<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 fiscal quarter ended June 30, 2000
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
000-28220
MIGRATEC, INC.
(Name of Small Business Issuer in its Charter)
FLORIDA 65-0125664
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
11494 Luna Road
Suite 100
DALLAS, TEXAS 75234-9421
(Address of principal executive offices)
Issuer's telephone number, including area code: (972) 969-0300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Per Share
Transitional Small Business Disclosure Format (Check One):
Yes No X
---- ----
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C> <C>
Consolidated Condensed Balance Sheets at June 30, 2000 (unaudited),
and December 31, 1999 3
Consolidated Condensed Statements of Operations for the three months and six
months ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Comparison of the three months ended June 30, 2000 and 1999 15
Comparison of the six months ended June 30, 2000 and 1999 17
Liquidity and Capital Resources 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURES
</TABLE>
2
<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,262,345 $ 1,417
Accounts receivable - billed 100,000 160,700
Other current assets 175,929 28,216
------------ ------------
Total current assets 2,538,274 190,333
PROPERTY AND EQUIPMENT, NET 158,176 73,365
OTHER ASSETS
Deferred financing costs -- 30,000
Capitalized software cost, net of amortization of $52,500
and $37,500, 2000 and 1999, respectively 37,500 52,500
Other assets 7,756 21,548
------------ ------------
Total other assets 45,256 104,048
------------ ------------
TOTAL ASSETS $ 2,741,706 $ 367,746
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, net of unamortized discount of $0 and
$20,797 in 2000 and 1999, respectively $ 154,224 $ 953,151
Accounts payable 384,273 449,750
Accrued expenses 262,767 158,590
Deferred income 106,000 12,000
Obligation under capital lease 945 11,313
------------ ------------
Total current liabilities 908,209 1,584,804
LONG-TERM LIABILITIES
Long-term portion of notes payable 3,774,368 28,765
Long-term portion of obligation under capital lease 4,842 --
------------ ------------
Total long-term liabilities 3,779,210 28,765
------------ ------------
TOTAL LIABILITIES 4,687,419 1,613,569
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;
90,241,563 and 78,660,189 shares issued at June 30,
2000 and December 31, 1999, respectively 11,956,807 9,912,535
Additional paid-in capital 8,867,487 2,261,472
Treasury stock, at cost (9,864,449 shares in 2000 and 1999) (1,777,891) (1,777,891)
Deferred stock compensation (2,150,104) --
Accumulated deficit (18,838,260) (11,638,187)
------------ ------------
Total stockholders' deficit (1,941,961) (1,242,071)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,741,706 $ 367,746
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Software licenses $ -- $ -- $ -- $ 264,396
Consulting services -- 134,649 -- 205,829
Software maintenance fees 3,000 -- 6,000 --
------------ ------------ ------------ ------------
TOTAL REVENUES 3,000 134,649 6,000 470,225
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of revenues -- 56,708 -- 87,959
Selling and marketing 236,633 62,848 302,758 245,692
Research and development 645,937 366,406 1,150,981 737,265
General and administrative 864,155 389,686 1,939,616 718,878
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,746,725 875,648 3,393,355 1,789,794
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,743,725) (740,999) (3,387,355) (1,319,569)
Interest and financing expense (1,259,191) (80,970) (3,846,662) (285,379)
Other income (expense), net 27,933 -- 33,944 171
------------ ------------ ------------ ------------
NET LOSS $ (2,974,983) $ (821,969) $ (7,200,073) $ (1,604,777)
============ ============ ============ ============
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.037) $ (0.017) $ (0.093) $ (0.034)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENTS ISSUED AND
OUTSTANDING (BASIC AND DILUTED) 79,922,566 48,838,776 77,394,364 47,050,875
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,200,073) $ (1,604,777)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 86,486 67,200
Deferred stock compensation 704,896 --
Interest expense associated with beneficial conversion feature of
convertible debt 3,750,000 --
Financing fees -- 33,794
Warrants issued for financing fees 1,015 131,300
Amortization of discount on notes payable 20,797 25,359
Change in assets and liabilities:
(Increase) decrease in accounts receivable - billed 60,700 159,277
(Increase) decrease in accounts receivable - unbilled -- (14,180)
(Increase) decrease in deferred financing costs 30,000 --
(Increase) decrease in other current assets (155,214) (8,395)
(Increase) decrease in other assets 13,792 --
Increase (decrease) in accounts payable (65,477) 40,047
Increase (decrease) in accrued expenses 104,177 69,529
Increase (decrease) in deferred income 94,000 --
------------ ------------
Total adjustments 4,645,172 503,931
------------ ------------
Net cash used by operating activities (2,554,901) (1,100,846)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (160,579) (3,693)
Retirement of property and equipment 11,783 --
------------ ------------
Net cash provided by (used in) in investing activities (148,796) (3,693)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,750,000 417,500
Proceeds from issuance of common stock 2,044,272 750,849
Payments under obligations of capital lease (5,526) (14,800)
Proceeds from (repayment of) shareholder advances -- (30,000)
Repayment of notes payable (824,121) (32,562)
------------ ------------
Net cash provided by financing activities 4,964,625 1,090,987
------------ ------------
Net increase (decrease) in cash 2,260,928 (13,552)
CASH -- BEGINNING 1,417 17,389
------------ ------------
CASH -- ENDING $ 2,262,345 $ 3,837
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 89,183 $ 83,870
============ ============
Income taxes paid $ -- $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
MigraTEC, Inc. (the "Company"), a Florida corporation, is a developer and
provider of software technology that automates the process of upgrading or
migrating software, enabling it to operate on increasingly advanced operating
and hardware systems.
During 1999, the Company redirected its strategic focus from selling software
products aimed at Y2K solutions to developing proprietary technology designed to
automate a significant amount of the manual upgrade or migration process from 32
bit to 64 bit operating systems and associated hardware. The majority of the
Company's efforts in 1999 were related to research and development activities.
The Company intends to license, on a line of code basis, its software solutions
to "end users" for their own internal migration projects, and to systems
integrators and large services providers to perform outsourced projects for
their own customers. Additionally, the Company may provide migration services
and consulting to certain customers.
The Company is the parent of a majority owned foreign subsidiary, One Up
Computer Services, Ltd. ("One Up, Ltd."), incorporated under the laws of the
Province of Ontario, Canada. One Up, Ltd. ceased its operations in 1997. At
December 31, 1999, a reserve was provided for all of the assets of One Up, Ltd.
in the amount of $36,808, which the Company does not expect to be realizable.
Liabilities of One Up, Ltd. of $45,736 will remain until the obligations are
resolved.
