<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 2000
REGISTRATION NO. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
MIGRATEC, INC.
(Exact name of Small Business Issuer in its Charter)
----------------------------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2721 65-0125664
(State or Other Jurisdiction of Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number Identification No.)
</TABLE>
----------
11494 Luna Road
Suite 100
Dallas, Texas 75234-9421
(972) 969-0300
(Address and telephone number of Principal Executive Offices)
----------
W. Curtis Overstreet
11494 Luna Road
Suite 100
Dallas, Texas 75234-9421
(972) 969-0300
(Name, Address and Telephone Number of Agent for Service)
With a copy to:
Ted. S. Schweinfurth, Esq.
Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270-2199
(214) 745-5473
----------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: From time to time after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X].
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE> 2
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Proposed maximum Proposed maximum Amount of
----------------------- ----------------- ----------------- ---------
securities to be offering price per offering price (1) registration fee
----------------- ------------------- --------------- ----------------
registered unit (1)
---------- ----
<S> <C> <C> <C>
Common stock, par value
$.001 per share $1.03125 67,465,492 $17,810.89
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c)
and (o) promulgated under the Securities Act on the basis of the average of the high and low sale
prices of the common stock on August 28, 2000, as reported on the OTC Bulletin Board.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
Subject to Completion, dated August 31, 2000
PROSPECTUS
MIGRATEC, INC.
65,421,083 Shares of Common Stock
This prospectus relates to the 65,421,083 shares of our common stock
being registered for possible future resale, from time to time, by certain of
our securityholders. Of such shares, 21,718,194 shares are currently outstanding
and 43,702,889 shares are reserved for issuance upon exercise of options and
warrants that we have granted to these selling securityholders or upon
conversion of convertible debt held by these selling securityholders. We will
not receive any proceeds from the sale of the shares by these selling
securityholders. We may, however, receive up to approximately $2,900,000 in the
event all the options and warrants held by the selling securityholders are
exercised. Any proceeds we receive from the exercise of the options and warrants
will be used for general corporate purposes.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "MIGR." On August 29, 2000, the closing sale price for our common stock
was $1.0156.
----------
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 4.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
----------
THE DATE OF THIS PROSPECTUS IS __________, 2000.
1
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
MIGRATEC.......................................................3
RISK FACTORS...................................................4
A NOTE ABOUT FORWARD-LOOKING STATEMENTS........................6
USE OF PROCEEDS................................................6
PLAN OF DISTRIBUTION...........................................6
SELLING SECURITYHOLDERS........................................8
PRICE RANGE OF COMMON STOCK...................................11
DIVIDEND POLICY...............................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................12
BUSINESS......................................................22
General....................................................22
Market Overview............................................22
Competition................................................23
Products and Services......................................23
Strategic Partners and Customers...........................24
Sales and Distribution Strategy............................25
Employees..................................................25
Properties.................................................25
MANAGEMENT....................................................26
Directors and Executive Officers...........................26
Significant Employees......................................27
Compensation of Directors..................................27
Executive Compensation.....................................28
Employment Agreements with Executive Officers..............29
Limitation of Liability and Indemnification................29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................32
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL HOLDERS..........................................33
DESCRIPTION OF CAPITAL STOCK..................................35
Common Stock...............................................35
Preferred Stock............................................35
Future Issuances of Preferred Stock........................35
LEGAL PROCEEDINGS.............................................35
WHERE YOU CAN FIND MORE INFORMATION...........................35
EXPERTS.......................................................36
INDEX TO FINANCIAL STATEMENTS.................................37
PART II.....................................................II-1
INFORMATION NOT REQUIRED IN PROSPECTUS......................II-1
Indemnification of Directors and Officers................II-1
Other Expenses of Issuance and Distribution..............II-3
Recent Sales of Unregistered Securities..................II-3
Exhibits.................................................II-5
Undertakings.............................................II-7
SIGNATURES...................................................S-1
</TABLE>
2
<PAGE> 5
MIGRATEC
We are a software solutions developer and provider focusing on
automated migration of software written in the C/C++ language from one
technological environment to another. Our proprietary technology enables
businesses to automate the upgrade or "migration" of their existing software
applications to new and more advanced hardware and software platforms more
efficiently than through the manual migration processes now widely employed.
Ordinarily, software upgrade or migration is a time-consuming and costly manual
process requiring the expertise of multiple programmers working on various
sections of code simultaneously, normally resulting in inconsistencies and
prolonged testing and debugging cycles. By automating the majority of the
migration process, businesses can dramatically reduce the cycle time, minimize
dependence on scarce skilled labor, and significantly reduce the total cost of
migration while increasing the quality of the final product.
As businesses increase their use of and reliance on e-commerce
applications and the Internet in general, the need for migration solutions also
increases. We have developed and are continuing to refine our
"MigrationSUITE(TM)", a suite of software solutions that can be tailored to
automate 32 to 64-bit upgrades, UNIX to UNIX migrations (including Linux, Sun
Solaris and IBM AIX), and Unix to NT and NT to Unix migrations. In addition to
increased consistency in the process, our technology significantly increases, by
as much as 10 to 20 times, the number of lines of code which can be upgraded per
day by a programmer as compared to the typical manual migration process.
We anticipate generating revenue by licensing our products to both
Independent Software Vendors (ISVs) and other businesses. We also plan to
license our technology to systems integrators, who would then act as
distribution partners by using our solutions to aid in the delivery of their
services. When demanded by the market we plan to provide direct delivery of
migration and consulting services.
Our principal executive offices are located at 11494 Luna Road, Suite
100, Dallas, Texas 75234-9421, and our telephone number at that address is (972)
969-0300.
3
<PAGE> 6
RISK FACTORS
Prospective purchasers of our common stock should consider carefully
the factors set forth below, as well as other information contained in this
prospectus, before making a decision to invest in our common stock.
WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES IN RECENT YEARS.
We have incurred substantial operating losses during the first six
months of 2000 and the prior three years. During the first six months of 2000,
we incurred a net loss of $7,200,073 (of which approximately $4,600,000 was a
non-cash charge), and for the years ended December 31, 1999, 1998 and 1997 we
have incurred net losses of $4,184,078, $3,458,075 and $2,517,606, respectively.
There can be no assurance that we will be profitable in the future. Our
continued failure to operate profitably may materially and adversely affect the
value of our common stock.
Our losses to date have been funded by loans and equity sales and we
will likely need additional financing.
WE MAY NEED SUBSTANTIAL ADDITIONAL FINANCING TO DEVELOP AND MARKET OUR PRODUCTS.
We may need substantial additional capital over the next 12 months to
develop our product line and to aggressively market our new products and
services. If we are not able to obtain financing, or obtain financing on terms
that we consider acceptable, our development and marketing plans would be
materially adversely affected.
OUR BUSINESS IS LARGELY DEPENDENT ON THE INTRODUCTION OF THE INTEL(R)
ITANIUM(TM) 64-BIT PROCESSOR INTO THE MARKETPLACE. DELAYED OR UNSUCCESSFUL
INTRODUCTION OF THIS PRODUCT WOULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS.
Currently, a portion of our product line and services are for the
automated migration of software written for a 32-bit processor to a 64-bit
environment. The demand for our 32 to 64-bit migration products and services
largely depends on the introduction of the Intel(R) Itanium(TM) 64-bit processor
into the market, which is scheduled for the first half of 2001. If the Intel(R)
Titanium 64-bit processor is not successfully introduced in the first half of
2001, our results of operations and financial condition would be materially
adversely affected.
OUR BUSINESS IS LARGELY DEPENDENT ON ESTABLISHING AND MAINTAINING STRATEGIC
RELATIONSHIPS WITH MAJOR TECHNOLOGY COMPANIES. THE LOSS OR FAILURE TO DEVELOP
THESE RELATIONSHIPS WOULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
We currently have strategic relationships with Intel, IBM and Dell
Corporation. We depend on these relationships to help us develop products that
are compatible with the products of these companies and to introduce us as a
migration solutions provider to their key customers. If we fail to establish or
maintain developmental and marketing relationships with major technology
partners, our results of operations and financial condition would be materially
adversely affected.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH EXISTING OR FUTURE COMPETITORS.
We currently face competition from manual migration services providers.
We are not aware of other providers of our automated migration technology,
although no assurance can be given that other companies will not develop
technology that is similar or superior to ours.
Our competitors may have greater name recognition and have, or have
access to, substantially greater financial and personnel resources than those
available to us.
4
<PAGE> 7
OUR CURRENT PRODUCTS AND SERVICES MAY BECOME QUICKLY OUTDATED.
The markets for our products and services are characterized by rapidly
changing technology. Accordingly, we believe that our future success depends on
our ability to develop new products and services that can meet market needs on a
timely basis. There can be no assurance that we will be able to do so, or that
we will be able to respond effectively to technological changes introduced by
our strategic partners or future competitors.
If we delay or fail to introduce new products and services, our results
of operations and financial condition would be materially adversely affected.
Even if we develop timely and successful products and services, there can be no
assurance that others will not introduce technology or services that
significantly diminish the value of ours or render them obsolete.
WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL FOR SUCCESSFUL OPERATION OF OUR
BUSINESS.
The operation and development of our business depend greatly on the
efforts of our senior management. The loss of services of these key employees
could adversely affect us. If we are unable to retain a skilled and cohesive
management team, our results of operations and financial condition would be
materially adversely affected.
OUR TECHNOLOGY OR INTELLECTUAL PROPERTY MAY INFRINGE UPON THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
We use patent-pending technology, but we cannot be certain that our
technology and intellectual property does not infringe upon issued patents or
other intellectual property rights of others. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our technology without our
knowledge. We may be subject to legal proceedings and claims from time to time
in the ordinary course of business relating to intellectual property rights.
SUBSTANTIALLY ALL OF OUR OUTSTANDING COMMON STOCK IS FREELY TRADABLE AND MAY BE
SOLD INTO THE MARKET AT ANY TIME, AND ANOTHER 65,421,083 SHARES WILL BE FREELY
TRADABLE UPON THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT, SUBJECT TO THE
TERMS OF EXERCISE OF WARRANTS AND OPTIONS AND THE CONVERSION OF CONVERTIBLE
DEBT. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
The 65,421,083 shares that will be freely tradable upon effectiveness
of this registration statement, subject to the terms of exercise of warrants and
options and the conversion of convertible debt, represent an increase in our
presently outstanding common stock of approximately 54%. The market price of our
common stock could drop significantly if the holders all our freely tradable
shares sell them or are perceived by the market as intending to sell them.
OUR COMMON STOCK HAS EXPERIENCED IN THE PAST, AND IS EXPECTED TO EXPERIENCE IN
THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY
INCREASES THE RISK OF LOSS TO PERSONS OWNING OUR COMMON STOCK.
Because of the limited trading market for our common stock, and because
of the possible price volatility, you may not be able to sell your shares of
common stock when you desire to do so. The inability to sell your shares in a
rapidly declining market may substantially increase your risk of loss because of
such illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility.
WE ARE NOT REQUIRED TO MEET OR MAINTAIN ANY LISTING STANDARDS FOR OUR COMMON
STOCK TO BE TRADED ON THE OTC BULLETIN BOARD.
The OTC Bulletin Board is separate and distinct from The Nasdaq Stock
Market. Although the OTCBB is a regulated quotation service operated by The
Nasdaq Stock Market that displays real-time quotes, last sale prices, and volume
information in over-the-counter equity securities like our common stock, we are
not required to meet or maintain any qualitative or quantitative standards for
our common stock to be traded on the OTCBB. Our common stock does not presently
meet the minimum listing standards for listing on The Nasdaq Stock Market or any
national securities exchange.
5
<PAGE> 8
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical fact, included in
this prospectus are forward-looking statements. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to such differences include,
but are not limited to:
o the uncertainties and/or potential delays associated with market
introduction and acceptance of our products and services;
o our ability to develop and protect our proprietary products and services;
o our ability to obtain substantial additional funding;
o our ability to attract and maintain a skilled and cohesive management group;
o the advent of new technology; and
o unfavorable changes in economic and industry conditions and/or regulatory
requirements.
You should not unduly rely on these forward-looking statements, which
speak only as of the date of this prospectus. Except as required by law, we are
not obligated to release publicly any revisions to these forward-looking
statements to reflect events or circumstances occurring after the date of this
prospectus or to reflect the occurrence of unanticipated events. Important
factors that could cause our actual results to differ materially from our
expectations are discussed under "Risk Factors" and elsewhere in this
prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by
the selling securityholders. We may, however, receive up to approximately
$2,900,000 in the event all the options and warrants held by the selling
securityholders are exercised. We will use the net proceeds we receive from the
exercise of options and warrants for working capital and general
corporate purposes. Pending any such uses, we intend to invest the net proceeds
from option and warrant exercises in short-term, interest-bearing securities or
accounts.
