<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 20, 1999, the issuer had
52,928,924 shares of common stock, no par value, outstanding.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at June 30, 1999, and December 31, 1998
Statements of Operations for the three months and six months ended
June 30, 1999 and 1998
Statements of Stockholders' Deficit for the six months ended
June 30, 1999 and 1998
Statements of Cash Flows for the six months ended
June 30, 1999 and 1998
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview: Introduction, Background and Product Strategy
Results of Operations:
Comparison of the Three Months Ended June 30, 1999 and 1998
Comparison of the Six Months Ended June 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
June 30, 1999, and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 06/30/99 12/31/98
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,837 $ 17,389
Accounts receivable - billed, net of allowance for doubtful
accounts of $0 and $0, respectively 119,991 279,268
Accounts receivable - unbilled 24,180 10,000
Shareholder advance 3,766 3,766
Other current assets 38,019 29,624
----------- -----------
Total current assets 189,793 340,047
PROPERTY AND EQUIPMENT, NET 135,195 198,702
OTHER ASSETS
Financing fees -- 33,794
Other assets 21,548 21,548
----------- -----------
Total other assets 21,548 55,342
----------- -----------
Total Assets $ 346,536 $ 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 $ 1,697,555 $ 1,297,579
Accounts payable 387,341 347,294
Accrued expenses 228,598 159,069
Obligation under capital lease 26,588 27,105
----------- -----------
Total current liabilities 2,340,082 1,831,047
LONG-TERM LIABILITIES
Long-term portion of notes payable 36,486 56,165
Long-term portion of obligation under capital lease -- 14,283
----------- -----------
Total long-term liabilities 36,486 70,448
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;
60,993,025 and 54,421,618 shares issued at June 30, 1999,
and December 31, 1998, respectively 7,792,739 7,041,890
Additional paid-in capital 1,017,758 886,458
Treasury stock, at cost (9,864,449 shares) (1,777,891) (1,777,891)
Accumulated deficit (9,058,886) (7,454,109)
----------- -----------
Total stockholders' deficit (2,026,280) (1,303,652)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 346,536 $ 594,091
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE> 4
ONE UP CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 134,649 $ 315,411 $ 470,225 $ 774,440
COSTS AND EXPENSES
Salaries and benefits 245,532 567,359 522,232 1,078,635
Contract labor 47,110 173,256 104,675 473,437
General and administrative 57,594 69,327 92,315 131,190
Advertising and marketing 7,722 43,811 23,745 60,779
Travel 4,679 8,803 7,570 11,455
Rent 40,602 31,950 72,552 63,900
Depreciation and amortization 33,600 48,900 67,200 97,800
Legal and professional fees 41,821 65,464 57,849 369,005
Year 2000 program costs 396,988 321,585 841,656 637,629
Bad debt expense -- -- -- 1,725
------------ ------------ ------------ ------------
Total operating expenses 875,648 1,330,455 1,789,794 2,925,555
------------ ------------ ------------ ------------
Loss from operations (740,999) (1,015,044) (1,319,569) (2,151,115)
OTHER INCOME (EXPENSES)
Interest income -- 5,385 171 5,530
Interest expense (63,168) (57,790) (120,284) (161,168)
Financing fees (17,802) (23,988) (165,095) (31,985)
Gain (loss) on sale of assets -- (2,950) -- (2,950)
------------ ------------ ------------ ------------
Total other income (expenses) (80,970) (79,343) (285,208) (190,573)
Minority interest in (income) loss of
consolidated subsidiary -- -- -- --
------------ ------------ ------------ ------------
Loss before income taxes and
extraordinary item (821,969) (1,094,387) (1,604,777) (2,341,688)
Provision for income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss before extraordinary item (821,969) (1,094,387) (1,604,777) (2,341,688)
Extraordinary income from forgiveness
of debt (net of income taxes of $0) -- 251,094 -- 256,344
------------ ------------ ------------ ------------
Net loss $ (821,969) $ (843,293) $ (1,604,777) $ (2,085,344)
============ ============ ============ ============
Loss before income taxes and extraordinary
item per common share $ (0.017) $ (0.026) $ (0.034) $ (0.064)
============ ============ ============ ============
Extraordinary income per common share $ -- $ 0.006 $ -- $ 0.007
============ ============ ============ ============
Net loss per common share (basic and diluted) $ (0.017) $ (0.020) $ (0.034) $ (0.057)
============ ============ ============ ============
Weighted average common shares and common
equivalents issued and outstanding (basic
and diluted) 48,838,776 41,987,145 47,050,875 36,442,256
============ ============ ============ ============
</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
Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Common Treasury Additional
Stock Stock Treasury Stock Paid-in
Issued Amount Stock Amount Capital
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 30,199,154 $ 2,197,640 (854,903) $(1,068,629) $ 796,263