The accompanying unaudited consolidated condensed financial statements reflect,
in the opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows of the Company. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to rules and regulations promulgated by the Securities and
Exchange Commission. These statements should be read together with the audited
financial statements and notes thereto for the years ended December 31, 1999 and
1998, included in the Company's Form 10-KSB for the fiscal year ended December
31, 1999 on file with the Commission. The results of operations for the interim
periods shown herein are not necessarily indicative of the results to be
expected for any future interim period or for the entire year.
PRINCIPLES OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of the
Company and One Up, Ltd., collectively referred to as "the Company."
Intercompany transactions and balances have been eliminated in consolidation.
INDUSTRY SEGMENT
The Company operates in a single industry segment, the developing and providing
of software technology that automates the process of upgrading or migrating
software.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The Company provides for depreciation on the straight-line basis
over the estimated useful life of 3 to 5 years for the related assets. Leasehold
improvements are amortized over the life of the improvements or the lease term
if shorter on a straight-line basis.
Major repairs or replacements of property and equipment are capitalized.
Maintenance, repairs and minor replacements are expensed as incurred.
6
<PAGE> 7
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs relate to costs incurred in the placement of the
Company's debt and are amortized using the effective interest method over the
term of the related debt.
CAPITALIZED SOFTWARE
The cost of purchased software is capitalized and amortized on a straight-line
basis over the estimated useful life, which has been estimated to be 3 years.
Amortization expense in 2000 and 1999 was $15,000 and $0, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable and accounts
payable, for which the carrying amounts approximate fair value. Based on
prevailing interest rates, management believes that the fair value of notes
payable approximates book value.
COSTS OF SOFTWARE DEVELOPED FOR SALE
The Company expenses or capitalizes development costs of software to be sold in
accordance with SFAS 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." These development costs are expensed as
incurred until technological feasibility has been established, at which time
such costs are capitalized until the product is available for general release to
customers.
INCOME TAXES
The provision for income taxes is based on pretax income as reported for
financial statement purposes. Deferred income taxes are provided in accordance
with the liability method of accounting for income taxes to recognize the tax
effects of temporary differences between financial statement and income tax
accounting. Valuation allowances are established when necessary to reduce tax
assets to the amount expected to be realized.
The Company has incurred net operating losses for federal income tax purposes
and it is uncertain as to whether the Company will generate future taxable
income during the carry-forward period. Accordingly, the Company's net current
and non-current deferred tax assets have been fully reserved at June 30, 2000
and December 31, 1999.
REVENUE RECOGNITION
The Company's revenues consist of software license revenues, consulting services
revenues and software maintenance and support revenues.
Revenues are recognized in accordance with American Institute of Certified
Public Accountant's Statement of Position (SOP) 97-2 "Software Revenue
Recognition".
The Company licenses software under license agreements. License fee revenues are
recognized when an agreement is in force, the product has been delivered, the
license fee is fixed or determinable, no significant production modification or
customization of the software is required and collectibility is reasonably
assured. License fee revenue for certain application development and data access
tools is recognized upon direct shipment to the end user. If collectibility is
not considered probable, revenue is recognized when the fee is collected.
Software maintenance and support revenues are recognized ratably over the term
of the related agreements, which in most cases is one year. Revenues from
consulting services under time and materials contracts and for training are
recognized as services are performed.
7
<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash equivalents include time deposits, certificates of deposit and all highly
liquid debt instruments with original maturities of three months or less when
purchased.
LOSS PER SHARE
Basic earnings per share is computed only on the weighted average number of
common shares outstanding during the respective periods, and the dilutive effect
of stock options and warrants is excluded. Diluted earnings per share is
computed to show the dilutive effect, if any, of stock options and warrants
using the treasury stock method based on the average market price of the stock
during the respective periods.
The effect of stock options and warrants that aggregated 26,029,708 and
24,416,355 shares as of June 30, 2000 and 1999, respectively, would be
anti-dilutive due to the Company's losses in 2000 and 1999 and, accordingly, are
not included in the computation of diluted earnings per share for the respective
periods.
If the convertible secured promissory notes discussed in Note 3 are converted,
an additional 30,000,000 shares of the Company's common stock would be
outstanding.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could vary from estimates used.
STOCK-BASED COMPENSATION
The Company has elected to account for stock-based compensation to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation for stock options is measured
as the excess, if any, of the fair market value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Such excess is deferred and amortized as compensation expense over the
respective vesting periods, which are principally 36 months.
The Company accounts for stock-based awards issued to non-employees in
accordance with the fair value method of SFAS 123 and Emerging Issues Task Force
Issue No. 96-18. Accordingly, the Company measures the cost of such awards based
on the fair market value of the options using the Black-Scholes option pricing
model.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," was adopted by the Company as of January 1, 1998. The new rules require
the reporting of comprehensive income and its components; however, the adoption
of this statement had no impact on the Company's net loss, stockholders'
deficit, or the Company's disclosures.
8
<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 2000. The adoption of SFAS 133 is not expected to have a material
impact on the financial position or results of operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, (SAB 101)
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain SEC
views in applying generally accepted accounting principles to revenue
recognition in financial statements. It is effective not later than the fourth
quarter of fiscal years beginning after December 15, 1999. The adoption of SAB
101 has not had a material effect on the Company's results of operations or
financial condition.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior year to conform to the
current classification.
NOTE 2. GOING CONCERN UNCERTAINTY
The Company incurred a loss of $4,184,078 and used operating cash of $2,339,753
for the year ended December 31, 1999. In addition, at December 31, 1999, the
Company's current liabilities exceeded current assets by $1,394,471. In the six
months ended June 30, 2000, the Company incurred a loss of $7,200,073 and used
operating cash of $2,554,901. 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 on its ability to effectively penetrate the market for software
migration services and related products. If the Company is not able to achieve
break-even, obtain additional or alternative funding, or generate sufficient
revenues and cash flows in the near term, the Company will be unable to continue
as a going concern.
During 1999, the Company actively sought a large investor to assist in funding
the Company's working capital requirements. In January, 2000 the Company entered
into a private placement agreement that has provided the Company $3,750,000 (See
Note 3). Management believes that the proceeds of this private placement and
anticipated operating revenues will meet working capital requirements into the
fourth quarter of 2000. The Company plans to raise additional capital to fund
expanded development efforts and continued operations. To the extent that
management's revenue projections are not met, the raising of additional capital
may be accelerated. The Company anticipates that in 2001, its efforts to build
relationships with industry leaders will lead to revenues sufficient to return
the Company to profitability. However, there can be no assurance that the
Company will successfully penetrate the market for software migration services
or that additional funds will be received.
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.
