior Secured Promissory Notes (net of
$127,938 in financing fees), from the receipt of $507,733 (net of penalties and
interest) relating to an income tax refund receivable, from the receipt of
$762,500 in proceeds from short-term loans from a bank and outside investment
groups, and from the collection of accounts receivable outstanding and the
receipt of sales revenues and customer deposits totaling $1,231,345.
Due to the significant decline in revenues and earnings for the year ended
December 31, 1996, resulting primarily from expiration of contracts with IBM and
failure of prior management to adapt the Company's products and services to
changing market conditions, the Company's new management formulated and
implemented a restructuring plan and a new business plan. 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 implementation of this plan should
return the Company to profitability by the fourth quarter of 1998. However,
there can be no assurance that the Company will generate an increase in revenues
or earnings or achieve profitability.
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Cash and the capital needed for R&D activities and continued growth remained a
major concern as of December 31, 1997. The Company's situation at the end of
1997 remained critical as it continued to suffer the serious cash flow
difficulties it had experienced since mid-1996. To continue to fund its
operations for 1998, the Company is currently in the process of receiving the
funds being raised from the Offerings which commenced in March 1998. The Company
continues to actively work with trade creditors to postpone the payment of and
negotiate settlements regarding such outstanding accounts payable on terms
favorable to the Company.
In March 1997, after assessing the Company's precarious situation, management
(headed up by a new President and CEO) began implementation of its new business
plan resulting in completing two Private Placements, restarting of the sales
engine, closing two sales contracts, and reestablishment of research and
development activities.
While much remains to be accomplished, the Company has made significant progress
towards stabilization. Management expects 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.
Although the Company experienced a significant net loss for the year ended
December 31, 1997, management believes it is important to note the growing
opportunity for the Company to sell its products and services based on the rapid
growth and changes occurring in today's marketplace. Management believes, that
by capitalizing on these opportunities, revenues and earnings will increase,
although no assurances can be given regarding such increase.
RISK FACTORS
This Form 10-KSB 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-KSB, 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
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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.
UNCERTAIN MARKET ACCEPTANCE
The Company believes that its Commander TechnologySM and new MigraTEC2000
products appear to have a strong demand in the marketplace. The new marketing
and sales approach being taken to sell this new technology and services is
expected to produce a significant number of customers. However, the Company's
ability to execute this new strategy remains untested, thus no assurance can be
given that market acceptance will occur.
RECENT OPERATING LOSSES
The Company was organized in January 1991, and while it has experienced certain
periods of profitability since its inception, the Company has sustained
substantial losses in recent times. For the years ended December 31, 1997 and
1996, the Company incurred net losses of $2,517,606 and $3,717,152,
respectively. As at December 31, 1997, the Company had an accumulated deficit of
$3,996,034. The Company is dependent on the proceeds of the March 1998 offerings
to sustain its operations. There can be no assurances that the Company will be
able to develop or sustain profitable operations in the future. Results of
operations in the future will be influenced by numerous factors including
technological developments, further development of the Company's proprietary
software conversion products, expansion of the Company's marketing program,
increases in expenses associated with sales growth, market acceptance of the
Company's products, the capacity of the Company to expand and maintain the
quality of its software conversion products, competition and the ability of the
Company to control costs. There can be no assurance that revenue growth or
profitability on a quarterly or annual basis will be reached in the future. In
addition, the Company will be subjected to all the risks incident to a rapidly
developing and technologically oriented business with only a limited history of
operations.
EXPLANATORY PARAGRAPH IN INDEPENDENT AUDITOR'S REPORT
As described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 6 of the Form 10-KSB Annual Report, the
Company had experienced a substantial decline of revenue, had incurred
substantial losses and required substantial funding both in the near term and
intermediate term period. The Company's independent auditors included an
explanatory paragraph in their report on the Company's December 31, 1997,
financial statements addressing the ability of the Company to continue as a
going concern. The Company still requires funding in order to accomplish its
change in business strategy following the restructuring of its management.
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DEPENDENCE ON KEY PERSONNEL
The success of the Company is highly dependent upon the continued services of
Mr. Curtis Overstreet, its Chief Executive Officer, and Mr. Benjamin Swirsky,
its recently elected Chairman of the Board. The loss of the services of either
Mr. Overstreet or Mr. Swirsky would likely have a material adverse effect on the
business of the Company. MigraTEC does not presently maintain key man insurance
on the life of any of its officers. There can be no assurances that the Company
will be able to replace Mr. Overstreet or Mr. Swirsky in the event their
services become unavailable.
SUBSTANTIAL INDEBTEDNESS
The Company's operations have been financed in part from short-term and
long-term indebtedness provided by shareholders and others. The Company is
obligated to repay the Senior Secured Promissory Notes on July 1, 1999. In the
absence of sufficient financing, the Company may be materially adversely
affected by the requirement to repay the Notes since it may not have use of such
funds to either sustain or to continue the development of its operations. If the
Company is unable to realize sufficient proceeds from the March 1998 offerings
or additional financings or to generate sufficient cash flow from operations to
meet scheduled or unscheduled debt payments, there can be no assurance that the
Company will be able to repay, or restructure such indebtedness, and any default
on its debt would have a material adverse effect on the Company.
LEGAL PROCEEDINGS
As described under Item 3 of the Company's 10-KSB Annual Report, the Company has
been subject to various claims and litigation relating to past transactions.
Over the past nine months the Company has been able to reach settlement with a
number of the parties having claims against the Company.
DEPENDENCE UPON OFFERING
The Company requires the proceeds from the March offerings to acquire shares of
the Company's Common Stock, presently owned by Mr. Richard Dews, former
President and Chief Executive Officer of the Company, to employ its new sales
strategy, to deploy its research and development plans for new products, to hire
sales and consulting staff, to market its computer migrations technology and new
Year 2000 technology to a market which has not been fully introduced to
MigraTEC's services, and for working capital. In the absence of the proceeds
from the March Offerings, the Company's ability to implement a growth plan will
be significantly impaired.
RAPID TECHNOLOGY CHANGE
The software development industry in which the Company competes, as well as the
computer industry as a whole, is subject to rapid technological change and
obsolescence. In order for the Company to compete effectively, it must offer
products which receive customer and consumer acceptance and fulfill customer and
industry needs. To the extent that the Company fails to achieve technological
advances and enhancements comparable to and competitive with those made by
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<PAGE> 15
others in the industry, the Company's products may become obsolete. There can be
no assurances that the Company's products will not be rendered obsolete by
changing technology or that the Company will be able to respond to advances in
technology or changes in customer or consumer needs in a manner as to be
commercially feasible.
PRODUCT DEVELOPMENT RISKS
The Company's business is, to a large degree, subject to continued updating of
existing technology, enhancement of its current software conversion products and
development of new products. Product enhancement and development involve a high
degree of risk, and there is no assurance that development efforts of the
Company will be successful or, if successful, that such development efforts can
be completed on a cost effective and timely basis. Additional funds may be
necessary to develop or enhance a product, and there can be no assurance that
such funds will be available from any source in the future. Finally, there is no
assurance that, once a product has been developed, it will be accepted in the
marketplace, will be commercially successful, or will not be rendered
technologically obsolete soon after its development.
COMPETITION
The Company is engaged in a highly competitive segment of the data processing
industry. The Company competes or may subsequently compete, directly or
indirectly, with a large number of companies which may provide various levels of
services or products comparable with those provided by the Company. Many present
or prospective competitors are larger, better capitalized, more established and
have greater access to resources necessary to produce a competitive advantage.
Although the Company believes that its products and services may be on the
leading edge of technology and can ultimately occupy an attractive market
position, there can be no assurance that the Company will ever be able to
compete effectively in its market.
The computer technology and services industry is extremely competitive. Despite
the Company's confidence that its technology represents a better solution than
that of its competitors and that its products and services are among the most
efficient and effective solutions systems in the marketplace, MigraTEC competes
with many firms which provide products and services similar to the Company's
current and proposed offerings. Most of these competitors have capital, name
recognition and financial, personnel and other resources far greater than those
of MigraTEC. These competitors include IBM, Andersen Consulting, Computer
Science Corporation, Viasoft, Acceler8 and many others. The Company's ability to
compete effectively will depend, in part, upon its systems' features, their cost
effectiveness, the ability of the Company to maintain state-of-the-art
technology, the ability of the Company to service its products efficiently and
the Company's success in marketing and selling such products and services. No
assurance can be given that the Company will effectively compete with its
market.
NO ASSURANCE OF PROTECTION FOR PROPRIETARY RIGHTS; RELIANCE ON TRADE SECRETS
The Company will seek to maintain its proprietary rights by patents, trade
secret protection and by the use of nondisclosure and restrictive covenant
agreements with its employees. While the
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<PAGE> 16
Company has taken legal precautions to protect its interests, there can be no
assurance that meaningful proprietary protection can be attained, that the
Company will be able to enter into or enforce patents and agreements which
restrict competitive activities of its employees, or that various individuals
trained by the Company may not seek to engage in competitive activities
subsequent to their employment by the Company. The Company's method of
operations will have only limited proprietary protection as it is unlikely that
it will be able to secure meaningful proprietary protection relevant to its
methods of business operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY
The Company is currently preparing a patent application on its MigraTEC2000
technology. While the Company believes that this patent will provide protection
for its technology, no assurance can be given that the Company will be able to
obtain a patent or effectively protect its rights in the marketplace.
POTENTIAL DILUTIVE EFFECT OF FUTURE OFFERINGS
The Company expects to engage in future financings over the next several years.
There can be no assurances that such financings will ever be completed, but any
such financings could involve a dilution of the interests of the shareholders of
the Company upon the issuance of additional shares of Common Stock and other
securities.
COMPETITION FOR KEY PERSONNEL
The competition for recruitment of personnel in the software development
industry is continuous and highly intense. The Company's success will depend in
part on its ability to recruit, train and retain highly skilled executive,
technical and marketing personnel. There can be no assurances that the Company
will, in fact, be in a position to secure and maintain the services of such
highly skilled personnel to support the Company's contemplated operating and
service expansion program.
