<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 33-28809-A
MIGRATEC, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0125664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12801 NORTH STEMMONS FREEWAY, SUITE 710, FARMERS BRANCH, TEXAS 75234
(Address of principal executive offices)
(972) 969-0300
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 15, 1999, the issuer
had 64,870,092 shares of common stock, no par value, outstanding.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at September 30, 1999 (unaudited), and December 31, 1998
Statements of Operations for the three months and nine months ended
September 30, 1999 and 1998 (unaudited)
Statements of Stockholders' Deficit for the nine months ended
September 30, 1999 and 1998 (unaudited)
Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (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, 1999 and 1998
Comparison of the Nine Months Ended September 30, 1999 and 1998
Liquidity and Capital Resources
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computations of Net Loss Per Share
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
none
SIGNATURES
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<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1999, and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
ASSETS 09/30/99 12/31/98
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 6,532 $ 17,389
Accounts receivable - billed 219,812 279,268
Accounts receivable - unbilled 48,160 10,000
Shareholder advance 2,390 3,766
Other current assets 29,161 29,624
------------ ------------
Total current assets 306,055 340,047
PROPERTY AND EQUIPMENT, NET 103,230 198,702
OTHER ASSETS
Financing fees -- 33,794
Other assets 21,548 21,548
------------ ------------
Total other assets 21,548 55,342
------------ ------------
Total Assets $ 430,833 $ 594,091
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, net of discount of $0 and $25,359, respectively,
including $0 and $30,000, respectively due to shareholders $ 994,556 $ 1,297,579
Accounts payable 342,721 347,294
Accrued expenses 142,636 159,069
Obligation under capital lease 19,011 27,105
------------ ------------
Total current liabilities 1,498,924 1,831,047
LONG-TERM LIABILITIES
Long-term portion of notes payable 94,349 56,165
Long-term portion of obligation under capital lease -- 14,283
------------ ------------
Total long-term liabilities 94,349 70,448
MINORITY INTEREST (5,984) (3,752)
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3)
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;
72,688,633 and 54,421,618 shares issued at September 30, 1999,
and December 31, 1998, respectively 9,185,679 7,041,890
Additional paid-in capital 1,520,734 886,458
Treasury stock, at cost (9,864,449 shares) (1,777,891) (1,777,891)
Accumulated deficit (10,084,978) (7,454,109)
------------ ------------
Total stockholders' deficit (1,156,456) (1,303,652)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 430,833 $ 594,091
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 4
MIGRATEC, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 294,267 $ 290,882 $ 764,492 $ 1,065,322
COSTS AND EXPENSES
Salaries and benefits 537,678 327,685 1,059,910 1,406,320
Contract labor 107,609 62,288 212,284 535,725
General and administrative 57,130 82,546 149,445 213,736
Advertising and marketing -- 26,325 23,745 87,104
Travel 12,713 4,635 20,283 16,090
Rent 34,174 31,950 106,726 95,850
Depreciation and amortization 33,600 48,000 100,800 145,800
Legal and professional fees 19,283 18,384 77,132 387,389
Year 2000 program costs 2,330 338,378 843,986 976,007
Bad debt expense -- -- -- 1,725
------------ ------------ ------------ ------------
Total operating expenses 804,517 940,191 2,594,311 3,865,746
------------ ------------ ------------ ------------
Loss from operations (510,250) (649,309) (1,829,819) (2,800,424)
OTHER INCOME (EXPENSES)
Interest income 74 3,238 245 8,768
Interest expense (56,187) (16,034) (176,471) (177,202)
Financing fees (502,975) (15,992) (668,070) (47,977)
Gain (loss) on sale of assets -- -- -- (2,950)
------------ ------------ ------------ ------------
Total other income (expenses) (559,088) (28,788) (844,296) (219,361)
Minority interest in income (loss) of
consolidated subsidiary 2,232 -- 2,232 --
------------ ------------ ------------ ------------
Loss before income taxes and
extraordinary item (1,067,106) (678,097) (2,671,883) (3,019,785)
Provision for income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss before extraordinary item (1,067,106) (678,097) (2,671,883) (3,019,785)
Extraordinary income from forgiveness
of debt (net of income taxes of $0) 41,014 -- 41,014 256,344
------------ ------------ ------------ ------------
Net loss $ (1,026,092) $ (678,097) $ (2,630,869) $ (2,763,441)
