<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 20, 1999, the issuer had
49,528,576 shares of common stock, no par value, outstanding.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at March 31, 1999, and December 31, 1998 3
Statements of Operations for the three months ended 4
March 31, 1999 and 1998
Statements of Stockholders' Deficit for the three months ended 5
March 31, 1999 and 1998
Statements of Cash Flows for the three months ended 6
March 31, 1999 and 1998
Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview: Introduction, Background and Market Strategy 10
Results of Operations:
Comparison of the Three Months Ended March 31, 1999 and 1998 16
Liquidity and Capital Resources 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits 19
(11) Computations of Net Loss Per Share
(27.1) Financial Data Schedule
(b) Reports on Form 8-K 19
none
SIGNATURES
</TABLE>
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<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1999, and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited) (Audited)
ASSETS 03/31/99 12/31/98
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<S> <C> <C>
CURRENT ASSETS
Cash $ 96,678 $ 17,389
Accounts receivable - billed, net of allowance for doubtful
accounts of $0 and $0, respectively 245,759 279,268
Accounts receivable - unbilled -- 10,000
Shareholder advance 3,766 3,766
Other current assets 20,219 29,624
----------- -----------
Total current assets 366,422 340,047
PROPERTY AND EQUIPMENT, NET 168,795 198,702
OTHER ASSETS
Financing fees 17,802 33,794
Other assets 21,548 21,548
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Total other assets 39,350 55,342
----------- -----------
Total Assets $ 574,567 $ 594,091
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, net of discount of $13,347 and $25,359, respectively,
including $0 and $30,000, respectively, due to shareholders $ 1,697,319 $ 1,297,579
Accounts payable 321,564 347,294
Accrued expenses 167,554 159,069
Obligation under capital lease 27,584 27,105
----------- -----------
Total current liabilities 2,214,021 1,831,047
LONG-TERM LIABILITIES
Long-term portion of notes payable 48,411 56,165
Long-term portion of obligation under capital lease 6,462 14,283
----------- -----------
Total long-term liabilities 54,873 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' DEFICIT
Common stock; no par value; 200,000,000 shares authorized;
57,098,450 and 54,421,618 shares issued at March 31, 1999,
and December 31, 1998, respectively 7,306,475 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 (8,236,917) (7,454,109)
----------- -----------
Total stockholders' deficit (1,690,575) (1,303,652)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 574,567 $ 594,091
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 335,576 $ 459,029
COSTS AND EXPENSES
Salaries and benefits 276,700 511,276
Contract labor 57,565 300,181
General and administrative 34,721 61,863
Advertising and marketing 16,023 16,968
Travel 2,891 2,652
Rent 31,950 31,950
Depreciation and amortization 33,600 48,900
Legal and professional fees 16,028 303,541
Year 2000 program costs 444,668 316,044
Bad debt expense -- 1,725
------------ ------------
Total operating expenses 914,146 1,595,100
------------ ------------
Loss from operations (578,570) (1,136,071)
OTHER INCOME (EXPENSES)
Interest income 171 145
Interest expense (57,116) (103,378)
Financing fees (147,293) (7,997)
------------ ------------
Total other income (expenses) (204,238) (111,230)
Minority interest in (income) loss of consolidated subsidiary -- --
------------ ------------
Loss before income taxes and extraordinary item (782,808) (1,247,301)
Provision for income tax expense (benefit) -- --
------------ ------------
Net loss before extraordinary item (782,808) (1,247,301)
Extraordinary income from forgiveness of debt (net of income taxes of $0) -- 5,250
------------ ------------
Net loss $ (782,808) $ (1,242,051)
============ ============
Loss before income taxes and extraordinary item per common share $ (0.02) $ (0.04)
============ ============
Extraordinary income per common share $ -- $ --
============ ============
Net loss per common share (basic and diluted) $ (0.02) $ (0.04)
============ ============
Weighted average common shares and common
equivalents issued and outstanding (basic and diluted) 45,243,109 30,829,925
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Deficit
Three Months Ended March 31, 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 13,430,000 2,686,000 -- -- --
Issuance of stock in connection with
conversion of debt to equity 1,375,000 275,000 -- -- --
Issuance of stock in connection with the
exercise of options and warrants for cash 22,500 225 -- -- --
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 March 31, 1998 45,026,654 $ 5,158,865 (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 1,843,000 230,375 -- -- --
Issuance of stock in connection with the
exercise of options and warrants for cash 833,500 34,210 -- -- --
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 March 31, 1999 57,098,450 $ 7,306,475 (9,864,449) $(1,777,891) $ 1,017,758
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<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 -- 2,686,000
