<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 33-28809-A
MIGRATEC, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0125664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12801 NORTH STEMMONS FREEWAY, SUITE 710, FARMERS BRANCH, TEXAS 75234
(Address of principal executive offices)
(972) 969-0300
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 18, 1998, the issuer
had 44,553,705 shares of common stock, no par value, outstanding.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at September 30, 1998 (unaudited), and December 31, 1997
Statements of Operations for the three months and nine months ended
September 30, 1998 and 1997 (unaudited)
Statements of Stockholders' Equity (Deficit) for the nine months ended
September 30, 1998 and 1997 (unaudited)
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited)
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview: Introduction, Background and Product Strategy
Results of Operations:
Comparison of the Three Months Ended September 30, 1998 and
1997 Comparison of the Nine Months Ended September 30, 1998
and 1997
Liquidity and Capital Resources
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) A Statement of Computations of Per Share Earnings
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
none
SIGNATURES
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<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Balance Sheets
September 30, 1998, and December 31, 1997
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 09/30/98 12/31/97
----------- -----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 306,998 $ 4,076
Accounts receivable, net of allowance for doubtful
accounts of $0 and $123,720, respectively 231,131 394,755
Shareholder advance 3,766 3,766
Restricted cash -- 28,150
Deferred tax asset 9,024 9,024
Other current assets 12,086 16,600
----------- -----------
Total current assets 563,005 456,371
PROPERTY AND EQUIPMENT, NET 299,605 452,555
OTHER ASSETS
Financing fees 53,405 101,382
Other assets 21,548 21,548
----------- -----------
Total other assets 74,953 122,930
----------- -----------
Total Assets $ 937,563 $ 1,031,856
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ -- $ 112,963
Notes payable -- 275,000
Transfer liability -- 187,500
Accounts payable 265,333 779,904
Accrued expenses 247,178 404,258
Obligation under capital lease 19,453 25,267
Customer deposits in excess of unbilled receivables -- 171,365
Shareholder advances -- 63,276
----------- -----------
Total current liabilities 531,964 2,019,533
LONG-TERM LIABILITIES
Long-term portion of notes payable, net of discount of $40,041 and
$76,077, respectively 1,072,459 1,036,423
Long-term portion of obligation under capital lease 27,081 41,388
Deferred tax liability 9,024 9,024
----------- -----------
Total long-term liabilities 1,108,564 1,086,835
MINORITY INTEREST (3,752) (3,752)
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE 12% PREFERRED STOCK; $1,000 PAR VALUE; 1,000,000
SHARES AUTHORIZED; REDEEMABLE AT PAR VALUE PLUS CUMULATIVE DIVIDENDS;
NONE ISSUED OR OUTSTANDING -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; no par value; 200,000,000 shares authorized; 54,808,608 and
30,199,154 shares issued at September 30, 1998, and December 31, 1997,
respectively 7,072,628 2,197,640
Additional paid-in capital 796,263 796,263
Treasury stock, at cost (10,254,903 and 854,903 shares, respectively) (1,808,629) (1,068,629)
Retained earnings (accumulated deficit) (6,759,475) (3,996,034)
----------- -----------
Total stockholders' equity (deficit) (699,213) (2,070,760)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 937,563 $ 1,031,856
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Operations
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1998 1997 1998 1997
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $ 290,882 $ 646,601 $ 1,065,322 $ 1,358,662
COSTS AND EXPENSES
Salaries and benefits 327,685 575,797 1,406,320 1,617,539
Contract labor 62,288 281,824 535,725 471,115
General and administrative 82,546 119,893 213,736 317,065
Advertising and marketing 26,325 (19,864) 87,104 (14,788)
Travel 4,635 (6,019) 16,090 12,772
Rent 31,950 32,400 95,850 84,333
Depreciation and amortization 48,000 41,638 145,800 155,192
Legal and professional fees 18,384 64,802 387,389 220,163
Year 2000 program costs 338,378 -- 976,007 --
Bad debt expense -- -- 1,725 123,720
Loss on release of assets -- -- -- 284,573
Provision for contract losses -- 5,800 -- 187,861
------------ ------------ ------------ ------------
Total operating expenses 940,191 1,096,271 3,865,746 3,459,545
------------ ------------ ------------ ------------
Loss from operations (649,309) (449,670) (2,800,424) (2,100,883)
OTHER INCOME (EXPENSE)
Interest income 3,238 340 8,768 1,081
Gain (loss) on sale of assets -- -- (2,950) 892
Interest expense (16,034) (45,824) (177,202) (71,813)
Financing fees (15,992) (5,319) (47,977) (73,569)
------------ ------------ ------------ ------------
Total other income (expense) (28,788) (50,803) (219,361) (143,409)
Minority interest in (income) loss of
consolidated subsidiary -- -- -- 9,384
------------ ------------ ------------ ------------
Loss before income taxes and
extraordinary item (678,097) (500,473) (3,019,785) (2,234,908)
Provision for income tax expense (benefit) -- -- -- 23,182
------------ ------------ ------------ ------------
Net loss before extraordinary item (678,097) (500,473) (3,019,785) (2,258,090)
Extraordinary income from forgiveness
of debt (net of income taxes of $0) -- -- 256,344 --
------------ ------------ ------------ ------------
Net loss $ (678,097) $ (500,473) $ (2,763,441) $ (2,258,090)
============ ============ ============ ============
Loss before extraordinary
item per common share $ (0.016) $ (0.018) $ (0.078) $ (0.086)
============ ============ ============ ============
Extraordinary income per common share $ -- $ -- $ 0.007 $ --
============ ============ ============ ============