============ ============ ============ ============
Loss before income taxes and extraordinary
item per common share $ (0.020) $ (0.016) $ (0.054) $ (0.078)
============ ============ ============ ============
Extraordinary income per common share $ 0.001 $ -- $ 0.001 $ 0.007
============ ============ ============ ============
Net loss per common share (basic and diluted) $ (0.019) $ (0.016) $ (0.053) $ (0.071)
============ ============ ============ ============
Weighted average common shares and common
equivalents issued and outstanding (basic
and diluted) 54,512,750 43,313,080 49,565,500 38,757,699
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Deficit
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Common Treasury
Stock Stock Treasury Stock
Issued Amount Stock Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 30,199,154 $ 2,197,640 (854,903) $ (1,068,629)
Issuance of stock in connection with private
placements for cash 22,790,000 4,558,000 -- --
Issuance of stock in connection with the
conversion of debt to equity 1,375,000 275,000 -- --
Issuance of stock in connection with the
exercise of options and warrants for cash 54,000 11,250 -- --
Treasury stock received in exchange for cash -- -- (9,400,000) (740,000)
Issuance of stock for services rendered -- -- 390,454 30,738
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1998 54,418,154 $ 7,041,890 (9,864,449) $ (1,777,891)
============ ============ ============ ============
Balance at January 1, 1999 54,421,618 $ 7,041,890 (9,864,449) $ (1,777,891)
Issuance of stock in connection with private
placements for cash 9,904,500 1,238,062 -- --
Issuance of stock in connection with the
conversion of debt to equity 5,967,927 745,990 -- --
Issuance of stock in connection with the
exercise of options and warrants for cash 2,393,908 159,737 -- --
Issuance of warrants for financing fees -- -- -- --
Issuance of stock to employees under the
Employee Stock Purchase Plan -
shares matched by employer 680 -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1999 72,688,633 $ 9,185,679 (9,864,449) $ (1,777,891)
============ ============ ============ ============
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance at January 1, 1998 $ 796,263 $ (3,996,034) $ (2,070,760)
Issuance of stock in connection with private
placements for cash -- -- 4,558,000
Issuance of stock in connection with the
conversion of debt to equity -- -- 275,000
Issuance of stock in connection with the
exercise of options and warrants for cash -- -- 11,250
Treasury stock received in exchange for cash -- -- (740,000)
Issuance of stock for services rendered -- -- 30,738
Net loss -- (2,763,441) (2,763,441)
------------ ------------ ------------
Balance at September 30, 1998 $ 796,263 $ (6,759,475) $ (699,213)
============ ============ ============
Balance at January 1, 1999 $ 886,458 $ (7,454,109) (1,303,652)
Issuance of stock in connection with private
placements for cash -- -- 1,238,062
Issuance of stock in connection with the
conversion of debt to equity -- -- 745,990
Issuance of stock in connection with the
exercise of options and warrants for cash -- -- 159,737
Issuance of warrants for financing fees 634,276 -- 634,276
Issuance of stock to employees under the
Employee Stock Purchase Plan -
shares matched by employer -- -- --
Net loss -- (2,630,869) (2,630,869)
------------ ------------ ------------
Balance at September 30, 1999 $ 1,520,734 $(10,084,978) $ (1,156,456)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 6
MIGRATEC, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,630,869) $ (2,763,441)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 100,800 145,800
(Gain) loss on disposal of assets -- 2,950
Bad debt expense -- 1,725
Financing fees 33,794 47,977
Warrants issued for financing fees 634,276 --
Amortization of discount on notes payable 25,359 36,036
Common stock and warrants issued for goods and services -- 30,738
Minority interest (2,232) --
Extraordinary income from forgiveness of debt (40,014) --
Change in assets and liabilities:
Decrease in accounts receivable 59,456 161,899
Increase in unbilled revenue (38,160) --
Decrease in restricted cash -- 28,150
Decrease in other current assets 1,839 4,514
Increase in other assets -- --
Increase (decrease) in accounts payable 36,441 (514,571)
Decrease in accrued expenses (7,943) (157,080)
Decrease in customer deposits in excess of unbilled receivables -- (171,365)
------------- -------------
Total adjustments 802,616 (383,227)
------------- -------------
Net cash used by operating activities (1,828,253) (3,146,668)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of property and equipment (5,328) 4,200
------------- -------------
Net cash provided (used) in investing activities (5,328) 4,200