NEED FOR QUALIFIED PERSONNEL
In order to meet its business objectives, it has been and will continue to be
necessary for the Company to develop and update the Company's sales model and to
employ and train qualified marketing and sales personnel staff to carry out the
new sales approach. Competition for qualified personnel in the software
development industry is intense and the Company will be required to compete for
such personnel with companies having greater financial and other resources than
the Company. There can be no assurance that the Company will be able to attract
and retain qualified personnel.
BROKER-DEALER SALES OF SHARES
The Company's Common Stock is not presently included for trading on the NASDAQ
System, and there can be no assurances that the Company will ultimately qualify
for inclusion within that system. The Nasdaq Stock Market, Inc. has recently
enacted certain changes to the entry and
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<PAGE> 17
maintenance criteria for listing eligibility on The Nasdaq SmallCap Market. The
entry standards require at least $4 million in net tangible assets, $50 million
in market capitalization or $750,000 net income in the most recently completed
fiscal year or in two of the last three years. The proposed entry standards
would also require a public float of at least one million shares at $5 million
market value of public float, a minimum bid price of $4.00 per share, at least
three market makers, and at least 300 shareholders. The maintenance standards
(as opposed to entry standards) require at least $2 million in net tangible
assets, $35 million in market capitalization or $500,000 in net income in the
most recently completed fiscal year or two of the last three years, a public
float of at least 500,000 shares, a $1 million market value of public float, a
minimum bid price of $1.00 per share, at least two market makers, and at least
300 shareholders.
No assurance can be given that the Common Stock of the Company will ever qualify
for inclusion on the NASDAQ System. Until the Company's shares qualify for
inclusion in the NASDAQ System, the Company's securities will be traded in the
over-the-counter markets through the "pink sheets" or on the OTC Bulletin Board.
As a result, the Company's Common Stock is covered by a Securities and Exchange
Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5 million or individuals with net worth in excess of $1 million or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and may
also affect the ability of shareholders to sell their shares in the secondary
market.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
after the March offerings or the perception that those sales could occur could
adversely affect the market price of the Common Stock and the Notes and the
Company's ability to raise additional funds in the future in the capital
markets. As at March 31, 1998, the Company had outstanding 34,787,205 shares of
Common Stock, assuming no exercise of outstanding options. In addition, options
and warrants to purchase 11,033,844 shares of Common Stock had been issued as of
that date. Of the shares outstanding, 14,176,986 shares are tradable without
restriction or limitation under the Act, except for any shares held by
"affiliates" of the Company which will be subject to the resale limitations
under Rule 144 of the Act. The remaining 20,610,219 outstanding shares of Common
Stock are "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares"), which will become unrestricted over various periods of
time. The Restricted Shares may not be sold except in compliance with the
registration requirements of the Act or pursuant to an exemption, including that
provided by Rule 144.
There are a number of events that have taken place subsequent to December 31,
1997, which have an effect on stockholders' equity. In addition to the March
offerings and other events, the Company intends to grant two-year warrants for
the purchase of 5,200,000 shares of the Company's common stock at an exercise
price of $0.20 per share to members of the Company's
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<PAGE> 18
Board of Directors as comprised at the closing of the Company's private offering
which commenced on March 30, 1998. At the culmination of all of these events,
assuming full subscription of the Offering #2 and related payment of placement
fees, the Company anticipates that its outstanding shares of Common Stock,
options and warrants will be:
43,137,205 shares of Common Stock issued and outstanding,
7,781,875 options to purchase shares of Common Stock, and
12,736,469 warrants to purchase shares of Common Stock.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included under Item 13 (a) of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE UNDER SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions with the Company of
the executive officers and directors of the Company. Directors will be elected
at the Company's annual meeting of shareholders and serve for one year or until
their successors are elected and qualify. Officers are elected by the Board and
their terms of office are, except to the extent governed by employment contract,
at the discretion of the Board.
<TABLE>
<CAPTION>
Name Age Position with the Company
---------------------------------- ------------- -------------------------------------
<S> <C> <C>
W. Curtis Overstreet 52 President, CEO and Director
Benjamin Swirsky 56 Chairman
Joseph B. Meredith 43 V.P. of Business Development
Rick J. Johnson 39 COO
Mark C. Myers 43 CFO, General Counsel and Secretary
Jeffrey C. Manchester 40 Director
Deane Watson, Jr. 51 Director
</TABLE>
W. CURTIS OVERSTREET. Mr. Overstreet was appointed President and Chief Executive
Officer of MigraTEC, Inc., and elected to the Board of Directors on April 10,
1997. He is a seasoned senior executive with almost 30 years of experience in
the computer software industry. He has had consistent success in both growth and
turnaround situations involving domestic and international environments. He has
particular expertise in the development of high performance sales and management
teams, which, in the opinion of the Board of Directors, are needed by the
Company at this time. Prior to his appointment as President, Mr. Overstreet
served as a consultant to Company management for several weeks, during which
time he reviewed the Company's management and technical expertise, the status of
current client projects, the prospects for future contracts and also analyzed
the Company's financial situation. The review and analysis of this information
and data was used to prepare the new business plan for the Company. Mr.
Overstreet graduated with a B.S. degree in Economics from West Texas State
University, a member of the Texas Agricultural and Mechanical University system,
located in Canyon, Texas.
BENJAMIN SWIRSKY. Mr. Swirsky was elected to the Board of Directors in July
1997, and subsequently was elected Chairman in December 1997. Most recently Mr.
Swirsky was the President and Chief Executive Officer of Slater Steel, Inc., a
diversified industrial company with investments in steel production, service,
forging and hardware and trucking industries. Slater Steel is headquartered in
Toronto, Ontario, and conducts operations in Canada and the United States. Mr.
Swirsky was previously President and Chief Executive Officer of Bramalea, one of
North
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<PAGE> 20
America's largest real estate development companies. Prior thereto, Mr. Swirsky
was a senior partner and a member of the executive committee of Peat, Marwick,
Mitchell, Chartered Accountants.
JOSEPH B. MEREDITH. Mr. Meredith was appointed Vice President of Business
Development of MigraTEC, Inc., on June 2, 1997. From January 1995 to May 1997,
Mr. Meredith was Account Executive for Software AG, Americas, based in Dallas,
Texas. Prior thereto, from August 1993 to November 1994, Mr. Meredith served as
Director of Business Development for BSG Corporation, based in Houston, Texas.
From May 1986 to August 1993, Mr. Meredith was Senior Account Executive for EDS
Corporation located in Dallas, Texas. From October 1982 to April 1986, Mr.
Meredith served as Regional Vice President for Parker North America Corporation
head quartered in Newport Beach, California.
RICK J. JOHNSON. Mr. Johnson was appointed Chief Operating Officer of MigraTEC,
Inc., on July 1, 1997, and serviced as Secretary of the Company from July 1997
through March 1998. From January to March 1997, Mr. Johnson was Director of
Operations Support - Integrated Business Solutions and thereafter also Director
of Applications Solutions for Software AG, Americas, based in Dallas, Texas.
Prior thereto, from January 1995 to December 1996, Mr. Johnson served as
Business Manager - West U.S. Area for that company. From February 1982 to
January 1995, Mr. Johnson served in various executive capacities with Andersen
Consulting and its predecessor division at Arthur Andersen & Co., based in
Dallas, Texas.
MARK C. MYERS. Mr. Myers was appointed to the position of Chief Financial
Officer, General Counsel and Secretary of MigraTEC, Inc., on April 1, 1998. From
1996 to 1997, Mr. Myers served as COO and CFO for Interactive Software, Inc., an
Oracle software consulting services and software sales company, based in Dallas,
Texas. Prior thereto, Mr. Myers served in numerous executive capacities
including President of Healthtronix from 1992 to 1996, President and founder of
United Medicorp, Inc., a high-tech medical insurance claim processing and
consulting company, from 1989 to 1992, President of Premier Services, Inc., from
1986 to 1989, Vice President and General Counsel for ARM, Inc., from 1985 to
1986, Assistant General Counsel and Director of Regulatory Affairs for U.S.
Telephone from 1998 to 1985, and a practicing attorney for Moseley, Jones, Enoch
& Martin from 1980 to 1982. Mr. Myers earned his JD/MBA from Southern Methodist
University in 1979, and graduated with a BBA in Accounting from Wichita State
University in 1975.
JEFFREY C. MANCHESTER. Mr. Manchester was elected to the Board of Directors in
July 1997. Currently, Mr. Manchester is Vice President of Operations, Southeast
Region, for Cambridge Technology, a management consulting firm. Prior thereto,
Mr. Manchester was a founding principal of The Systems Consulting Group, Inc.,
based in Miami, Florida, which was engaged in computer systems development.
Previous to that, Mr. Manchester was employed by Andersen
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<PAGE> 21
Consulting from July 1982 to May 1988, and was a Senior Manager of that firm at
the time of his departure.
DEANE WATSON, JR. Mr. Watson was elected to the Board of Directors in March
1998. Currently, Mr. Watson is a practicing attorney in general business
practice with an emphasis in oil and gas, real estate and collections. Since
1992, Mr. Watson has also served as President and Managing Director of Omega
Energy Corporation, and oil and gas production firm. Prior thereto, Mr. Watson
as served in numerous other capacities including residential builder/developer
from 1986 to 1989, independent petroleum landman from 1989 to 1992 and from 1980
to 1986, and Vice President/ Escrow Officer of Chicago Title Company from 1973
to 1980. Mr. Watson earned his JD from Texas Weslayan School of Law in 1993, and
graduated with a BBA with an emphasis in Economics and Accounting from West
Texas State University in 1982.
Effective December 1, 1997, the Company adopted a policy whereby Directors would
be compensated for their services at a rate of $2,000 per month. The Company
paid $6,000 for Directors' fees for the year ended December 31, 1997.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent (10%) of a registered class
of the Company's equity securities, to file with the Commission initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent (10%) stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file. Due to recent changes
in management and certain ambiguity as to whether the Company's Common Stock was
registered under Section 12(g) of the Securities Exchange Act of 1934, Messrs.
W. Curtis Overstreet and H. Wayne Sanderson were late in filing their Initial
Report of Beneficial Ownership. In addition, Mr. Richard G. Dews, a former
member of management, has failed to file such report.