Net loss per common share (basic and diluted) $ (0.016) $ (0.018) $ (0.071) $ (0.086)
============ ============ ============ ============
Weighted average common shares and common
equivalents outstanding 43,313,080 27,470,512 38,757,699 26,182,304
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Stockholders' Equity (Deficit)
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Common Preferred Preferred
Stock Stock Stock Stock Treasury
Issued Amount Issued Amount Stock
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 18,002,253 $ 1,166,960 -- $ -- (854,903)
Issuance of stock to employees under the
Employee Stock Purchase Plan for 13,367 5,080 -- -- --
cash
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 -- -- --
Net loss -- -- -- -- --
---------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 28,367,154 $ 1,697,640 -- $ -- (854,903)
========== =========== =========== =========== ===========
Balance at January 1, 1998 30,199,154 $ 2,197,640 -- $ -- (854,903)
Issuance of stock in connection with the
exercise of warrants for cash 22,500 225 -- -- --
Issuance of stock in connection with
private offerings for cash 24,165,000 4,833,000 -- -- --
Treasury stock received in exchange for
cash -- -- -- -- (9,400,000)
Issuance of stock for services rendered 390,494 30,738 -- -- --
Issuance of stock in connection with the
exercise of options for cash 31,500 11,025 -- -- --
Net loss -- -- -- -- --
---------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 54,808,608 $ 7,072,628 -- $ -- (10,254,903)
========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Retained
Treasury Additional Earnings
Stock Paid-in (Accumulated
Amount Capital Deficit) Total
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $(1,068,629) $ 712,186 $ (1,478,428) $ (667,911)
Issuance of stock to employees under the
Employee Stock Purchase Plan for -- -- -- 5,080
cash
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
Net loss -- -- (2,258,090) (2,258,090)
----------- ----------- ------------ -----------
Balance at September 30, 1997 $(1,068,629) $ 712,186 $ (3,736,518) $(2,395,321)
=========== =========== ============ ===========
Balance at January 1, 1998 $(1,068,629) $ 796,263 $ (3,996,034) $(2,070,760)
Issuance of stock in connection with the
exercise of warrants for cash -- -- -- 225
Issuance of stock in connection with
private offerings for cash -- -- -- 4,833,000
Treasury stock received in exchange for
cash (740,000) -- -- (740,000)
Issuance of stock for services rendered -- -- -- 30,738
Issuance of stock in connection with the
exercise of options for cash -- -- -- 11,025
Net loss -- -- (2,763,441) (2,763,441)
----------- ----------- ------------ -----------
Balance at September 30, 1998 $(1,808,629) $ 796,263 $ (6,759,475) $ (699,213)
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,763,441) $ (2,258,090)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 145,800 155,192
Gain (loss) on sale of assets 2,950 (892)
Loss on release of assets -- 284,573
Assets given in lieu of wages -- 14,233
Bad debt expense 1,725 123,720
Financing fees 47,977 68,250
Amortization of discount -- 36,036
Common stock issued for services -- 30,738
Minority interest -- (9,384)
Change in assets and liabilities:
(Increase) decrease in accounts receivable 161,899 (248,318)
Decrease in unbilled revenue -- 203,070
Decrease in income tax refund receivable -- 507,733
Decrease in restricted cash -- 28,150
(Increase) decrease in other current assets 4,514 (4,135)
Increase in other assets -- (109,667)
Increase (decrease) in accounts payable (514,571) 333,766
Increase (decrease) in accrued expenses (157,080) 234,800
Decrease in customer deposits in excess of unbilled receivables (171,365) (414,620)
--------------- ---------------
Total adjustments (383,227) 1,138,321
--------------- ---------------
Net cash used by operating activities (3,146,668) (1,119,769)
CASH FLOWS FROM INVESTING ACTIVITIES:
Financing fees -- (12,096)
Sales of property and equipment 4,200 8,200
--------------- ---------------
Net cash provided (used) in investing activities 4,200 (3,896)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash overdraft -- (112,963)
Proceeds from notes payable 704,000 500,000
Proceeds from transfer of accounts receivable with recourse -- 77,500
Proceeds from other debt financing -- 812,500
Proceeds from issuance of common stock 4,844,250 5,680
Payments under obligations of capital lease -- (20,121)
Repayment of shareholder advances (63,276) (3,363)
Repayment of notes payable (979,000) (300,000)
Repayment of transfer liability -- (265,000)
Purchase of treasury stock -- (740,000)
--------------- ---------------
Net cash provided in financing activities 3,445,390 1,014,817
--------------- ---------------
Net increase (decrease) in cash 302,922 (108,848)
Cash - beginning 4,076 36,939
--------------- ---------------
Cash - ending $ 306,998 $ (71,909)
=============== ===============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 176,267 $ 20,655
=============== ================
Income taxes paid $ -- $ --
=============== ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock in connection with the conversion of debentures $ -- $ 525,000
=============== ================
Equipment obtained under capital lease $ -- $ 101,379
=============== ================
Issuance of stock for services rendered $ 30,738 $ --
=============== ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 7
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by MigraTEC, Inc., pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position as of September 30, 1998, and the
results of operations and cash flows for the nine months ended September 30,
1998 and 1997. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1997, including the accompanying notes. The results of
operations for the interim period shown are not necessarily indicative of the
results that may be expected for the entire fiscal year ending December 31,
1998.