PLAN OF DISTRIBUTION
We are registering the shares of our common stock described in this
prospectus for the selling securityholders named below under the caption
"Selling Securityholders." We are registering the common stock to satisfy our
obligations under agreements with some of the selling securityholders to
register their common stock so that their shares will be freely tradable and to
provide our affiliates with freely tradable shares of our common stock. We are
unaware of any selling securityholders with plans to sell their holdings of the
Company's common stock. Subject to the limitations on the use of this prospectus
described below, the "selling securityholders" also includes persons who receive
shares as a gift from a selling securityholder, commonly known as donees, and
persons who receive shares from a selling securityholder as collateral to secure
a loan, commonly known as pledgees, selling shares received from a named selling
securityholder after the date of this prospectus.
All costs, expenses and fees in connection with the registration of the
shares offered by this prospectus will be borne by us. Brokerage commissions and
similar selling expenses, if any, attributable to the sale of the shares will be
borne by the selling securityholders. Sales of the shares may be made by selling
securityholders from time to time in one or more types of transactions, which
may include block transactions, in the over-the-counter market, in negotiated
transactions, through put or call options transactions relating to the shares,
through short sales of the shares, or a combination of such methods of sale, at
market prices prevailing at the time of sale, or at negotiated prices. Such
transactions may or may not involve brokers or dealers. We are not aware of any
selling securityholders having entered into any agreements, understandings or
arrangements with any underwriters or
6
<PAGE> 9
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of the shares by the selling securityholders.
The selling securityholders may sell their shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling securityholders or the
purchasers of the shares for whom such broker-dealers may act as agents or to
whom they sell as principal, or both. Such compensation as to a particular
broker-dealer might be in excess of customary commissions.
The selling securityholders may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with such selling
securityholder, including in connection with distributions of the common stock
by such broker-dealers. The selling securityholders may enter into option or
other transactions with broker-dealers that involve the delivery of their shares
to the broker-dealers, who may then resell or otherwise transfer such shares.
The selling securityholders may also loan or pledge their shares to a
broker-dealer and the broker-dealer may sell the shares so loaned or, upon a
default, may sell or otherwise transfer the pledged shares.
The selling securityholders and any broker-dealers that act in
connection with the sale of their shares might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by such broker-dealers and any profit on the resale of the shares sold
by them while acting as principals might be deemed to be underwriting discounts
or commissions under the Securities Act. We have agreed to indemnify some of the
selling securityholders for liabilities they incur for selling their shares
using this prospectus, including liabilities arising under the Securities Act.
The selling securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of their shares
against certain liabilities, including liabilities arising under the Securities
Act.
Because selling securityholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the selling
securityholders will be subject to the prospectus delivery requirements of the
Securities Act. The anti-manipulative rules under the Securities Exchange Act,
including Regulation M, may apply to their sales in the market.
Selling securityholders also may resell all or a portion of their
common stock in open market transactions in reliance upon the SEC's Rule 144,
provided they meet the criteria and conform to the requirements of such Rule.
Upon our being notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of such
selling securityholder's shares of common stock through a block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer, we will, if required, file a supplement or an amendment to
this prospectus disclosing the name of each such selling securityholder and of
the participating broker-dealer(s), the number of shares involved, the price at
which such shares were sold, the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, that such broker-dealer(s)
did not conduct any investigation to verify the information set out in this
prospectus, and the other facts material to the transaction. In addition, upon
our being notified by a selling securityholder that a donee or pledgee intends
to sell more than 500 shares, we will file a supplement to this prospectus.
Sales of a substantial number of shares of the common stock in the
public market by the selling securityholders or even the potential of such sales
could adversely affect the market price for our common stock, which could have a
direct impact on the value of the shares being offered by the selling
securityholders.
7
<PAGE> 10
SELLING SECURITYHOLDERS
The following table sets forth the name, number of shares of common
stock and the number of shares underlying the warrants, options and convertible
debt owned by each selling securityholder, based on the number of shares of
common stock, warrants, options and convertible debt held on August 23, 2000.
Because the selling securityholders may sell all, a portion or none of their
shares, no estimate can be made of the aggregate number of shares that may
actually be sold by any selling securityholder or that may be subsequently owned
by any selling securityholder.
The shares offered by this prospectus may be sold from time to time by
the selling securityholders named below.
(COMMON STOCK UNDERLYING)
<TABLE>
<CAPTION>
CONVERTIBLE COMMON TOTAL SHARES
NAME DEBT WARRANTS OPTIONS STOCK REGISTERED
---- ------------ -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Allman, Pierce M .......................... 80,000 400,000 480,000
Atlas, Pearlman, Trop & Borkson P.A ....... 71,429 71,429
Baldwin, Glenn ............................ 8,000 40,000 48,000
Barretti, Philip .......................... 152,858 152,858
Boutcher, Daniel .......................... 33,500 33,500
Brown, Chris .............................. 8,000 40,000 48,000
Brown, Larry .............................. 3,200 16,000 19,200
Brodsky, Fred ............................. 120,000 600,000 720,000
Bruce, Carl and Tracie .................... 2,400 12,000 14,400
Bruce, Richard ............................ 4,000 20,000 24,000
Burke, Douglas ............................ 2,000 10,000 12,000
Cabe, Thomas .............................. 396,800 1,584,000 1,980,800
Campbell, Matthew ......................... 250,000 250,000
Carpenter, James R ........................ 71,429 71,429
Carothers, Joe E .......................... 96,000 96,000
Carter, Michael L ......................... 192,000 192,000
Collins, Daniel Miles
1998 Investment Trust ..................... 40,000 40,000
Craig, James E ............................ 71,429 71,429
David, Leslie W ........................... 249,029 249,029
Dews, Richard G ........................... 600,000 600,000
Dreher Living Trust ....................... 60,000 60,000
EAI Partners, Inc. (1) .................... 4,570,281 1,333,333 5,903,614
Feldman, Richard .......................... 214,287 214,287
Fialkow, Frederick H ...................... 71,429 71,429
Frances S. Landau Trust ................... 214,287 214,287
Franklin, John W .......................... 160,000 800,000 960,000
Friedman, Richard ......................... 285,716 285,716
Gellis, Henry ............................. 181,000 181,000
GHK Corporation ........................... 1,013,500 1,013,500
Gray, George D ............................ 8,000 8,000
Gray, Richard ............................. 20,000 20,000
Grover, Paul .............................. 4,000 20,000 24,000
Haberman, James ........................... 71,429 71,429
Hefner, C.R., Jr .......................... 80,000 200,000 280,000
Helfan, Robin ............................. 35,715 35,715
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
CONVERTIBLE COMMON TOTAL SHARES
NAME DEBT WARRANTS OPTIONS STOCK REGISTERED
---- ------------ -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Helmbrist Investments Ltd. ........ 71,429 71,429
Henning, Han ...................... 142,858 142,858
Innovative Research Associates,
Inc.............................. 35,000 35,000
Irish, Charles F., Jr ............. 120,000 120,000
Jackson, Reta ..................... 5,000 25,000 30,000
Jansson, Anders ................... 71,429 71,429
Johnston, Lance ................... 240,000 6,150 246,150
Karlin, Maurice J ................. 71,429 71,429
Knighton, Maurice H ............... 8,000 40,000 48,000
Lancaster, Robert P ............... 120,000 120,000
Lay, H. Ward ...................... 160,000 800,000 960,000
Lee, Jiin Jen ..................... 71,429 71,429
Light, Larry & Bruce .............. 71,429 71,429
MJ Capital Partners ............... 100,000 140,000 240,000
MT Partners, L.P. (2) ............. 15,800,000 3,160,200 18,960,200
MacPhee, Larry .................... 60,000 60,000
Manchester, Jeffrey C ............. 96,429 96,429
Mannix, J. Stephen ................ 8,000 40,000 48,000
Markowitz, Jeffrey ................ 285,716 285,716
Masonwood Development ............. 160,000 800,000 960,000
Mercury Fund No. 1, Ltd. (3) ...... 14,200,000 2,839,800 17,039,800
Meredith, Joy ..................... 8,000 40,000 48,000
Murfin, Steven J .................. 50,000 50,000
Myers, Mark C ..................... 32,000 173,000 205,000
Noble Investment Company .......... 704,878 704,878
Norris, Darell F .................. 20,000 242,858 262,858
Norris Family Trust ............... 20,000 100,000 120,000
Northway, Frank A ................. 48,000 48,000
Overstreet, John V ................ 96,000 96,000
Phoenix Energy Companies,
Inc. (4) .......................... 720,000 4,400,000 5,120,000
Plimpton, Leslie .................. 2,400 12,000 14,400
Pollock, Thomas L. & Barbara L .... 35,714 35,714
Pyrenees Capital Ltd. ............. 142,858 142,858
Richards, Glenn and Bernita ....... 31,000 155,000 186,000
Rothman, Norman ................... 71,429 71,429
Rothman, Norman & Caryl ........... 71,429 71,429
Rooney, Patrick G ................. 71,429 71,429
Rowan, Marcus A ................... 160,750 1,300,000 1,460,750
Russell Post Properties ........... 71,429 71,429
Schaufele, Louis J ................ 40,000 200,000 240,000
Schrock, Omer ..................... 71,429 71,429
Schubert, Dennis D ................ 35,715 35,715
Schwartz, Armond G., Jr ........... 20,000 100,000 120,000
Singer, Daniel .................... 3,200 16,000 19,200
Sohm, Henry J ..................... 6,000 30,000 36,000
Strehli, Charles L ................ 19,200 96,000 115,200
Sterquell, Patricia M ............. 40,001 40,001
Sterquell, Thomas Calvert
1998 Investment Trust ............. 39,999 39,999
Swirsky, Benjamin ................. 197,500 197,500
TDF Management .................... 71,429 71,429
Van Burkleo Grantor Trust ......... 96,000 96,000
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
CONVERTIBLE COMMON TOTAL SHARES
NAME DEBT WARRANTS OPTIONS STOCK REGISTERED
---- ------------ -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Varel, Mark ................ 12,800 12,800
Vervack, James ............. 50,000 50,000
Wahlin, Lars ............... 142,858 142,858
Watson, Deane C., Jr. (5) .. 25,000 150,000 175,000
Watson Family Trust ........ 100,000 100,000
Whiddon, Lonnie L .......... 160,000 400,000 560,000
Wilson, Benjamin ........... 12,000 12,000
Wilson, Bruce L ............ 48,000 48,000
Zhuang, Fei ................ 71,429 71,429
Zobrist, Keith H ........... 120,000 120,000
---------- --------- --------- ---------- ----------
30,000,000 9,132,608 4,570,281 21,718,194 65,421,083
---------- --------- --------- ---------- ----------
--------------------
(1) The ultimate beneficial owner of these shares is Milton Barbaroush.
(2) MT Partners, L.P. may distribute this convertible debt to its limited partners prior to the
effective date of this registration statement. In the event of such distribution, the limited
partners will be listed in this registration statement individually as selling security holders
instead of the partnership.
(3) The ultimate beneficial owner of these shares is Kevin C. Howe.
(4) The ultimate beneficial owner of these shares is Thomas Cabe.
</TABLE>
10
<PAGE> 13
PRICE RANGE OF COMMON STOCK
The common stock is quoted and traded on a limited and sporadic basis
on the OTC Bulletin Board operated by The Nasdaq Stock Market, Inc. under the
trading symbol "MIGR." The limited and sporadic trading does not constitute, nor
should it be considered, an established public trading market for the common
stock. The following table sets forth the high and low closing bid prices for
our common stock for the periods indicated, as reported by the OTC Bulletin
Board, Nasdaq Trading and Market Services. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
necessarily represent actual transactions. The approximate number of holders of
record of our common stock on August 23, 2000 was 812.
<TABLE>
<CAPTION>
HIGH LOW
-----------------
(in $)
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First Quarter 0.7200 0.3400
Second Quarter 0.6000 0.3125
Third Quarter 0.4000 0.1900
Fourth Quarter 0.2800 0.1600
YEAR ENDED DECEMBER 31, 1999
First Quarter 0.5000 0.1150
Second Quarter 0.4200 0.1450
Third Quarter 0.3900 0.0950
Fourth Quarter 0.3200 0.1700
YEAR ENDING DECEMBER 31, 2000
First Quarter 3.2813 0.2900
Second Quarter 2.6875 0.7188
</TABLE>
DIVIDEND POLICY
We have not declared or paid any cash dividends or distributions on our
common stock during the past two fiscal years or during 2000. For the
foreseeable future, we expect to retain any earnings to finance the operation
and expansion of our business. The declaration of dividends in the future will
be determined by our Board of Directors based upon earnings, financial
condition, capital requirements and other relevant factors.
Pursuant to the shareholders agreement between MigraTEC and certain
shareholders, dated as of January 25, 2000, we may not declare or pay dividends,
or make any distribution with respect to, our capital stock without the approval
of 70% of the members of our Board of Directors.
Our agreement with MJ Capital Partners III, L.P., dated November 16,
1998, restricts our ability to declare or pay any dividends as long as any
obligation under the agreement remains outstanding. We are 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.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes and the other financial
information included elsewhere in this prospectus.