Issuance of stock in connection with private
placements for cash 21,252,500 4,250,500 -- -- --
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 June 30, 1998 52,880,654 $ 6,734,390 (9,864,449) $(1,777,891) $ 796,263
========== =========== ========== =========== ===========
Balance at January 1, 1999 54,421,618 $ 7,041,890 (9,864,449) $(1,777,891) $ 886,458
Issuance of stock in connection with private
placements for cash 5,530,500 691,312 -- -- --
Issuance of stock in connection with the
exercise of options and warrants for cash 1,040,575 59,537 -- -- --
Issuance of warrants for financing fees -- -- -- -- 131,300
Issuance of stock to employees under the
Employee Stock Purchase Plan -
shares matched by employer 332 -- -- -- --
Net loss -- -- -- -- --
---------- ----------- ---------- ----------- -----------
Balance at June 30, 1999 60,993,025 $ 7,792,739 (9,864,449) $(1,777,891) $ 1,017,758
========== =========== ========== =========== ===========
<CAPTION>
Accumulated
Deficit Total
----------- -----------
<S> <C> <C>
Balance at January 1, 1998 $(3,996,034) $(2,070,760)
Issuance of stock in connection with private
placements for cash -- 4,250,500
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 (2,085,344) (2,085,344)
----------- -----------
Balance at June 30, 1998 $(6,081,378) $ (328,616)
=========== ===========
Balance at January 1, 1999 $(7,454,109) $(1,303,652)
Issuance of stock in connection with private
placements for cash -- 691,312
Issuance of stock in connection with the
exercise of options and warrants for cash -- 59,537
Issuance of warrants for financing fees -- 131,300
Issuance of stock to employees under the
Employee Stock Purchase Plan -
shares matched by employer -- --
Net loss (1,604,777) (1,604,777)
----------- -----------
Balance at June 30, 1999 $(9,058,886) $(2,026,280)
=========== ===========
</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
Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,604,777) $(2,085,344)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 67,200 97,800
Financing fees 33,794 31,985
Warrants issued for financing fees 131,300 --
Amortization of discount on notes payable 25,359 50,708
Common stock issued for services -- 30,738
Bad debt expense -- 1,725
(Gain) loss on sale of assets -- 2,950
Change in assets and liabilities:
Decrease in accounts receivable 159,277 143,414
Increase in unbilled revenue (14,180) --
Decrease in restricted cash -- 28,150
Increase in other current assets (8,395) (3,828)
Increase in other assets -- (25,000)
Increase (decrease) in accounts payable 40,047 (483,097)
Increase (decrease) in accrued expenses 69,529 (153,286)
Decrease in customer deposits in excess of unbilled receivables -- (171,365)
----------- -----------
Total adjustments 503,931 (449,106)
----------- -----------
Net cash used by operating activities (1,100,846) (2,534,450)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of property and equipment (3,693) 4,200
----------- -----------
Net cash provided (used) in investing activities (3,693) 4,200
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash overdraft -- (112,963)
Proceeds from notes payable, excluding shareholder amounts 417,500 704,000
Proceeds from transfer of accounts receivable with recourse -- 77,500
Proceeds from issuance of common stock 750,849 4,536,750
Payments under obligations of capital lease (14,800) (13,860)
Repayment of shareholder advances (30,000) (61,920)
Repayment of notes payable, excluding shareholder amounts (32,562) (979,000)
Repayment of transfer liability -- (265,000)
Purchase of treasury stock -- (740,000)
----------- -----------
Net cash provided in financing activities 1,090,987 3,145,507
----------- -----------
Net increase (decrease) in cash (13,552) 615,257
Cash - beginning 17,389 4,076
----------- -----------
Cash - ending $ 3,837 $ 619,333
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 83,870 $ 119,797
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</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
June 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 June 30, 1999, and our results of
operations and cash flows for the six months ended June 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 $1,604,777 and used operating cash of $1,100,846 for the six months
ended June 30, 1999. In addition, current liabilities exceed current assets by
$2,150,289 at June 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 $791,312 in connection with private
offerings for our common stock, (2) the receipt of $547,500 in proceeds from
several short-term notes payable with certain investor groups, including a
director and an officer, (3) the receipt of $134,537 in connection with the
exercise of warrants and options previously granted to holders of short-term
notes payable, consultants and employees, (4) the increase in trade accounts
payable of $40,047 and accrued expenses of $69,529, and (5) the collection of
accounts receivable outstanding and the receipt of sales revenues totaling
$732,156.