To the Company's knowledge, except as indicated above, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
(10%) beneficial owners were completed.
ITEM 10. EXECUTIVE COMPENSATION
Total cash compensation paid to all executive officers as a group for services
provided to the Company in all capacities during the year ended December 31,
1997, aggregated to $434,772. Set forth below is a summary compensation table in
the tabular format specified in the applicable rules of the Securities and
Exchange Commission.
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<PAGE> 22
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Position Period Salary Bonus sation Award(s) SARs (#) Payouts sation
- ----------------------- ------------- ------------- ------------- -------------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Curtis Overstreet, 1997 $ 67,925 $ 48,000 $ 2,000 $ - - - $ 29,500
President, CEO and 1996 $ - $ - $ - $ - - - $ -
Director 1995 $ - $ - $ - $ - - - $ -
Richard G. Dews, 1997 $ 1,500 $ - $ - $ - - - $ -
Former President, 1996 $145,636 $ - $ - $ 63,650 - - $ -
CEO and Chairman 1995 $250,020 $891,743 $ - $ - 2,154,112 - $ -
H. Wayne Sanderson, 1997 $ 50,945 $ - $ - $ - - - $ -
Former Secretary, 1996 $ 62,813 $ - $ - $ 3,350 26,006 - $ -
V.P. and Director 1995 $100,000 $ - $ - $ - 113,374 - $ -
</TABLE>
The Company entered into a one year employment agreement with its President and
CEO effective April 10, 1997. The agreement includes provisions for an annual
base salary of $90,000, incentives to earn additional compensation in the forms
of salary increases and various performance bonuses upon meeting certain
criteria, as stipulated in the agreement, and sales commissions.
The Company entered into a one year employment agreement with its Vice President
of Business Development effective June 2, 1997. The agreement includes
provisions for an annual base salary of $75,000 and sales commissions.
The Company entered into a one year employment agreement with its Chief
Operating Officer effective July 1, 1997. The agreement includes provisions for
an annual base salary of $125,000 and incentives to earn additional compensation
in the forms of salary increases and various performance bonuses upon meeting
certain criteria, as stipulated in the agreement.
The Company entered into a one year employment agreement with Chief Financial
Officer effective April 1, 1998. The agreement includes provisions for an annual
base salary of $125,000 and incentives to earn additional compensation in the
forms of salary increases and various performance bonuses upon meeting certain
criteria, as stipulated in the agreement.
OPTION EXERCISES AND VALUES AT YEAR END
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---------------------------- ------------------ ------------------ ---------------------- ----------------------
<S> <C> <C> <C> <C>
W. Curtis Overstreet - $ - 733,903 / 2,201,708 $271,544 / $814,632
Richard G. Dews - $ - - / - $ - / $ -
H. Wayne Sanderson - $ - 26,006 / - $105,000 / $ -
</TABLE>
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<PAGE> 23
Pursuant to provisions of the employment agreement with its President and CEO,
the Company granted options to purchase ten percent (10%) of the total number of
common shares outstanding as of the date of the agreement at an exercise price
of $0.37 per share, and includes an anti-dilutive clause which increases the
number of options available for exercise under certain conditions as noted in
the agreement. The options vest at the rate of 25% after each six month period
beginning April 10, 1997. Any unexercised options will expire four years after
the vesting date, except as noted in the agreement.
The Company entered into an agreement with its current Chairman effective June
24, 1997, whereby the Company granted options to purchase 50,000 common shares
at an exercise price of $0.35 per share. The options were vested 100% at grant
date, and expire June 24, 2000.
Pursuant to provisions of the employment agreement with its Vice President of
Business Development, the Company granted options to purchase two percent (2%)
of the total number of common shares outstanding as of the date of the agreement
at an exercise price of $0.31 per share, and includes an anti-dilutive clause
which increases the number of options available for exercise under certain
conditions as noted in the agreement. The options vest at the rate of 1/24 per
month beginning June 2, 1997, and are exercisable at vesting at any time during
employment, except as noted in the agreement.
Pursuant to provisions of the employment agreement with its Chief Operating
Officer, the Company granted options to purchase two percent (2%) of the total
number of common shares outstanding as of the date of the agreement at an
exercise price of $0.33 per share, and includes an anti-dilutive clause which
increases the number of options available for exercise under certain conditions
as noted in the agreement. The options vest at the rate of 1/24 per month
beginning June 13, 1997, and are exercisable at vesting at any time during
employment, except as noted in the agreement.
Pursuant to provisions of the employment agreement with its Chief Financial
Officer, the Company granted options to purchase 900,000 shares of the Company's
common stock at an exercise price of $0.20 per share. The options vest at the
rate of 1/24 each month beginning April 1, 1998, and are exercisable at vesting
at any time during employment, except as noted in the agreement.
The Company entered into an agreement with a Director effective June 19, 1997,
whereby the Company granted options to purchase 25,000 common shares at an
exercise price of $0.35 per share. The options were vested 100% at grant date,
and expire June 19, 2000.
As of March 31, 1998, the Company has previously granted to members of its
management and employees options to purchase an aggregate of 841,006 shares of
Common Stock of the Company exercisable at prices ranging from $4.0375 to $0.35.
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<PAGE> 24
EMPLOYEE STOCK PURCHASE PLAN
In April 1997, management announced plans to terminate the Employee Stock
Purchase Plan that the Company had adopted effective July 1, 1996. As a result,
employees who were participating in the Stock Purchase Plan terminated their
participation effective April 1, 1997, and all amounts previously withheld for
the second quarter 1997 were refunded to the participants.
EMPLOYEE STOCK OPTION PLAN
In April 1997, management announced plans to terminate the Employee Stock Option
Plan that the Company had adopted effective March 25, 1996.
In 1997, the Company adopted a new stock option plan, the 1997 Stock Option
Plan, authorizing the issuance of incentive stock options, non statutory options
and reload options to eligible persons as described in the Plan. Pursuant to the
Plan, the Company granted stock options effective December 29, 1997, as follows:
(i) to 20 individuals who were employed as of April 30, 1997, to purchase
343,500 shares of the Company's common stock at $0.35 per share. The
options were vested 41.67% at the option date, vest an additional 1/48
each month thereafter, and expire one year after fully vested;
(ii) to 12 individuals who were employed as of April 30, 1997, to purchase
111,900 shares of the Company's common stock at $0.35 per share. The
options were vested 100% at the option date, and expire April 30, 1999;
and
(iii)to eight employees who were hired subsequent to April 30, 1997, to
purchase 133,000 shares of the Company's common stock at $0.35 per
share. The options vested 6.25% ninety days after each employee's date
of hire, vest an additional 1/48 each month thereafter, and expire one
year after fully vested.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth Common Stock ownership as of March 31, 1998, with
respect to (i) each person known to the Company to be the beneficial owner of
five percent (5%) or more of the Company's outstanding Common Stock, (ii) each
director of the Company, and (iii) all executive officers and directors of the
Company as a group. This information as to beneficial ownership was furnished to
the Company by or on behalf of the persons named. Unless otherwise indicated,
the business address of each person is 12801 North Stemmons Freeway, Suite 710,
Farmers Branch, Texas 75234. Information with respect to the percent of class is
based on 34,787,205 shares of the Company's Common Stock issued and outstanding
as of March 31, 1998.
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<PAGE> 25
<TABLE>
<CAPTION>
Shares
Beneficially Percentage of Shares
Name Owned Beneficially Owned
------------------------------------------- -------------------------- -------------------------
<S> <C> <C>
Cede & Co. 11,625,709 33.42
Richard G. Dews 2,001,976 6.82
Aronowitz RI Family, L.P. 2,000,000 6.82
CLR Associates, Inc. 1,602,564 5.46
W. Curtis Overstreet - -
Benjamin Swirsky 500,000 1.70
Jeffrey C. Manchester - -
Deane Watson, Jr. 545,227 1.57
Directors and Officers as a
group (7 persons) 1,490,454 4.28
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 6, 1996, the Company entered into an agreement to pay $100,000 over a
12 month period to a former employee in exchange for services rendered. An
acceleration clause requires any remaining balance to be paid in full upon the
Company raising $500,000 of capital. The December 31, 1997, balance sheet
reflects the remaining unpaid balance of $25,000 as an accrued liability.
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, efforts by Mr. Dews to sell shares of the Company's Common
Stock, originally acquired and restricted pursuant to Rule 144 of the Act, and
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 amounts 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 Marilyn Johnson the amount of $68,250 in
installments of $1,000 for 68 months on the tenth of each month beginning April
10, 1998, with the final payment of $250 being due on December 10, 2003.
Attorney fees paid 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 to be paid in cash.
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<PAGE> 26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements listed on the index to financial statements on
Page F-1 are filed as part of this Form 10-KSB.
(c) Exhibits
3.1 Certificate of Incorporation of the Company (incorporated
herein by reference to Form S-18 Registration Statement under
the Securities Act of 1933, as amended, filed with the
Commission under S.E.C. File Number 33-28809-A).
3.2 By-Laws of the Company (incorporated herein by reference to
Form S-18 Registration Statement under the Securities Act of
1933, as amended, filed with the Commission under S.E.C. File
Number 33-28809-A).
16.1 Letter from Angel E. Lana, C.P.A., to the Securities and
Exchange Commission dated June 4, 1996 (incorporated by
reference to the 8-K Current Report dated June 14, 1996).
27 Financial Data Schedule
-26-
<PAGE> 27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on this 15th day of April, 1998.
MIGRATEC, INC.
By: /s/ W. CURTIS OVERSTREET
------------------------------------
W. Curtis Overstreet,
President and
Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant, and in the capacities and on the
date indicated.