2ND QUARTER ENDED JUNE 30, 2000
RESULTS OF OPERATIONS
Management believes that the net loss for the quarter ended June 30, 2000 was
primarily due to our 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, we entered into a Software License
Agreement with Intel. Under the terms of the agreement, we granted a license to
use our 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 our 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 our 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 we 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, we 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 AIX 5L
development team to adapt our software migration technology to provide an
automated path for migrating 32-bit applications to the 64-bit AIX 5L
environment. Management believes that this is the first step in introducing our
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, our 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 MigraTEC shifting its
strategic focus from selling Y2K products to development of its new technology.
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<PAGE> 15
OPERATING EXPENSES
MigraTEC'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 our operating expenses is related to compensation costs.
MigraTEC's operating expenses were significantly higher in the second quarter of
2000 as compared to the second quarter of 1999 because we 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. 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. 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. These changes all resulted from our
change in focus from selling and servicing our Y2K product to developing our
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, we 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, we 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 we did not have any
deferred compensation expense from previous grants.
INTEREST AND FINANCING EXPENSE
Our 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, we
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 our 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 MigraTEC 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, MigraTEC 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.
13
<PAGE> 16
PROVISION FOR INCOME TAXES
As a result of operating losses for 2000 and 1999, we have not had a federal
income tax obligation. No tax benefit has been recorded due to the uncertainty
that MigraTEC 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, we 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, our revenues decreased by approximately
99% to $6,000, as compared to $470,225 for the first six months of 1999.
OPERATING EXPENSES
Our 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 our operating expenses is related to compensation costs.
MigraTEC's operating expenses were significantly higher in the first six months
of 2000 as compared to the first six months of 1999 because we 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. 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. 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. These changes all resulted from
our change in focus from selling and servicing our Y2K product to developing our
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, we 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,
MigraTEC 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 we did not have any deferred compensation expense from previous
grants.
14
<PAGE> 17
INTEREST AND FINANCING EXPENSE
Our 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, we 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 our 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 MigraTEC 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, MigraTEC 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, we have not had a federal
income tax obligation. No tax benefit has been recorded due to the uncertainty
that MigraTEC 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, we 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, we 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, we had cash of $2,262,345 and outstanding accounts receivable
of $100,000.
At June 30, 2000, MigraTEC'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, we received net proceeds of $4,964,625 from
financing activities. MigraTEC 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.
We had substantial operating losses during the first six months of 2000 and the
prior three years. MigraTEC began active operations in January 1991, and
while we have experienced certain periods of profitability since inception, we
have sustained substantial losses in recent years. For the first six months of
2000, MigraTEC incurred a net loss of $7,200,073, and for the years ended
December 31, 1999, 1998, and 1997, we incurred net losses of $4,184,078,
$3,458,075 and $2,517,606, respectively. At June 30, 2000 and December 31, 1999,
MigraTEC had accumulated deficits of $18,838,260 and $11,638,187,
respectively.
15
<PAGE> 18
In January 2000 we entered into a private placement agreement that has provided
us 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. We plan 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 our technology
partners;
o further development of our proprietary software products and services;
o expansion of our marketing program and market acceptance of our
products and services;
o capacity to further identify MigraTEC as a migrations solutions
provider;
o our ability to control increases in expenses associated with sales
growth and other costs;
o the availability of substantial additional funding; and
o our ability to attract and maintain a skilled and cohesive management
group.
16
<PAGE> 19
YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
Management believes that the net loss for the year ended December 31,
1999 was primarily due to our focus on development activities which were not
revenue producing but which nevertheless allowed MigraTEC to complete principal
development of our upgraded 32 to 64-bit migration technology as well as
enhancement of other automated migration tools. Management believes that this
development activity has positioned MigraTEC for the introduction of our
technology into the market during the later part of 2000.
17
<PAGE> 20
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
During 1999, our revenues decreased by approximately 38% to $905,179,
compared to $1,454,150 for 1998. This decrease is attributable to our shift in
strategic focus from selling Y2K products to development of our new technology.
OPERATING EXPENSES
MigraTEC's total operating expenses decreased by approximately 12% to
$4,178,175 during 1999, compared to $4,741,330 for 1998. Salaries and benefits
decreased by approximately 15% to $2,030,324 during 1999, compared to $2,395,000
for 1998 as a result of workforce reduction associated with the shift in our
business focus. Contract labor costs decreased approximately 43% to $685,974
during 1999, compared to $1,201,502 for 1998 as a result of the workforce
reduction previously described. General and administrative expenses decreased
approximately 38% to $648,032 during 1999, compared to $1,038,247 for 1998,
primarily due to a reduction in legal and professional fees of approximately 74%
to $107,682 during 1999, compared to $409,206 for 1998. During 1998, we incurred
significant legal fees and costs associated with a settlement with its former
CEO.
Decreases in expenses in 1999 were partially offset by an expense of
$706,500 incurred in 1999 from a settlement with EAI Partners, Inc. ("EAI"). In
August, 1999, MigraTEC entered into a new stock option agreement which entitles
EAI to purchase our common stock. The new agreement was in settlement and
replacement of a prior stock option agreement entered into by MigraTEC and
EAI during November, 1996.
In 1999, we charged off two accounts receivable, totaling $43,303, the
majority of which related to a Y2K contract for a foreign entity. Additionally,
MigraTEC's majority owned foreign subsidiary, One Up Computer Services, Ltd.
("One Up, Ltd.") ceased operations in 1997, and a $36,808 reserve for the assets
of One Up, Ltd. was provided for in 1999.
Selling and marketing expenses decreased approximately 74% to $27,234
during 1999, compared to $104,856 for 1998. This decrease is a result of our
change in focus from selling and servicing our Y2K product to developing our
migration technology.
INTEREST AND FINANCING EXPENSE
Our interest and financing expense increased by approximately 11% to
$415,292 during 1999, compared to $374,317 for 1998. The two components of this
expense are interest expense and financing fees. Interest expense remained
relatively constant between 1999 and 1998 ($228,299 and $234,534, respectively),
but financing fees increased approximately 34% to $186,993 during 1999, compared
to $139,783 for 1998. This increase in financing fees is due to MigraTEC
issuing significantly more warrants and decreasing the exercise price of those
warrants to obtain short-term financing for its operations.
OTHER INCOME AND EXPENSE
Other income and expense in 1999 was a net income of $279, as compared
to a net expense of $79,577 in 1998. We incurred a loss in 1998 of $93,486 from
the disposal and abandonment of certain furniture and equipment.
18
<PAGE> 21
PROVISION FOR INCOME TAXES
As a result of operating losses for 1999 and 1998, we have not had a
federal income tax obligation. During the year ended December 31, 1999, MigraTEC
incurred a net operating loss for federal tax purposes of approximately
$4,043,000. No tax benefit has been recorded due to the uncertainty that we will
generate sufficient taxable income during the carry forward period to realize
the benefit of the net deferred tax asset. The net operating loss carryover for
the year ended December 31, 1999, will expire in 2014. We have aggregate net
operating loss carry-forwards for federal tax purposes totaling approximately
$10,968,000, which will expire between 2010 and 2014.
EXTRAORDINARY ITEMS
In 1999, we incurred a loss of $496,069 related to the restructure of
our senior secured promissory notes. These notes were in default at maturity in
1999. We successfully restructured this debt with conversions of this debt into
our common stock at $0.125 per share. Additionally, the exercise price for
warrants associated with this debt was reduced from $0.35 per share to $0.20 per
share, and the expiration date was extended one year to July 2001.
We recognized a gain of $282,999 in 1998 related to the forgiveness of
debt. This gain relates to reduction in amounts due to various vendors through
renegotiations of terms.
NET LOSS
For the year ended December 31, 1999, we incurred a net loss of
$4,184,078 or $0.079 per share, as compared with a net loss of $3,458,075 or
$0.086 per share for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $2,339,753 for 1999, which
resulted from the operating loss, decreased by net changes in assets and
liabilities and non-cash expenses and income of $1,844,325. This compares
to net cash used by operating activities of $3,611,131 for 1998, which resulted
from the operating loss increased by net changes in assets and liabilities and
non-cash expenses and income of $153,056.
At December 31, 1999, we had a net working capital deficit of
$1,394,471, compared to a net working capital deficit of $1,491,000 at December
31, 1998.
At December 31, 1999, we had cash of $1,417 and $160,700 in outstanding
accounts receivable.
At December 31, 1999, our outstanding debt obligations included (i)
$273,341 in short-term loans (net of $19,159 unamortized discount) (ii) $56,165
in other notes payable relating to settlements with a vendor and a former
employee, (iii) $532,545 in advances from outside investors, (iv) $61,503 due to
consultant for services and (v) $58,362 (net of $1,638 unamortized discount) in
advances from a director and officer.
During 1999, we received proceeds of $2,423,435 from financing
activities. We received (i) $1,738,197 in connection with the issuance of common
stock, and (ii) $923,206 in proceeds from short-term loans from various
investors, directors and an officer. The cash proceeds were offset by $237,968
expended for the repayment of principal of short-term loans from various
investors, directors, an officer and obligations under a capital lease.
19
<PAGE> 22
MigraTEC had substantial operating losses during 1999 and the prior
three years. We began active operations in January, 1991, and while we have
experienced certain periods of profitability since inception, we have sustained
substantial losses in recent years. For the years ended December 31, 1999, 1998
and 1997, we incurred net losses of $4,184,078, $3,458,075 and $2,517,606,
respectively. At December 31, 1999, we had an accumulated deficit of
$11,638,187.
20
<PAGE> 23
Obligations Under Employment Agreements
We have employment agreements with our management requiring MigraTEC to
pay specified amounts as annual base salaries and certain bonuses. Current
aggregate minimum annual cash compensation under the agreements is $338,000,
which will be funded from working capital. Additional bonuses are at the sole
discretion of MigraTEC's Board of Directors. See "Management--Executive
Compensation" and "--Employment Agreements with Executive Officers."
21
<PAGE> 24
BUSINESS
GENERAL
We are a software solutions developer and provider focusing on
automated migration of software written in the C/C++ language from one
technological environment to another. Our proprietary technology enables
businesses to automate the upgrade or "migration" of their existing software
applications to new and more advanced hardware and software platforms more
efficiently than through the manual migration processes now widely employed.
Ordinarily, software upgrade or migration is a time-consuming and costly manual
process requiring the expertise of multiple programmers working on various
sections of code simultaneously, normally resulting in inconsistencies and
prolonged testing and debugging cycles. By automating the majority of the
migration process, businesses can dramatically reduce the cycle time, minimize
dependence on scarce skilled labor, and significantly reduce the total cost of
migration while increasing the quality of the final product.
As businesses increase their use of and reliance on e-commerce
applications and the Internet in general, the need for migration solutions also
increases. We have developed and are continuing to refine our
"MigrationSUITE(TM)", a suite of software solutions that can be tailored to
automate 32 to 64-bit upgrades, UNIX to UNIX migrations (including Linux, Sun
Solaris and IBM AIX), and Unix to NT and NT to Unix migrations. In addition to
increased consistency in the process, our technology significantly increases, by
as much as 10 to 20 times, the number of lines of code which can be upgraded per
day by a programmer as compared to the typical manual migration process.
We anticipate generating revenue by licensing our products to both
Independent Software Vendors (ISVs) and other businesses. We also plan to
license our technology to systems integrators, who would then act as
distribution partners by using our solutions to aid in the delivery of their
services. When demanded by the market we plan to provide direct delivery of
migration and consulting services.
Our principal executive offices are located at 11494 Luna Road, Suite
100, Dallas, Texas 75234-9421, and our telephone number at that address is (972)
969-0300.
MARKET OVERVIEW
As the pace of technological change quickens, we believe that major
corporations and software companies will increasingly be focused on maximizing
e-commerce opportunities and the power of the Internet. We believe that
capitalizing on these opportunities in a cost-effective and efficient way will
require the more powerful and more capable technological infrastructure provided
by server consolidation and the new 64-bit operating systems and associated
hardware being introduced by companies such as Intel Corporation, IBM
Corporation, Cisco, Dell Corporation, EMC and Nortel.
In order to upgrade to new technologies, companies must either
completely replace their prior software or modify the programs to run
efficiently in the new environment, a time-consuming process known as "software
migration." A significant benefit of migration, however, is that a business can
use its past investment by continuing to depend on software that contains the
business rules it has refined and perfected over time. Ordinarily, software
migration is a time-consuming and costly manual process requiring the expertise
of multiple programmers working on various sections of code simultaneously,
normally resulting in inconsistencies and prolonged testing and debugging
cycles. By automating the majority of the migration process, businesses can
dramatically reduce the cycle time, minimize dependence on scarce skilled labor,
and significantly reduce the total cost of migration while increasing the
quality of the final product.
We believe that the growing need to migrate software, when combined
with the inherent disadvantages of manual migration, presents a tremendous
market opportunity. Estimates of the number of lines of code in North America
that could possibly need to be migrated reaches the trillions. C and C++ based
code, the focus of our expertise and efforts to date, is believed to comprise
20-30% of the entire business application code base.
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<PAGE> 25
COMPETITION
Based upon feedback from the technology and services companies with
which we have been working to establish distribution relationships, we are
currently unaware of any direct competitors with an automated software migration
solution. Therefore, our current competition is traditional manual migration
performed, either by the internal staff of a business or a professional service
provider. However, we view the providers of traditional migration services as
potential customers whose performance will be improved with the licensing of our
technology.