Issuance of stock in connection with
conversion of debt to equity -- 275,000
Issuance of stock in connection with the
exercise of options and warrants for cash -- 225
Treasury stock received in exchange for cash (740,000)
Issuance of stock for services rendered 30,738
Net loss (1,242,051) (1,242,051)
----------- -----------
Balance at March 31, 1998 $(5,238,085) $(1,060,848)
=========== ===========
Balance at January 1, 1999 $(7,454,109) $(1,303,652)
Issuance of stock in connection with private
placements for cash -- 230,375
Issuance of stock in connection with the
exercise of options and warrants for cash -- 34,210
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 (782,808) (782,808)
----------- -----------
Balance at March 31, 1999 $(8,236,917) $(1,690,575)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (782,808) $(1,242,051)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 33,600 48,900
Financing fees 15,993 7,997
Warrants issued for financing fees 131,300 --
Amortization of discount on notes payable 12,012 25,354
Common stock issued for services -- 30,738
Change in assets and liabilities:
Decrease in accounts receivable 33,509 379,755
(Increase) decrease in unbilled revenue 10,000 (78,630)
Decrease in restricted cash -- 28,150
(Increase) decrease in other current assets 9,405 (8,177)
Increase in other assets -- (25,000)
Decrease in accounts payable (25,730) (1,841)
Increase in accrued expenses 8,485 92,026
Decrease in customer deposits in excess of unbilled receivables -- (171,365)
----------- -----------
Total adjustments 228,574 327,907
----------- -----------
Net cash used by operating activities (554,234) (914,144)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,693) --
----------- -----------
Net cash used in investing activities (3,693) --
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 264,585 2,961,225
Payments under obligations of capital lease (7,342) (6,894)
Repayment of shareholder advances (30,000) (57,306)
Repayment of notes payable, excluding shareholder amounts (7,527) (504,000)
Repayment of transfer liability -- (265,000)
Purchase of treasury stock -- (740,000)
----------- -----------
Net cash provided in financing activities 637,216 2,056,562
----------- -----------
Net increase in cash 79,289 1,142,418
Cash - beginning 17,389 4,076
----------- -----------
Cash - ending $ 96,678 $ 1,146,494
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 58,455 $ 101,015
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 the opinion of management, necessary for a
fair presentation of the financial position as of March 31, 1999, and the
results of operations and cash flows for the three months ended March 31, 1999
and 1998. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1998, including the accompanying notes.
NOTE 2. BUSINESS ACTIVITY
On February 29, 1996, MigraTEC, Inc. ("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 and then subsequently to MigraTEC, Inc.
NOTE 3. GOING CONCERN UNCERTAINTY
As reflected in the accompanying consolidated financial statements, the Company
incurred a loss of $782,808 and used operating cash of $554,234 for the three
months ended March 31, 1999. In addition, the Company's current liabilities
exceed current assets by $1,847,599 at March 31, 1999, and the Company was
unable to meet certain debt maturities at March 31, 1999. 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 and upgrade 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 and cash flows in the near term, the Company
will be unable to continue as a going concern.
Recently, the Company began reengineering its business focus, shifting its
strategic approach to utilizing its technology through the development of
strategic relationships. To continue to fund its operations for 1999, the
Company has (1) completed a private offering during March 1999 which yielded
gross proceeds of $241,313, (2) entered into several short-term notes payable
during the first quarter of 1999 with certain investor groups, including a
director and an officer, totaling $447,500, and (3) received gross proceeds of
$59,537 for the exercise of warrants relating to various short-term notes
payable and the exercise of consultant and employee stock options.
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<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1999
(Unaudited)
NOTE 3. GOING CONCERN UNCERTAINTY (CONTINUED)
Most recently, the Company began the process of obtaining additional capital
through a private offering whereby the Company plans to issue up to 6,000,000
restricted and unregistered shares of its Common Stock at $0.125 per share. The
Company has entered into agreements with two individual investors to purchase
the 6,000,000 restricted and unregistered shares in the private offering. As of
the date hereof, the Company has received proceeds from the private offering
totaling $250,000. In addition, if needed, the Company is considering issuing
additional equity through a private offering during the second half of 1999 in
an amount sufficient to meet the Company's current operating expenses until such
time that product revenues are sufficient to sustain operations of the Company.