9
<PAGE> 10
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 3. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
6/30/00 12/31/99
------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Notes payable to an officer, dated November 12 and 15, 1999, bearing interest at
10% per annum, due upon demand, paid January 2000. Pursuant to a short-term
convertible loan and services agreement, the note holder was granted a two-year
warrant to purchase 3,500 shares of common stock at
$0.01 per share in 1999 and an additional 3,500 shares in 2000. $ -- $ 35,000
Note payable to a director of the Company, net of unamortized discount of
$1,638, bearing interest at 10% per annum, due and paid in February 2000. The
note holder was granted a two-year warrant to purchase 50,000 shares of common
stock at $0.01 per share. -- 23,362
----------- ----------
Subtotal notes payable to related parties -- 58,362
----------- ----------
Convertible note payable to an investor, dated January 25, 2000, without
interest, due January 24, 2003, collateralized by all assets
owned or thereafter acquired, subject to collateral rights of notes 1,775,000 --
dated December 4 and 28, 1998. More fully described below.
Convertible note payable to an investor, dated January 25, 2000, without
interest, due January 24, 2003, collateralized by all assets
owned or thereafter acquired, subject to collateral rights of notes 1,975,000 --
dated December 4 and 28, 1998. More fully described below.
Various one-year notes payable, net of unamortized discount of $19,159, bearing
interest at 10% per annum, due in February and March 2000, paid in February
2000. Note holders were granted two-year warrants to purchase an
aggregate of 585,000 shares of common stock at $0.01 per share. -- 273,341
Notes payable to an investor, dated December 4 and December 28, 1998,
bearing interest at 16% per annum, collateralized by all assets owned or
thereafter acquired. Modified, extended and renewed October 31, 1999 bearing
interest at 16% per annum, repayable with monthly installments of principal and
interest totaling $21,100 with a final maturity of December 31, 2000. In
connection with the modification, the note holder was granted two-year warrants
to purchase 100,000 shares of common stock at $0.01 per share and 100,000
shares of common stock at $0.20 per share. 140,100 232,545
Note payable to an investor, dated December 23, 1999, bearing
interest at 16% per annum, due January 23, 2000, paid in January 2000. -- 100,000
Note payable to an investor, dated December 13, 1999, bearing interest
at 16% per annum, due December 31, 1999, paid in January 2000. The note holder
was granted a two-year warrant to purchase 10,000 shares of common stock at
$0.01 per share. -- 100,000
Note payable to an investor, dated July 29, 1999, bearing interest at
16% per annum, due upon demand with an option to renew monthly with payment of
interest, monthly commitment fee of $2,000 and beginning in September, 1999
granting upon each renewal warrants exercisable within two years to purchase
10,000 shares of the Company's stock at $0.01 per share, paid January 2000. -- 100,000
Note payable to a former employee, dated March 3, 1998, bearing interest
at 14%, payable in monthly installments of $1,000, due December 10, 2003. 32,492 36,165
Note payable to a third party, as settlement of suit, dated October 28,
1998, payable in monthly installments of $2,000 with a final maturity of
October 1, 2000 6,000 20,000
Note payable to a consultant for services, dated October 1, 1999, bearing
interest at 16% per annum, due and paid January 31, 2000. The note holder was
granted a two-year warrant to purchase 6,150 shares of common stock at
$0.01 per share. -- 61,503
----------- ----------
Subtotal to third parties 3,928,592 923,554
----------- ----------
Total outstanding, net of unamortized discounts 3,928,592 981,916
Less current portion (154,224) (953,151)
----------- ----------
Long-term portion $ 3,774,368 $ 28,765
=========== ==========
</TABLE>
10
<PAGE> 11
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 3. NOTES PAYABLE (CONTINUED)
On January 25, 2000, the Company closed the first stage of a three-stage
private financing of the Company by MT Partners, L.P., an affiliate of Cardinal
Investment Company, Inc., and Mercury Fund No. 1, Ltd., an affiliate of Mercury
Ventures, Ltd. (collectively, the "Investors").
The Investors entered into a Note and Warrant Purchase Agreement with the
Company (the "Agreement") pursuant to which the Investors agreed to provide up
to $3,750,000 of private financing to the Company, evidenced by convertible
secured promissory notes of the Company. The Investors have provided the maximum
amount of funding under the Agreement, which aggregates $3,750,000.
The notes are convertible at any time, at the election of the Investors, into
shares of the Company's common stock, on the basis of one share of common stock
for each $.125 in principal amount of the notes outstanding at the time of
conversion. The notes do not accrue interest.
Effective June 1, 2000, the Agreement was modified to eliminate the Company's
obligation to create a new series of convertible preferred stock. The notes have
been modified to automatically convert into shares of common stock on the terms
described above, upon the earlier of either:
o The closing of a sale of the Company's common stock, preferred stock or
issuance of debt with equity features in one or more transactions in which
the Company receives aggregate proceeds of at least $5,000,000; or
o The first trading day following a period of 90 consecutive trading days,
during which the closing sale price of the Company's common stock has been
in excess of $1.25, such 90 day period to begin after June 1, 2000.
Notwithstanding those events, automatic conversion of the notes shall not occur
prior to the effective date of a registration statement for the underlying
shares of the Company's common stock to be filed by the Company in accordance
with a registration rights agreement between the Company and the Investors.
At the initial closing, the Company issued to the Investors warrants to purchase
up to an aggregate of 2,000,000 shares of common stock. On March 31, 2000, the
second $1,250,000 was funded by the Investors and the Company issued to the
Investors additional warrants to purchase up to 2,000,000 shares of common
stock. On May 1, 2000, the final $1,250,000 was funded by the Investors and the
Company issued to the Investors additional warrants to purchase up to 2,000,000
shares of common stock. All of such warrants are exercisable for a period of 5
years from the date of issuance and have an exercise price of $0.20 per share.
The notes and the associated warrants contain conversion features considered to
be "beneficial" because the conversion prices are below the market price of the
common stock at the date of issuance. As a result, the Company recorded
$2,500,000 of interest expense during the quarter ended March 31, 2000 in
accordance with Emerging Issues Task Force Pronouncement Number 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios." In May 2000, the Company recorded an
additional $1,250,000 of interest expense related to the notes and associated
warrants issued upon receipt of the third stage of financing.