NOTE 2. BUSINESS ACTIVITY
On February 29, 1996, MigraTEC, Inc. (formerly One Up Corporation) ("MigraTEC"),
a Texas corporation, entered into a reverse acquisition agreement with New York
Acquisitions, Inc., a publicly held "shell" Florida corporation. MigraTEC became
a wholly-owned subsidiary of the public company through the exchange of
11,337,432 shares on a post-split basis of the public company's common stock for
all of the outstanding stock of MigraTEC. The name New York Acquisitions, Inc.,
was amended to One Up Corporation.
Effective February 16, 1998, to better reflect its core business, the Company
changed its name from One Up Corporation to MigraTEC, Inc.
NOTE 3. GOING CONCERN UNCERTAINTY
As reflected in the accompanying consolidated financial statements, the Company
incurred a loss from continuing operations of $3,019,785 for the nine months
ended September 30, 1998. The Company's continued existence and plans for future
growth are dependent in part upon its ability to obtain the capital necessary to
operate, primarily through the issuance of additional debt or equity, and in
part on its ability to effectively penetrate the market for software migration
services, related products, and Year 2000 software products and services. If the
Company is not able to achieve break-even, obtain additional or alternative
funding, or generate sufficient sales revenues in the near term, the Company
will be unable to continue as a going concern.
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<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
(Formerly One Up Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
(Unaudited)
NOTE 3. GOING CONCERN UNCERTAINTY (Continued)
Recently, the Company began reengineering its business focus, shifting its
strategic approach to exploiting its technology through the development of
strategic relationships. To continue to fund its operations for 1998, the
Company successfully commenced two private offerings in March 1998 which, in the
opinion of management, yielded gross proceeds to the Company sufficient to fund
operations until such time that product revenues begin to ramp up. Management
anticipates that its efforts will move the Company forward with a focus on
achieving improved operating performance by the end of 1998. The anticipated
increase in revenues coupled with a continued emphasis on controlling costs
should position the Company to achieve improved results for 1999, although no
assurances can be given regarding such increase.
The financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or classification of
liabilities which may result from the inability of the Company to continue as a
going concern.
NOTE 4. STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS
Pursuant to the 1997 Stock Option Plan ("1997 Plan"), during the third quarter
of 1998, the Company has granted stock options to 20 employees to purchase an
aggregate of 462,192 shares of the Company's common stock. The options expire
August 31, 2003, vest over a four year period and are exercisable at a per share
price of $0.23. The options under the 1997 Plan are all considered compensatory.
During September 1998, the Company issued 1,537,500 shares of its Common Stock
to 14 individual investors at $0.20 per share under terms of a private offering
for total net cash proceeds of $307,500. In a related transaction, the Company
granted warrants to purchase an aggregate of 1,000,000 shares of its Common
Stock at $0.10 per share. The warrants expire September 9, 2001.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1998
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS DISCUSSED IN
THIS QUARTERLY REPORT ON FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF MIGRATEC, INC., AND ITS SUBSIDIARY
(COLLECTIVELY, THE "COMPANY"), MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE DISCUSSED WITH THE FORWARD- LOOKING STATEMENTS THROUGHOUT THIS
REPORT AND ARE SUMMARIZED IN THIS SECTION AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING
STATEMENTS - CAUTIONARY LANGUAGE."