Management anticipates that its efforts will move the Company forward with a
focus on achieving improved operating performance by the end of 1999.
The anticipated increase in revenues from additional software tools developed by
the Company 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. While much remains to be
accomplished, management believes that 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 successful implementation of its plan to shift the Company's strategic
approach to utilizing its technology through strategic relationships, should
move the Company forward with a focus on achieving 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.
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' DEFICIT AND STOCK OPTIONS
Subsequent to December 31, 1998, management terminated the 1997 Stock Option
Plan, which had not been approved by the Company's shareholders within the time
specified in the 1997 Plan, and therefore canceled all of the outstanding
options previously issued pursuant to the 1997 Plan. On March 1, 1999, the
Company adopted a new stock option plan, the 1999 Stock Option Plan, authorizing
the issuance of incentive stock options, non-statutory options and reload
options to eligible persons as described in the 1999 Plan. Pursuant to the 1999
Plan, as of the date hereof, the Company has granted to members of its
management and employees options to purchase an aggregate of 1,507,936 shares of
Common Stock of the Company exercisable at prices ranging from $0.3438 to
$0.1875 per share.
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<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1999
(Unaudited)
NOTE 4. STOCKHOLDERS' DEFICIT AND STOCK OPTIONS (CONTINUED)
Pursuant to the terms and conditions of certain short-term loans made to the
Company by certain investor groups, including one director and one officer,
during the first quarter of 1999, the Company granted warrants to purchase an
aggregate of 638,000 shares of its Common Stock at an exercise price of $0.01
per share, fully vested at date of grant. All of these warrants were exercised
prior to March 31, 1999. As a result of issuing these warrants with exercise
amounts below fair value, the Company booked a charge to financing fees of
$131,300.
During the first quarter of 1999, the Company issued 195,500 shares of its
Common Stock to certain investor groups, including two directors and one
officer, as a result of the exercise of warrants previously granted to purchase
shares at prices ranging from $0.20 to $0.01 per share.
During March 1999, the Company issued 1,930,500 restricted and unregistered
shares of its Common Stock to 12 individual investors and one officer at $0.125
per share under terms of a private offering for total net cash proceeds of
$241,313. In a related transaction, the Company granted two-year warrants to
purchase an aggregate of 386,100 shares of its Common Stock at $0.20 per share.
During the first quarter of 1999, the Company issued to a former employee 332
shares of its Common Stock representing the Company's 50% matching of shares
previously purchased by the employee pursuant to the terms of the Employee Stock
Purchase Plan.
During April and May of 1999, the Company issued (1) an aggregate of 7,075
shares of its Common Stock to two former employees upon exercise of options
previously granted to purchase shares at $0.1875 per share and (2) 200,000
shares of its Common Stock to two consultants upon exercise of warrants
previously granted to purchase shares at $0.12 per share.
During April of 1999, the Company began the process of obtaining additional
capital through a private offering whereby the Company plans to issue up to
6,000,000 restricted and unregistered shares of its Common Stock at $0.125 per
share. The Company has entered into agreements with two individual investors to
purchase the 6,000,000 restricted and unregistered shares in the private
offering. As of the date hereof, the Company has issued 2,000,000 restricted and
unregistered shares of its Common Stock to the two individual investors pursuant
to the offering. In a related transaction, the Company granted two-year warrants
to purchase an aggregate of 400,000 shares of its Common Stock at $0.20 per
share.
Substantially all options and warrants granted during the first quarter of 1999
have exercise prices which approximate fair value at the date of grant.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1ST QUARTER ENDED MARCH 31, 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 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."
BUSINESS OVERVIEW
INTRODUCTION
MigraTEC, Inc., was organized under the laws of the state of Florida on February
24, 1989. MigraTEC, Inc., 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).
MigraTEC, Inc. (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> 11
GENERAL
With the ongoing rapid development and availability of ever-advancing
technology, the process of companies continually seeking ways to upgrade their
information processing systems is taking place at an accelerating pace.
MigraTEC is a developer and provider of software technology and services which
automate the upgrade or "migration" process helping companies move their
existing software applications to new and more advanced hardware and software
platforms and which address the Year 2000 ("Y2K") challenge. The Company
believes that its migration software tools and technology can facilitate the
migration activities of companies for years to come.
Ordinarily, the upgrade or migration process is a manual, time-consuming and
costly process. Migration preserves the functionality, business logic and
consistency of the existing software application, thereby avoiding the business
interruption, retraining and reengineering 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 ensures the continued ease of ongoing maintenance of
the software.