PRODUCTS AND SERVICES
Overview
MigraTEC's "core" proprietary technology, our "Migration
Workbench(TM)", is designed to automate a significant amount of the upgrade or
migration process utilizing a specialized technique which analyzes the
structural relationships contained within computer program code. Our technology
then identifies all elements requiring change, automatically changes certain
elements and presents the user with a decision tree support mechanism for
facilitating the migration of the remaining items. Our current primary product
line is the "MigrationSUITE(TM)", a suite of software solutions that automates
the migration of software from one technological environment to another, such as
Win32 to Win64, UNIX to UNIX and Windows to Linux.
We believe that our core technology can serve as the foundation for
additional software products. We are designing our products so they can be 1)
used by MigraTEC to provide a variety of services directly and 2) licensed to
end users, other service providers and/or systems integrators for the delivery
of technology solutions to their customers. We intend to further develop our
technology for advanced migration solutions designed to facilitate the
transition between numerous computer languages and operating platforms.
In June 1998, we filed a patent application covering processes relating
to our core software technology. We are currently evaluating the advisability of
filing additional patent applications.
Benefits Of Automated Migration
We believe that our automated migration solutions produce the following
key benefits for businesses:
o Significantly reduces the cost of migrating software while
dramatically enhancing the quality of the end product.
o Maximizes current technology investment by allowing a business
to retain the functionality of current software applications
as they are upgraded or migrated to a new operating system.
o Minimizes or eliminates retraining expense. Much of the
productivity that comes from new technology can be exploited
without the corresponding need to retrain every user of that
technology. Migration of the user interface allows the
application to keep the current "look and feel" on the new
platform, thereby eliminating otherwise significant retraining
expense.
o Focuses information systems staff on application enhancements.
Skilled information systems staff is a precious commodity and
should be assigned to projects with the highest return on
investment to the business. By using our automated technology,
such staff will not be burdened with the time-consuming
process of manual migration.
o Significantly reduces the time required for development of new
software versions that can provide businesses with significant
competitive advantage.
o Extends life of software applications. Due to the frequent and
dramatic changes in computing technology, vendors may abandon
a platform. MigraTEC's technology allows software vendors to
offer customers the tactical alternative of simply migrating
their current applications to a new platform.
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<PAGE> 26
Description of Products
Our products assist in the migration and porting of software written in
the C/C++ language from one technological environment to another (for example,
Win32 to Win64, Unix to Unix, Windows to Unix/Linux and vice versa). The
underlying breakthrough technology that makes this possible is MigraTEC's
proprietary source code analysis and migration engine called Migration
Workbench(TM). Our products are packaged into software suites built on the
Migration Workbench technology and facilitate solutions to migration problems
related to specific platform problem domains. The "Direct(TM)" series of
products assists customers in migrating applications from one platform/operating
environment to another. Our "64Express(TM)" product series helps customers
deliver their applications on the new 64-bit operating systems, including
Windows 2000/64, Linux IA64 and AIX 5L.
Our current product line consists of the following:
MigrationSUITE(TM) to Windows includes:
o Visual Direct(TM) assists in the migration of UNIX
applications to Microsoft Windows Visual Studio.
o 64Express(TM) to Windows enables rapid migration of existing
32-bit Windows applications to 64-bit Windows on Intel's IA-64
architecture.
MigrationSUITE(TM) to Linux includes:
o 64Express(TM) to Linux enables rapid migration of existing
32-bit Linux e-commerce applications to 64-bit Linux on
Intel's IA-64 architecture.
MigrationSUITE(TM) to AIX includes:
o VA Direct(TM) addresses the first step in migrating AIX
applications to the new AIX 5L for IA-64, which is upgrading
applications to the most current version of IBM's Visual Age
compiler.
o 64Express(TM) to AIX 5L enables rapid migration of existing
32-bit AIX applications to 64-bit AIX on Intel's IA-64
architecture.
Future product development efforts will leverage the underlying Workbench
technology by continuing to broaden the migration product line as well as
developing solutions to additional business problems in the applications and
operations segments of the information technology world.
STRATEGIC PARTNERS AND CUSTOMERS
In addition to major hardware providers, we believe the thousands of
ISVs who write and distribute 32-bit versions of their software products will
need to upgrade their products for optimal performance on the new 64-bit
operating systems in order to remain competitive in the marketplace.
In April 2000, we granted Intel a license for its internal use of our
migration software products. This license allows Intel to use our technology at
its Application Support Centers to educate ISVs on the application of our
technology. This agreement also provides for Intel and MigraTEC to develop and
implement a joint marketing plan to introduce and disseminate our products and
services, which we anticipate will include website links, training, press
releases, industry events and testimonials.
In May 2000 we entered into a consulting agreement with Dell
Corporation to provide migration technology and process consultation services to
at least ten Dell Precision Workstation ISVs and customers. These ISVs and
customers will each use our technology to upgrade an initial software
application to the Intel(R) Itanium(TM) 64-bit platform. The initial
applications to be upgraded represent only a small fraction of the total amount
of code requiring migration. In addition to generating revenue, we believe that
this agreement will lead to additional migration projects with these ISVs and
Dell customers.
IBM has included us in its AIX 5L Beta Program, which allows us to
further develop our products to complement IBM's new AIX 5L Operating System
for the 64-bit processor. We believe that participation in this program will
assist in introducing our technology to IBM's key ISVs and the UNIX marketplace.
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<PAGE> 27
We have ongoing discussions with systems integrators regarding the
potential licensing of our technology for providing migration services to their
customers. Initial interest has focused on 32 to 64-bit upgrades in both the
Windows and Unix environments, as well as opportunities presented by ongoing
server consolidation efforts. These organizations are currently developing
business cases that will establish the need for and timing of such initiatives.
SALES AND DISTRIBUTION STRATEGY
Our primary sales and distribution strategy is to license our software
tools 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. We anticipate these licenses to be structured primarily on
a per line of code basis. We also plan to deliver certain migration services
directly to end users.
In order to leverage existing customer bases and sales and marketing
infrastructures, our sales model focuses on developing relationships with large
organizations that provide application development, maintenance, conversion and
upgrade services. Currently, MigraTEC's primary strategy is to partner with
technology companies introducing 64-bit operating systems and hardware and to
focus on offering migration of software to run on these systems. Our management
believes that our partnering strategy will provide:
o partners that can direct development efforts towards emerging markets
and growing customer bases;
o partners with extensive sales and marketing resources and a vested
interest in placing the end product into the market; and
o funding necessary to expand key development efforts.
EMPLOYEES
As of August 23, 2000, we employed approximately 39 full-time personnel
and engaged approximately 2 contract programming consultants for particular
projects. None of these employees are covered by collective bargaining
agreements and management believes its employee relations are good.
PROPERTIES
We do not own any real property. Our headquarters are located in
Farmers Branch, a suburb of Dallas, Texas. The lease on MigraTEC's office space
expires July 31, 2003 and the current full-service annual occupancy cost,
including rent, is approximately $165,954.
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<PAGE> 28
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of MigraTEC.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kevin C. Howe 51 Chairman of the Board
W. Curtis Overtstreet 54 Director, Chief Executive Officer and President
T. Ulrich Brechbuhl 36 Chief Financial Officer and Secretary
Rick J. Johnson 41 Chief Operating Officer
Richard A. Gray, Jr. 52 Director
Drew R. Johnson 31 Director
Deane C. Watson, Jr. 53 Director
</TABLE>
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualify.
Kevin C. Howe has been a director and Chairman of the Board since
January 2000. Since May 1991, Mr. Howe has been President of Sage U.S., Inc., a
business software publisher. Since March 1999, Mr. Howe has also been the
general partner and manager of Mercury Ventures, Ltd., a venture capital firm in
Dallas, Texas. Mr. Howe is also on the board of directors of the following
companies: The Sage Group plc, a publicly traded accounting software publisher
in the United Kingdom; Club Technology Corporation, a publisher of application
software for country clubs based in Irving, Texas; Atomic Software, a payment
processing portal in Alpharetta, Georgia; NetCertification, a web training
portal in Dallas, Texas; Freshloc Technologies, a wireless sensoring company
in Plano, Texas; Unified Office, a provider of call control solutions to the
telecommunications industry, based in Houston, Texas; and River Logic, which
creates Internet-based economic networks, based in Beverly, Massachusetts.
W. Curtis Overstreet has been President, Chief Executive Officer and a
director of MigraTEC since April 1997. From October 1994 to March 1997, Mr.
Overstreet was Regional Vice President for Software AG, Americas, based in
Dallas, Texas.
T. Ulrich Brechbuhl has served as Chief Financial Officer of MigraTEC
since March 1, 2000. From 1997 until joining MigraTEC, Mr. Brechbuhl was Chief
Financial Officer and a founding partner of Thayer Aerospace, L.L.C., a Wichita,
Kansas-based manufacturer of precision machined parts for the aerospace
industry. He continues to serve as a director for Thayer. Prior to joining
Thayer, Mr. Brechbuhl worked as a consultant and manager with Bain & Company,
Inc. in Dallas, Texas, for three years, where he focused on high technology and
aerospace industries.
Rick J. Johnson has been serving as the Chief Operating Officer of
MigraTEC since July 1997, and was also our Secretary from July 1997 through
March 1998. From 1995 to March 1997, Mr. Johnson was with Software AG, Americas,
based in Dallas, Texas, where he served as Director of Operations Support -
Integrated Business Solutions, Director of Applications Solutions and Business
Manager - West U.S. Area. From 1982 to January 1995, Mr. Johnson served in
various consulting and management capacities with Andersen Consulting and its
predecessor division at Arthur Andersen & Co., based in Dallas, Texas.
Richard A. Gray, Jr. has been a director since April 1998. Since 1985,
he has been President and owner of Gray & Company Realtors, Inc., a commercial
real estate brokerage and developer in U.S. and Asian markets based
26
<PAGE> 29
in Dallas, Texas. From 1974 to 1986, Mr. Gray was a partner of Hudson & Hudson,
a commercial real estate company in Dallas, Texas.
Drew R. Johnson has been a director since January 2000. He has been a
principal of Cardinal Investment Company, a venture capital firm in Dallas,
Texas, since 1997. Prior to joining Cardinal, Mr. Johnson was employed with the
consulting firm of McKinsey & Company. Mr. Johnson is also a director of Thayer
Aerospace, L.L.C., a manufacturer of precision machined parts for the aerospace
industry in Wichita, Kansas; Exline Pan Pacific, a retail and rental home
furnishings business in Asia, headquartered in Dallas, Texas and Express Foods
Group, a restaurant holding company headquartered in Houston, Texas.
Deane C. Watson, Jr. has been a director since March 1998. Since 1996,
he has been President of Chelsea Homes, Inc., a residential home builder in
Texas, and Manager of Hills of Seven Falls, L.L.C., a land developer in Texas.
Since 1992, Mr. Watson has been President and Managing Director of Omega Energy
Corporation, an oil and gas production company. Mr. Watson is also a practicing
attorney, focusing on oil and gas and real estate law.
SIGNIFICANT EMPLOYEES
Joseph B. Meredith has been Vice President of Business Development
since 1997. Prior to joining MigraTEC, Mr. Meredith was an account executive for
Software AG, Americas, based in Dallas, Texas from 1995 to 1997. From 1993 to
1994, he served as Director of Business Development for BSG Corporation, based
in Houston, Texas. From 1986 to August 1993, Mr. Meredith was Senior Account
Executive for EDS Corporation located in Dallas, Texas.
Sheldon Travis, Vice President of Research, has been with the company
since 1995. He has also held senior engineering positions (for both software and
hardware) with a variety of companies including Xerox, Adobe and Sprint, and has
degrees in both Electrical Engineering and Computer Sciences.
Simon Mak joined MigraTEC as Vice President of Marketing in July 2000.
Mr. Mak has provided consulting to various internet start-ups, and prior to that
worked in sales for Mercury Interactive Corporation, where he assisting in
establishing the company's Dallas regional office. Mr. Mak has also worked in
sales and engineering for Digital Equipment Corporation and Raytheon.
COMPENSATION OF DIRECTORS
During the year ended December 31, 1999, no compensation was paid to
directors for serving on our Board. During the first six months of 2000, an
aggregate of $37,500 was earned by directors for serving on our Board.
During 2000, directors who are not officers or employees of MigraTEC
will receive $10,000 annually, or $2,500 per fiscal quarter, while serving on
our Board. Mr. Howe will receive $60,000 annually, or $15,000 per fiscal
quarter, while serving as Chairman of the Board. Directors will also be
reimbursed for out-of-pocket expenses incurred in attending Board and Committee
meetings.