In addition, if needed, we are considering issuing additional equity through a
private offering during the second half 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 (CONTINUED)
June 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 the remainder of
1999. 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 1999. 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 June 30, 1999, including both current and long-term
portions, is comprised of (1) $1,112,500 in senior secured promissory notes, (2)
$550,045 in short-term loans from various investment groups, including a
director, and (3) $71,496 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 of $45,719. Ten of the note holders, comprising $262,500 in principal
amount, have accepted our original settlement offer, waiving the default
provisions of the notes in an agreement to extend the due date of the notes
until July 1, 2000. Under terms of the agreement, the annual interest rate on
the notes remains at ten percent, semi-annual interest payments remain payable
on July 31 and January 31, with the final interest payment being due on July 1,
2000, and the exercise price of the related warrants to purchase an aggregate of
750,005 shares of our common stock is reduced from $0.35 to $0.20 per share.
Twenty holders of the remaining $850,000 in principal amount of the notes have
not yet accepted our original settlement offer, and we are, therefore, currently
in default under these notes, which are presently due on demand, as we attempt
to negotiate with these note holders.
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<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
(Unaudited)
NOTE 3. NOTES PAYABLE (CONTINUED)
In our continuing efforts towards reaching a settlement agreement on mutually
acceptable terms, on July 31, 1999, we paid the semi-annual interest due on our
senior secured promissory notes to all of the note holders, including both the
ten note holders who had previously accepted our original offer as well as the
twenty note holders who have not yet accepted our original offer. Subsequent to
this, we have submitted to a third party, who is acting on behalf of the note
holders, a draft of a revised proposal which, in addition to the concessions
contained in our original offer, includes two additional features whereby (1)
the expiration date of the warrants will be extended from July 1, 2000, to July
1, 2001, and (2) the principal amount of the notes plus any accrued interest,
combined, will 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. We do not anticipate any additional changes to our revised proposal,
which will be offered to all of the note holders. If accepted, our revised offer
would replace our original offer which has previously been accepted by ten of
the note holders. However, until such time that our revised proposal, or some
other settlement agreement, is finalized and accepted, we remain in default with
regard to the twenty holders comprising $850,000 in principal amount of the
notes which remain due on demand. Although we believe our revised proposal will
be accepted by the note holders, we can give you no assurance regarding their
acceptance.
We are obligated to make monthly payments of $1,000 on a note payable to a
former employee relating to settlement of a lawsuit previously filed. At June
30, 1999, we were in default under this note after failing to meet our June 10,
1999, payment obligation, and we are currently three payments in arrears. We are
in the process of negotiating payment arrangements regarding our past due
payments totaling $3,000. However, as a result of our default under this note,
all of the past due and remaining payments totaling $54,250 is presently due on
demand.
We are obligated to make monthly payments of $32,000 on a note to an outside
investment group. At June 30, 1999, we were in default under this note after
failing to meet our June 1, 1999, payment obligation, and we are currently three
payments in arrears. We are in the process of negotiating payment arrangements
regarding our past due payments totaling $96,000. However, as a result of our
default under this note, the unpaid principal amount of $232,545 plus accrued
interest is presently due on demand.
We are obligated to make monthly payments of $2,000 on a note payable to a
vendor relating to settlement of a lawsuit previously filed. We are currently in
default under this note after failing to meet our August 11, 1999, payment
obligation. We are in the process of negotiating payment arrangements regarding
our past due payment. However, as a result of our default under this note, the
past due and all remaining payments totaling $30,000 is presently due on demand.
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<PAGE> 10
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
(Unaudited)
NOTE 4. STOCKHOLDERS' DEFICIT AND STOCK OPTIONS
Pursuant to the 1999 Stock Option Plan, during the second quarter of 1999, we
granted to members of management and employees options to purchase up to an
aggregate of 129,600 shares of our Common Stock at prices ranging from $0.3438
to $0.1875 per share exercisable through June 21, 2004.
During the second quarter of 1999, we issued to consultants and former employees
207,075 shares of our Common Stock as a result of the exercise of warrants and
options previously granted to purchase shares at prices ranging from $0.1875 to
$0.12 per share.
During the second quarter of 1999, we issued to three individual investors
3,687,500 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 $460,937.
In a related transaction, we granted two-year warrants to purchase up to an
aggregate of 737,500 shares of our Common Stock at $0.20 per share.