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash overdraft -- (112,963)
Proceeds from notes payable, excluding shareholder amounts 617,500 704,000
Proceeds from issuance of common stock 1,397,799 4,844,250
Payments under obligations of capital lease (22,377) (20,121)
Repayment of shareholder advances, net of proceeds (30,000) (63,276)
Repayment of notes payable, excluding shareholder amounts (140,198) (979,000)
Repayment of transfer liability, net of proceeds -- (187,500)
Purchase of treasury stock -- (740,000)
------------- -------------
Net cash provided in financing activities 1,822,724 3,445,390
------------- -------------
Net increase (decrease) in cash (10,857) 302,922
Cash - beginning 17,389 4,076
------------- -------------
Cash - ending $ 6,532 $ 306,998
============= =============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 159,093 $ 176,267
============= =============
Income taxes paid $ -- $ --
============= =============
Issuance of stock upon conversion of debt to equity $ 745,990 $ --
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 7
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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 our opinion, necessary for a fair
presentation of our financial position as of September 30, 1999, and our results
of operations and cash flows for the nine months ended September 30, 1999 and
1998. These unaudited consolidated financial statements should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 1998, including the accompanying notes.
NOTE 2. GOING CONCERN UNCERTAINTY
As reflected in the accompanying consolidated financial statements, we incurred
a loss of $2,630,869 and used operating cash of $1,828,253 for the nine months
ended September 30, 1999. In addition, current liabilities exceed current assets
by $1,192,869 at September 30, 1999, and we were unable to meet certain debt
maturities at June 30, 1999 (See Note 3). Our continued existence and plans for
future growth are dependent in part on our ability to obtain the capital
necessary to operate, primarily through the issuance of additional debt or
equity, and in part on our ability to effectively penetrate the market for
software migration and upgrade services, related products, and Year 2000
software products and services. If we are not able to achieve break-even, obtain
additional or alternative funding, or generate sufficient sales revenues and
cash flows in the near term, we will be unable to continue as a going concern.
During 1999, through the date of this report, we have funded our operations
primarily from (1) the collection of $1,250,563 in connection with private
offerings for our common stock, (2) the receipt of $682,500 in proceeds from
several short-term notes payable with certain investor groups, including a
director and an officer, (3) the receipt of $252,659 in connection with the
exercise of warrants and options previously granted to holders of short-term
notes payable, consultants and employees, and (4) the collection of accounts
receivable outstanding and the receipt of sales revenues totaling $1,002,443.
In addition, if needed, we are considering issuing additional equity through a
private offering during the fourth quarter of 1999 in an amount sufficient to
meet current operating expenses until such time that product revenues are
sufficient to sustain our operations. However, we cannot assure you that any
additional funding will be available to us when needed, on commercially
reasonable terms, or at all. We have no current arrangements with respect to, or
potential sources of, additional funding, and it is not anticipated that
existing shareholders will satisfy any portion of our current or future funding
requirements.
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<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 2. GOING CONCERN UNCERTAINTY (CONTINUED)
While much remains to be accomplished, we believe that we have made significant
progress towards stabilization. As we develop additional software tools and
introduce both current and proposed products and services into the marketplace,
we anticipate that our sales revenues will increase during 2000. While our
success will in part depend on our ability to market and sell our products and
services, we believe that the successful implementation of our plan to
reengineer our business focus by shifting our strategic approach to utilizing
our technology through strategic relationships, coupled with our continued
emphasis on controlling costs, should move us forward with a focus on achieving
improved results for 2000. However, we can provide no assurance to you that we
will generate an increase in revenues or earnings, or achieve improved operating
performance or results.