OVERVIEW
INTRODUCTION
MigraTEC, Inc. (formerly New York Acquisitions, Inc.) was organized under the
laws of the state of Florida on February 24, 1989. The company was a development
stage enterprise until it acquired a privately-owned, Texas-based company on
February 29, 1996. At that time, MigraTEC, Inc. ("MigraTEC") (then a
privately-held Texas corporation) entered into a reverse acquisition agreement
with New York Acquisitions, Inc., a publicly-held "shell" Florida corporation.
MigraTEC became a wholly-owned subsidiary of the public company through the
exchange of 11,337,432 shares on a post-split basis of the public company's
common stock for all of the outstanding stock of MigraTEC. The name New York
Acquisitions, Inc., was amended to One Up Corporation and then subsequently to
MigraTEC, Inc. For accounting purposes, the reorganization of MigraTEC and the
public company is regarded as an acquisition by the public company of all of the
outstanding stock of MigraTEC, and is accounted for as a recapitalization of the
public company with MigraTEC as the acquirer (a reverse acquisition).
Accordingly, the historical financial statements are those of MigraTEC.
MigraTEC, Inc. (formerly known as One Up Corporation) (the "Company" or
"MigraTEC"), was incorporated in 1991. The initial focus of the business was to
provide contract computer programming education services. Subsequently, several
software products were developed and sold, and the Company further diversified
into consulting services and providing assistance to clients wishing to migrate
or convert their software from the Windows operating system to the IBM OS/2
platform. Identifying the need to automate the migration process, the Company
developed its first set of software tools for that purpose, and licensed the
technology to IBM in 1993. The IBM software license generated virtually all of
the Company's revenues for the next three years, during which the Company
continued to enhance and further automate its migration technology.
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<PAGE> 10
GENERAL
MigraTEC, Inc. (the "Company" or "MigraTEC") is a provider of software products
and services which address both the Year 2000 ("Y2K") challenge and the need for
companies to migrate existing software applications to new and more efficient
hardware and software platforms.
Migration is the process of making all changes necessary to move an
organization's current software applications from an existing operating system
to a new target operating system in order to utilize advancing technology and
meet changing business requirements. Migration allows companies to retain the
functionality and business processes which have been developed in their existing
software applications while gaining the efficiencies which result from moving
the software applications to more advanced technology platforms. Migration
avoids the business interruption, retraining and re-engineering problems created
when a software application is totally replaced. Thus, migration not only
extends the productive life of existing software applications, which have
already been developed at significant cost, but also preserves the business
logic and consistency of the existing software application, ensuring continued
ease of ongoing maintenance of the software.
MigraTEC's software technology has been utilized in over 400 migration projects,
facilitated either directly by the Company or through a license of previous
technology of the Company to IBM. Successful migration projects performed by the
Company include Caterpillar Inc., Ameritech Inc., USAA Insurance, Duke Energy,
Bell Sygma, The Sabre Group Inc., Payless ShoeSource Inc., Group 1 Software
Europe Ltd. and AutoTester Inc., including follow-up projects at Duke Energy,
Bell Sygma, Ameritech Inc. and The Sabre Group Inc.
In order to facilitate the Company's transition from its prior dependency on the
revenues generated from the IBM software license, a new management team was
brought into the Company in 1997 to implement a turnaround plan based on further
developing MigraTEC's proprietary "core" software technology and establishing
the Company as a "technology partner" of large strategically positioned
companies. Currently, MigraTEC is focused on further developing its proprietary
technology to serve as the foundation for an advanced "universal migration"
software tool designed to facilitate the transition between numerous computer
languages and operating platforms. The Company intends to utilize the enhanced
technology to facilitate its provision of migration services and to generate
additional revenues through the licensing of the technology to large computer
products and services organizations.
MARKET OVERVIEW AND STRATEGY
With rapid technological changes occurring in today's marketplace, such as the
move to the Internet, Windows and WindowsNT, the development of 64 bit
processors, Y2K compliance issues, and the advent of the introduction of the
European Monetary Unit, management believes that MigraTEC's proprietary software
technology represents an attractive resource for companies seeking access to
technology that will allow them to respond to these challenges and market
opportunities.
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<PAGE> 11
The Company believes that the parsing technology, for which it filed a patent
application in June of 1998, can be used as the nucleus for many "best of breed"
software products. To maximize the opportunity that this "core" technology
presents, the Company formulated and has begun to execute a plan that allows it
to assess market opportunities and bring new products to market quickly at a
relatively low cost. The key steps to implement this plan have been:
o In April 1998 the Company retained Deloitte & Touche (D&T) to conduct
an in-depth analysis of the Company's "core" technology and to
recommend potential "best of breed" products that can be developed from
the "core" technology. This analysis confirmed that MigraTEC has
valuable technology from which many software products or "tools" can be
developed. The D&T analysis further identified over a dozen strategic
market needs which can be addressed with further development of
MigraTEC's "core" technology.
o In May 1998 the MigraTEC research team developed high-level project
plans for seven of the potential products identified by D&T.
o The Company is currently in discussions with several large companies
about possible joint ventures to develop the new products.