<TABLE>
<S> <C> <C>
By: /s/ W. CURTIS OVERSTREET 4/15/98
--------------------------------- ---------------
W. Curtis Overstreet President, Chief Executive Dated
Officer, Principal Executive
Officer, and Director
By: /s/ MARK C. MYERS 4/15/98
--------------------------------- ---------------
Mark C. Myers Chief Financial Officer, Dated
Principal Financial Officer
By: /s/ BENJAMIN SWIRSKY 4/15/98
--------------------------------- ---------------
Benjamin Swirsky Chairman Dated
By: /s/ DEANE WATSON, JR. 4/15/98
--------------------------------- ---------------
Deane Watson, Jr. Director Dated
</TABLE>
-27-
<PAGE> 28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
through
F-28
EXHIBITS
(11) Statement of Computations of Per Share Earnings F-29
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MigraTEC, Inc. (Formerly One Up Corporation)
We have audited the consolidated balance sheets of MigraTEC, Inc. (Formerly One
Up Corporation) and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MigraTEC, Inc.
(Formerly One Up Corporation) and Subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company's losses in 1997 and 1996, net capital deficiency and
the outstanding contingencies raise substantial doubt about the Company's
ability to continue as a going concern. Management plans as to these matters are
also described in Note 3. The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classifications of liabilities that might result from the outcome of
the uncertainty.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
April 1, 1998
F-2
<PAGE> 30
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 4,076 $ 36,939
Accounts receivable - billed, net of allowance for
doubtful accounts of $123,720 and $0 respectively 394,755 116,157
Accounts receivable - unbilled -- 203,070
Shareholder advance 3,766 3,766
Income tax refund receivable -- 507,733
Restricted cash 28,150 --
Deferred tax asset 9,024 --
Other current assets 16,600 4,827
----------- -----------
Total current assets 456,371 872,492
PROPERTY AND EQUIPMENT, NET 452,555 843,226
OTHER ASSETS
Financing fees 101,382 68,250
Deferred tax asset -- 97,765
Other assets 21,548 1,300
----------- -----------
Total other assets 122,930 167,315
----------- -----------
Total Assets $ 1,031,856 $ 1,883,033
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ 112,963 $ --
Notes payable 275,000 2,053
Transfer liability 187,500 --
Accounts payable 779,904 870,359
Accrued expenses 404,258 303,003
Obligation under capital lease 25,267 --
Customer deposits in excess of unbilled receivables 171,365 678,450
Shareholder advances 63,276 68,682
Deferred tax liability -- 97,765
----------- -----------
Total current liabilities 2,019,533 2,020,312
LONG-TERM LIABILITIES
Long-term portion of notes payable, net of discount of $76,077 1,036,423 --
Convertible debentures -- 525,000
Long-term portion of obligation under capital lease 41,388 --
Deferred tax liability 9,024 --
----------- -----------
Total long-term liabilities 1,086,835 525,000
MINORITY INTEREST (3,752) 5,632
COMMITMENTS AND CONTINGENCIES (NOTES 3, 10, 11, 12, 13, 15, 16 AND 17)
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;
30,199,154 and 18,002,253 shares issued in 1997 and 1996, respectively 2,197,640 1,166,960
Additional paid-in capital 796,263 712,186
Treasury stock, at cost (854,903 shares) (1,068,629) (1,068,629)
Retained earnings (accumulated deficit) (3,996,034) (1,478,428)
----------- -----------
Total stockholders' equity (deficit) (2,070,760) (667,911)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,031,856 $ 1,883,033
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 31
MIGRATEC, INC. AND
SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Operations
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
REVENUES $ 2,045,607 $ 2,259,997
COSTS AND EXPENSES
Salaries and benefits 2,084,146 3,118,811
Contract labor 672,475 835,204
General and administrative 340,665 723,932
Advertising and marketing 17,086 98,037
Product costs -- 1,596
Travel 39,749 465,530
Rent 186,899 386,106
Depreciation and amortization 233,962 317,036
Insurance 5,025 16,662
Legal and professional fees 211,936 315,486
Year 2000 program costs 293,604 --
Provision for contract losses 6,800 --
Bad debt expense 123,720 --
Loss on release of assets 284,573 --
Merger, acquisition and consulting expenses -- 871,586
------------ ------------
Total operating expenses 4,500,640 7,149,986
------------ ------------
Loss from operations
(2,455,033) (4,889,989)
OTHER INCOME (EXPENSES)
Interest income 1,281 7,312
Interest income on shareholder advance -- 33,522
Gain on sale of assets 8,392 --
Interest expense (156,175) (45,263)
Financing fees (108,806) --
------------ ------------
Total other income (expenses) (255,308) (4,429)
Minority interest in income (loss) of
consolidated subsidiary (9,384) 39
------------ ------------
Loss before income taxes and extraordinary item
(2,700,957) (4,894,379)
Provision for income tax expense (benefit) -- (1,177,227)
------------ ------------
Net loss before extraordinary item
(2,700,957) (3,717,152)
Extraordinary income from forgiveness of debt (net of income taxes of $0) 183,351 --
------------ ------------
Net loss $ (2,517,606) $ (3,717,152)
============ ============
Loss before income taxes and extraordinary item per common share $ (0.100) $ (0.304)
============ ============
Extraordinary gain per common share $ (0.006) $ --
============ ============
Net loss per common share (basic and diluted) $ (0.094) $ (0.231)
============ ============
============ ============
Weighted average common shares and common
equivalents outstanding (basic and diluted) 26,910,165 16,082,740
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 32
MIGRATEC, INC. AND
SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1997 and 1996
<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, 1996, including
effect of stock split 11,337,432 $ 1,000 -- $ -- --
Issuance of stock for services rendered 2,267,486 -- -- -- --
Effect of reverse acquisition 1,660,350 106,220 37 37,000 --
Conversion of preferred stock to common
stock 37,018 37,000 (37) (37,000) --
Issuance of stock in connection with
private placement for cash 418,500 279,000 -- -- --
Issuance of stock related to various
consulting agreements and for cash 2,146,000 550,000 -- -- --
Issuance of stock to key employees for
cash 106,750 173,250 -- -- --
Treasury stock received in exchange for
shareholder advances -- -- -- -- (854,903)
Issuance of stock to employees under the
Employee Stock Purchase Plan for cash 28,717 20,490 -- -- --
Net loss -- -- -- -- --
Balance at December 31, 1996 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 -- -- --
Issuance of stock in connection with the
exercise of warrants for cash 60,000 600 -- -- --
Issuance of stock in connection with
private placements for cash 1,800,000 500,000 -- -- --
Issuance of stock for services rendered 32,000 -- -- -- --
Discount related to issuance of Secured
Promissory Notes with Warrants -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 30,199,154 $ 2,197,640 -- -- (854,903)
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Retained
Treasury Additional Earnings
Stock Paid-in (Accumulated
Amount Capital Deficit) Total
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996, including
effect of stock split $ -- $ 66,559 $ 2,393,321 $ 2,460,880
Issuance of stock for services rendered -- 67,000 -- 67,000
Effect of reverse acquisition -- 11,377 (154,597) --
Conversion of preferred stock to common
stock -- -- -- --
Issuance of stock in connection with
private placement for cash -- -- -- 279,000
Issuance of stock related to various
consulting agreements and for cash -- 567,250 -- 1,117,250
Issuance of stock to key employees for
cash -- -- -- 173,250
Treasury stock received in exchange for
shareholder advances (1,068,629) -- -- (1,068,629)
Issuance of stock to employees under the
Employee Stock Purchase Plan for cash -- -- -- 20,490
Net loss -- -- (3,717,152) (3,717,152)
Balance at December 31, 1996 (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
Issuance of stock in connection with the
exercise of warrants for cash -- -- -- 600
Issuance of stock in connection with
private placements for cash -- -- -- 500,000
Issuance of stock for services rendered -- 8,000 -- 8,000
Discount related to issuance of Secured
Promissory Notes with Warrants -- 76,077 -- 76,077
Net loss -- -- (2,517,606) (2,517,606)
----------- ----------- ----------- -----------
Balance at December 31, 1997 $(1,068,629) $ 796,263 $(3,996,034) $(2,070,760)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 33
MIGRATEC, INC. AND
SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,517,606) $(3,717,152)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 233,962 317,036
Gain on sale of assets (8,392) --
Loss on release of assets 284,573 --
Assets given in lieu of wages, net 14,233 --
Bad debt expense 123,720 --
Financing fees 68,250 --
Merger, acquisition and consulting expenses paid for in stock -- 567,250
Deferred income tax expense (benefit) -- (127,556)
Common stock issued for services 8,000 67,000
Minority interest (9,384) (39)
Extraordinary income from forgiveness of debt (183,351) --
Change in assets and liabilities:
(Increase) decrease in accounts receivable - billed (402,318) 375,662
(Increase) decrease in accounts receivable - unbilled 203,070 (203,070)
Increase in shareholder advance -- (33,522)
(Increase) decrease in income tax refund receivable 507,733 (507,733)
Increase in restricted cash (28,150) --
(Increase) decrease in other current assets (11,773) 10,157
Increase in other assets (122,930) (44,902)
Increase in accounts payable 92,896 693,674
Increase in accrued expenses 101,255 223,615
Decrease in income taxes payable -- (603,214)
Increase (decrease) in customer deposits (507,085) 678,450
Total adjustments 364,309 1,412,808
Net cash used by operating activities (2,153,297) (2,304,344)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (46,726) (81,567)
Sales of property and equipment 15,700 --
Rebate from lessor for leasehold improvements -- 109,364
Net cash provided (used) in investing activities (31,026) 27,797
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash overdraft 112,963 --
Proceeds from notes payable 575,000 100,000
Proceeds from transfer of accounts receivable with recourse 187,500 --
Proceeds from other debt financing 1,112,500 525,000
Proceeds from issuance of common stock 505,680 1,022,740
Payments under obligations of capital lease (34,724) --
Proceeds from (repayment of) shareholder advances (5,406) 63,076
Repayment of notes payable (302,053) (110,751)
Net cash provided in financing activities 2,151,460 1,600,065
Net decrease in cash (32,863) (676,482)
Cash - beginning 36,939 713,421
----------- -----------
Cash - ending $ 4,076 $ 36,939
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 41,809 $ 39,445
=========== ===========
Income taxes paid $ -- $ 50,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Settlement of shareholder advances through purchase of treasury stock $ -- $ 1,068,629
=========== ===========
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.