In connection with this private financing, the Investors, the Company and
certain shareholders executed a Shareholders' Agreement which requires approval
of at least 70% of the Company's Board of Directors for any of the following
corporate actions:
1) permitting authorization of additional series or classes of shares of
any capital stock resulting in dilution greater than 10% when compared
to the fully diluted common stock equivalent position of the Company as
of January 25, 2000;
2) disposing of all or substantially all of the properties or assets of
the Company;
3) merging where such transaction involves greater than 20% of the
Company's market capitalization;
4) voluntarily dissolving, liquidating or partially liquidating the
Company;
11
<PAGE> 12
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 3. NOTES PAYABLE (CONTINUED)
5) incurring additional debt in excess of $250,000;
6) incurring any single capital expenditure in excess of $150,000;
7) declaring or paying any dividend with respect to any capital stock of
the Company;
8) purchasing any capital stock of the Company;
9) amending the employment contracts or making material changes to the
compensation or severance amounts of certain officers of the Company;
10) amending, altering or repealing the Company's Articles of Incorporation
or Bylaws; or
11) entering into contracts with any affiliate of the Company.
Additionally, the Shareholders' Agreement restricts transfers of the Company's
common stock and provides the Investors with a right of first refusal for
private transfers of shares of the Company's common stock.
During the six months ended June 30, 2000 and 1999, loan origination fees of $0
and $600, respectively, were paid to directors and officers of the Company who
granted loans to the Company.
NOTE 4. CAPITAL STOCK, WARRANTS AND OPTIONS
CAPITAL STRUCTURE
The Company is authorized to issue 200,000,000 shares of no par common stock, of
which 90,241,563 and 78,660,189 shares were issued, inclusive of treasury stock,
at June 30, 2000 and December 31, 1999, respectively. The Company is also
authorized to issue 1,000,000 shares of convertible 12% preferred stock, $1,000
par value, redeemable at par value plus cumulative dividends. At June 30, 2000
and 1999, no convertible preferred stock was issued or outstanding.
On June 23, 2000, the Company's Annual Shareholders' meeting was held. The
stockholders approved reincorporation in Delaware and the creation of blank
check preferred stock. Upon reincorporation in Delaware, the Company's Board of
Directors will be authorized to issue up to 50,000,000 shares of preferred stock
in one or more series with such limitations and restrictions as may be
determined in its sole discretion without further stockholder approval.
ISSUANCES OF COMMON STOCK
PRIVATE PLACEMENTS
During the first quarter of 2000, the Company completed private placements of
2,451,000 shares of unregistered common stock at a price of $0.125 per share and
two-year warrants to purchase a total of 490,200 unregistered shares of common
stock at $0.20 per share, yielding proceeds of $306,375. Both the unregistered
common shares sold and the shares issuable upon exercise of the warrants contain
piggyback registration rights. As of June 30, 2000, warrants to purchase 438,200
shares of common stock remain unexercised out of the 490,200 issued.
EXERCISE OF OPTIONS AND WARRANTS
During the first and second quarters of 2000, the Company has issued 9,130,374
shares of common stock upon exercise of options and warrants yielding proceeds
of $1,737,897.
STOCK OPTIONS GRANTED TO EMPLOYEES, OFFICERS AND DIRECTORS
In January 2000, the Company's Board of Directors approved, subject to the
stockholders' approval, the MigraTEC, Inc. Long-Term Incentive Plan ("the 2000
Plan"), which provides for the issuance of up to 7,000,000 shares of the
Company's common stock in the form of stock options, dividend equivalent rights
or restricted share awards to Company directors, officers, employees and
consultants. The 2000 Plan was approved at the Company's Annual Shareholders'
Meeting held June 23, 2000.
12
<PAGE> 13
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 4. CAPITAL STOCK, WARRANTS AND OPTIONS (CONTINUED)
As of June 30, 2000, certain directors, officers and employees have been granted
options to purchase common stock of the Company pursuant to the 2000 Plan. The
terms of such grants are summarized below:
<TABLE>
<CAPTION>
OPTION PRICE
------------
NUMBER WEIGHTED
RANGE OF EXERCISE PRICES GRANTED AVERAGE TOTAL
------------------------ ------- -------- -----
<S> <C> <C> <C>
Granted at market value
Officers and Directors
$0.75 1,150,000 0.75 $ 862,500
Employees
$0.74 to $2.87 800,800 1.198 959,614
Granted below market value
Officers and Directors
$0.20 to $0.75 3,500,000 0.294 1,030,000
Employees
$0.75 240,000 0.75 180,000
----------- ------- -----------
5,690,800 $ 0.533 $ 3,032,114
=========== ======= ===========
</TABLE>
The Company recorded deferred stock compensation of $2,855,000 for the
difference between the exercise price and the market value of the Company's
common stock underlying certain options granted. This amount is being amortized
over the vesting period of the individual options, which vesting periods vary
from immediate to three years. Stock compensation expense charged to income was
$704,896 for the six month period ended June 30, 2000.
TOTAL OPTIONS AND WARRANTS OUTSTANDING
At June 30, 2000, the Company had outstanding options and warrants for the
purchase of common shares as follows:
<TABLE>
<S> <C>
Warrants 8,991,466
Stock Options:
Non-employees 5,025,281
Directors, Officers and Employees 12,012,961
-----------
TOTAL 26,029,708
===========
</TABLE>
In August 1999, the Company entered into a Stock Option Agreement with EAI
Partners, Inc. ("EAI") which requires the Company to file a registration
statement covering the option shares no later than August 31, 2000. In the event
the Company fails to file a registration statement by August 31, 2000, EAI will
be entitled to an option to acquire an additional 600,000 shares at the greater
of $0.50 or 50% of the closing price for the five days preceding exercise,
expiring September 1, 2001.
NOTE 5. RELATED PARTY TRANSACTIONS
In January and February 1998, the Company received an aggregate of $254,000 from
the issuance of short-term notes to three directors of the Company. The notes
had interest rates ranging from 10% to 12% and were convertible into the
Company's common stock at $0.20 per share. Warrants to purchase 175,000 shares
of the Company's common stock at prices ranging from $0.01 to $0.20 per share
were issued to these directors in connection with the notes. During March 1998,
$200,000 of the principal of these notes was converted into 1,000,000 shares of
common stock. Accrued interest and the balance of the notes was paid in April
1998. In March 1999, the Company issued 75,000 shares of its common stock to two
directors as a result of exercise of these warrants. In January 2000, 100,000
shares of common stock were issued upon the exercise of the remaining warrants.
Effective March 25, 1998, the Company entered into an agreement with its former
principal executive officer, Mr. Richard Dews, in settlement of certain claims
made against the Company by Mr. Dews totaling approximately $640,000. Pursuant
to the agreement,
13
<PAGE> 14
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 5. RELATED PARTY TRANSACTIONS (CONTINUED)
(1) the Company acquired from Mr. Dews 9,400,000 shares of its common stock for
$740,000, (2) the Company agreed to file a registration statement or take other
appropriate steps to allow free trading of the remaining shares owned by Mr.