The Company believes that the further development of its technology will create
the following revenue opportunities:
o Funding for enhancing the Company's core technology pursuant to the
specifications of "strategic partners."
o Royalties/revenue sharing produced from licensing the enhanced
technology to "strategic partners."
o Revenues from software sales to "end user" customers.
o Revenues from expanded services offerings provided by the Company.
Larger companies such as Sun Microsystems, Oracle, IBM and EDS are seeking out
smaller technology companies like MigraTEC to form development partnerships to
address emerging market opportunities. MigraTEC is currently discussing
co-development opportunities with these companies and anticipates that with its
"core" technology there will be other opportunities for strategic relationships.
The Company has recently signed a five-year agreement with EDS which licenses
MigraTEC's Y2K software to EDS and guarantees EDS access to future software
products developed by the Company. Under the terms of the agreement, MigraTEC
will be paid an amount per line of code that EDS processes through EDS's Y2K
"factory" using the MigraTEC2000 software tool.
The Company believes that its strategic "partnering" and co-development strategy
will provide:
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<PAGE> 12
o "Partners" that can direct development efforts towards emerging
markets.
o "Partners" with extensive sales and marketing resources and a vested
interest in getting the end product into the market.
o Cash necessary to retain key development personnel.
The Company believes that by concentrating on the further development of
"strategic partnerships" with large technology companies and service providers,
the Company can substantially benefit from such partners' strategic market
positions and growing customer bases.
PRODUCTS AND SERVICES
OVERVIEW
MigraTEC's proprietary technology is designed to automate a significant amount
of the migration process by identifying critical code elements in the software
to be migrated, thereby automating a high percentage of the changes required. In
June of 1998, the Company submitted a patent application covering the "core"
portion of its proprietary software technology.
The Company is designing its software products so they can be used:
o by MigraTEC to provide a variety of services for its business
customers,
o by individual businesses to correct or migrate their own client/server
software applications, or
o by other services and/or systems integrators in order to facilitate
their delivery of solutions and/or hardware to their customers.
MIGRATEC2000
The first "product" to which the Company has applied its enhanced technology is
MigraTEC2000, a Y2K software tool to remediate Y2K problems for client/server
applications. The Company's MigraTEC2000 software product utilizes a parsing
technology to perform the following: (1) an inventory of the current source code
to ensure that all lines of code in the application are present for analysis and
remediation, (2) an analysis of the code to ensure that all lines of code
containing Y2K date related fields have been identified, and (3) an automated
remediation of the code pursuant to parameters and instructions determined by
the client. The patent application filed by the Company was related to the
parsing technology incorporated into its MigraTEC2000 software product. Parsing
technology, which management believes is superior to scanning technologies, is a
technology that analyzes the structural relationships contained within computer
program code. The superiority that parsing technology achieves is in the
identification of not only the obvious names of program elements but also the
numerous and subtle ways in which those elements interact with each other to
produce secondary effects.
-12-
<PAGE> 13
The Y2K problem arises from the widespread use of computer programs which were
programmed using two-digit year codes when calculating dates after December 31,
1999. Many "mission critical" programs do not presently have the ability to
correctly interpret and apply date codes representing the year 2000 and later.
"00" may be interpreted as the year 1900 instead of the year 2000 causing
potentially massive information processing and reporting mistakes and the
malfunction of systems which are controlled by date codes. Industries and
software applications which may be particularly affected include those related
to financial services, insurance, transportation, health care, billing, planning
and scheduling, and represent billions of lines of code containing date-related
instructions which will need to be checked and remediated. Failure to correct
Y2K problems may result in significant portions of a company's business being
inoperable.
Originally, the Y2K issue was thought to be a "mainframe only" problem. This was
due primarily to the fact that most non-mainframe (client/server) programs had
been written within the past ten years, and, thus, were thought to be Y2K
compliant. However, in reality, a significant percentage of client/server
programs are not Y2K compliant. Since most companies have just recently begun to
recognize the potential for Y2K problems in the client/server area, they have a
limited amount of time in which to bring their programs into compliance.
The Company's MigraTEC2000 software and proprietary migration software
technology have attracted the interest of several service providers including
IBM, Sun Microsystems, EDS, and Reasoning Inc., as well as others interested in
partnering opportunities. During 1998, EDS, Keane Inc., Ernst & Young, and
Reasoning Inc. have evaluated "MigraTEC2000," the Company's Y2K tool. Each of
these companies indicated that MigraTEc2000 is a high-quality tool designed for
the remediation of client/server applications written in C and C++. The Company
has entered into agreements with EDS and Reasoning Inc. involving the use of
MigraTEC2000 and the Company anticipates a growing volume of relationships
involving MigraTEC's software.