These 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 our inability to continue as
a going concern.
NOTE 3. NOTES PAYABLE
The notes payable at September 30, 1999, including both current and long-term
portions, is comprised of (1) $375,000 in senior secured promissory notes, (2)
$650,045 in short-term loans from various investment groups, including a
director, and (3) $63,860 in other notes payable relating to settlement of
vendor and other lawsuits previously filed. As of the date hereof, we are
currently in default under certain of these notes payable as follows.
On July 1, 1999, we were unable to meet our obligation to repay our senior
secured promissory notes in the principal amount of $1,112,500 plus accrued
interest. In an effort towards reaching a settlement agreement on mutually
acceptable terms, on July 31, 1999, we paid the semi-annual interest due to all
of the note holders, and subsequently submitted a proposal to modify the terms
of the notes. Under terms of our proposal, (1) the annual interest rate on the
notes would remain at ten percent, (2) the next semi-annual interest payment
would remain payable on January 31, 2000, with the final interest payment being
due on July 1, 2000, (3) the exercise price of the related warrants to purchase
an aggregate of 3,178,591 shares of our common stock would be reduced from $0.35
to $0.20 per share, (4) the expiration date of the warrants would be extended
from July 1, 2000, to July 1, 2001, and (5) the principal amount of the notes
plus any accrued interest, combined, would be convertible into shares of our
common stock at per share prices of (i) $0.125 through November 30, 1999, (ii)
$0.20 from December 1, 1999, through February 29, 2000, and (iii) $0.35 from
March 1, 2000, through May 31, 2000. As of the date hereof, we have issued
6,993,957 shares of our common stock to 21 of the note holders who have accepted
our
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<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 3. NOTES PAYABLE (CONTINUED)
proposal and converted notes in the principal amount of $862,500 plus accrued
interest of $11,743. In addition, as of the date hereof, three of the note
holders comprising $125,000 in principal amount have accepted our proposal,
waiving the default provisions of the notes in an agreement to extend the due
date of the notes until July 1, 2000, but have not yet converted their notes.
Five holders of the remaining $125,000 in principal amount of the notes have not
yet accepted our proposal, and we are, therefore, currently in default under
these notes, which are presently due on demand, as we continue to negotiate with
these note holders. Until such time that our proposal is accepted, we remain in
default with regard to these five holders comprising $125,000 in principal
amount of the notes which remain due on demand. Although we believe our proposal
will be accepted by these note holders, we can give you no assurance regarding
their acceptance.
NOTE 4. STOCKHOLDERS' DEFICIT AND STOCK OPTIONS
Pursuant to the 1999 Stock Option Plan, during the third quarter of 1999, we
granted to members of management and employees options to purchase up to an
aggregate of 685,968 shares of our common stock at prices ranging from $0.3906
to $0.1719 per share exercisable through September 13, 2004.
Effective July 1, 1999, we issued to a former employee 348 shares of our common
stock representing our 50% matching of shares previously purchased by the
employee pursuant to the terms of the Employee Stock Purchase Plan.
Effective July 1, 1999, pursuant to the terms of a Letter Agreement between us
and a consultant, whereby we will receive certain consulting services from the
consultant for a period of two years, we granted to the consultant a warrant to
purchase up to an aggregate of 180,000 shares of our common stock at $0.20 per
share. Vesting is at a rate of 7,500 shares per month beginning July 31, 1999,
and continuing for the next 23 months, unless the Letter Agreement is terminated
prior to full vesting. Full vesting of the warrant may be accelerated under
certain terms and conditions as stipulated in the Letter Agreement. The warrant
expires two years after fully vested, or, if earlier, two years after the Letter
Agreement is terminated.