F-6
<PAGE> 34
MIGRATEC, INC. AND
SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1. BACKGROUND AND BUSINESS ACTIVITY
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 was founded January 7, 1991, by Richard G. Dews. The initial focus of
the business was to provide contract computer programming education. A
professional curriculum was developed as the foundation for these courses. By
1992, MigraTEC had developed and sold several software products, as well as
further diversifying into consulting services and migration assistance for
clients wishing to migrate their software from the Windows operating system to
the IBM OS/2 platform. By 1993, MigraTEC had identified a need for an automated
migration technique and developed its first set of software tools for that
purpose. Initially, MigraTEC licensed the tools to IBM on an exclusive basis
until December 31, 1995. During 1995, MigraTEC developed more advanced migration
technologies and methodologies, the Company automated much of the migration
process, allowing clients to migrate source code from Windows 16 bit to Windows
95 and NT, from OS/2 to Windows 95 and NT, and enhanced its capabilities to
migrate Windows source code to OS/2. Since January 1996, MigraTEC has offered
its migration services to the public, utilizing these new techniques, continuing
in the development and sale of strategic applications software migration
technology.
During 1997 the Company made a decision to reorient its strategic approach to
exploit its technology as a product offering as opposed to a service offering.
Consequently, since October 1997, the technical focus of the Company has been
reoriented to concentrating on product development and building a technical
marketing organization. Development efforts initiated in October 1997 have lead
to MigraTEC currently launching a new flagship product for the Year 2000
analysis and remediation of desktop applications called MigraTEC2000.
Additionally, during the fourth quarter R&D efforts have enabled the Company to
market its Resource Migration Service, a service which provides a complete
process for migrating resource files (containing dialog boxes and controls,
icons, cursors, bitmaps and fonts) and their corresponding resource header files
and
F-7
<PAGE> 35
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 1. BACKGROUND AND BUSINESS ACTIVITY (CONTINUED)
is supported by MigraTEC proprietary, automated resource migration utility which
greatly reduces the time and effort traditionally required to manually migrate
an application's resources.
MigraTEC is the parent of a majority owned foreign subsidiary, One Up Computer
Services, Ltd. One Up Computer Services, Ltd., was incorporated under the laws
of the Province of Ontario, Canada, in October 1992. Its operations primarily
consisted of contract computer programming education that compliments the
curriculum of MIGRATEC. The operations of One Up Computer Services, Ltd., in the
past have not been significant to the operations of MigraTEC. Early in the first
quarter of 1997, One Up Computer Services, Ltd., ceased operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of MigraTEC, the public company,
and its majority owned foreign subsidiary, collectively referred to as the
Company. Intercompany transactions and balances have been eliminated in
consolidation.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The Company provides for depreciation on the straight-line basis
over the estimated useful lives of the related assets ranging from three to ten
years. Leasehold improvements are amortized straight-line over the life of the
improvements or the lease term if shorter.
Major repairs or replacements of property and equipment are capitalized.
Maintenance, repairs and minor replacements are charged to operations as
incurred.
Software Development Costs
The Company begins to capitalize software development costs after technological
feasibility has been established. Software costs are amortized over the
estimated economic life of the software from the time that a particular product
is developed.
F-8
<PAGE> 36
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Year 2000
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company has examined
the Year 2000 issue, and determined that it will not have a significant impact
on its business, operations or its financial condition.
Income Taxes
Deferred income taxes are determined using the asset and liability method, under
which deferred tax assets and liabilities are determined based on differences
between financial accounting and tax basis of assets and liabilities. Income tax
expense or benefit is the payable or refund for the period plus or minus the
change during the period in deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Revenue Recognition
The Company recognizes revenue as services are performed in accordance with the
terms as set forth in their contract agreements. Losses expected to be incurred
on contracts in progress are charged to operations in the period such losses are
determined. At December 31, 1997 and 1996, accrued expenses include
approximately $6,800 and $0, respectively, of additional direct labor costs that
exceed related contract revenues.
Currency Translation
The functional currency translation of the majority owned subsidiary's assets,
liabilities, revenues and expenses was insignificant to the Company's
consolidated financial statements. Accordingly, the accompanying consolidated
financial statements do not include translation gains and losses.
Statements of Cash Flows
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of three months or less when purchased.
F-9
<PAGE> 37
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss Per Share
Loss per share has been computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the respective periods. The
effect of outstanding warrants and options on the net loss for 1997 and 1996
would be anti-dilutive and, accordingly, they are not included in the
computation of weighted average shares for the years ended December 31, 1997 and
1996.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Included in the accompanying balance sheet is a deferred tax asset at December
31, 1997, of $1,268,226. Realization of that asset is dependent upon the Company
generating sufficient future taxable income against which its loss carryforwards
can be offset. The Company has recorded a 100% valuation allowance for this
asset due to the uncertainty of generating future taxable income. That
uncertainty could change if near-term estimates of future taxable income during
the carryforward period are increased.
The Company recognizes revenue as services are performed. Estimated losses are
recorded in the period determined. Revenue or losses could change if estimates
of percentage complete on contracts changes due to delays or unforseen problems.
Stock-Based Compensation
The Company measures compensation cost for its stock-based compensation plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." The difference, if any, between the
fair value of the stock on the date of grant over the amount received for the
stock is accrued over the related vesting period. Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," requires companies electing to continue to use APB 25 to account
for its stock-based compensation plan to make pro forma disclosures of net
income (loss) and earnings (loss) per share as if SFAS 123 had been applied (See
Note 15).
F-10
<PAGE> 38
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires enterprises to report, by major component and in total, all changes in
equity from non owner sources. The Statement is effective for the Company's
fiscal year ended December 31, 1998, with earlier application permitted. The
effect of adoption of this Statement, if any, will be limited to the form and
content of the Company's disclosures and will not impact the Company's results
of operations or financial position.
Reclassifications
Certain amounts recorded in prior periods have been reclassified to conform to
the current classification.
NOTE 3. GOING CONCERN UNCERTAINTY
As reflected in the accompanying consolidated financial statements, the Company
incurred a net loss of $2,517,606 during 1997, and the Company's current
liabilities exceed current assets in the amount of $1,563,162 at December 31,
1997. 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 migration services and related
products. If the Company is not able to successfully complete the private
placements as planned, or obtain alternative funding, and generate additional
sales revenues in the near term, the Company will be unable to continue as a
going concern.
Beginning in March 1997, after assessing the Company's situation, new management
(headed up by a new President and CEO) began implementation of its new business
plan. During the second and third quarters of 1997, the Company's new management
successfully implemented two 90-day plans. Aimed at improving the Company's
economic situation, the 90-day "turn around" plan led to reductions in
expenditures, stabilization of the work force, hiring of new management and
sales teams, election of a new board of directors, and beginning the process of
raising capital with the signing of the first of two Private Placement
Memorandums (See Note 8). The second 90-day plan resulted in the signing of the
second Private Placement Memorandum, restarting of the sales process, closing
two sales contracts, and reestablishment of research and development activities.
F-11
<PAGE> 39
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 3. GOING CONCERN UNCERTAINTY (CONTINUED)
During the fourth quarter of 1997, based on a decision to reorient its strategic
approach to utilize its technology as a product offering as opposed to a service
offering, the technical focus of the Company was reoriented to concentrating on
product development and building a technical marketing organization. Development
efforts initiated in October 1997 have lead to MigraTEC currently launching a
new flagship product for the Year 2000 analysis and remediation of desktop
applications called MigraTEC2000. Additional R&D efforts have enabled the
Company to market its Resource Migration Service, a service which provides a
complete process for migrating resource files (containing dialog boxes and
controls, icons, cursors, bitmaps and fonts) and their corresponding resource
header files and is supported by MigraTEC proprietary, automated resource
migration utility which greatly reduces the time and effort traditionally
required to manually migrate an application's resources.
Management expects 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.
Cash and the capital needed for R&D activities and continued growth remain a
major concern. To continue to fund its operations for 1998, the Company is
currently in the process of receiving the funds being raised from the private
offerings which commenced in March 1998 (See Note 17). In addition, the Company
is exploring a number of alternatives for a solution to its cash flow
requirements, including obtaining additional financing through private
offerings. However, no assurance can be given that such financing can be
arranged or that the terms and conditions of such financing will be acceptable
to the Company.
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. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997 and 1996:
F-12
<PAGE> 40
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 4. PROPERTY AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Furniture and equipment $ 904,127 $ 932,110
Equipment under capital lease 101,379 --
Leasehold improvements 30,746 410,512
----------- -----------
$ 1,036,252 $ 1,342,622
----------- -----------
Less accumulated depreciation and amortization (583,697) (499,396)
----------- -----------
$ 452,555 $ 843,226
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996, was
$232,662 and $303,586, respectively. Accumulated depreciation on equipment under
capital lease was $38,017 and $0, as of December 31, 1997 and 1996,
respectively.
Effective March 31, 1997, leasehold improvements with a net book value of
$290,041 were released to the landlord as a result of the Company successfully
negotiating the early termination of its lease for office facilities in
Westlake, Texas, and moving to its present location in Farmers Branch, Texas
(See Note 12).
NOTE 5. CURRENT NOTES PAYABLE
In 1994, MigraTEC entered into an installment vehicle note payable to GMAC
Financial Services. The note bore interest at 6.75% annually, had monthly
principal and interest payments of $955, and was fully repaid at maturity in
February 1997.
The short term notes payable at December 31, 1997, include the following:
(i) a note payable of $100,000 to a third party, dated June 10, 1997,
bearing interest at 16% per annum, collateralized by all assets owned
or thereafter acquired, originally payable September 10, 1997, and
subsequently extended to April 15, 1998;
(ii) a note payable of $100,000 to a third party, dated August 25, 1997,
bearing interest at 18% per annum, payable November 26, 1997; and
(iii)a note payable of $75,000 to a third party, dated September 1, 1997,
bearing interest at 18% per annum, payable November 30, 1997.