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<PAGE> 30
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
by MigraTEC for the three years ended December 31, 1999 on behalf of each of the
executive officers of MigraTEC.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL LONG TERM ALL OTHER
PRINCIPAL POSITION ANNUAL COMPENSATION COMPENSATION COMPENSATION COMPENSATION
------------------ ------------------- ------------ ------------ ------------
Year Salary Bonus Options (#)
---- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
W. Curtis Overstreet 1999 $ 140,000 -0- -0- -0- -0-
President and Chief 1998 132,917 -0- $ 27,404(1) 6,000,000(2) -0-
Executive Officer 1997 68,192 $ 48,000 3,483(1) -0- $ 29,500(3)
Mark C. Myers 1999 111,700 -0- -0- -0- -0-
Chief Financial 1998 87,500 -0- -0- 900,000(2) 949(5)
Officer and
Secretary(4)
Rick J. Johnson 1999 117,000 -0- -0- -0- -0-
Chief Operating Officer 1998 121,833 -0- -0- 1,500,000(2) -0-
1997 62,500 15,000 -0- -0- -0-
----------
(1) Commissions paid to Mr. Overstreet based on revenue.
(2) These options were granted in 1998 and voluntarily reduced by each holder by 50% in September 1999.
As a result of such reduction, Mr. Overstreet, Mr. Myers and Mr. Rick Johnson had options to purchase
3,000,000 shares, 450,000 shares and 750,000 shares of our common stock, respectively, as of
December 31, 1999.
(3) Consulting fees paid to Mr. Overstreet prior to his becoming an executive officer of MigraTEC
in April 1997.
(4) Mr. Myers became Chief Financial Officer of MigraTEC in April 1998. He resigned from his positions as
Chief Financial Officer and Secretary of MigraTEC effective as of January 31, 2000, and Mr. Brechbuhl
assumed these positions in March 2000.
(5) Mr. Myers was issued a warrant to purchase 3,500 shares of our common stock at $.01 per share as
compensation for certain consulting services.
</TABLE>
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<PAGE> 31
No options to purchase MigraTEC common stock were issued to our
executive officers during the year ended December 31, 1999. The following table
sets forth information with respect to stock options held by our executive
officers as of December 31, 1999. The closing bid price for our common stock on
December 31, 1999 was $0.2812.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING UNEXERCISED IN- THE-MONEY OPTIONS AT
NAME AND ACQUIRED REALIZED OPTIONS AT FY-END FY-END
PRINCIPAL POSITION ON EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------ ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
W. Curtis Overstreet -0- -0- 3,000,000(1)/-0- $243,600/-0-
President and Chief
Executive Officer
Mark C. Myers -0- -0- 450,000(1)/-0- $36,540/-0-
Chief Financial
Officer and Secretary
Rick J. Johnson -0- -0- 750,000(1)/-0- $60,900/-0-
Chief Operating
Officer
----------
(1) These options were granted in 1998 and voluntarily reduced by each holder by 50% in September 1999.
Mr. Overstreet, Mr. Myers and Mr. Rick Johnson originally had options to purchase 6,000,000
shares, 900,000 shares and 1,500,000 shares of our common stock, respectively.
</TABLE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
We entered into an employment agreement with Mr. Curtis Overstreet, our
President and Chief Executive Officer, dated April 10, 1997, which provides for
an annual base salary (currently $140,000) and incentives for salary increases
and bonuses to be determined by and subject to the discretion of our Board.
We entered into an employment agreement with Mr. Rick Johnson, our
Chief Operating Officer, dated July 1, 1997, which provides for an annual base
salary (currently $130,000) and incentives for salary increases and bonuses to
be determined by and subject to the discretion of our Board.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 145 of the Delaware General Corporation Law
Section 145(a) provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
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<PAGE> 32
corporation, partnership, joint venture, trust or other enterprise against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 145(c) provides that to the extent that a present or former
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with such defense.
Section 145(d) provides that any indemnification under subsections (a)
and (b) of Section 145, unless ordered by a court, shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of Section 145. Such determination
shall be made, with respect to a person who is a director or officer at the time
of such determination:
o by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or
o by a committee of such directors designated by majority vote of such
directors, even though less than a quorum, or
o if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or
o by the stockholders.
Section 145(e) provides that expenses, including attorneys' fees,
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or for such director or officer to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses, including attorneys' fees, incurred by former directors and officers
or other employees and agents may be so paid upon such terms and conditions, if
any, as the corporation deems appropriate.
Certificate of Incorporation
The certificate of incorporation of MigraTEC provides that a director
of MigraTEC shall not be liable to MigraTEC or its stockholders for monetary
damages for breach of fiduciary duty as a director, unless the breach involves
o a breach of the director's duty of loyalty to MigraTEC or its stockholders,
o acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law,
o liability for unlawful dividend payments or stock purchases or redemptions,
or
o a transaction from which the director derived an improper personal benefit.
Our certificate of incorporation provides that MigraTEC shall indemnify
all persons whom it may indemnify to the fullest extent permitted by law.
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<PAGE> 33
Bylaws
The bylaws of MigraTEC generally make mandatory the provisions of
Section 145 of the Delaware General Corporation Law discussed above, including
the advancement of expenses reasonably incurred in defending a claim prior to
its final resolution, and provide that MigraTEC's directors and officers will at
all times be indemnified to the maximum extent permitted by law.
Indemnification Agreements
MigraTEC has entered into indemnification agreements with certain of
its directors and executive officers. These agreements provide the directors and
executive officers of MigraTEC with indemnification to the maximum extent
permitted by law. These agreements also include provisions requiring advancement
of expenses, establishing procedures and standards for resolving claims, and
providing for indemnification following a change of control of MigraTEC.
D&O Insurance
MigraTEC has a directors' and officers' liability insurance policy to
insure its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of MigraTEC,
including liabilities arising under the Securities Act.
SEC Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of MigraTEC
pursuant to the foregoing provisions, or otherwise, MigraTEC has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE> 34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January and February 1998, Mr. Deane Watson and Mr. Rick Gray loaned
us $104,000 and $100,000, respectively, pursuant to convertible notes with
interest rates of 10% and 12%. Mr. Watson and Mr. Gray converted these notes
into shares of our common stock at $0.20 per share in March 1998. Accrued
interest on the notes was paid in April 1998. In connection with this
transaction, Mr. Watson and Mr. Gray also received warrants to purchase 100,000
and 50,000 shares of our common stock, respectively, at prices of $0.01 to $0.20
per share. Mr. Gray exercised these warrants in March 1999 and Mr. Watson
exercised these warrants in January 2000.
In the first quarter of 1998, prior to his becoming our Chief Financial
Officer in April 1998, Mr. Myers received 195,227 shares of our common stock as
compensation for legal services provided to MigraTEC.
In July 1998, Mr. Watson was issued a warrant to purchase 25,000 shares
of our common stock at $0.20 per share as compensation for placement agent and
consulting services related to our private offerings. Mr. Watson also received
cash compensation of $1,350 and $248,162 in 1999 and 1998, respectively, and
195,227 shares of our common stock in 1998, for legal services provided to
MigraTEC.
During 1999, Deane Watson loaned us $25,000 at an interest rate of 10%
and received a warrant to purchase 50,000 shares of our common stock at $0.01
per share. Mr. Watson exercised these warrants in February 1999 and the loan was
repaid in February 2000.
In August 1999, Rick Gray loaned us $100,000 at an interest rate of
10%. Mr. Gray received a warrant to purchase 20,000 shares of our common stock
at $0.01 per share for consulting services in connection with this loan, which
he exercised in 1999. We repaid the loan in September 1999.
During 1999, Mark Myers received a warrant to purchase 3,500 shares of
our common stock at $.01 per share as compensation for consulting services. He
exercised this warrant in January 2000. Mr. Myers also loaned $30,000 to us in
January 1999 at an interest rate of 16%. The loan was repaid in February 1999.
In connection with the loan, Mr. Myers received a warrant to purchase 3,000
shares of our common stock at $0.01 per share, which he exercised in 1999.
In August 1999, we entered into an agreement with EAI Partners, Inc.
("EAI") in settlement and replacement of a prior stock option agreement entered
into by EAI and the former Chief Executive Officer of MigraTEC in 1996. Pursuant
to the August 1999 agreement, EAI was issued an option to purchase an aggregate
of 5,903,614 shares of our common stock, exercisable as follows: EAI may acquire
1,903,614 shares at $0.075 per share and the remaining 4,000,000 shares at the
greater of $0.20 or 50% of the average closing bid prices per share of our
common stock for the five trading days immediately prior to exercise. As of
December 31, 1999, EAI had acquired 1,333,333 shares through the exercise of
this option.
Mr. Kevin Howe, Chairman, and Mr. Drew Johnson joined the Board in
January 2000 as representatives of Mercury Fund No. 1, Ltd. ("Mercury") and MT
Partners, L.P. ("MT Partners"), respectively, in connection with the initial
tranche of funding a three-stage $3,750,000 investment in MigraTEC, completed
May 1, 2000.
As a result of this investment, Mercury and MT Partners each holds
convertible promissory notes and warrants convertible into an aggregate of up to
17,039,800 and 18,960,200 shares of our common stock, respectively, which
represents approximately 21.1% and 23.5%, respectively, of the total number of
shares of our common stock outstanding as of August 23, 2000. See "Security
Ownership of Certain Beneficial Owners and Management." The notes are
convertible at any time, at the election of Mercury and MT Partners, on the
basis of one share of common stock for each $0.125 in principal amount of the
notes outstanding at the time of conversion. The notes do not accrue interest.
The warrants are exercisable at $0.20 per share and expire in increments of
2,000,000 shares on January 25, 2005, March 31, 2005 and April 30, 2005.
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<PAGE> 35
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS
AND PRINCIPAL HOLDERS
The table following sets forth information regarding the beneficial
ownership of common stock for each person who is known by us to be the
beneficial owner of more than five percent of MigraTEC's voting securities, for
each director and named executive officer of MigraTEC, and all directors and
executive officers of MigraTEC as a group. Unless otherwise indicated in the
footnotes, each person named below has sole voting and investment power over the
shares indicated.
All information is as of August 23, 2000. As of such date, 80,833,278
shares of common stock were outstanding. For purposes of this table, a person is
deemed to be the "beneficial owner" of the number of shares of common stock that
such person has the right to acquire within 60 days of the date of this
prospectus through the exercise of any option, warrant or right, through the
conversion of any security, through the power to revoke a trust, discretionary
account, or similar arrangement, or through the automatic termination of a
trust, discretionary account or similar arrangement.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS (1) BENEFICIALLY OWNED CLASS
-------------------- ------------------ ----------
<S> <C> <C>
W. Curtis Overstreet 2,375,000(2) 3%
Mark C. Myers (3) 688,927(4) *
T. Ulrich Brechbuhl 2,500 *
Rick J. Johnson 600,000(5) *
Richard A. Gray, Jr 2,400,000(6) 3.0%
Kevin C. Howe 17,038,800(7) 21.5%
Drew R. Johnson -0- -0-
Deane C. Watson, Jr 850,227(8) 1.1%
EAI Partners, Inc 5,903,614(9) 7.4%
Thomas H. Cabe 9,484,000(10) 11.9%
Mercury Fund No. 1, Ltd. 17,039,800(7) 21.1%
MT Partners, L.P. 18,960,200(11) 23.5%
Directors and Executive Officers as a group 23,955,454 29.5%
</TABLE>
----------
* Less than 1%.
(1) The address for Messrs. Overstreet, Myers, Brechbuhl and Rick
Johnson is 11494 Luna Road, Suite 100, Dallas, TX 75234, Texas.
The address for Mr. Gray is 2611 Cedar Springs, Dallas, Texas
75201. The address for Mr. Howe and Mercury Fund No. 1, Ltd. is
17950 Preston Road, Suite 800, Dallas, Texas 75252. The address
for Mr. Drew Johnson and MT Partners, L.P. is 500 Crescent Court,
Suite 250, Dallas, Texas 75201. The address for Mr. Watson is
1800 Preston Park Blvd., Suite 115, Plano, Texas 75093. The
address for EAI Partners, Inc. is 1900 Corporate Blvd., Suite
305W, Boca Raton, Florida 33431. The address for Thomas H. Cabe
is 5114 Yolanda Lane, Dallas, Texas 75229.
(2) All of these shares are issuable to Mr. Overstreet upon the
exercise of an outstanding stock option.
(3) Mr. Myers resigned from his positions as Chief Financial Officer
and Secretary of MigraTEC effective January 31, 2000.
(4) Includes 32,000 shares issuable to Mr. Myers upon the exercise of
a warrant.
(5) All of these shares are issuable to Mr. Rick Johnson upon the
exercise of an outstanding stock option.
(6) Includes 250,000 shares issuable to Mr. Gray upon the exercise of
a stock option and 80,000 shares held by the spouse of Mr. Gray.
33
<PAGE> 36
(7) Includes 14,200,000 shares issuable to Mercury Fund No. 1, Ltd.
upon the conversion of a note and 2,839,800 shares issuable to
Mercury Fund No. 1, Ltd. upon the exercise of outstanding
warrants to purchase common stock. Mr. Howe exercises voting
control over these shares on behalf of the general partner of
Mercury Fund No. 1, Ltd. See "Certain Relationships and Related
Transactions."
(8) Includes 250,000 shares issuable to Mr. Watson upon the exercise
of a stock option and 200,000 shares held by the Watson Family
Trust 1/16/96, of which Mr. Watson is the trustee and a
beneficiary.