Dews, (3) the Company issued to Mr. Dews a transferable warrant to purchase up
to 600,000 shares of the Company's common stock at $0.25 per share, (4) the
Company paid to Mr. Dews $60,000 in full satisfaction, including principal and
accrued interest, of amounts he previously loaned to the Company, (5) the
Company released Mr. Dews from all claims arising from or relating to his
employment or the promissory note from the Company to Mr. Dews, (6) Mr. Dews
released the Company from all claims, estimated by Mr. Dews to total
approximately $640,000, arising from or relating to his employment or the
promissory note from the Company to Mr. Dews, including back wages relating to
accrued but unused vacation pay, and (7) pursuant to a promissory note dated
March 25, 1998, without stated interest, the Company agreed to pay to Marilyn
Johnson the amount of $68,250 in installments of $1,000 for 68 months on the
tenth of each month beginning April 10, 1998, with the final payment of $250
being due on December 10, 2003. Attorney fees paid by the Company in negotiating
the settlement with Mr. Dews were comprised of (1) the transfer of 390,454
shares of the Company's common stock and (2) $210,523 in cash. One-half of the
attorney fees related to this settlement were paid to a director of the Company
as compensation for his legal services to the Company. In the first quarter of
2000, Mr. Dews exercised his warrant and was issued 600,000 shares of the
Company's common stock.
In July 1998, three directors of the Company were issued warrants to purchase
1,683,250 shares of the Company's common stock at an exercise price of $0.20 per
share, with an expiration date of July 1, 2001. These warrants were issued as
compensation for services related to the Company's private stock offerings in
1998. In February 2000 and May 2000, the Company issued 1,000,000 and 300,000,
respectively, shares of its common stock pursuant to the exercise of these
warrants.
In 1998, pursuant to a private placement, a director purchased 600,000 shares of
the Company's common stock at $0.20 per share and was issued warrants to
purchase 100,000 shares of common stock at $0.10 per share, exercisable until
September 2001. As of June 30, 2000, none of these warrants have been exercised.
A director was paid $0 and $300 in 2000 and 1999, respectively, as compensation
for legal services to the Company. During the first six months of 2000, four
directors of the Company have earned an aggregate of $37,500 as compensation for
serving as directors. No fees were paid or payable to directors in 1999.
NOTE 6. COMMITMENTS
On April 12, 2000, the Company executed a non-cancelable operating lease for its
office facility for a term of 39 months beginning May 1, 2000. The lease
provides for a monthly base rent of $14,982 with three months of free rent, with
the first rental payment due August 1, 2000. The following is a summary of the
base rents for the next five years:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ 74,910
2001 179,784
2002 179,784
2003 104,874
2004 --
Thereafter --
---------
$ 539,352
=========
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2ND QUARTER ENDED JUNE 30, 2000
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
(COLLECTIVELY REFERRED TO HEREIN AS "MIGRATEC") 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.
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to explain the major
factors affecting MigraTEC's results of operations and variance of results
between periods. The following discussion of MigraTEC's financial condition and
results of operations should be read along with the financial statements and
notes to the financial statements included elsewhere herein.
Management believes that the net loss for the quarter ended June 30, 2000 was
primarily due to the Company's focus on development activities which were not
revenue producing but which, nevertheless, allowed MigraTEC to significantly
develop its upgraded 32 to 64-bit migration technology as well as enhance other
automated migration tools.
Management believes that its development activities have positioned MigraTEC for
the introduction of its technology into the market during the latter part of
2000. On April 17, 2000, subsequent to over six months of testing of MigraTEC's
32 to 64-bit upgrade technology by Intel, MigraTEC entered into a Software
License Agreement with Intel. Under the terms of the agreement, MigraTEC granted
a royalty-free license to use its migration software products to Intel for
internal use. The license is perpetual, but may be terminated by MigraTEC after
12 months upon 90 days notice. The agreement allows Intel to use MigraTEC's
technology at Intel's Application Support Centers to educate independent
software vendors on the use and application of the technology. The agreement
also requires Intel and MigraTEC to use their best efforts to create and execute
a joint marketing plan related to the introduction and dissemination of
MigraTEC's technology. The implementation of the joint marketing plan is
intended to include website links, training, press releases, industry event
participation and testimonials.
In May 2000 MigraTEC entered into a consulting agreement with Dell to provide
migration technology expertise, process migration technology expertise, process
consultation services and Migration Workbench technology to a minimum of ten
Dell Precision Workstation Independent Software Vendors ("ISVs") and customers.
This agreement provides these ISVs and customers the opportunity to upgrade an
initial software application to the 64-bit Intel Itanium platform using
MigraTEC's technology. The initial applications represent only a small fraction
of the total code needing to be migrated. Management believes that as a result
of this agreement, MigraTEC will have the opportunity to contract with these
ISVs and customers to upgrade a significant number of additional applications.
During the second quarter of 2000, MigraTEC also began working with IBM's
Monterey development team to adapt MigraTEC's software migration technology to
provide an automated path for migrating 32-bit applications to the 64-bit
Monterey environment. Management believes that this is the first step in
introducing MigraTEC's software migration technology to IBM's ISVs and the UNIX
marketplace.
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES
For the second quarter ended June 30, 2000, the Company's revenues decreased by
approximately 98% to $3,000, as compared to $134,649 for the second quarter
ended June 30, 1999. This decrease is attributable to the Company shifting its
strategic focus from selling Y2K products to development of its new technology.
15
<PAGE> 16
OPERATING EXPENSES
The Company's total operating expenses increased by approximately 100% to
$1,746,725 during the second quarter of 2000, as compared to $875,648 for the
second quarter of 1999.
The majority of the Company's operating expenses is related to compensation
costs. The Company's operating expenses were significantly higher in the second
quarter of 2000 as compared to the second quarter of 1999 because the Company
employed 37 individuals during the second quarter of 2000, as compared to 26
individuals in the second quarter of 1999.
Costs of revenues during the second quarter of 2000 were $0, as compared to
$56,708 for 1999. This change was the result of the Company's shift in focus
from selling and servicing its Y2K product to developing its software migration
technology.
Selling and marketing expenses increased approximately 277% to $236,633 during
the second quarter of 2000, as compared to $62,848 for the second quarter of
1999. This increase is a result of the Company's change in focus from selling
and servicing its Y2K product to selling and marketing its software migration
technology.
Research and development expenses increased approximately 76% to $645,937 during
the second quarter of 2000, as compared to $366,406 for the second quarter of
1999. This increase was the result of the Company's change in focus from selling
and servicing its Y2K product to developing its software migration technology.