F-13
<PAGE> 41
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 6. TRANSFER LIABILITY
In December 1997, the Company entered into an account purchase transaction
agreement with Plano Bank & Trust whereby MigraTEC was to assign and sell with
full recourse currently outstanding receivables arising from sales or services
to customers and receive payment for up to $200,000 in receivables to be
purchased by the Bank at a discount. According to terms and conditions of the
Agreement, MigraTEC would receive 81.5% of the face amount of each receivable
tendered to the Bank, net of the Bank's service charge (or discount) equal to
3.5% and net of a 15% reserve amount to be held in a restricted deposit account
established for the purpose of the reserve amount. The outstanding liability
under the Agreement is collateralized by a security interest in all accounts
receivable and property of the Company's counsel, Deane Watson, Jr. The loan is
guarnateed by Deane Watson, Jr. The balance outstanding of $187,500 as reflected
in the accompanying financial statements at December 31, 1997, was paid in full
subsequent to year end, and the Agreement was terminated effective March 23,
1998.
NOTE 7. CAPITAL LEASE
The Company acquired office equipment under the provisions of a long term
capital lease. For financial reporting purposes, minimum lease payments relating
to the office equipment have been capitalized. The lease expires June 2000.
The future minimum lease payments under the capital lease and the net present
value of the future minimum lease payments at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 29,156
1999 29,156
2000 14,578
--------
Total minimum lease payments 72,890
--------
Amount representing interest (6,235)
--------
Net present value of the future minimum
lease payments (including current
portion of $25,267) $ 66,655
========
</TABLE>
NOTE 8. SENIOR SECURED PROMISSORY NOTES
The long term portion of notes payable of $1,112,500, less the discount of
$76,077, consists of Senior Secured Promissory notes issued during 1997 in two
offerings.
F-14
<PAGE> 42
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 8. SENIOR SECURED PROMISSORY NOTES (CONTINUED)
On June 16, 1997, the Company commenced the first of two offerings (the
"Offering #1") which provided for up to 40 units of the Company's securities
comprising $1,000,000 aggregate principal amount of non-convertible 10% Senior
Secured Promissory Notes (the "Notes") and Common Stock Purchase Warrants (the
"Warrants") to purchase an aggregate of 2,000,000 shares of the Company's common
stock. The Notes mature on July 1, 1999, with interest payable semiannually
commencing on January 31, 1998. The Warrants are exercisable at the lesser of
market value at the time of the final closing (calculated as the average closing
bid price for the prior ten trading days) or $0.50 per share. The Warrants are
exercisable on or prior to the expiration date of July 1, 2000. The Offering #1
was offered by the Placement Agent on a "best efforts" basis. The Offering #1,
which terminated August 31, 1997, after a 45 day extension, yielded net proceeds
to the Company totaling $708,000.
On September 1, 1997, the Company commenced the second offering (the "Offering
#2") under the same terms and conditions as that of Offering #1, except that
Offering #2 provided for up to only 28 units of the Company's securities. The
Offering #2, which terminated November 30, 1997, after a 45 day extension,
yielded net proceeds to the Company totaling $276,563.
On October 31, 1997, the maximum exercise price of the Warrants for both the
Offering #1 and the Offering #2 was reduced from $0.50 to $0.35 per share,
thereby increasing the exercisable number of warrants from 1,600,000 and
625,000, respectively, to 2,285,728 and 892,863, respectively. As of the filing
of this report, none of these Warrants has been exercised.
The Company recorded proceeds from the Notes and Warrants of $1,112,500 as notes
payable of $1,036,423 and additional paid-in capital of $76,077. The Notes have
been recorded at the discounted present value of the Notes at the estimated
incremental borrowing rate of the Company of 14%. The value of the Warrants is
represented by the remaining proceeds of $76,077. This has been reflected as a
discount on the Notes which will be amortized over the term of the Notes.
As of December 31, 1997, accrued expenses includes $41,718 in interest, payable
on January 31, 1998, related to the Notes.
NOTE 9. INCOME TAXES
Deferred tax assets and liabilities at December 31, 1997, and December 31, 1996,
consist of the following:
F-15
<PAGE> 43
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 9. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current deferred tax asset $ 106,424 $ --
Current deferred tax liability (22,745) (97,765)
Valuation allowance (74,655) --
Net cur rent deferred tax asset (liability) $ 9,024 $ (97,765)
=========== ===========
Noncurrent deferred tax asset $ 1,161,802 $ 545,986
Noncurrent deferred tax liability (22,745) --
Valuation allowance (1,148,081) (448,221)
----------- -----------
Net noncurrent deferred tax asset (liability) $ (9,024) $ 97,765
=========== ===========
</TABLE>
The current deferred tax asset at December 31, 1997, results primarily from
allowance for doubtful accounts and accrued salaries not deductible for tax
purposes. The current and noncurrent deferred tax liability at December 31,
1997, results from an adjustment for the change from the cash to the accrual
method for federal income tax purposes in a prior year. The noncurrent deferred
tax asset results from differences in depreciation rates for book and federal
income tax purposes, and from the benefit of net operating losses. The remaining
net operating loss has a 100% valuation allowance recorded against it due to the
uncertainty of generating future taxable income. The valuation allowance
increased from December 31, 1996, to December 31, 1997, by $774,515.
The noncurrent deferred tax asset at December 31, 1996, results primarily from
merger and acquisition costs capitalized for federal income tax purposes and the
benefit of net operating losses. The net operating loss has a 100% valuation
allowance recorded against it due to the uncertainty of generating future
taxable income. The current deferred tax liability at December 31, 1996, results
from the cash basis of accounting for federal income tax purposes versus the
accrual basis for financial accounting purposes.
The components of the provision for federal income taxes for the years ended
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----------
<S> <C> <C>
Current expense (benefit) $ -- $(1,049,671)
Deferred expense (benefit) -- (127,556)
----- -----------
$ -- $(1,177,227)
===== ===========
</TABLE>
The Company's income tax expense (benefit) for the years ended December 31, 1997
and 1996, differed from the statutory federal rate of 34 percent as follows:
F-16
<PAGE> 44
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 9. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Statutory rate applied to income (loss)
before income taxes $ (918,325) $(1,664,089)
Increase (decrease) in income taxes:
Penalties and interest 1,847 64,588
Valuation allowance 838,274 448,221
Extraordinary item 62,339 --
Amounts not deductible for
federal income tax purposes
and other 15,865 (25,947)
----------- -----------
Income tax expense (benefit) $ -- $(1,177,227)
=========== ===========
</TABLE>
At December 31, 1996, the Company owed $603,028 for income taxes (including
accrued penalties and interest), related to 1995 operations, which was due March
15, 1996. The Company did not pay this expense due to anticipating the net
operating loss for the year ended December 31, 1996. In January 1997, a portion
of the 1996 net operating loss was carried back in order to recapture prior
taxes paid, thereby generating a refund receivable for those prior taxes which
was utilized, in part, to offset the entire 1995 tax liability (including
penalties and interest).
In March 1997, the Company received the income tax refund (net of the $603,028
taxes due for 1995 discussed above) of $507,733 relating to the net operating
loss generated during 1996. The portion of the net operating loss generated for
the years ended December 31, 1996 and 1995, eligible to be carried forward to
future years of approximately $1,275,000 will expire in 2011 and 2010. The net
operating loss generated for the year ended December 31, 1997, of approximately
$2,100,000 will expire in 2012.
NOTE 10. RELATED PARTY TRANSACTIONS
During 1996, two shareholders/officers advanced amounts to the Company totaling
$72,000. At December 31, 1997, the balance remaining due to the two shareholders
was $63,276 plus $4,622 in accrued interest.
The Company has back wages due to a former officer of approximately $25,000 and
$25,600 at December 31, 1997 and 1996, respectively.
F-17
<PAGE> 45
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
On March 31, 1998, pursuant to the terms and conditions of an agreement reached
with its former principal executive officer, Mr. Richard Dews (See Note 17), the
Company paid $60,000 in full satisfaction of amounts previously loaned to the
Company by Mr. Dews, of which the principal balance outstanding was $53,124 and
accrued and unpaid interest due was $5,670. The principal balance and accrued
interest at December 31, 1997, are included in the accompanying balance sheet as
shareholder advance and accrued interest.
NOTE 11. STOCKHOLDERS EQUITY (DEFICIT) AND STOCK OPTIONS
On January 30, 1997, and February 4, 1997, at effective per share prices of
$0.09125 and $0.04875, respectively, all of the 7% Convertible Subordinated
Debentures, which were issued pursuant to the October 30, 1996, Regulation S
Offering Memorandum (the "Reg S Offering") (with an aggregate principal face
value of $525,000), were converted to a combined total of 10,291,534 common
shares.
In a matter related to the Reg S Offering, effective June 10, 1997, the Company
reached an agreement with the Placement Agent for an amendment to their previous
Placement Agreement whereby the Company agreed to reduce the exercise price of
the warrants to purchase 250,000 of the Company's common stock from $1.00 to
$0.50, and to grant new warrants to purchase an additional 250,000 shares of the
Company's common stock at an exercise price of $0.50 per share. In addition, the
Company negotiated with the Placement Agent for an amendment to their existing
Consulting Agreement, reducing the monthly fee from $10,000 to $5,000 for the
first twelve months and $7,500 for the second twelve months, a total reduction
of $56,250 in consulting fees previously expensed by the Company. (To date, the
Company has remitted no monthly fee amounts due under the Agreement, the entire
balance of which is included in the Company's outstanding accounts payable.)
Subsequent to year end, effective January 23, 1998, the placement agreement was
further renegotiated resulting in a reduction of the exercise price of the
warrants to $0.40 per share.
During the first quarter of 1997, pursuant to the Employee Stock Purchase Plan,
employees purchased 13,367 shares of the Company's common stock valued at $5,080
based on the March 31, 1997, closing bid price of $0.38 per share. As of June
30, 1997, the end of the Plan's first fiscal year, 11,858 shares of common stock
(representing the Company's 50% match due to participants who remain employed by
the Company) were due to be issued subject to the provisions and vesting
requirements as described in the Plan documents.
F-18
<PAGE> 46
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 11. STOCKHOLDERS EQUITY (DEFICIT) AND STOCK OPTIONS (CONTINUED)
During the second quarter of 1997, management announced plans to terminate the
Employee Stock Purchase Plan that the Company had adopted on July 1, 1996. As a
result, employees who were participating in the Plan terminated their
participation effective April 1, 1997, and all amounts previously withheld for
the second quarter 1997 were refunded to the participants.