Effective July 29, 1999, pursuant to the terms and conditions of a short-term
loan made to us by an outside investor group, we granted a two-year warrant to
purchase up to an aggregate of 10,000 shares of our common stock at $0.01 per
share, fully vested at date of grant. Effective September 1, 1999, pursuant to
the terms and conditions extending the due date of the loan, we granted a
two-year warrant to purchase up to an aggregate of 10,000 additional shares of
our common stock at $0.01 per share, fully vested at date of grant.
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<PAGE> 10
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 4. STOCKHOLDERS' DEFICIT AND STOCK OPTIONS (CONTINUED)
Effective August 1, 1999, pursuant to the terms and conditions of a Letter
Agreement between us and a consultant, whereby we received marketing services
from the consultant, we granted to the consultant a two-year warrant to purchase
up to an aggregate of 25,000 shares of our common stock at $0.20 per share,
fully vested at date of grant.
Effective August 9, 1999 and August 31, 1999, we issued to an outside investment
group 1,000,000 and 333,333 shares, respectively, of our common stock at $0.075
per share pursuant to a Stock Option Agreement which grants an option entitling
the Group to purchase up to an aggregate of 5,903,614 shares. Under the terms
and conditions of the Agreement, the Group was required to purchase the
1,000,000 shares upon signing, tendering payment of $75,000 to us, thereby
exercising a portion of the option. Additional terms and conditions of the
Agreement call for the maximum exercise price of the final 2,000,000 shares to
be reduced from $0.50 to $0.20 provided that the Group purchases at least
333,333 shares by August 31, 1999, tendering payment of $25,000 to us, thereby
exercising an additional portion of the option. The remaining 4,570,281 shares
exercisable under the option may be purchased by the Group as follows: (1)
570,281 shares are exercisable at $0.075 per share, and expire 30 days after
registration, (2) 2,000,000 shares are exercisable at the greater of (i) $0.20
or (ii) 50% of the prior five day average closing bid price per share, and
expire six months after registration, and (3) 2,000,000 shares are exercisable
at the greater of (i) $0.20 or (ii) 50% of the prior five day average closing
bid price per share, and expire 12 months after registration. The Agreement
provides that we will file a shelf registration statement with the SEC no later
than August 31, 2000, in order to register the 5,903,614 shares underlying the
option. In the event that we fail to file the registration statement by August
31, 2000, the Group will be entitled to purchase an additional 600,000 shares of
our common stock at the greater of (i) $0.50 or (ii) 50% of the prior five day
average closing bid price per share, fully vested and exercisable from September
1, 2000, through August 31, 2001.
Effective September 8, 1999, pursuant to the terms and conditions of a
short-term loan made to us by one of our directors, we issued 20,000 shares of
our common stock upon exercise of a warrant granted on August 31, 1999, to
purchase shares at $0.01 per share.
During the third quarter of 1999, we issued to twenty-seven individual
investors, including one director, 4,374,000 restricted and unregistered shares
of our common stock at $0.125 per share under terms of a private offering for
total net cash proceeds of $546,750. In a related transaction, we granted
two-year warrants to purchase up to an aggregate of 874,800 shares of our common
stock at $0.20 per share.
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<PAGE> 11
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 5. SUBSEQUENT EVENTS
Pursuant to the 1999 Stock Option Plan, subsequent to September 30, 1999, we
granted to members of management and employees options to purchase up to an
aggregate of 36,000 shares of our common stock at $0.1719 per share exercisable
through November 15, 2004.
Effective October and November 1, 1999, pursuant to the terms and conditions
extending the due date of a short-term loan previously made to us by an outside
investor group, we granted two-year warrants for the purchase of up to an
aggregate of 10,000 shares each of our common stock at $0.01 per share, fully
vested at date of grant.
Effective October 13, 1999, we issued 200,000 shares of our common stock to an
outside investment group upon exercise of a warrant previously granted to
purchase shares at $0.01 per share.
Effective October 13, 1999, we issued 704,878 shares of our common stock to a
consultant at a reduced exercise price of $0.125 per share upon exercise of
warrants previously granted to purchase shares at prices which originally ranged
from $0.40 to $0.25625 per share.