NOTE 5. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, pursuant to the 1999 Stock Option Plan, as of the
date hereof, we have granted to members of management and employees options to
purchase up to an aggregate of 240,000 shares of our Common Stock at $0.1875 per
share exercisable through July 1, 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 16, 1999, we issued to an individual investor 800,000 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 $100,000. In a related
transaction, we granted a two-year warrant to purchase up to an aggregate of
160,000 shares of our Common Stock at $0.20 per share.
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.
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<PAGE> 11
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
(Unaudited)
NOTE 5. SUBSEQUENT EVENTS (CONTINUED)
Effective July 29, 1999, pursuant to the terms and conditions of a short-term
loan made to us by a certain 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 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, we issued to an outside investment group 1,000,000
shares 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 is required to purchase the 1,000,000 shares upon signing, tendering
payment of $75,000 to us, thereby exercising a portion of the option. The
remaining 4,903,614 shares exercisable under the option may be purchased by the
Group as follows: (1) 903,614 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) $0.50 or (ii) 50% of the prior five day
average closing bid price per share, and expire 12 months after registration.
The maximum exercise price of the final 2,000,000 shares may be reduced from
$0.50 to $0.20 under certain terms and conditions as stipulated in the
Agreement. 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.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 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 six months ended June 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 the remainder of 1999, although we can give you no assurances regarding
any increase.
We believe that our net loss posted for the six months ended June 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 JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues
During the second quarter of 1999, our sales revenues decreased to $134,649,
compared to $315,411 for the second quarter 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
-12-
<PAGE> 13
revenue growth. Licensing and service revenue related to MigraTEC2000
approximated $44,671 for the second quarter of 1999. Service revenue from
non-related MigraTEC2000 products and services was approximately $89,978 and
$315,411 for the three months ended June 30, 1999 and 1998, respectively.
Operating Expenses
Our total operating expenses decreased by approximately 34% to $875,648 during
the second quarter of 1999, compared to $1,330,455 for the second quarter of
1998. Labor costs decreased by approximately 56% to $292,642 for the three
months ended June 30, 1999, compared to $740,615 for the three months ended June
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 $57,594 from
$69,327, primarily resulting from decreased expenditures for directors fees,
leased computer equipment, and other office-related expenses. Advertising,
marketing and public relations costs decreased to $7,722 from $43,811. Rent
expense increased to $41,821 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 second quarter of 1999, compared to $48,900 for the second quarter of
1998, as a result of asset abandonments and retirements. Legal and professional
fees decreased to $41,821 during the second quarter of 1999 from $65,464 for the
second quarter of 1998, 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 $396,988 incurred
in the second quarter 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 $321,585. As a
percentage of revenues, total operating expenses increased to 650% for the
second quarter of 1999, compared to 422% for the second quarter of 1998,
primarily attributable to the decrease in revenues as previously discussed.
Other Income and Expenses
Interest expense, which includes loan origination fees, increased to $63,168 for
the second quarter of 1999, compared to $57,790 for the second 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
incurred in connection with short-term notes entered into during 1999. Also, we
incurred financing fees of $17,802 relating to the amortized portion of fees
paid in 1997 in connection with the issuance of our senior secured promissory
notes.
For the three months ended June 30, 1999, we incurred a net loss of $821,969, or
$0.017 per share, as compared with a net loss of $843,293, or $0.020 per share,
for the same period in 1998.
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<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
During the first six months of 1999, our sales revenues decreased to $470,225,
compared to $774,440 for the first six 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 $380,247 for
the six months of 1999. Service revenue from non-related MigraTEC2000 products
and services was approximately $89,978 and $774,440 for the six months ended
June 30, 1999 and 1998, respectively.
Operating Expenses
Our total operating expenses decreased by approximately 39% to $1,789,794 during
the first six months of 1999, compared to $2,925,555 for the first six months of
1998. Labor costs decreased by approximately 60% to $626,907 for the six months
ended June 30, 1999, compared to $1,552,072 for the six months ended June 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 $92,315 from
$131,190, 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 $60,779. Rent
expense increased to $72,552 from $63,900, 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 $67,200
from $97,800, as a result of asset abandonments and retirements. Legal and
professional fees decreased to $57,849 from $369,005, 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 $841,656 incurred in the first six 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 $637,629. As a percentage of revenues, total operating
expenses increased to 381% for the first six months of 1999, compared to 378%
for the first six months of 1998, primarily attributable to the decrease in
revenues as previously discussed.
Other Income and Expenses
Interest expense, which includes loan origination fees, decreased to $120,284
for the six months ended June 30, 1999, compared to $161,168 for the six months
ended June 30, 1998. The decrease was primarily due to (i) amortization of
discount related to our senior secured promissory notes and (ii) loan fees
incurred during 1998 connected with short-term financing. Also, we incurred
financing fees of $165,095, of which $33,795 relates to the amortized portion
-14-
<PAGE> 15
of fees paid in 1997 in connection with the issuance of our senior secured
promissory notes and $131,300 relates to stock purchase warrants issued with
debt.