General and administrative expenses increased 122% to $864,155 during the second
quarter of 2000, as compared to $389,686 for the second quarter of 1999. The
increase was due generally to the following: (i) replacement of the chief
financial officer in the first quarter of 2000, (ii) director fees of $22,500
were accrued in the second quarter of 2000 (none were accrued in the second
quarter of 1999), (iii) accounting and legal fees increased approximately
$53,000 in the second quarter of 2000 as compared to the second quarter of 1999
and (iv) shareholder meeting expenses of approximately $70,000 were incurred in
the second quarter of 2000, as compared to none in the second quarter of 1999.
In the first six months of 2000, the Company issued options to purchase an
aggregate of 3,740,000 shares of common stock to directors, officers and
employees, some of which have exercise prices less than the fair market value at
the date of grant. The aggregate excess of the fair market value at the date of
grant was deferred and will be amortized as compensation expense over the
respective vesting periods. The amount amortized as compensation expense in the
second quarter of 2000 was $257,723. In the first six months of 1999, the
Company did not issue any stock options to directors, officers or employees
which were exercisable at per share prices below fair market value at the date
of grant, and the Company did not have any deferred compensation expense from
previous grants.
INTEREST AND FINANCING EXPENSE
The Company's interest and financing expense increased to $1,259,191 during the
second quarter of 2000, as compared to $80,970 for the second quarter of 1999.
Interest expense increased to $1,259,190 during the second quarter of 2000, as
compared to $63,168 for the second quarter of 1999. For the second quarter of
2000, the Company recorded $1,250,000 of interest expense in accordance with
EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios." The expense recorded
relates to the convertible secured promissory notes payable and related warrants
issued with a conversion price below the market price of the Company's common
stock at the date of issuance. Financing fees decreased 100% to $0 during the
second quarter of 2000, as compared to $17,802 for the second quarter of 1999.
Financing fees in the second quarter of 1999 represent the amortized portion of
fees paid in connection with issuance of debt in prior years. This debt was
converted into common stock of the Company in 1999.
OTHER INCOME AND EXPENSE
Other income in the second quarter of 2000 increased to $27,933 as compared to
$0 in the second quarter of 1999. In 2000, the Company was able to invest in
short-term interest bearing investments using funds from the private placement
funding of $3,750,000 received in the first and second quarters of 2000.
16
<PAGE> 17
PROVISION FOR INCOME TAXES
As a result of operating losses for 2000 and 1999, the Company has not had a
federal income tax obligation. No tax benefit has been recorded due to the
uncertainty that the Company will generate sufficient taxable income during the
carry forward period to realize the benefit of the net deferred tax asset. The
carry forward period will expire in 2014.
NET LOSS
For the second quarter ended June 30, 2000, the Company incurred a net loss of
$2,974,983 or $0.037 per share, as compared with a net loss of $821,969 or
$0.017 per share for the second quarter ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
For the six months ended June 30, 2000, the Company's revenues decreased by
approximately 99% to $6,000, as compared to $470,225 for the first six months of
1999.
OPERATING EXPENSES
The Company's total operating expenses increased by approximately 90% to
$3,393,355 during the first six months of 2000, as compared to $1,789,794 for
the first six months of 1999.
The majority of the Company's operating expenses is related to compensation
costs. The Company's operating expenses were significantly higher in the first
six months of 2000 as compared to the first six months of 1999 because the
Company employed 37 individuals during the first six months of 2000, as compared
to 26 individuals in the first six months of 1999.
Costs of revenues during the first six months of 2000 were $0, as compared to
$87,959 for 1999. This change was the result of the Company's shift in focus
from selling and servicing its Y2K product to developing its software migration
technology.
Selling and marketing expenses increased approximately 23% to $302,758 during
the first six months of 2000, as compared to $245,692 for the first six months
of 1999. This increase is a result of the Company's change in focus from selling
and servicing its Y2K product to selling and marketing its software migration
technology.
Research and development expenses increased approximately 56% to $1,150,981
during the first six months of 2000, as compared to $737,265 for the first six
months of 1999. This increase was the result of the Company's change in focus
from selling and servicing its Y2K product to developing its software migration
technology.
General and administrative expenses increased 170% to $1,939,616 during the
first six months of 2000, as compared to $718,878 for the first six months of
1999. The increase was due generally to the following: (i) replacement of the
chief financial officer in the first quarter of 2000, (ii) director fees of
$37,500 were accrued in the first six months of 2000 (none were accrued in the
first six months of 1999), (iii) accounting and legal fees increased
approximately $231,000 in the first six months of 2000 as compared to the first
six months of 1999 and (iv) shareholder meeting expenses of approximately
$77,000 were incurred in the first six months of 2000 as compared to none in the
first six months of 1999. In the first six months of 2000, the Company issued
options to purchase an aggregate of 3,740,000 shares of common stock to
directors, officers and employees, some of which have exercise prices less than
the fair market value at the date of grant. The aggregate excess of the fair
market value at the date of grant was deferred and will be amortized as
compensation expense over the respective vesting periods. The amount amortized
as compensation expense in the first six months of 2000 was $704,896. In the
first six months of 1999, the Company did not issue any stock options to
directors, officers or employees which were exercisable at per share prices
below fair market value at the date of grant, and the Company did not have any
deferred compensation expense from previous grants.
17
<PAGE> 18
INTEREST AND FINANCING EXPENSE
The Company's interest and financing expense increased to $3,846,662 during the
first six months of 2000, as compared to $285,379 for the first six months of
1999. Interest expense increased to $3,815,647 during the first six months of
2000, as compared to $120,284 for the first six months of 1999. For the first
six months of 2000, the Company recorded $3,750,000 of interest expense in
accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios."
The expense recorded relates to the convertible secured promissory notes payable
and related warrants issued with a conversion price below the market price of
the Company's common stock at the date of issuance. Financing fees decreased 81%
to $31,015 during the first six months of 2000, as compared to $165,095 for the
first six months of 1999. Financing fees in the first six months of 1999
represent the amortized portion of fees paid in connection with issuance of debt
in prior years. This debt was converted into common stock of the Company in
1999.
OTHER INCOME AND EXPENSE
Other income in the first six months of 2000 increased to $33,944 as compared to
$171 in the first six months of 1999. In 2000, the Company was able to invest in
short-term interest bearing investments using funds from the private placement
funding of $3,750,000 received in the first and second quarters of 2000.
PROVISION FOR INCOME TAXES
As a result of operating losses for 2000 and 1999, the Company has not had a
federal income tax obligation. No tax benefit has been recorded due to the
uncertainty that the Company will generate sufficient taxable income during the
carry forward period to realize the benefit of the net deferred tax asset. The
carry forward period will expire in 2014.