In 1997, the Company adopted a stock option plan, the 1997 Stock Option Plan,
authorizing the issuance of incentive stock options, non statutory options and
reload options to eligible persons as described in the Plan. Pursuant to the
Plan, effective December 29, 1997, the Company granted stock options as follows:
(i) to 20 existing employees to purchase 343,500 shares of the Company's
common stock at $0.35 per share. The options were vested 41.67% at the
grant date, vest an additional 1/48 each month thereafter, and expire
one year after fully vested;
(ii) to 12 existing employees to purchase 111,900 shares of the Company's
common stock at $0.35 per share. The options were fully vested at the
grant date, and expire April 30, 1999; and
(iii)to eight new employees to purchase an aggregate total of 133,000 shares
of the Company's common stock at $0.35 per share. The options vested
6.25% ninety days after each employee's date of hire, vest an
additional 1/48 each month thereafter, and expire one year after fully
vested.
During 1997, the Company granted stock warrants to two board members and two
consultants to purchase an aggregate total of 200,000 shares of the Company's
common stock at exercise prices ranging from $0.35 to $0.75 per share. The
warrants were vested 100% at the grant date, and expire at dates ranging from
March 31, 2000, to July 22, 2000.
Effective September 24, 1997, the Company granted stock warrants to a consultant
to purchase 240,000 shares of the Company's common stock at an exercise price of
$0.70 per share. The warrants vest 6.25% ninety days after the grant date, and
vest an additional 1/48 each month thereafter. The options are exercisable upon
vesting, and expire one year after 100% vested.
Pursuant to the terms and conditions of short-term loans made to the Company by
certain investor groups, effective June 4, 1997, the Company granted stock
warrants to purchase 10,000 shares of its common stock at an exercise price of
$0.35 per share. The warrants were vested 100% at the option date, and expire
June 3, 2000.
F-19
<PAGE> 47
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 11. STOCKHOLDERS EQUITY (DEFICIT) AND STOCK OPTIONS (CONTINUED)
Substantially all options and warrants granted during 1997 have exercise prices
which approximate fair value at the date of grant.
Pursuant to the terms and conditions of short-term loans made to the Company by
certain investor groups, on September 3, 1997, the Company issued 60,000 shares
of its common stock as a result of the exercise of warrants to purchase said
shares at $0.01 per share.
Effective October 15, 1997, the Company issued to certain investor groups
1,832,000 shares of its common stock at $0.20 per share, under a private
placement memorandum for total net cash proceeds of $500,000.
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 17), (1) the Company acquired from Mr. Dews 9,400,000 shares
of the Company's Common Stock for $740,000, and (2) 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. 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 12. COMMITMENTS AND CONTINGENCIES
In May 1995, MigraTEC leased its former office facility located in Westlake,
Texas, from IBM under a noncancelable operating lease, which was to expire April
2000. In March 1997, however, due to the forthcoming increase in rental rates
per square foot to more than double the current rates coupled with the Company's
need to reduce overhead and monthly expenses, MigraTEC's new management
successfully negotiated a settlement for early cancellation of the lease. The
terms of the agreement reached between MigraTEC and IBM included cancellation of
the lease effective March 31, 1997, in turn for MigraTEC's payment of $20,000 to
IBM in settlement of approximately $90,000 owed to IBM and the property
management company for past due rent, utilities and other related expenses. In
addition, MigraTEC released to the landlord leasehold improvements that it had
previously made to the facility with a net book value of $290,041.
On April 7, 1997, MigraTEC leased its present office facility under a
noncancelable operating lease, which expires April 30, 2000. Future minimum
commitments under this lease are as follows:
F-20
<PAGE> 48
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<S> <C>
Period ending December 31,
1998 $ 127,800
1999 127,800
2000 42,600
-----------
Total $ 298,200
===========
</TABLE>
In May 1995, the Company leased two copiers from Danka under a noncancelable
operating lease, which was to expire April 2000. The Company was forced to
abandon the copiers effective March 31, 1997. At that time, the copiers were
repossessed by Danka to be refurbished and sold with any difference between the
proceeds and the remaining total payments on MigraTEC's lease ($90,679) to be
charged back and billed to the Company at that time. On March 4, 1998, Copelco
Credit Corporation, filed suit against the Company in District Court, Harris
County, Texas, seeking payment for the remainder of the balance due under a
contract for leased copier equipment in the amount of $90,763 plus attorney
fees, court costs and interest. The suit alleges that the Company has defaulted
under the terms of the lease by failing and refusing to pay monthly installment
payments as they became due. The suit further alleges that Copelco has demanded
return of the equipment, and that the Company has failed and refused to return
the equipment and is wrongfully retaining possession of the equipment. The
Company has filed its response to the lawsuit, and expects to begin negotiations
to settle the suit for a lesser amount and/or reach favorable payment terms.
Beginning in April 1996, the Company entered into a series of one year lease
agreements with AT&T for various computer equipment at an average monthly cost
of approximately $12,000 for the first year. Under terms of the agreement, for
each year thereafter that the Company renews its lease for the equipment, the
monthly cost will be reduced by one-half the cost of the first year, to
approximately $6,000 from this date forward.
During 1996 the Company entered into employment agreements with several key
employees for a term of one year (automatically renewing each year), of which
six remain employed by the Company to date. The total base salary of the six
remaining employees is approximately $438,000.
Pursuant to provisions within the remaining key employee employment agreements,
one employee was granted common stock options equal to his annual base salary.
Such options, valued at 85% of the market value of the Company's common stock on
July 1, 1996 ($4.75), must be exercised in the period from July 1, 1997, to June
20, 1998. The annual base salary of the employee as of the date the options were
granted was approximately $105,000.
F-21
<PAGE> 49
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During the first quarter of 1997, a key employee, who had entered into a one
year employment agreement with the Company during 1996, was laid-off. Pursuant
to terms of an amendment to the employment agreement, the Company is liable to
the employee for severance pay equal to the employee's annual salary of
approximately $70,000, which is currently included in accrued expenses. On March
25, 1998, the Company reached an agreement to pay this severance in sixty equal
monthly installments beginning April 10, 1998 (See Note 17).
Effective April 10, 1997, the Company entered into a one year employment
agreement with its newly elected President and CEO. The agreement includes
provisions for an annual base salary of $90,000, incentives to earn additional
compensation in the forms of salary increases and various performance bonuses
upon meeting certain criteria, as stipulated in the agreement, and sales
commissions. In addition, the agreement contains a provision granting options to
purchase ten percent (10%) of the total number of common shares outstanding as
of the date of the agreement at an exercise price of $0.37 per share, and
includes an anti-dilutive clause which increases the number of options available
for exercise upon recapitalization, stock split, stock dividend, or issuance of
stock below fair market value. Fair market value is defined as the quoted OTC
market price. The options vest at the rate of 25% after each six month period
beginning April 10, 1997. Any unexercised options will expire four years after
the vesting date, except as provided under special conditions and circumstances
as noted in the agreement.
Effective June 2, 1997, the Company entered into a one year employment agreement
with its Vice President of Business Development. The agreement includes
provisions for an annual base salary of $75,000 and sales commissions. In
addition, the agreement contains a provision granting options to purchase two
percent (2%) of the total number of common shares outstanding as of the date of
the agreement at an exercise price of $0.31 per share, and includes an
anti-dilutive clause which increases the number of options available for
exercise upon recapitalization, stock split, stock dividend, or issuance of
stock below fair market value. Fair market value is defined as the quoted OTC
market price. The options vest at the rate of 1/24 per month beginning June 2,
1997, and are exercisable at vesting at any time during employment, except as
provided under special conditions and circumstances as noted in the agreement.
Effective June 13, 1997, the Company entered into a one year employment
agreement with its Chief Operating Officer. The agreement includes provisions
for an annual base salary of $125,000 and incentives to earn additional
compensation in the forms of salary increases and various performance bonuses
upon meeting certain criteria, as stipulated in the agreement. In addition, the
agreement contains a provision granting options to purchase two percent (2%) of
the total number of common shares outstanding as of the date of the agreement at
an exercise price of $0.33 per share, and includes an anti-dilutive clause which
increases the number of options available for exercise upon recapitalization,
stock split, stock dividend, or issuance of
F-22
<PAGE> 50
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
stock below fair market value. Fair market value is defined as the quoted OTC
market price. The options vest at the rate of 1/24 per month beginning July 13,
1997, and are exercisable at vesting at any time during employment, except as
provided under special conditions and circumstances as noted in the agreement.
The options granted under terms of the above employment agreements have exercise
prices which approximate fair market value at the date of grant.
Effective June 20, 1997, Business Aircraft Leasing, Inc., was awarded a judgment
in the state of Tennessee against the Company in the amount of $29,349 resulting
from the suit filed on April 16, 1997, for Default, in Tennessee Judicial
District Chancery Court, Nashville, Tennessee, seeking payment for unpaid fees
relating to the Company's trade accounts payable plus attorney fees, litigation
expenses and interest. On September 5, 1997, Business Aircraft filed in the
Texas courts to attempt to enforce the judgment obtained in Tennessee. The case
is presently in negotiations as the Company attempts to settle the amount of the
judgment and/or reach favorable payment terms.
Effective November 11, 1997, Ciber, Inc., was awarded a judgment against the
Company in the amount of $55,650 resulting from the suit filed on April 24,
1997, in District Court, Dallas County, Texas, seeking payment for unpaid fees
relating to the Company's trade accounts payable plus attorney fees, costs of
suit and interest. The case is presently in negotiations as the Company attempts
to settle the amount of the judgment and/or reach favorable payment terms.
On February 4, 1997, Romac International, Inc., filed suit against the Company,
for Breach of Contract, in District Court, Dallas County, Texas, seeking payment
for unpaid fees relating to the Company's trade accounts payable in the amount
of $137,448, plus attorney's fees and interest. On March 25, 1997, the Company
filed its response, and is continuing to negotiate a settlement.