Effective October 14, 1999, we issued to an individual investor 100,000
restricted and unregistered shares of our common stock at $0.125 per share under
terms of a private offering for total net cash proceeds of $12,500. In a related
transaction, we granted a two-year warrant to purchase up to an aggregate of
20,000 shares of our common stock at $0.20 per share.
Effective October 29, 1999, we issued 15,000 shares of our common stock to a
former employee upon exercise of options previously granted to purchase shares
at $0.1875 per share.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 1999
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 OUR SUBSIDIARY MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
CERTAIN FACTORS THAT COULD CONTRIBUTE TO THESE 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."
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 we experienced significant losses for the nine months ended September
30, 1999, as well as for 1998, 1997 and 1996, we believe it is important to note
the growing opportunity for us to sell our 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. We
believe, that by capitalizing on this opportunity, revenues and earnings will
increase during 2000, although we can give you no assurances regarding any
increase.
We believe that our net loss posted for the nine months ended September 30,
1999, was in part due to continued expenditures for reengineering our business
and shifting our strategic approach to utilizing our technology through
strategic partnerships. In mid-1998, we introduced our new Y2K tool,
MigraTEC2000, and most recently announced the completion of our initial
development of an additional migration service in April 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
During the third quarter of 1999, our sales revenues increased to $294,267,
compared to $290,882 for the third quarter of 1998. Licensing and service
revenue related to MigraTEC2000 approximated $219,494 for the third quarter of
1999 compared to $226,300 for the third quarter
-12-
<PAGE> 13
of 1998. Service revenue from non-related MigraTEC2000 products and services was
approximately $74,773 and $64,582 for the three months ended September 30, 1999
and 1998, respectively.
Operating Expenses
Our total operating expenses decreased by approximately 14% to $804,517 during
the third quarter of 1999, compared to $940,191 for the third quarter of 1998.
Labor costs increased by approximately 65% to $645,287 for the three months
ended September 30, 1999, compared to $389,973 for the three months ended
September 30, 1998. General and administrative expenses decreased to $57,130
from $82,546, primarily resulting from decreased expenditures for leased
computer equipment. Advertising, marketing and public relations costs decreased
to $0 from $26,325. Rent expense increased to $34,174 from $31,950, due to
increased escalation charges for 1998, as well as monthly estimates for 1999,
being passed through and billed currently by our landlord. Depreciation and
amortization decreased to $33,600 for the third quarter of 1999, compared to
$48,000 for the third quarter of 1998, as a result of asset abandonments and
retirements. Legal and professional fees increased to $19,283 during the third
quarter of 1999 from $18,384 for the third quarter of 1998. The increase in
labor costs was offset primarily by the decrease in expenditures for the Year
2000 program, which were comprised of primarily labor costs and included various
other expenses related to the development and marketing of our Year 2000 tool
set, as well as research and development related to the development of other
migration tools. Year 2000 program costs decreased to only $2,330 for the third
quarter of 1999, consisting of commissions payable on licensing and service
revenue related to MigraTEC2000. Such costs incurred in the corresponding period
in 1998 totaled $338,378. As a percentage of revenues, total operating expenses
decreased to 273% for the third quarter of 1999, compared to 323% for the third
quarter of 1998, primarily attributable to the decrease in expenses as
previously discussed.
Other Income and Expenses
Interest expense, which includes loan origination fees, increased to $56,187 for
the third quarter of 1999, compared to $16,034 for the third quarter of 1998.
The increase was primarily due to (i) finance and late charges we incurred
resulting from the late payment of trade accounts payable and (ii) interest and
loan origination fees incurred in connection with short-term notes entered into
during 1999. Also, we incurred financing fees of $502,975 relating to stock
purchase warrants issued with debt.
For the three months ended September 30, 1999, we incurred a net loss of
$1,067,106, or $0.019 per share, as compared with a net loss of $678,097, or
$0.016 per share, for the same period in 1998.