For the six months ended June 30, 1999, we incurred a net loss of $1,604,777, or
$0.034 per share, as compared with a net loss of $2,085,344, or $0.057 per
share, for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $1,100,846 for the six months ended
June 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 $2,534,450 for the six months ended June
30, 1998, which resulted primarily from our operating loss, increased by net
changes in assets and liabilities and non-cash expenses and income.
At June 30, 1999, we had a net working capital deficit of $2,150,289, compared
to a net working capital deficit of $1,491,000 at December 31, 1998, a net
decrease in working capital of $659,289 for the six months ended June 30, 1999.
At June 30, 1999, we had cash of $3,837 and $144,171 in outstanding accounts
receivable ($119,991 billed and $24,180 unbilled), all of which is considered
fully collectible.
At June 30, 1999, our outstanding debt obligations included (i) $1,112,500 in
senior secured promissory notes, (ii) $525,045 in short-term loans from outside
investment groups, (iii) $25,000 in short-term loans from a director, (iv)
$71,496 in other notes payable relating to settlement of vendor and other
lawsuits previously filed, and (v) $26,588 due under a capital lease.
During the first six months of 1999, we received proceeds of $1,090,987 from
financing activities. We collected (i) $750,849 in connection with the issuance
of shares of our common stock and (ii) $447,500 in proceeds from short-term
loans from various outside investment groups, a director and an officer. Our
cash proceeds were offset by $107,362 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 $791,312, (ii) entered
into several short-term notes payable with outside investment groups, including
one director and one officer, totaling $547,500, and (iii) received gross
proceeds of $134,537 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 our trade accounts payable to fund our operations.
In addition, in funding our operations for 1999, we have used certain of our
notes payable. As is discussed in further detail in the notes to our financial
statements included elsewhere herein, as result, we are presently in default
under certain of our notes payable including (i) approximately $850,000 in
principal amount of our senior secured promissory notes, (ii) $232, 545 in a
short-term loan from an outside investment group, (iii) $30,000 in a note
payable relating to settlement of a vendor lawsuit previously filed, and (iv)
$54,250 in a note payable to a former employee relating to settlement of a
lawsuit previously filed. If needed, we are considering issuing additional
equity through a private offering during the second half 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: August 23, 1999
BY: /s/ MARK C. MYERS
-------------------------------------
Mark C. Myers, Principal Financial
Officer
Dated: August 23, 1999
-18-
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. 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 six months ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted loss per share -
Loss before extraordinary item $ (821,969) $ (1,094,387) $ (1,604,777) $ (2,341,688)
Extraordinary income -- 251,094 -- 256,344
------------ ------------ ------------ ------------
Net loss $ (821,969) $ (843,293) $ (1,604,777) $ (2,085,344)
============ ============ ============ ============
Denominator:
Denominator for basic loss per share -
Weighted average shares 48,838,776 41,987,145 47,050,875 36,442,256
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 48,838,776 41,987,145 47,050,875 36,442,256
============ ============ ============ ============
Basic loss per share $ (0.017) $ (0.020) $ (0.034) $ (0.057)
============ ============ ============ ============
Diluted loss per share $ (0.017) $ (0.020) $ (0.034) $ (0.057)
============ ============ ============ ============
</TABLE>
As MigraTEC incurred a net loss for the three months and six months ended June
30, 1999 and 1998, there were no adjustments for potentially dilutive securities
as the adjustments would have been anti-dilutive.
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1999, FILED AS
PART OF FORM 10-QSB QUARTERLY REPORT FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB QUARTERLY REPORT
FOR THE SIX MONTHS ENDED JUNE 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,837
<SECURITIES> 0
<RECEIVABLES> 144,171
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 189,793
<PP&E> 833,131
<DEPRECIATION> (697,936)
<TOTAL-ASSETS> 346,536
<CURRENT-LIABILITIES> 2,340,082
<BONDS> 0
0
0
<COMMON> 7,792,739
<OTHER-SE> (9,819,019)
<TOTAL-LIABILITY-AND-EQUITY> 346,536
<SALES> 0
<TOTAL-REVENUES> 335,576
<CGS> 0
<TOTAL-COSTS> 1,789,794
<OTHER-EXPENSES> 131,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,079
<INCOME-PRETAX> (1,604,777)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,604,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,604,777)
<EPS-BASIC> (0.034)
<EPS-DILUTED> (0.034)
</TABLE>