"UNIVERSAL" MIGRATION TOOL
The Company is currently working on the development of a migration work bench
which is a "universal migration" software tool which will incorporate the "core"
technology already developed by the Company. This software tool is being
designed to further automate the migration of a customer's software from a wide
variety of existing operating system platforms to a wide variety of target
operating system which should significantly decrease the time and cost of the
migration project. This should remove the major obstacles facing most companies
when making a decision with regard to upgrading their operating systems or
software applications.
The Company believes that the value of a migration work bench to a computer
hardware vendor would be immense in facilitating a "buy decision" by greatly
reducing the customer's total upgrade and migration process. The Company also
believes that a migration work bench would be extremely valuable to service
providers and systems integrators in reducing their costs and time requirements
involved in performing an upgrade or migration project. The Company believes
that there is significant potential for entering into strategic relationships
with hardware vendors, service providers and systems integrators under which the
Company can generate revenues through licensing agreements and or provisions of
services utilizing the migration work bench. The Company is currently in
discussions with such entities regarding the structuring of strategic
relationships involving the Company's technology.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
MigraTEC should be read in conjunction with the consolidated financial
statements of MigraTEC included elsewhere herein.
Although the Company experienced significant losses for the nine months ended
September 30, 1998, and for 1997, management believes it is important to note
the growing opportunity for MigraTEC to sell its automated migration products
and services based on the rapid growth and changes occurring in today's
marketplace, as well as the increasing market demand for migration products and
services. Management believes, that by capitalizing on this opportunity,
revenues and earnings will increase during the remainder of 1998, although no
assurances can be given regarding such increase.
Management believes that the net loss posted for the nine months ended September
30, 1998, was in part due to continued expenditures for reengineering the
Company's business and shifting its strategic approach to exploiting its
technology through strategic partnerships. In mid-1998, the Company introduced
its new Y2K tool, MigraTEC2000, and intends to introduce an additional migration
service in January 1999. This leads management to believe that the Company can
achieve profitability for the three month period ended December 31, 1998,
although no assurances can be given regarding such improvement.
THREE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
During the third quarter of 1998, the Company's sales revenues decreased to
$290,882, compared to $646,601 for the third quarter of 1997. This decrease was
primarily attributable to the Company focusing its efforts on exploiting its
technology by developing agreements with strategic partners involving licensing
and service arrangements related to MigraTEC2000 as a foundation for future
revenue growth. Licensing and service revenue related to MigraTEC2000
approximated $226,300 during the third quarter of 1998. Service revenue from
non-related MigraTEC2000 products and services was $64,582 and $646,601 for the
three months ended September 30, 1998 and 1997, respectively.
Operating Expenses
The Company's total operating expenses decreased by approximately 14% to
$940,191 during the third quarter of 1998, compared to $1,096,271 for the third
quarter of 1997. Labor costs decreased by approximately 55% to $389,973 compared
to $857,621, for the three months ended September 30, 1998 and 1997,
respectively. This decrease primarily resulted from a reduction in the labor
force during the second and third quarters of 1998. General and administrative
expenses decreased to $82,546 from $119,893 primarily resulting from decreased
expenditures during the third quarter of 1998 for employee recruiting fees and
moving expenses (related to relocating the Company's principal offices in 1997)
as well as a significant reduction in property taxes resulting
-14-
<PAGE> 15
from the Company's relocation. Legal and professional fees decreased to $18,384
from $64,802. This decrease was primarily due to reduced managerial and
financial consulting fees. The decrease in labor costs was offset by a majority
of the expenditures for the Year 2000 program (which are comprised of primarily
labor costs). Year 2000 program costs of $338,378 incurred in the third quarter
of 1998 consists of labor costs and various other expenses related to the
development and marketing of the Company's Year 2000 tool set. No such costs
were incurred in the corresponding period in 1997. As a percentage of revenues,
total operating expenses increased to 323% for the third quarter of 1998,
compared to 170% for the third quarter of 1997, primarily attributable to the
decrease in revenues as previously discussed.
Other Income and Expenses
The Company recognized interest income of $3,238 relates to the interest earned
on cash balances invested in short term certificates of deposit. Interest
expense (which includes loan origination fees) decreased to $16,034 from
$45,824. This decrease was primarily due to (i) principal reduction of the
Senior Secured Promissory Notes and (ii) lower interest and loan fees connected
with the reduction in principal of short-term financing. Also, the Company
incurred financing fees of $15,992 relate to the amortized portion of fees paid
in 1997 in connection with the issuance of the Senior Secured Promissory Notes.