MigraTEC's automated software "tools" can significantly decrease the time,
effort and cost of an upgrade or migration project. The Company believes that
the productivity of its software tools will produce a growing revenue stream for
the Company, principally produced from licensing of the tools to large
technology service organizations for use in delivering services to their own
customers.
BACKGROUND
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. The Company's Y2K technology
and services have been utilized by several companies including EDS, Metamor,
Computer Horizons, The Sabre Group Inc. and Reasoning Inc.
When the IBM software license expired in 1996, the Company's revenue stream
decreased significantly and the Company incurred significant debt. In order to
implement a turnaround plan and reestablish the financial viability of the
Company, a new management team was brought into the Company during 1997 and
early 1998. The turnaround plan was based on developing a new generation of
MigraTEC's proprietary "core" software technology and establishing the Company
as a "technology partner" of large strategically positioned companies. The
Company successfully raised capital through a series of private offerings. The
significant trade debt that the Company incurred during 1996 and 1997 was also
successfully addressed. Currently, MigraTEC is focused on further developing its
proprietary technology to serve as the foundation for advanced "universal
migration" software tools designed to facilitate the transition between numerous
computer languages and operating platforms. The Company intends to utilize the
enhanced technology to facilitate its own provision of migration services and to
generate revenues through the licensing of the technology to large technical
services organizations.
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<PAGE> 12
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 and operating systems, and Y2K compliance issues, 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.
The Company believes that the processes relating to the "core" portion of the
Company's technology, for which a patent application was filed 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 the second half of 1998 MigraTEC completed development of an
expanded Y2K offering and began development of upgrade capabilities
for the Sun Microsystems Solaris operating system from 32 to 64-bit.
Initial development of the 32 to 64-bit technology was completed in
April 1999.
o In the second half of 1998 MigraTEC also undertook the definition and
development of the next generation of its migration software
technology.
o The Company is currently in discussions with several large companies
about possible joint ventures to develop additional products.
o In the first quarter of 1999, the Company began development of a
software tool to automate the migration of software applications from
DEC Unix to Solaris Unix. The Company believes it will have "factory"
services available using this technology beginning in the third
quarter of 1999.
o In the first quarter of 1999, the Company began development of a
software tool to automate the 32 to 64-bit upgrade process for
software applications running on the Windows/Intel operating system.
The Company believes it will have "factory" services available using
this technology beginning in the third quarter of 1999.
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<PAGE> 13
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 service offerings to be 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 continuing to discuss
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. The Company has also signed agreements with
Computer Horizons, Metamor and Ctek licensing its Y2K software tool. Under the
terms of the agreements, MigraTEC will be paid an amount per line of code that
is processed using the MigraTEC2000 software tool.
The Company believes that its strategic "partnering" and co-development strategy
will provide:
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 Funding necessary to expand key development efforts.
The Company believes that by concentrating on the further development of
"strategic partnerships" with large technology companies and services providers,
the Company can successfully 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 upgrade or 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
certain processes relating to the "core" portion of its proprietary software
technology.
-13-
<PAGE> 14
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, and
o by other services and/or systems integrators in order to facilitate
their delivery of solutions and/or hardware to their customers.
"UNIVERSAL" MIGRATION TOOL
The Company is currently working on the development of a migration work bench
which is intended to be 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 systems 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 or migration process. The Company also
believes that a migration work bench would be extremely valuable to services
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, services 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 structuring of strategic relationships
involving the Company's technology.
32 TO 64-BIT UPGRADE TOOL
The Company recently announced the availability of its new 32 to 64-bit
technology designed to automate the upgrade process for software applications
utilizing Sun Microsystems' Solaris operating system. This represents the first
of the Company's new migration work bench tools and automates the otherwise
predominantly manual process of making changes to customers' existing software
applications so they will more fully utilize the increased capabilities of Sun's
64-bit operating system. The Company will use the software tool in its own 32 to
64-bit upgrade "factory" and plans to license the technology to strategic
services partners.
OTHER MIGRATION TOOLS
The Company is currently in the process of developing another 32 to 64-bit
upgrade tool for automating the upgrade of software applications running on the
Windows/Intel platform in conjunction with the anticipated release of
Microsoft's Windows2000 later this year. In addition, the Company is in the
process of developing several automated "Unix to Unix" software tools which
should be available by the end of the third quarter of 1999.