(9) Includes 4,570,281 shares issuable to EAI Partners, Inc. upon the
exercise of a stock option.
(10) Includes 3,500,000 shares held by Phoenix Energy Companies, Inc.
Mr. Cabe is the President of Phoenix Energy and exercises voting
control over these shares.
(11) Includes 15,800,000 issuable to MT Partners, L.P. upon the
conversion of a note and 3,160,200 shares issuable to MT
Partners, L.P. upon the exercise of outstanding warrants to
purchase common stock. See "Certain Relationships and Related
Transactions."
34
<PAGE> 37
DESCRIPTION OF CAPITAL STOCK
MigraTEC's certificate of incorporation authorizes 200,000,000 shares
of common stock, par value $0.001 per share, and 50,000,000 shares of preferred
stock, par value $0.001 per share. As of August 23, 2000, MigraTEC had
80,833,278 shares of common stock issued and outstanding held by approximately
812 record holders. MigraTEC has no preferred stock issued and outstanding.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share
owned of record on all matters voted upon by stockholders, and a majority vote
of the outstanding shares present at a stockholders' meeting is required for
most actions to be taken by stockholders. Directors of MigraTEC are elected by a
plurality. The holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of a majority of the voting power of the shares voting
for the election of directors can elect all of the directors if they choose to
do so. The common stock bears no preemptive rights, and is not subject to
redemption, sinking fund or conversion provisions.
Holders of common stock are entitled to receive dividends if, as and
when declared by MigraTEC's board of directors out of funds legally available
for dividends, subject to the dividend and liquidation rights of MigraTEC's
outstanding preferred stock and any other series of preferred stock that may be
issued in the future and subject to any dividend restriction contained in any
credit facility which MigraTEC may enter into in the future. Any dividends
declared with respect to shares of common stock will be paid pro rata in
accordance with the number of shares of common stock held by each stockholder.
PREFERRED STOCK
Our Board of Directors is authorized to issue our preferred stock in
one or more series with such limitations and restrictions as may be determined
in the sole discretion of the Board.
FUTURE ISSUANCES OF PREFERRED STOCK
We have no present intention to issue any shares of our preferred
stock. However, our Board may issue such shares in connection with raising
additional capital in the future if the Board deems it advisable to do so.
LEGAL PROCEEDINGS
On July 24, 1998, Carroll Independent School District filed suit
against MigraTEC in District Court, Tarrant County, Texas, seeking payment
for unpaid business and personal property taxes (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. Additional interest is currently accruing on this
amount.
From time to time MigraTEC is party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary course
of its business. Currently, MigraTEC is not aware of any current or pending
litigation or proceedings that would have a material adverse effect on
MigraTEC's business, results of operations or financial condition.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy
statements and other information with the SEC. In addition, our complete
registration statement with all exhibits is filed with the SEC.
You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy
35
<PAGE> 38
and information statements, and other information regarding us and other issuers
that file electronically with the SEC. The address of the SEC's Internet site is
http://www.sec.gov.
Please note that our registration statement, of which this prospectus
is only a part, contains additional information about us. In addition, our
registration statement includes numerous exhibits containing information about
us. Copies of our complete registration statement may be obtained from the SEC
by following the procedures described above.
EXPERTS
The consolidated financial statements of MigraTEC at December 31, 1999,
and for the year then ended, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, and at
December 31, 1998, and for the year then ended, by King Griffin & Adamson P.C.,
independent public accountants, as set forth in their respective reports thereon
(which reports each contain an explanatory paragraph describing conditions that
raise substantial doubt about MigraTEC's ability to continue as a going concern
as described in Note 2 to the consolidated financial statements) appearing
elsewhere in this registration statement, and are included in reliance upon such
reports given on the authority of such firms as experts in accounting and
auditing.
36
<PAGE> 39
MIGRATEC, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
Audited Annual Financial Statements
<S> <C>
Report of Independent Auditors..........................................................F-1
Report of Independent Certified Public Accountants......................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............................F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998..............................................................F-4
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1999 and 1998..............................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998..............................................................F-6
Notes to Consolidated Financial Statements..............................................F-7
Interim Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999...................................................................F-26
Consolidated Condensed Statements of Operations for the
three and six months ended June 30, 2000 and 1999 (unaudited)...........................F-27
Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited)......................................................F-28
Notes to Consolidated Condensed Financial Statements....................................F-29
</TABLE>
37
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MigraTEC, Inc.
We have audited the accompanying consolidated balance sheet of MigraTEC, Inc.
and subsidiary (the "Company") as of December 31, 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the year ended December 31, 1999. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MigraTEC, Inc. and
subsidiary at December 31, 1999, and the consolidated results of their
operations and their cash flows for year ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company's recurring losses, negative cash flows from operations,
and net capital deficiency, raise substantial doubts about the Company's ability
to continue as a going concern. Management's plans as to these matters are also
described in Note 2. The financial statements do not include any adjustments
relating to the recoverability and classification of assets or the amounts and
classifications of liabilities that might result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Dallas, Texas
April 12, 2000
F-1
<PAGE> 41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS
Board of Directors
MigraTEC, Inc.
We have audited the accompanying consolidated balance sheet of MigraTEC, Inc.
and Subsidiary as of December 31, 1998 and the related consolidated statements
of operations, stockholders' deficit, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MigraTEC, Inc. and
Subsidiary as of December 31, 1998 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company's losses in 1998, net capital
deficiency, amounts due in the short term under notes payable, and the
outstanding contingencies raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classifications of liabilities that might result from the outcome of
the uncertainty.
/s/ KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
April 19, 1999
F-2
<PAGE> 42
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,417 $ 17,389
Accounts receivable - billed 160,700 279,268
Accounts receivable - unbilled -- 10,000
Shareholder advance -- 3,766
Other current assets 28,216 29,624
------------ -----------
Total current assets 190,333
340,047
PROPERTY AND EQUIPMENT, NET 73,365 198,702
OTHER ASSETS
Deferred financing costs 30,000 33,794
Capitalized software cost, net of amortization of $37,500 in 1999 52,500 --
Other assets 21,548 21,548
------------ -----------
Total other assets 104,048 55,342
------------ -----------
Total Assets $ 367,746 $ 594,091
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, net of unamortized discount of $20,797 and $25,359 in 1999 and
1998, respectively $ 953,151 $ 1,297,579
Accounts payable 449,750 347,294
Accrued expenses 158,590 159,069
Deferred income 12,000 --
Obligation under capital lease 11,313 27,105
------------ -----------
Total current liabilities 1,584,804 1,831,047
LONG-TERM LIABILITIES
Long-term portion of notes payable 28,765 56,165
Long-term portion of obligation under capital lease -- 14,283
------------ -----------
Total long-term liabilities
28,765 70,448
------------ -----------
Total liabilities 1,613,569 1,901,495
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;
78,660,189 and 54,421,618 shares outstanding in 1999 and 1998, respectively 9,912,535 7,041,890
Additional paid-in capital 2,261,472 886,458
Treasury stock, at cost (9,864,449 shares in 1999 and 1998) (1,777,891) (1,777,891)
Accumulated deficit (11,638,187) (7,454,109)
------------ -----------
Total stockholders' deficit (1,242,071) (1,303,652)
------------ -----------
Total Liabilities and Stockholders' Deficit $ 367,746 $ 594,091
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 43
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 905,179 $ 1,454,150
Operating Expenses
Salaries and benefits 2,030,324 2,395,000
Contract labor 685,974 1,201,502
General and administrative 648,032 1,038,247
EAI settlement 706,500 --
Provision for doubtful accounts 43,303 1,725
Reserve for foreign subsidiary assets 36,808 --
Selling and marketing 27, 234 104,856
------------ ------------
Total Operating Expenses 4,178,175 4,741,330
------------ ------------
Loss from Operations (3,272,996) (3,287,180)
Interest and financing expense (415,292) (374,317)
Other income (expense), net 279 (79,577)
------------ ------------
Loss before extraordinary item (3,688,009) (3,741,074)
Extraordinary income for forgiveness of debt (expense for restructure of debt) (496,069) 282,999
------------ ------------
Net loss $ (4,184,078) $ (3,458,075)
============ ============
Loss before extraordinary items per common share (basic and diluted) $ (0.070) $ (0.093)
============ ============
Extraordinary (charge) income per common share (basic and diluted) $ (0.009) $ 0.007
============ ============
Net loss per common share (basic and diluted) $ (0.079) $ (0.086)
============ ============
Weighted average common shares and common equivalents outstanding
(basic and diluted) 53,216,891 40,220,420
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 44
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Year Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
COMMON COMMON TREASURY TREASURY ADDITIONAL
STOCK STOCK STOCK STOCK PAID-IN ACCUMULATED
(SHARES) AMOUNT (SHARES) AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 30,199,154 $2,197,640 (854,903) $(1,068,629) $ 796,263 $ (3,996,034) $(2,070,760)
Issuance of stock in connection with
private placements for cash 22,790,000 4,558,000 -- -- -- -- 4,558,000
Issuance of stock in connection with
conversion of debt to equity 1,375,000 275,000 -- -- -- -- 275,000
Issuance of stock in connection with the
exercise of options and warrants for cash 54,000 11,250 -- -- -- -- 11,250
Treasury stock received in exchange for
cash -- -- (9,400,000) (740,000) -- -- (740,000)
Issuance of stock for services rendered -- -- 390,454 30,738 -- -- 30,738
Issuance of warrants for computer
consulting services rendered -- -- -- -- 18,000 -- 18,000
Issuance of warrants for financing fees -- -- -- -- 72,195 -- 72,195
Issuance of stock to employees under the
Employee Stock Purchase Plan - shares
matched by employer 3,464 -- -- -- -- -- --
Net loss -- -- -- -- -- (3,458,075) (3,458,075)
---------- ---------- ---------- ----------- ---------- ------------ -----------
Balance at December 31, 1998 54,421,618 7,041,890 (9,864,449) (1,777,891) 886,458 (7,454,109) (1,303,652)
Issuance of stock in connection with
private placements for cash 11,679,500 1,459,937 -- -- -- -- 1,459,937
Issuance of stock in connection with
conversion of debt to equity 9,059,605 1,132,448 -- -- 496,069 -- 1,628,517
Issuance of stock in connection with the
exercise of options and warrants for cash 3,498,786 278,260 -- -- -- -- 278,260
Issuance of stock for services rendered -- -- -- -- 8,450 -- 8,450
Issuance of warrants for financing fees -- -- -- -- 163,995 -- 163,995
Issuance of options - settlement with
EAI Partners, Inc. -- -- -- -- 706,500 -- 706,500
Issuance of stock to employees under the
Employee Stock Purchase Plan - shares
matched by employer 680 -- -- -- -- -- --
Net loss -- -- -- -- -- (4,184,078) (4,184,078)
---------- ---------- ---------- ----------- ---------- ------------ -----------
Balance at December 31, 1999 78,660,189 $9,912,535 (9,864,449) $(1,777,891) $2,261,472 $(11,638,187) $(1,242,071)
========== ========== ========== =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 45
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,184,078) $(3,458,075)
Adjustments to reconcile net loss to net cash used by operating activities:
Extraordinary item 496,069 (282,999)
Depreciation and amortization 172,491 156,167
(Gain) loss on sale and disposal of assets -- 93,486
Provision for doubtful accounts 43,303 1,725
Provision for foreign subsidiary assets 36,808 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable - billed 44,179 113,762
(Increase) decrease in accounts receivable - unbilled 10,000 (10,000)
(Increase) decrease in restricted cash -- 28,150
(Increase) decrease in deferred financing costs 3,794 --
(Increase) decrease in other current assets (120) (13,024)
Increase (decrease) in accounts payable 102,455 (149,611)
Increase (decrease) in accrued expenses (907) (158,586)
Increase (decrease) in deferred income 12,000 --
(Decrease) in customer deposits in excess of unbilled receivables -- (171,365)
Financing fees -- 67,588
Warrants issued for financing fees 163,995 72,195
Amortization of discount on notes payable 25,359 50,718
Common stock options and warrants issued for goods and services 8,450 48,738
Conversion of debt to common stock 19,949 --
Issuance of options - settlement with EAI Partners, Inc. 706,500 --
----------- -----------
Total adjustments 1,844,325 (153,056)
----------- -----------
Net cash used by operating activities (2,339,753) (3,611,131)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,654) --
Sales of property and equipment -- 4,200
(Increase) decrease in capitalized software costs (90,000) --
----------- -----------
Net cash provided by (used in) in investing activities (99,654) 4,200
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash overdraft -- (112,963)
Proceeds from notes payable 923,206 854,000
Proceeds from (repayment of) transfer of accounts receivable with recourse -- (187,500)
Proceeds from issuance of common stock 1,738,197 4,569,250
Purchase of treasury stock -- (740,000)
Payments under obligations of capital lease (30,075) (25,267)
Proceeds from (repayment of) shareholder advances -- (33,276)
Repayment of notes payable (207,893) (704,000)
----------- -----------
Net cash provided by financing activities 2,423,435 3,620,244
----------- -----------
Net increase (decrease) in cash (15,972) 13,313
Cash - beginning 17,389 4,076
----------- -----------
Cash - ending $ 1,417 $ 17,389
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 228,393 $ 192,067
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock upon conversion of debt to equity $ 1,132,448 $ 275,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 46
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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
systems.