For the three months ended September 30, 1998, MigraTEC incurred a net loss of
$678,097, or $0.02 per share, as compared with a net loss of $500,473, or $0.02
per share, for the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
During the first nine months of 1998, the Company's sales revenues decreased by
approximately 22% to $1,065,322, compared to $1,358,662 for the same nine month
period of 1997. This decrease was primarily attributable to the Company focusing
its efforts on exploiting its technology by developing agreements with strategic
partners involving licensing and service arrangements related to MigraTEC2000 as
a foundation for future revenue growth. Licensing and service revenue related to
MigraTEC2000 approximated $226,300 during the first nine months of 1998. Service
revenue from non-related MigraTEC2000 products and services was $839,022 and
$1,358,662 for the nine months ended September 30, 1998 and 1997, respectively.
Operating Expenses
The Company's total operating expenses increased by approximately 12% to
$3,865,746 during the first nine months of 1998, compared to $3,459,545 for the
first nine months of 1997. Labor costs decreased by approximately 7% to
$1,942,045 compared to $2,088,654, for the nine months ended September 30, 1998
and 1997, respectively. This decrease primarily resulted from a reduction in
the labor force during the second and third quarters of 1998. General and
administrative expenses decreased to $213,736 from $317,065, primarily resulting
from decreased expenditures during the second and third quarters of 1998 for
employee recruiting fees and moving expenses (related to relocating the
Company's principal offices in 1997). Legal and professional fees increased to
$387,389 from $220,163, primarily due to increased legal costs resulting from
various litigation in which the Company was involved. The decrease in labor
costs was offset by a majority of the expenditures for the Year 2000 program
(which are comprised primarily of labor costs). Year 2000 program costs of
$976,007 incurred in the first nine months of 1998 consists of labor costs and
various other expenses related to the development and marketing of the Company's
Year 2000 tool set. No such costs were incurred in 1997. As a percentage of
revenues, total operating expenses increased to 363% for the first nine months
of 1998, compared to 255% for the first nine months of 1997, primarily
attributable to the decrease in revenues and increase in operating expenses as
previously discussed.
-15-
<PAGE> 16
Other Income and Expenses
The Company recognized interest income of $8,768 relates to the interest earned
on cash balances invested in short term certificates of deposit. Interest
expense (which includes loan origination fees) increased to $177,202 from
$71,813. This increase was primarily due to (i) principal reduction of the
Senior Secured Promissory Notes, (ii) higher interest and loan fees connected
with obtaining short-term financing, (iii) interest on shareholder loans, and
(iv) finance charges assessed by trade creditors for late payment of accounts
payable. Also, the Company incurred financing fees of $47,977 relate to the
amortized portion of fees paid in 1997 in connection with the issuance of the
Senior Secured Promissory Notes.
Income Taxes
As a result of operating losses for 1998 and 1997, the Company has not had a
federal income tax obligation. At December 31, 1997, the Company had a total net
operating loss of approximately $3,400,000. The net operating loss carryover
generated for the year ended December 31, 1997, will expire in 2012.
Extraordinary Item
The Company recognized a gain of $256,344 related to the forgiveness of debt.
This gain relates to reductions in amounts due to various vendors through
renegotiation of terms.
For the nine months ended September 30, 1998, MigraTEC incurred a net loss of
$2,763,441 or $0.07 per share, as compared with a net loss of $2,258,090 or
$0.09 per share, for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $3,146,668 for the nine months ended
September 30, 1998, which resulted from the net operating loss, offset primarily
by a net decrease of $648,453 in assets and liabilities. The decreases in
accounts payable and accrued expenses were funded from operations (principally
from the collection of $1,051,620 in outstanding accounts receivable relating to
sales revenues) and cash provided in financing activities. This compares to net
cash used by operating activities of $1,119,769 for nine months ended September
30, 1997, which resulted primarily from the operating loss offset by the receipt
of the income tax refund.
At September 30, 1998, the Company had net working capital of $31,041, compared
to a net working capital deficit of $1,563,162 at December 31, 1997, an increase
in net working capital of $1,594,203 for the nine months then ended, due
primarily to the reduction of accounts payable, accrued expenses and short term
debt.
At September 30, 1998, the Company had cash of $306,998 and $231,131 in
outstanding accounts receivable, all of which is considered fully collectible.
-16-
<PAGE> 17
At September 30, 1998, the Company's outstanding debt obligations included
$1,072,459 in Senior Secured Promissory Notes (net of $40,041 unamortized
discount).
During the first nine months of 1998, the Company received proceeds of
$3,445,390 from financing activities. The Company collected (1) $4,844,250 in
connection with the issuance of common stock, and (2) $781,500 in proceeds from
short-term loans from a bank and various outside investment groups. The cash
proceeds were offset by (1) $740,000 paid for the purchase of 9,400,000 shares
of treasury stock and (2) $1,327,397 expended for the repayment of principal of
short-term loans from a bank and various outside investment groups, shareholder
advances and obligations under capital lease.