From January 15, 1997, to March 14, 1997, due to a lack of funds, the Company
failed to pay earned but unused vacation pay to terminated employees (both
layoffs and resignations) totaling $48,271 which was due and payable at the
dates of termination. As of December 15, 1997, the Company had paid $35,722
representing the total amount due for unused vacation pay to all but two of the
terminated employees. The remaining liability for the unpaid vacation pay is
recorded in the accompanying financial statements as part of accrued
liabilities.
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 17), 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
F-23
<PAGE> 51
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Company to Mr. Dews, including back wages relating to accrued but unused
vacation pay totaling $10,818.
NOTE 13. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments of the Company that are subject to credit risk are cash
and trade accounts receivable. Approximately $367,750 of the net accounts
receivable has been collected through the date of this report. The Company's
accounts receivable balances are generally unsecured. In the event of complete
nonperformance of accounts receivable, the maximum exposure to the Company is
the recorded amount shown on the balance sheet.
For the year ended December 31, 1997, approximately 75% of the Company's gross
revenues were earned from three customers, each of whom separately contributed
45%, 15% and 15% to the Company's total gross revenues for the year then ended.
For the year ended December 31, 1996, approximately 57% of the Company's gross
revenues were earned from three customers, each of whom separately contributed
31%, 13% and 13% to the Company's total gross revenues for the year then ended.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. Cash,
trade accounts receivable, advance payment receivables, accounts payable,
accrued liabilities and deposits and other liabilities are carried at amounts
that reasonably approximate their fair values.
<TABLE>
<CAPTION>
December 31, 1997
------------------------
Carrying Fair
amount value
--------- ----------
<S> <C> <C>
Fixed rate debt, short term $ 275,000 $ 275,000
========== ==========
Fixed rate debt, long term $1,036,423 $1,036,423
========== ==========
</TABLE>
The fair values of the Company's fixed rate debt have been estimated based upon
relative changes in the Company's variable borrowing rates since origination of
the fixed rate debt.
F-24
<PAGE> 52
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 15. STOCK OPTIONS AND WARRANTS
Pursuant to the 1997 Stock Option Plan (the "1997 Plan"), and in accordance with
certain employee and consultant agreements, the Company has issued stock options
and warrants. The options under the 1997 Plan are all considered compensatory.
Following is a summary of warrant and option activity:
<TABLE>
<CAPTION>
Compensatory Warrant/Option Price
----------------------
Options Warrants Total Per Share Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995 2,267,486 - 2,267,486 $0.0295 67,000
Granted 887,551 1,254,878 2,142,429 1.6149 3,459,750
Canceled 119,449 400,000 519,449 2.5267 1,312,500
Exercised 2,283,236 400,000 2,683,236 0.2417 648,500
---------- ---------- ---------- ------- -------
Outstanding at December 31, 1996 752,352 454,878 1,207,230 1.2970 1,565,750
Granted 4,701,255 440,000 5,141,255 0.3726 1,915,391
Canceled 730,346 250,000 980,346 1.4379 1,409,650
Exercised - - - - -
---------- ---------- ---------- ------- -------
Outstanding at December 31, 1997 4,723,261 644,878 5,368,139 $0.3859 $2,071,491
========== ========== ========== ======= =======
</TABLE>
The outstanding stock options and warrants expire from June 20, 1998, through
April 10, 2003.
The following summarizes information about compensatory options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
- ------------------------------------------------------------------------------ -------------------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Options with contractual
lives $0.35 to $4.0375 3,549,017 4.27 Years $0.3882 1,018,258 $0.4533
Options without contractual lives
$0.31 to $0.33 1,174,244 n/a $0.3200 269,078 $0.3191
</TABLE>
The options issued without lives expire when the employees are terminated for
any reason.
A summary of changes in the Company's non-compensatory options follows:
<TABLE>
<CAPTION>
Non-Compensatory Weighted Average
Options Exercise Price
<S> <C> <C>
Outstanding at December 31, 1996 - -
Granted 3,748,591 $ 0.3646
Exercised 60,000 0.0100
Forfeited - -
--------- ------------
Outstanding at December 31, 1997 3,688,591 $ 0.3703
========= ============
</TABLE>
F-25
<PAGE> 53
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 15. STOCK OPTIONS AND WARRANTS (CONTINUED)
The options granted in 1997 and 1996 have exercise prices which approximate fair
value at the date of grant and accordingly, no compensation cost has been
recognized for compensatory stock options in the accompanying consolidated
financial statements. Had compensation cost for the Company's stock options have
been determined consistent with SFAS 123, the Company's net loss and income loss
per share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
<S> <C> <C>
Net income (loss) As reported $ (2,517,606) $ (3,717,152)
============== ==============
Pro forma $ (3,180,214) $ (4,154,309)
============== ==============
Income (loss) per common share As reported $ (0.094) $ (0.231)
============== ==============
Pro forma $ (0.118) $ (0.258)
============== ==============
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes method option-pricing model.
The following assumptions were used for grants in 1997: dividend yield of 0%,
volatility of 133%, risk free interest rate estimated as 6% with an expected
life of 1 to 5 years.
The following assumptions were used for grants in 1996: dividend yield of 0%,
volatility of 159%, risk free interest rates ranging from 5.125% to 6.125% over
a two year period with an expected life of 2 to 3 years.
The model is based on historical stock prices and volatility which, due to the
low volume of transactions, may not be representative of future price variances.
NOTE 16. EMPLOYEE SAVINGS PLAN
Effective January 1, 1994, the Company adopted a discretionary 401(k) savings
plan ("Plan") for its employees. This Plan is available to all employees meeting
certain eligibility requirements, as further described in the Plan documents. No
discretionary employer contributions were made for the years ended December 31,
1997 and 1996. Participants are 100% vested in the portion of the plan
representing employee contributions. Participants vest 20% in employer
contributions after two years of service (as defined by the Plan document) and
20% each year thereafter.
F-26
<PAGE> 54
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 17. SUBSEQUENT EVENTS
Effective February 16, 1998, to better reflect its core business, the Company
changed it's name from One Up Corporation to MigraTEC, Inc.
Subsequent to December 31, 1997, the Company entered into several short term
notes payable with varying terms and maturities totaling $704,000.
Pursuant to the terms and conditions of certain short term loans made to the
Company by certain investor groups, the Company granted 1,787,500 stock
warrants, fully vested date of grant, to purchase shares of its common stock
with varying exercise prices and terms. Additionally, 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.
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.
Effective April 1, 1998, the Company entered into a one year employment
agreement with its Chief Financial Officer. The agreement includes provisions
for an annual base salary of $125,000 and incentives to earn additional
compensation in the forms of salary increases and various performance bonuses
upon meeting certain criteria, as stipulated in the agreement. In addition, the
agreement contains a provision granting options to purchase 900,000 shares of
the Company's common stock at an exercise price of $0.20 per share. 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, except as provided under special
conditions and circumstances as noted in the agreement.
Pursuant to the 1997 Stock Option Plan, the Company granted stock options
subsequent to December 31, 1997, to purchase an aggregate of 226,600 shares of
the Company's common stock with varying exercise prices and terms.
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, efforts by Mr. Dews to sell shares of the Company's Common
Stock, originally acquired and restricted pursuant to Rule 144 of the Act, and
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
F-27
<PAGE> 55
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997 and 1996
NOTE 17. SUBSEQUENT EVENTS (CONTINUED)
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 amounts 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
Marilyn Johnson the amount of $68,250 in installments of $1,000 for 68 months on
the tenth of each month beginning April 10, 1998, with the final payment of $250
being due on December 10, 2003. Attorney fees paid 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 to be paid in
cash.
On March 9, 1998, the Company entered into 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.
On March 30, 1998, the Company entered into 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 is being
offered on a "best efforts" basis. The Offering #2, which is scheduled to
terminate April 15, 1998, may be extended for a period to be determined by the
Company. As of the filing of this report, the Offering #2 has yielded gross
proceeds to the Company totaling $1,143,000. The Company expects the Offering #2
to be fully subscribed.
The Company expects to pay placement fees by granting to the Placement Agent
warrants for the purchase of the shares of Company's Common Stock equivalent to
10% of the total number of shares issued as a result of the two aforementioned
private offerings. Any warrants granted will be exercisable at and will expire
three years from the closing date of the Offering #2 at an exercise price of
$0.20 per share.
F-28
<PAGE> 56
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement of Computations of Per Share Earnings
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss $ (2,517,606) $ (3,717,152)
============= =============
Weighted average number of common shares outstanding
at beginning of period, including effect of stock split 17,147,350 11,337,432
Issuance of stock for services rendered 1,901,962 6,838
Effect of reverse acquisition - 1,392,698
Conversion of preferred stock to common stock - 31,051
Issuance of stock in connection with privates placement for cash 385,754 328,168
Issuance of stock related to various consulting agreements and for cash - 1,491,281
Issuance of stock to key employees for cash - 67,519
Treasury stock received in exchange for shareholder advances - (469,496)
Issuance of stock under Employee Stock Purchase Plan for cash
10,071 2,125
Issuance of stock at conversion of debentures 9,340,377 -
Issuance of stock at exercise of warrants for cash - 19,726
----------- -----------
Shares used for computation 26,910,116 16,082,740
=========== ===========
Net loss per common share $ (0.094) $ (0.231)
=========== ===========
</TABLE>
Note: Basic and diluted calculations are the same.
F-29
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,076
<SECURITIES> 0
<RECEIVABLES> 517,475
<ALLOWANCES> 123,720
<INVENTORY> 0
<CURRENT-ASSETS> 456,371
<PP&E> 1,036,252
<DEPRECIATION> 583,697
<TOTAL-ASSETS> 1,031,856
<CURRENT-LIABILITIES> 2,019,533
<BONDS> 0
0
0
<COMMON> 2,197,640
<OTHER-SE> (4,268,400)
<TOTAL-LIABILITY-AND-EQUITY> 1,031,856
<SALES> 0
<TOTAL-REVENUES> 2,045,607
<CGS> 0
<TOTAL-COSTS> 4,500,640
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,981
<INCOME-PRETAX> (2,700,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,700,957)
<DISCONTINUED> 0
<EXTRAORDINARY> 183,351
<CHANGES> 0
<NET-INCOME> (2,517,606)
<EPS-PRIMARY> (0.094)
<EPS-DILUTED> (0.094)
</TABLE>