The Company, in 1999, completed the shift of 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 and 1998 are related to research and
development activities.
The Company intends to license 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 sell migration services to certain customers.
The Company is the parent of a majority owned foreign subsidiary, One Up, Ltd.
Computer Services, Ltd. ("One Up, Ltd."), incorporated under the laws of the
Province of Ontario, Canada. One Up ceased its operations in 1997. In 1999, a
reserve has been 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 of $45,736 will remain until the obligations are resolved.
PRINCIPLES OF CONSOLIDATION
The 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 developer and provider
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 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.
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.
F-7
<PAGE> 47
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
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 1999 and 1998 was $37,500 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.
REVENUE RECOGNITION
The Company's revenues consist of software license revenues, consulting
services revenues and 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.
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.
F-8
<PAGE> 48
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
CASH EQUIVALENTS
Cash equivalents include time deposits, certificates of deposits, 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 using the additional 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 23,131,381 and
23,939,911 shares as of December 31, 1999 and 1998, respectively, would be
anti-dilutive due to the Company's losses in 1999 and 1998 and, accordingly,
are not included in the computation of diluted earnings per share for the
respective periods.
Subsequent to December 31, 1999, stock options, which aggregate 5,534,800
shares, were granted to Directors, Officers and employees. Additionally, if the
private financing discussed in Note 16 is fully funded, the warrants are
exercised and the related convertible secured promissory notes are converted
into the Company's common stock, an additional 36,000,000 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" (APB 25)
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. See Note 14 regarding the pro forma net loss per common share
information as required by the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation", (SFAS No. 123).
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
method option-pricing model.
F-9
<PAGE> 49
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
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 and display 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.
EXTRAORDINARY ITEMS
For the year ended December 31, 1999, an extraordinary expense of $496,069 was
recorded as the result of a debt restructuring which is more fully discussed in
Note 5.
For the year ended December 31, 1998, extraordinary income of $282,999 was
recorded as the result of re-negotiation of terms with various accounts payable
vendors.
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 beginning in
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 (SAB) No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. It is effective for the first
fiscal quarter beginning after December 15, 1999. The Company does not expect
the adoption of SAB No. 101 will have a material effect on its 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
As reflected in the accompanying financial statements, 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 exceed current assets by $1,394,471. 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.
F-10
<PAGE> 50
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2. GOING CONCERN UNCERTAINTY, (CONTINUED)
During 1999, the Company was actively seeking a larger investor in order to
assist in funding the Company's working capital requirements. In January, 2000
the Company entered into a private placement agreement that may provide the
Company up to $3,750,000 (See Note 16), of which $2,500,000 has been received.
Management believes that the proceeds of this private placement and anticipated
operating revenues will meet working capital requirements for 2000. If operating
revenues fall short of management's projections, or if the remaining $1,250,000
of the private placement is not funded, management anticipates seeking
additional funds through private offerings. While the Company was seeking
capital for its working capital requirements, it was developing relationships
with industry leaders in order to market and sell its products in 2000.
The Company anticipates that in 2000, its efforts to build relationships with
industry leaders and obtain financing of its working capital needs 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 full funding of the January 2000 private
placement agreement 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.
NOTE 3. OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Officer and employee receivables $ 12,188 $ 2,864
Prepaid expenses 16,028 22,524
Other -- 4,236
------------ ------------
$ 28,216 $ 29,624
============ ============
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Furniture and equipment $ 706,966 $ 697,312
Equipment under capital lease 101,379 101,379
Leasehold improvements 30,746 30,746
------------- ------------
839,091 829,437
Less accumulated depreciation and amortization (765,726) (630,735)
------------- ------------
$ 73,365 $ 198,702
============= ============
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998, was
$99,397 and $120,573, respectively. Amortization expense for equipment under
capital lease and leasehold improvements was $35,594 for each of the years
ended December 31, 1999 and 1998.
F-11
<PAGE> 51
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5. NOTES PAYABLE
Notes payable at December 31, 1999 and 1998, include the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <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. The note holder was
granted a two-year warrant to purchase 3,500 shares of common stock at $0.01
per share. $ 35,000 $ --
Note payable to an officer, dated November 27, 1998, bearing interest at 16%
per annum, due December 31, 1999. The note holder was granted a two-year
warrant to purchase 3,000 shares of common stock at $0.01 per share. -- 30,000
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 30,000
Senior Secured Promissory Notes, net of unamortized discount of $25,359 at
December 31, 1998, bearing interest at 10% per annum, collateralized by
accounts receivable, equipment, and intellectual property, due July 1, 1999
Holders of the Senior Secured Promissory Notes were granted warrants to
purchase 3,178,591 shares of common stock. -- 1,087,141
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 outside 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. 232,545 150,000
Note payable to an outside 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 outside 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 --
</TABLE>
F-12
<PAGE> 52
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5. NOTES PAYABLE, (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Note payable to an outside 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. 36,165 42,603
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. 20,000 44,000
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 923,554 1,323,744
----------- -----------
Total outstanding, net of unamortized discounts 981,916 1,353,744
Less current portion (953,151) (1,297,579)
----------- -----------
Long-term portion $ 28,765 $ 56,165
=========== ===========
</TABLE>
A summary of future maturities follows:
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
2000 $ 953,151
2001 8,885
2002 9,926
2003 9,954
2004 -
---------
$ 981,916
=========
</TABLE>
During the year ended December 31, 1999 and 1998, loan origination fees of
$1,300 and $4,600, respectively, were paid to Directors and Officers of the
Company who granted loans to the Company.
The Company was unable to repay the $1,112,500 of Senior Secured Promissory
Notes at maturity on July 1, 1999. In an effort to reach a settlement agreement
on mutually acceptable terms, on July 31, 1999, the Company paid the
semi-annual interest due to all of the note holders, and subsequently submitted
a proposal to modify the terms of the notes. Under terms of our proposal, (1)
the annual interest rate on the notes would remain at ten percent, (2) the next
semi-annual interest payment would remain payable on January 31, 2000, with the
final interest payment being due on July 1, 2000, (3) the exercise price of the
related warrants to purchase an aggregate
F-13
<PAGE> 53
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5. NOTES PAYABLE, (CONTINUED)
of 3,178,591 shares of the Company's common stock would be reduced from $0.35 to
$0.20 per share, (4) the expiration date of the warrants would be extended from
July 1, 2000 to July 1, 2001, and (5) the principal amount of the notes plus any
accrued interest, combined, would be convertible into shares of the Company's
common stock at per share prices of (i) $0.125 through November 30, 1999, (ii)
$0.20 from December 1, 1999, through February 29, 2000, and (iii) $0.35 from
March 1, 2000 through May 31, 2000.
During the period September 2, 1999 to November 30, 1999, all of the holders of
the Senior Secured Promissory Notes elected to convert the $1,112,500 plus
$19,949 of accrued interest into 9,059,605 shares of common stock at $0.125 per
share. In connection with the conversion of the Senior Secured Notes to equity
and extension of the term of the related warrants, the Company recognized an
extraordinary item of $496,069.
NOTE 6. CAPITAL LEASE
The Company acquired certain office equipment under the provisions of a
long-term capital lease. For financial reporting purposes, minimum lease
payments have been capitalized. The lease expires in June, 2000.
Future minimum lease payments under the capital lease and the net present value
of the future minimum lease payments at December 31, 1999, were $16,063 and
$11,313, respectively.
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Interest $ 46,540 $ 46,634
Legal and professional 41,050 --
Salaries and employee benefits 55,008 63,192
Contract labor 14,760 25,933
Commissions -- 13,122
Printing -- 6,092
Other 1,232 4,096
---------- ----------
$ 158,590 $ 159,069
========== ==========
</TABLE>
NOTE 8. INTEREST AND FINANCING EXPENSE
In connection with financing Company operations, certain debt transactions
included issuance of warrants to purchase Company common stock at prices
ranging from $0.01 to $0.20 per share. The Company has recorded financing
expense equal to the fair value of the warrants.
F-14
<PAGE> 54
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9. OTHER INCOME (EXPENSE)
Other income (expense) for the years ended December 31, 1999 and 1998 were
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Interest income $ 269 $ 9,102
Miscellaneous income 10 4,807
Loss on sale of assets -- (93,486)
---------- ----------
$ 279 $ (79,577)
========== ==========
</TABLE>
NOTE 10. INCOME TAXES
Deferred tax assets and liabilities at December 31, 1999 and 1998, consist of
the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current deferred tax asset $ 46,929 $ 24,600
Current deferred tax liability -- (22,745)
Valuation allowance (46,929) (1,855)
------------ ------------
Total current deferred tax asset (liabilities) $ -- $ --
============ ============
Non-current deferred tax asset $ 3,791,353 $ 2,400,559
Valuation allowance (3,791,353) (2,400,559)
------------ ------------
Net non-current deferred tax asset (liability) $ -- $ --
============ ============
</TABLE>
The current deferred tax asset results primarily from accrued salaries, the
provision for doubtful accounts, and other expenses not currently deductible
for tax purposes. The current deferred tax liability results from an adjustment
for the change from the cash to the accrual method of accounting for Federal
income tax purposes in a prior year. The non-current deferred tax asset results
primarily from differences in depreciation rates for financial reporting and
Federal income tax purposes and the benefit of net operating losses. The net
current and non-current deferred tax assets have been fully reserved due to the
uncertainty of generating future taxable income during the carry forward
period. The valuation allowance increased by $1,419,932 from December 31, 1998
to December 31, 1999.
The Company's income tax expense (benefit) for the years ended December 31,
1999 and 1998, differed from the statutory Federal tax rate as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Statutory rate applied to loss before income taxes $ (1,422,587) $ (1,175,745)
Increase in valuation allowance 1,419,932 1,179,678
Other 2,655 (3,933)
------------ ------------
Income tax expense (benefit) $ -- $ --
============ ============
</TABLE>
Net operating losses generated through December 31, 1999, eligible to be
carried forward to future years of approximately $ 10,968,000 will expire
between 2010 and 2014.
F-15
<PAGE> 55
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11. RELATED PARTY TRANSACTIONS
In January 1999, the Company entered into a short-term note payable agreement
with an officer of the Company. This $30,000 loan was repaid in February 1999
with interest at 16%. The officer was granted a warrant for the purchase of
3,000 shares of common stock at $0.01 per share in connection with this loan.
In August 1999, the Company entered into a short-term note payable agreement
with a Director of the Company. This $100,000 loan was repaid in September 1999
with interest at 10%. The officer was granted a warrant for the purchase of
20,000 shares of common stock at $0.01 per share in connection with this loan.
In January and February, 1998, the Company was extended an aggregate of
$254,000 of short-term notes by three Directors of the Company. Interest rates
varied 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 granted to these
Directors in connection with the funding of these 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.
Effective March 25, 1998, the Company reached an agreement with its former
principal executive officer, Mr. Richard Dews, regarding actions of Mr. Dews as
Chairman and CEO, efforts by Mr. Dews to sell shares of the Company's Common
Stock, originally acquired and restructured pursuant to Rule 144 of the Act,
and claims made against the company by Mr. Dews totaling approximately
$640,000. Pursuant to the agreement, which was finalized on March 31, 1998, (1)
the Company acquired from Mr. Dews 9,400,000 shares of the Company's 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 unregistered and free trading
Common Stock, subject to Section 144 rules and regulations, at $0.25 per share,
(4) the Company paid to Mr. Dews $60,000 in full satisfaction, including
principal and accrued interest, of amounts previously loaned to the Company by
Mr. Dews, (5) the Company released Mr. Dews from all claims arising from or
relating to the employment of Mr. Dews 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 the
employment of Mr. Dews 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, no 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 as a result of 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 paid in cash. One-half of the attorney fees paid related
to this settlement were paid to a director of the Company, acting in the
capacity of the Company's legal counsel.
In July, 1998, three Directors of the Company were granted warrants for
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 granted
in exchange for Placement Agent fees and consulting services related to the
Company's private stock offerings in 1998.
F-16
<PAGE> 56
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11. RELATED PARTY TRANSACTIONS
A Company Director purchased in 1998, 500,000 and 100,000 common shares of the
Company at $0.20 per share. These purchases were part of 1998 private
placements. The 100,000 common shares also included warrants to purchase an
additional 100,000 shares at $0.10 per share exercisable until September, 2001.
A Director of the Company was paid legal fees of $1,350 and $37,637 in 1999 and
1998 respectively. During 1998, the Company paid fees totaling $24,584 to four
Directors in their capacity as directors. No fees were paid or payable to
directors in 1999.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases its office facility under a non-cancelable operating lease,
with a monthly base rent of $10,650, which expires in April, 2000. Total rent
expense in 1999 and 1998 was $139,499 and $127,800, respectively.
Each of the four officers of the Company has an employment agreement, which
renews annually, subject to a 30-day written notice of termination. The
agreements include provisions for bonuses, commissions and stock options. In
1999 and 1998 the four officers were paid an aggregate of $477,500 and
$464,173, respectively, under the terms of these agreements.