-14-
<PAGE> 15
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 covered the processes
relating to the "core" portion of the Company's technology which was
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.
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 services 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. evaluated MigraTEC2000. 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, Computer Horizons, Metamor, Ctek, and Reasoning Inc.
involving the use of MigraTEC2000, and the Company anticipates a growing volume
of relationships involving MigraTEC's software.
-15-
<PAGE> 16
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
MigraTEC should be read in conjunction with the consolidated financial
statements of MigraTEC included elsewhere herein.
Although the Company experienced significant losses for the three months ended
March 31, 1999, as well as for 1998, 1997 and 1996, management believes it is
important to note the growing opportunity for MigraTEC to sell its automated
migration products and services based on the rapid growth and changes occurring
in today's marketplace, as well as increasing market demand for migration
products and services. Management believes, that by capitalizing on this
opportunity, revenues and earnings will increase during the remainder of 1999,
although no assurances can be given regarding such increase.
Management believes that the net loss posted for the three months ended March
31, 1999, 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 most recently announced the completion of
the initial development of an additional migration service in April 1999.
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues
During the first quarter of 1999, the Company's sales revenues decreased to
$335,576, compared to $459,029 for the first quarter of 1998. This decrease was
primarily attributable to the Company focusing its efforts on utilizing 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 $335,576 during the first quarter of 1999. Service revenue from
non-related MigraTEC2000 products and services was $0 and $459,029 for the three
months ended March 31, 1999 and 1998, respectively.
Operating Expenses
The Company's total operating expenses decreased by approximately 43% to
$914,146 during the first quarter of 1999, compared to $1,595,100 for the first
quarter of 1998. Labor costs decreased by approximately 59% to $334,265 compared
to $811,457, for the three months ended March 31, 1999 and 1998, respectively.
This decrease primarily resulted from a reduction in the labor force during the
second and third quarters of 1998, which reduction was attributable to the
Company changing its business focus. General and administrative expenses
decreased to $34,721 from $61,863 primarily resulting from decreased
expenditures for directors fees, leased computer equipment, long distance
telephone charges, and printing/copying costs. Depreciation and amortization
decreased to $33,600 for the first quarter of 1999, compared to $48,900 for the
first quarter of 1998, as a result of asset abandonments and retirements. Legal
and professional fees decreased to $16,028 during the first quarter of 1999 from
$303,541 for the first quarter of
-16-
<PAGE> 17
1998, primarily due to decreased 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 of
primarily labor costs). Year 2000 program costs of $444,668 incurred in the
first quarter of 1999 consists of labor costs and various other expenses related
to the development and marketing of the Company's Year 2000 tool set, as well as
research and development related to the development of other migration tools.
Such costs were incurred in the corresponding period in 1998 totaled $316,044.
As a percentage of revenues, total operating expenses decreased to 272% for the
first quarter of 1999, compared to 347% for the first quarter of 1998, primarily
attributable to the decrease in operating expenses as previously discussed.
Other Income and Expenses
Interest expense (which includes loan origination fees) decreased to $57,116 for
the first quarter of 1999, compared to $103,378 for the first quarter of 1998.
The decrease was primarily due to (i) amortization of discount related to 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 $147,293, of which $15,993 relates to the amortized
portion of fees paid in 1997 in connection with the issuance of the Senior
Secured Promissory Notes and $131,300 relates to stock purchase warrants issued
with debt.
For the three months ended March 31, 1999, MigraTEC incurred a net loss of
$782,808, or $0.02 per share, as compared with a net loss of $1,242,051, or
$0.04 per share, for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $554,234 for the three months ended
March 31, 1999, which resulted from the operating loss, reduced by net changes
in assets and liabilities and non-cash expenses and income of $228,574. This
compares to net cash used by operating activities of $914,144 for three months
ended March 31, 1998, which resulted primarily from the operating loss, reduced
by net changes in assets and liabilities and non-cash expenses and income of
$327,907.
At March 31, 1999, the Company had a net working capital deficit of $1,847,599,
compared to a net working capital deficit of $1,491,000 at December 31, 1998.
At March 31, 1999, the Company had cash of $96,678 and $245,759 in outstanding
accounts receivable, all of which is considered fully collectible.
At March 31, 1999, the Company's outstanding debt obligations included (i)
$1,099,153 in Senior Secured Promissory Notes (net of $13,347 unamortized
discount), (ii) $542,500 in short-term loans from outside investment groups,
(iii) $25,000 in short-term loans from a director, and (iv) $79,077 in other
notes payable relating to settlement of vendor lawsuits previously filed.