NET LOSS
For the first six months ended June 30, 2000, the Company incurred a net loss of
$7,200,073 or $0.093 per share, as compared with a net loss of $1,604,777 or
$0.034 per share for the first six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $2,554,901 for the first six months of
2000 and $1,100,846 for the first six months of 1999, which resulted from the
operating loss, decreased by net changes in assets and liabilities and non-cash
expenses and income of $4,645,172 for the first six months of 2000 and $503,931
for the first six months of 1999.
At June 30, 2000, the Company had working capital of $1,630,065, as compared to
a working capital deficit of $1,394,471 at December 31, 1999.
At June 30, 2000, the Company had cash of $2,262,345 and outstanding accounts
receivable of $100,000.
At June 30, 2000, the Company's outstanding debt obligations included (i)
$3,750,000 in convertible debt held by two investors, (ii) $140,100 in notes
payable to investors and (iii) $38,492 in other notes payable relating to
settlements with a vendor and a former employee.
In the first six months of 2000, the Company received net proceeds of $4,964,625
from financing activities. The Company received $2,044,272 in connection with
the issuance of common stock, and $3,750,000 in proceeds from convertible debt
from two investors. The cash proceeds were offset by $829,647 expended for the
repayment of principal of short-term loans from various investors, directors, an
officer and obligations under a capital lease.
The Company had substantial operating losses during the first six months of 2000
and the prior three years. The Company began active operations in January 1991,
and while the Company has experienced certain periods of profitability since
inception, it has sustained substantial losses in recent years. For the first
six months of 2000, the Company incurred a net loss of $7,200,073, and for the
years ended December 31, 1999, 1998, and 1997, the Company incurred net losses
of $4,184,078, $3,458,075 and $2,517,606, respectively. At June 30, 2000 and
December 31, 1999, the Company had accumulated deficits of $18,838,260 and
$11,638,187, respectively.
18
<PAGE> 19
In January 2000 the Company entered into a private placement agreement that has
provided it with $3,750,000 as of June 30, 2000, which is the maximum funding
under this agreement. Management believes that the proceeds from this private
placement and anticipated operating revenues will meet working capital
requirements into the fourth quarter of 2000. The Company plans to raise
additional capital to fund expanded development efforts and continued
operations. To the extent that management's revenue projections are not met, the
raising of additional capital may be accelerated. Results of operations in the
future will be influenced by numerous factors including, but not limited to:
o internal technological developments and those of the Company's
technology partners;
o further development of the Company's proprietary software products and
services;
o expansion of the Company's marketing program and market acceptance of
its products and services;
o capacity to further identify the Company as a migrations solutions
provider;
o the Company's ability to control increases in expenses associated with
sales growth and other costs;
o the availability of substantial additional funding; and
o the Company's ability to attract and maintain a skilled and cohesive
management group.
FORWARD LOOKING STATEMENTS
The foregoing discussion may contain 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. Such statements are
intended to be covered by the safe harbors created by such provisions. All
statements, other than statements of historical fact, included in or
incorporated by reference into this Form 10-QSB, are forward-looking statements.
The forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of MigraTEC.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, then actual results may vary materially from those
anticipated, estimated or projected. Although management 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.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by MigraTEC, management or any other person that
the objectives of MigraTEC will be achieved.
Key factors that could cause MigraTEC's actual results to differ materially from
expectations, estimates of costs, projected results or anticipated results
include, but are not limited to, the following risks:
o MigraTEC may not be able to generate sufficient cash flows to fund
operations or to obtain additional financing on favorable terms;
o MigraTEC may not be able to effectively penetrate its target markets
for migration products and sales;
o MigraTEC may not be able to successfully develop and/or protect its
technology
o MigraTEC may not be able to effectively control increases in expenses
associated with sales growth and other costs;
o management may not be able to successfully implement the business plan
and sales strategy;
o MigraTEC may not be able to attract and retain a skilled and cohesive
management group; and
o unfavorable changes in economic and industry conditions and regulatory
requirements may develop.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1998, Carroll Independent School District filed suit against the
Company in District Court, Tarrant County, Texas, seeking payment for unpaid
business and personal property taxes related to 1996 (Carroll Independent School
District v. One Up Corporation, Cause No. L-14690). Judgment was entered on
January 27, 2000 for the plaintiff in the amount of $90,056.45, which includes
interest and court costs.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the shareholders' agreement between MigraTEC and certain of its
shareholders, dated as of January 25, 2000, MigraTEC may not declare or pay
dividends, or make any distribution with respect to, its capital stock without
the approval of 70% of its board of directors.
MigraTEC's agreement with MJ Capital Partners, III, L.P., dated as of November
16, 1998, restricts the Company's ability to declare or pay any dividends with
respect to its common stock as long as any obligation under such agreement
remains outstanding. MigraTEC is currently making monthly payments of principal
and interest under the agreement, which is scheduled to be paid in full by
December 31, 2000 under the current payment terms.
During the three months ended June 30, 2000, MigraTEC sold its unregistered
securities in the transactions described below. Unless stated otherwise below,
for each such transaction, exemption from registration of the sale of these
securities under the applicable federal and state securities laws is claimed by
MigraTEC under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and under comparable limited offering exemptions under state
securities laws, as a transaction by an issuer which does not involve a public
offering.
During April, May and June 2000, MigraTEC issued an aggregate of 43,960 shares
of its common stock at an average price of $0.303 per share upon the exercise of
stock options by an aggregate of 6 employees and a former director.
During April, May and June 2000, MigraTEC issued an aggregate of 289,287 shares
of its common stock to 3 investors pursuant to the exercise of warrants at $.20
per share issued in connection with previous loans made to the Company.
During April 2000, MigraTEC issued an aggregate of 10,000 shares of its common
stock to an investor at a price of $.20 per share upon the exercise of a warrant
issued in connection with a loan made to the Company.
During May 2000, MigraTEC issued 300,000 shares of its common stock at a price
of $.20 per share, pursuant to the exercise of warrants issued in 1998 as
compensation for services provided to MigraTEC.
During May 2000, MigraTEC issued 20,000 shares of its common stock to an
investor at a price of $.20 per share upon the exercise of warrants issued in
connection with a private offering by the Company in the fourth quarter of 1999.
During June 2000, MigraTEC issued 52,500 shares of its common stock to an
investor at a price of $.20 per share upon the exercise of warrants issued in
connection with a private offering by the Company in the first quarter of 1999.
During June 2000, MigraTEC issued 20,000 shares of its common stock to an
investor at a price of $.20 per share upon the exercise of warrants issued in
connection with a private offering by the Company in the third quarter of 1999.
During June 2000, MigraTEC issued 125,000 shares of its common stock to a former
director of MigraTEC at a price of $.20 per share pursuant to the exercise of a
stock option.