-13-
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
During the first nine months of 1999, our sales revenues decreased to $764,492,
compared to $1,065,322 for the first nine months of 1998. This decrease was
primarily attributable to focusing our efforts on utilizing our 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 $599,472 for
the first nine months of 1999, compared to $226,300 for the first nine months of
1998. Service revenue from non-related MigraTEC2000 products and services was
approximately $164,750 and $839,022 for the nine months ended September 30, 1999
and 1998, respectively.
Operating Expenses
Our total operating expenses decreased by approximately 33% to $2,594,311 during
the first nine months of 1999, compared to $3,865,746 for the first nine months
of 1998. Labor costs decreased by approximately 34% to $1,272,194 for the nine
months ended September 30, 1999, compared to $1,942,045 for the nine months
ended September 30, 1998. This decrease primarily resulted from a reduction in
our labor force during the second and third quarters of 1998 attributable to
changing our business focus. General and administrative expenses decreased to
$149,445 from $213,736, primarily resulting from decreased expenditures for
directors fees, leased computer equipment, and other office-related expenses.
Advertising, marketing and public relations costs decreased to $23,745 from
$87,104. Rent expense increased to $106,726 from $95,850, due to increased
escalation charges for 1998, as well as monthly estimates for 1999, being passed
through and billed currently by our landlord. Depreciation and amortization
decreased to $100,800 from $145,800, as a result of asset abandonments and
retirements. Legal and professional fees decreased to $77,132 from $387,389,
primarily due to decreased legal costs resulting from various litigation in
which we were involved. 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 $843,986 incurred in the first nine
months of 1999 consists of labor costs and various other expenses related to the
development and marketing of our Year 2000 tool set, as well as research and
development related to the development of other migration tools. Such costs
incurred in the corresponding period in 1998 totaled $976,007. As a percentage
of revenues, total operating expenses decreased to 339% for the first nine
months of 1999, compared to 363% for the first nine months of 1998, primarily
attributable to the decrease in revenues and expenses as previously discussed.
Other Income and Expenses
Interest expense, which includes loan origination fees, decreased to $176,471
for the nine months ended September 30, 1999, compared to $177,202 for the nine
months ended September 30, 1998. Also, we incurred financing fees of $668,070,
of which $33,794 relates to the amortized portion of fees paid in 1997 in
connection with the issuance of our senior secured promissory notes and $634,276
relates to stock purchase warrants issued with debt.
-14-
<PAGE> 15
For the nine months ended September 30, 1999, we incurred a net loss of
$2,630,869, or $0.053 per share, as compared with a net loss of $2,763,441, or
$0.071 per share, for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $1,828,253 for the nine months ended
September 30, 1999, which resulted from our operating loss, reduced by net
changes in assets and liabilities and non-cash expenses and income. This
compares to net cash used by operating activities of $3,146,668 for the nine
months ended September 30, 1998, which resulted primarily from our operating
loss, increased by net changes in assets and liabilities and non-cash expenses
and income.
At September 30, 1999, we had a net working capital deficit of $1,192,869,
compared to a net working capital deficit of $1,491,000 at December 31, 1998, a
net decrease in working capital of $298,131 for the nine months ended September
30, 1999.
At September 30, 1999, we had cash of $6,532 and $267,972 in outstanding
accounts receivable ($219,812 billed and $48,160 unbilled), all of which is
considered fully collectible.
At September 30, 1999, our outstanding debt obligations included (i) $375,000 in
senior secured promissory notes, (ii) $625,045 in short-term loans from outside
investment groups, (iii) $25,000 in short-term loans from a director, (iv)
$63,860 in other notes payable relating to settlement of vendor and other
lawsuits previously filed, and (v) $19,011 due under a capital lease.
During the first nine months of 1999, we received proceeds of $1,822,724 from
financing activities. We collected (i) $1,397,799 in connection with the
issuance of shares of our common stock and (ii) $647,500 in proceeds from
short-term loans from various outside investment groups, a director and an
officer. Our cash proceeds were offset by $222,575 expended for our repayment of
principal of short-term loans from an outside investment group and an officer,
other notes payable relating to settlement of vendor and other lawsuits
previously filed, and obligations under a capital lease.