-17-
<PAGE> 18
During the first three months of 1999, the Company received proceeds of $637,216
from financing activities. The Company collected (1) $264,585 in connection with
the issuance of common stock and (2) $447,500 in proceeds from short-term loans
from various outside investment groups, a director and an officer/shareholder.
The cash proceeds were offset by $74,869 expended for the repayment of principal
of short-term loans from an officer/shareholder and other notes payable relating
to settlement of vendor lawsuits previously filed, as well as obligations under
capital lease.
To continue to fund its operations for 1999, the Company has (1) completed a
private offering during March 1999 which yielded gross proceeds of $241,313, (2)
entered into several short-term notes payable during the first quarter of 1999
with outside investment groups, including one director and one shareholder,
totaling $447,500, and (3) received gross proceeds of $59,537 for the exercise
of warrants relating to various short-term notes payable and the exercise of
consultant and employee stock options.
Most recently, the Company has begun the process of obtaining additional capital
through a private offering whereby the Company plans to issue up to 6,000,000
restricted and unregistered shares of its Common Stock at $0.125 per share. The
Company has entered into agreements with two individual investors to purchase
the 6,000,000 restricted and unregistered shares in the private offering. As of
the date hereof, the Company has received proceeds from the private offering
totaling $250,000. In addition, if needed, the Company is considering issuing
additional equity through a private offering during the second half of 1999 in
an amount sufficient to meet the Company's current operating expenses until such
time that product revenues are sufficient to sustain operations of the Company.
This Form 10-QSB contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in or incorporated by reference into
this Form 10-QSB, are forward-looking statements. In addition, when used in this
document, the words "anticipate," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove to have been correct.
Among the key factors that could cause actual results to differ materially from
expectations, estimates of costs, projected results or anticipated results are
the risk that the Company will be unable to generate sufficient cash flows to
fund operations or to obtain additional financing on favorable terms, the risk
that the Company will be unable to effectively penetrate its target markets for
migration products and services and Y2K product sales, the risk that new
untested management will be unable to successfully implement the business plan
and sales strategy, and the risk of unfavorable changes in economic and industry
conditions, as well as changes in regulatory requirements. The Company has also
made certain assumptions relating to its operations and the industry in general.
All written or oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by, but
not limited to, the factors described above.
-18-
<PAGE> 19
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
-19-
<PAGE> 20
SIGNATURES
Pursuant with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
MIGRATEC, INC.
(Registrant)
BY: /s/ W. CURTIS OVERSTREET
-------------------------------------
W. Curtis Overstreet, President and
Principal Executive Officer
Dated: 05/20/99
-------------------
BY: /s/ MARK C. MYERS
-------------------------------------
Mark C. Myers, Principal Financial
Officer
Dated: 05/20/99
-------------------
-20-
<PAGE> 21
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
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted loss per share -
Net loss before extraordinary item $ (782,808) $ (1,247,301)
Extraordinary income -- 5,250
------------ ------------
Net loss $ (782,808) $ (1,242,051)
============ ============
Denominator:
Denominator for basic loss per share -
Weighted average shares 45,243,109 30,829,925
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 45,243,109 30,829,925
============ ============
Basic loss per share $ (0.02) $ (0.04)
============ ============
Diluted loss per share $ (0.02) $ (0.04)
============ ============
</TABLE>
As the Company incurred a net loss for the three months ended March 31, 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 MARCH 31, 1999, FILED AS
PART OF FORM 10-QSB QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB QUARTERLY
REPORT FOR THE THREE MONTHS ENDED MARCH 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 96,678
<SECURITIES> 0
<RECEIVABLES> 245,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 366,422
<PP&E> 833,131
<DEPRECIATION> (664,336)
<TOTAL-ASSETS> 574,567
<CURRENT-LIABILITIES> 2,214,021
<BONDS> 0
0
0
<COMMON> 7,306,475
<OTHER-SE> (8,997,050)
<TOTAL-LIABILITY-AND-EQUITY> 574,567
<SALES> 0
<TOTAL-REVENUES> 335,576
<CGS> 0
<TOTAL-COSTS> 914,146
<OTHER-EXPENSES> 131,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,109
<INCOME-PRETAX> (782,808)
<INCOME-TAX> 0
<INCOME-CONTINUING> (782,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (782,808)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