During May 2000, pursuant to Regulation D of the Securities Act, MigraTEC issued
convertible secured promissory notes in the aggregate principal amount of
$1,250,000 in a private financing agreement with MT Partners, L.P., an affiliate
of Cardinal Investment Company, Inc. and Mercury Fund No. 1, Ltd., an affiliate
of Mercury Ventures, Ltd. (collectively, the"Investors"). The notes do not
accrue interest and are convertible at any time, at the election of the
Investors, into shares of MigraTEC's common stock, on the basis of one share of
common stock for each $.125 in principal amount of the notes outstanding at the
time of conversion. As of June 30, 2000 the notes, which aggregate $3,750,000
(including
20
<PAGE> 21
$2,500,000 issued in the first quarter of 2000), were convertible into
30,000,000 shares of MigraTEC's common stock. In connection with this
transaction, as of June 30, 2000, the Investors were also issued warrants to
purchase up to an aggregate of 6,000,000 shares of MigraTEC's common stock at
$0.20 per share (including 4,000,000 issued in the first quarter of 2000)
exercisable for a period of five years from the date of issuance.
Effective June 1, 2000, the financing agreement was modified to eliminate
MigraTEC's obligation to create a new series of convertible preferred stock. The
notes have been modified to automatically convert into shares of common stock on
the terms described above, upon the earlier of either:
o The closing of a sale of MigraTEC's common stock, preferred stock or
issuance of debt with equity features in one or more transactions in
which MigraTEC receives aggregate proceeds of at least $5,000,000; or
o The first trading day following a period of 90 consecutive trading
days, during which the closing sale price of MigraTEC's common stock
has been in excess of $1.25, such 90 day period to begin after June 1,
2000.
Notwithstanding those events, automatic conversion of the notes shall not occur
prior to the effective date of a registration statement for the underlying
shares of the Company's common stock to be filed by the Company in accordance
with a registration rights agreement between the Company and the Investors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The matters voted upon at MigraTEC's Annual Shareholders' Meeting held on June
23, 2000 were as follows:
(i) The election of five directors to serve until the next annual meeting
of shareholders or until their successors are elected and qualified.
The number of votes cast for and against the election of each nominee,
as well as the number withheld and broker non-votes with respect to the
election of each nominee, were as follows:
<TABLE>
<CAPTION>
NAME FOR AGAINST WITHHELD BROKER NON-VOTES
---- --- ------- -------- ----------------
<S> <C> <C> <C> <C>
Richard A. Gray, Jr. 75,101,318 21,795 70,520 --
Kevin C. Howe 75,106,193 16,920 70,520 --
Drew R. Johnson 75,095,518 27,595 70,520 --
W. Curtis Overstreet 75,120,282 2,831 70,520 --
Deane C. Watson, Jr. 75,110,398 12,715 70,520 --
</TABLE>
(ii) The approval of reincorporation of MigraTEC from Florida to Delaware.
The number of votes cast for and against, as well as the number of
abstentions and broker non-votes with respect to such matter were as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C>
44,171,966 371,179 122,541 30,527,947
</TABLE>
(iii) The approval of creation of blank check preferred stock. The number of
votes cast for and against, as well as the number of abstentions and
broker non-votes with respect to such matter were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C>
42,197,623 2,045,649 422,414 30,527,947
</TABLE>
(iv) The approval of the MigraTEC Long-Term Incentive Plan. The number of
votes cast for and against, as well as the number of abstentions and
broker non-votes with respect to such matter were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C>
43,544,916 912,884 207,886 30,527,947
</TABLE>
21
<PAGE> 22
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be furnished pursuant to this Item 6 (a) are listed in
the Exhibit Index filed herewith, which Exhibit Index is hereby incorporated
herein by reference.
22
<PAGE> 23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on this 9th day of August 2000.
MIGRATEC, INC.
By: /s/ W. Curtis Overstreet
-------------------------------------
W. Curtis Overstreet
Chief Executive Officer and President
By: /s/ T. Ulrich Brechbuhl
-------------------------------------
T. Ulrich Brechbuhl
Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Warrant to MT Partners, L.P. and Mercury
Fund No. 1, Ltd. (2)
10.1 Employment Agreement between the Company and
W. Curtis Overstreet dated April 10, 1997 (1)
10.2 Employment Agreement between the Company and
Joseph B. Meredith dated June 1, 1997 (1)
10.3 Employment Agreement between the Company and
Rick J. Johnson dated July 1, 1997 (1)
10.4 Agreement between the Company and Electronic Data
Systems Corporation dated as of September 1, 1998 (1)
10.5 MigraTEC, Inc. Long-Term Incentive Plan (2)
10.6 Form of Incentive Stock Option Agreement pursuant to
the MigraTEC, Inc. Long-Term Incentive Plan (2)
10.7 Form of Non-Qualified Stock Option Agreement pursuant
to the MigraTEC, Inc. Long-Term Incentive Plan (2)
10.8 Warrant Agreement between MigraTEC, Inc. and
MT Partners, L.P. and Mercury Fund No. 1, Ltd.,
dated as of January 25, 2000 (2)
10.9 $1,975,000 Convertible Secured Promissory Note by
MigraTEC, Inc. to MT Partners, L.P.,
dated as of January 25, 2000 (2)
10.10 $1,775,000 Convertible Secured Promissory Note by
MigraTEC, Inc. to Mercury Fund No. 1, Ltd.,
dated as of January 25, 2000 (2)
10.11 Security Agreement between MigraTEC, Inc. and
MT Partners, L.P. and Mercury Fund No. 1, Ltd.,
dated as of January 25, 2000 (2)
10.12 Shareholders' Agreement between MigraTEC, Inc. and
certain shareholders, dated as of January 25, 2000 (2)
10.13 Registration Rights Agreement between MigraTEC, Inc.
and certain shareholders, dated as of
January 25, 2000 (2)
10.14 Form of Director Indemnification Agreement between
MigraTEC, Inc. and Kevin C. Howe and Drew R. Johnson,
dated as of January 25, 2000 (2)
10.15 Office Lease Agreement between MigraTEC, Inc. and
Charter Crown Plaza Partners, L.P.,
dated as of April 12, 2000 (2)
11.1 Statement re: Computations of Net Loss per Share (3)
21.1 Subsidiary of MigraTEC, Inc. (2)
27.1 Financial Data Schedule (3)
</TABLE>
------------------------
(1) Incorporated by reference from Post-Effective Amendment No.1 to
MigraTEC's Registration Statement on Form SB-2 filed May 7, 1999, File
No. 333-65093.
(2) Incorporated by reference from Form 10-KSB filed by MigraTEC on
April 14, 2000.
(3) Filed herewith.