In funding our operations for 1999, as of the date hereof we have (i) completed
private offerings which have yielded gross proceeds of $1,250,563, (ii) entered
into several short-term notes payable with outside investment groups, including
one director and one officer, totaling $682,500, and (iii) received gross
proceeds of $252,659 for the exercise of warrants relating to various short-term
notes payable and warrants and options previously granted to consultants and
employees. We have also used certain of our notes payable to fund our
operations. As is discussed in further detail in the notes to our financial
statements included elsewhere herein, as a result, we are presently in default
under certain of our notes payable including (i) approximately $125,000 in
principal amount of our senior secured promissory notes. If needed, we are
considering issuing additional equity through a private offering during the
fourth quarter of 1999 in an amount sufficient to meet our current operating
expenses until such time that product revenues are sufficient to sustain our
operations.
-15-
<PAGE> 16
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. These 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 we believe that our expectations
reflected in the forward-looking statements are reasonable, no assurance can be
given that our 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 we will be unable to generate sufficient cash flows to fund
operations or to obtain additional financing on favorable terms, the risk that
we will be unable to effectively penetrate our target markets for migration
products and services and Y2K product sales, the risk that our new untested
management will be unable to successfully implement our business plan and sales
strategy, and the risk of unfavorable changes in economic and industry
conditions, as well as changes in regulatory requirements. We have also made
certain assumptions relating to our operations and the industry in general. All
written or oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by, but not limited to,
the factors described above.
-16-
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computations of Net Loss Per Share
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
None
-17-
<PAGE> 18
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: November 16, 1999
---------------------
BY: /s/ MARK C. MYERS
-------------------------------------
Mark C. Myers, Principal Financial
Officer
Dated: November 16, 1999
---------------------
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 Computations of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
MIGRATEC, INC. AND SUBSIDIARY
Computations 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,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted loss per share -
Loss before extraordinary item $ (1,067,106) $ (678,097) $ (2,671,883) $ (3,019,785)
Extraordinary income 41,014 -- 41,014 256,344
------------ ------------ ------------ ------------
Net loss $ (1,026,092) $ (678,097) $ (2,630,869) $ (2,763,441)
============ ============ ============ ============
Denominator:
Denominator for basic loss per share - 54,512,750 43,313,080 49,565,500 38,757,699
Weighted average shares
Effect of dilutive securities:
Stock options and warrants -- -- -- --
------------ ------------ ------------ ------------
Dilutive potential common shares -- -- -- --
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions
============ ============ ============ ============
Basic loss per share $ (0.019) $ (0.016) $ (0.053) $ (0.071)
============ ============ ============ ============
Diluted loss per share $ (0.019) $ (0.016) $ (0.053) $ (0.071)
============ ============ ============ ============
</TABLE>
As MigraTEC incurred a net loss for the three months and nine months ended
September 30, 1999 and 1998, there were no adjustments for potentially dilutive
securities as the adjustments would have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999,
FILED AS PART OF FORM 10-QSB QUARTERLY REPORT FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN TS ENTIRETY BY REFERENCE TO SUCH FORM
10-QSB QUARTERLY REPORT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,532
<SECURITIES> 0
<RECEIVABLES> 267,972
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 306,055
<PP&E> 834,765
<DEPRECIATION> (731,535)
<TOTAL-ASSETS> 430,833
<CURRENT-LIABILITIES> 1,498,924
<BONDS> 0
0
0
<COMMON> 9,185,679
<OTHER-SE> (10,342,135)
<TOTAL-LIABILITY-AND-EQUITY> 430,833
<SALES> 0
<TOTAL-REVENUES> 764,492
<CGS> 0
<TOTAL-COSTS> 2,594,311
<OTHER-EXPENSES> 634,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210,265
<INCOME-PRETAX> (2,671,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,671,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 41,014
<CHANGES> 0
<NET-INCOME> (2,630,869)
<EPS-BASIC> (0.053)
<EPS-DILUTED> (0.053)
</TABLE>