The Company continues to actively work with trade creditors to negotiate
settlements regarding outstanding accounts payable on terms favorable to the
Company. As of the filing of this report, the Company has been successful in
settling $503,882 in outstanding accounts payable for approximately $247,000,
thereby saving the Company just over $250,000. In addition to the aforementioned
settlements, subsequent to September 30, 1998, the Company has further reduced
its debt by paying, and thereby reducing, outstanding accounts payable of
approximately $74,000.
To continue to fund its operations for 1998, the Company successfully commenced
two private offerings in March 1998 which, in the opinion of management, yielded
gross proceeds to the Company sufficient to fund operations until such time that
product revenues begin to ramp up. While much remains to be accomplished, the
Company has made significant progress towards stabilization. While the success
of the Company will in part depend upon its ability to market and sell its
products and services, management believes that the recent implementation of its
plan to shift the Company's strategic approach to exploiting its technology
through strategic relationships, should move the Company forward with a focus on
achieving profitability by the end of 1998. The anticipated increase in revenues
coupled with a continued emphasis on controlling costs should position the
Company to achieve improved results for 1999. However, there can be no assurance
that the Company will generate an increase in revenues or earnings, or achieve
improved operating performance or results.
This Form 10-QSB contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in or incorporated by reference into
this Form 10-QSB, are forward-looking statements. In addition, when used in this
document, the words "anticipate," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove to have been correct.
-17-
<PAGE> 18
Among the key factors that could cause actual results to differ materially from
expectations, estimates of costs, projected results or anticipated results are
the risk that the Company will be unable to generate sufficient cash flows to
fund operations or to obtain additional financing on favorable terms, the risk
that the Company will be unable to effectively penetrate its target markets for
migration products and services and Y2K product sales, the risk that new
untested management will be unable to successfully implement the business plan
and sales strategy, and the risk of unfavorable changes in economic and industry
conditions, as well as changes in regulatory requirements. The Company has also
made certain assumptions relating to its operations and the industry in general.
All written or oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by, but
not limited to, the factors described above.
-18-
<PAGE> 19
SIGNATURES
Pursuant with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MIGRATEC, INC.
(Registrant)
BY: /s/ W. CURTIS OVERSTREET
------------------------------------------
W. Curtis Overstreet, President and
Principal Executive Officer
Dated: /s/ 11/23/98
------------------
BY: /s/ MARK C. MYERS
------------------------------------------
Mark C. Myers, Principal Financial
Officer
Dated: /s/ 11/23/98
------------------
-19-
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<S> <C>
(11) A Statement of Computations of Per Share Earnings
(27.1) Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
MIGRATEC, INC. AND SUBSIDIARY
Computation of Net Loss Per Share
The following table sets forth the computation of basic and diluted loss
per share as calculated in accordance with FASB 128.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and
diluted loss per share -
Net loss before extraordinary
item $ (678,097) $ (500,473) $ (3,019,785) $ (2,258,090)
Extraordinary income -- -- 256,344 --
------------ ------------ ------------ ------------
Net Loss $ (678,097) $ (500,473) $ (2,763,441) $ (2,258,090)
============ ============ ============ ============
Denominator:
Denominator for basic loss
per share - weighted average shares 43,313,080 27,470,512 38,757,699 26,182,304
Effect of dilutive securities:
Stock options and warrants -- -- -- --
-- -- -- --
------------ ------------ ------------ ------------
Dilutive potential common shares -- -- -- --
------------ ------------ ------------ ------------
Denominator for diluted loss
per share - adjusted weighted average
shares and assumed conversions 43,313,080 27,470,512 38,757,699 26,182,304
============ ============ ============ ============
Basic loss per share $ (0.016) $ (0.018) $ (0.078) $ (0.086)
============ ============ ============ ============
Diluted loss per share $ (0.016) $ (0.018) $ (0.071) $ (0.086)
============ ============ ============ ============
</TABLE>
As the Company incurred a net loss for the three and nine months ended
September 30, 1998 and 1997, there were no adjustments for potentially dilutive
securities as the adjustments would have been antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998,
FILED AS PART OF FORM 10-QSB QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB
QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 306,998
<SECURITIES> 0
<RECEIVABLES> 231,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 563,005
<PP&E> 1,016,752
<DEPRECIATION> (717,147)
<TOTAL-ASSETS> 937,563
<CURRENT-LIABILITIES> 531,964
<BONDS> 0
0
0
<COMMON> 7,072,628
<OTHER-SE> (7,771,841)
<TOTAL-LIABILITY-AND-EQUITY> 937,563
<SALES> 0
<TOTAL-REVENUES> 1,065,322
<CGS> 0
<TOTAL-COSTS> 3,865,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,179
<INCOME-PRETAX> (3,019,785)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,019,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 256,344
<CHANGES> 0
<NET-INCOME> (2,763,441)
<EPS-PRIMARY> (0.071)
<EPS-DILUTED> (0.071)
</TABLE>