The Company is party to a personal property tax claim arising in the ordinary
course of business. A payable which in the opinion of management, is sufficient
to reserve for this claim has been recorded as of December 31, 1999 and 1998.
NOTE 13. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments, which potentially expose the Company to concentrations
of credit risk, consist primarily of trade accounts receivable. Accounts
receivable in the aggregate of $160,700 have been collected through March 31,
2000. The Company's accounts receivables are unsecured.
For the years ended December 31, 1999 and 1998, significant customers accounted
for the percentages of the Company's total revenues as indicated below. These
revenues were associated with the Company's Y2K product which is no longer
being marketed.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Ctek, Ltd. 24% --%
Sun Professional Services 18 --
Federal Express 17 --
EDS 14 --
Reasoning, Inc. 11 25
Bell Sygma -- 46
The Sabre Group, Inc. -- 13
---- ----
84% 84%
==== ====
</TABLE>
F-17
<PAGE> 57
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14. CAPITAL STOCK, WARRANTS AND OPTIONS
CAPITAL STRUCTURE
The Company is authorized to issue 200,000,000 shares of no par common stock,
of which 78,660,189 and 54,421,618 shares were issued and outstanding at
December 31, 1999 and 1998, 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 December 31, 1999 and
1998, no convertible preferred stock was issued or outstanding.
ISSUANCES OF COMMON STOCK
PRIVATE PLACEMENTS
During 1999, the Company completed private placements of 11,679,500 shares of
unregistered common stock, plus two-year warrants to purchase a total of
2,335,900 unregistered shares of common stock at $0.20 per share, at a price of
$0.125 per common share yielding proceeds of $1,459,937. Both the unregistered
common shares sold and issuable upon exercise of the underlying warrants
contain piggyback registration rights.
During March and September 1998, the Company completed private placements of
22,790,000 shares of common stock at $0.20 per common share yielding proceeds
of $4,558,000. In connection with the March 1998 offering, the Company issued
warrants to various individuals who had either acted as placement agents or
furnished consulting services to the Company for the purchase of 2,147,750
shares of common stock at $0.20 per share. In connection with the September
1998 offering, purchasers of common stock also received warrants to purchase
1,000,000 shares of common stock at $0.10 per share.
CONVERSION OF DEBT TO EQUITY
During the period September 2, 1999 to November 30, 1999, the Company issued
9,059,605 shares of common stock in settlement of principal and accrued
interest related to the Senior Secured Notes which became due July 1, 1999 (See
Note 5).
During 1998, the Company issued 1,375,000 shares of common stock in settlement
of $275,000 of notes payable, including $175,000 of amounts due to directors of
the Company.
EXERCISE OF OPTIONS AND WARRANTS
During 1999 and 1998, the Company issued 3,498,786 and 54,000 shares of common
stock, respectively, upon exercise of options and warrants yielding proceeds of
$278,260 and $11,250, respectively.
TREASURY STOCK
During 1998, the Company repurchased 9,009,546 shares of common stock, net of
390,454 of shares issued for services in connection with the repurchase (See
Note 11).
F-18
<PAGE> 58
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14. CAPITAL STOCK, WARRANTS AND OPTIONS, (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
During 1999 and 1998, the Company issued 680 and 3,464 shares of common stock,
respectively, representing the employers match of shares purchased by employees
under the Company's Employee Stock Purchase Plan .
WARRANTS
A summary of warrants outstanding as of December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Warrants for purchase of 2,335,900 shares at $0.20 per share, issued in
connection with private placements of unregistered common stock in 1999,
expiring between March and December 2001 2,335,900 --
Warrants for purchase of 1,000,000 shares at $0.10 per share, issued in
connection with the September 1998 private placement of unregistered common
stock, expiring September 2001 950,000 1,000,000
Warrants for purchase of 2,147,750 shares of common stock at $0.20 per share,
issued in connection with March 1998 private placement of common stock,
expiring July 2001 2,147,750 2,147,750
Warrants issued for purchase of 704,878 shares at $0.2563 to $0.40 per share,
issued in connection with placement of debt in 1996. In 1998, the exercise
price for 500,000 shares was decreased from $0.50 to $0.40 per share. In
October 1999, the Company agreed to reduce the exercise price to $.125 in -- 704,878
exchange for immediate exercise
Warrants for purchase of 3,178,591 shares of common stock at $0.20 per share,
issued in connection with Senior Secured Promissory Notes, expiring July 2001,
as modified in 1999 (See Note 5) 3,178,591 3,178,591
Warrants for purchase of 927,650 shares of common stock at $0.01 to $0.20 per
share, issued in connection with short term borrowings in 1999, expiring
between October and December 2001 (See Note 5) 209,650 --
Warrants issued for purchase of 468,000 shares of common stock at $0.01 to
$0.20 per share, issued in connection with notes payable dated in 1998 (See 100,000 445,500
Note 5)
Warrants issued for purchase of 10,000 shares of common stock at $0.35 per
share, issued in connection with note payable dated in 1997, expiring June 2000 10,000 10,000
---------- ----------
Total 8,931,891 7,486,719
========== ==========
</TABLE>
Warrant activity is summarized as follows:
<TABLE>
<CAPTION>
WARRANT PRICE
--------------------------
WARRANTS WEIGHTED TOTAL
AVERAGE
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1997 3,893,469 $ 0.3643 $ 1,418,507
Granted 4,115,750 0.1836 755,605
Canceled (500,000) (0.50) (250,000)
Exercised (22,500) (0.01) (225)
----------- ----------- -----------
Outstanding at December 31, 1998 7,486,719 0.2570 1,923,887
Granted 3,263,550 0.1518 495,457
Exercised (1,818,378) (0.0688) (125,120)
Exercise price modification -- (0.1651) (641,179)
----------- ----------- -----------
Outstanding at December 31, 1999 8,931,891 $ 0.1851 $ 1,653,045
=========== =========== ===========
</TABLE>
F-19
<PAGE> 59
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14. CAPITAL STOCK, WARRANTS AND OPTIONS, (CONTINUED)
STOCK OPTIONS GRANTED TO NON-EMPLOYEES
A summary of stock options granted to non-employees outstanding as of December
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Granted August 1999 to EAI Partners, Inc. to purchase 5,902,614 shares of
common stock, expiring September 2000 to September 2001 (See below) 4,570,281 --
Granted March 1998 to former CEO, exercisable at $0.25 per share, expiring
March 2000 (See Note 11) 600,000 600,000
Granted October 1998 in exchange for software, exercisable at $0.12 per share -- 200,000
Granted September 1997 for services rendered, exercisable at $.70 per share,
expiring December 2002 240,000 240,000
Granted July 1997 for services rendered, exercisable at $.50 per share,
expiring July 2000 35,000 35,000
Granted June 1997 to a Director for services rendered, exercisable at $.35 per
share, expiring June 2000 25,000 25,000
Granted July 1999 for services to be rendered, exercisable at $0.20 per share
vesting at rate of 7,500 per month through July 2001, expiring July 2002;
Agreement canceled February, 2000 at which time 60,000 shares were vested 180,000 --
Granted August 1999 for prior services rendered, exercisable at $0.20 per
share, immediately vested, expiring July 2001 25,000 --
Granted December 1999 for services rendered, exercisable at $0.01 per share
immediately vested, expiring December 2001 10,000 --
---------- ----------
Total 5,685,281 1,100,000
========== ==========
</TABLE>
In August, 1999, the Company entered into a Stock Option Agreement with EAI
Partners, Inc. ("EAI") which replaced a November, 1996 stock option agreement,
covering 6,000,000 shares of the Company's common stock, between EAI and the
Company's former CEO, pursuant to which the Company was required to register
the shares under the options. As a part of the Company's settlement agreement
with the Company's former CEO, the Company agreed to indemnify the former CEO
against any liability arising from the Company's failure to register the EAI
options as required by the November, 1996 stock option agreement. The August,
1999 Agreement granted EAI an option to purchase 5,903,614 shares of the
Company's common stock. The first 1,903,614 option shares are exercisable at a
price of $0.075 per share with the final 4,000,000 option shares being
exercisable at the greater of $.20 or 50% of the average closing bid prices per
share of the Company's common stock for the five business days immediately
prior to the date EAI exercises the final 4,000,000 stock options. The Company
has agreed to file a registration statement covering the option shares no later
than August 31, 2000. As of December 31, 1999, EAI has exercised 1,333,333 of
the first 1,903,614 stock options. 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.
The Company has recognized a loss in the amount of $706,500 as a result of the
August, 1999 Agreement.
F-20
<PAGE> 60
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14. CAPITAL STOCK, WARRANTS AND OPTIONS, (CONTINUED)
Stock options granted to non-employees is summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE
--------------------------
WEIGHTED
OPTIONS AVERAGE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1997 440,000 $ 0.6034 $ 265,500
Granted 800,000 0.2175 174,000
Canceled (140,000) (0.5089) (71,250)
Exercised -- -- --
----------- ----------- -----------
Outstanding at December 31, 1998 1,100,000 0.3348 368,250
Granted 6,118,614 0.1608 983,871
Exercised (1,533,333) (0.0809) (124,000)
----------- ----------- -----------
Outstanding at December 31, 1999 5,685,281 $ 0.2160 $ 1,228,121
=========== =========== ===========
</TABLE>
STOCK OPTIONS GRANTED TO EMPLOYEES, OFFICERS AND DIRECTORS
In 1997, the Company established a stock option plan ("1997 Plan"); however,
the 1997 Plan was not approved by the Company's stockholders within the time
specified and was terminated in 1999. Outstanding options issued pursuant to
the 1997 Plan were canceled in 1999.
The Company adopted a new stock option plan, the 1999 Stock Option Plan ("1999
Plan"). Under the terms of the 1999 Plan, the Company could grant up to
2,000,000 shares of the Company's common stock. The 1999 Plan was not approved
by the Company's stockholders within one year of adoption by the Company's
Board of Directors, thereby converting options, granted under the 1999 Plan to
non-qualified options for Federal income tax purposes. All terms of the options
remained unchanged.
In January, 2000, the Company's Board of Directors approved, subject to
stockholders' approval a long-term incentive plan, which provides for granting
up to a maximum of 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 name of this plan
is MigraTEC, Inc. Long-Term Incentive Plan ("2000 Plan").
The Company has issued stock options to employees, officers and directors as
summarized in the table below.
<TABLE>
<CAPTION>
OFFICERS OPTION PRICE
AND ---------------------------
EMPLOYEES DIRECTORS TOTAL WEIGHTED TOTAL
AVERAGE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1997 613,406 4,109,855 4,723,261 $ 0.3788 $ 1,789,156
Granted 1,676,492 13,900,000 15,576,492 0.2144 3,339,447
Canceled (805,206) (4,109,855) (4,915,061) (0.3930) (1,931,684)
Exercised (31,500) -- (31,500) (0.3500) (11,025)
----------- ----------- ----------- ----------- -----------
Outstanding at December 31, 1998 1,453,192 13,900,000 15,353,192 0.2075 3,185,894
Granted 2,421,904 -- 2,421,904 0.1985 480,706
Canceled (2,163,812) (6,950,000) (9,113,812) 0.2117 (1,929,681)
Exercised (22,075) (125,000) (147,075) 0.1981 (29,139)
----------- ----------- ----------- ----------- -----------
Outstanding at December 31, 1999 1,689,209 6,825,000 8,514,209 $ 0.2006 $ 1,707,780
=========== =========== =========== =========== ===========
</TABLE>
F-21
<PAGE> 61
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14. CAPITAL STOCK, WARRANTS AND OPTIONS, (CONTINUED)
Effective September 7, 1999, the Company officers and four directors agreed to
modify options previously granted for services provided as follows (a) the
number of shares underlying each option was voluntarily reduced by 50%, (b) the
remaining 50% of the shares underlying each option remained fully vested as of
the date of the modification, (c) for officers, the expiration date was
re-defined to be four years after the date of termination of employment, (d)
for directors the expiration date was re-defined to be four years after the
date of the modification. The exercise price for the modified options was
unchanged at $0.20 per share. There was no impact on the financial statements
as a result of this modification.
Options in the aggregate of 1,689,209 expire from April, 2001, through
December, 2004. The remaining options, which aggregate 6,825,000, have been
granted to officers and directors and expire 48 months after termination of
employment or 48 months from date of the modification for Directors.
COMPENSATION EXPENSE FOR OPTIONS AND WARRANTS GRANTED TO EMPLOYEES, OFFICERS
AND DIRECTORS
Substantially all options issued to directors, officers and employees were
issued with exercise prices equal to fair value. Fair value for all options
issued is generally the trading price at the date of issuance. Had compensation
cost for the Company's stock options been determined consistent with SFAS 123,
the Company's net loss per share would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net income (loss)
As reported $ (4,184,078) $ (3,458,075)
=============== ===============
Pro forma $ (4,263,881) $ (5,081,264)
=============== ===============
Income (loss) per common share (basic and diluted)
As reported $ (0.079) $ (0.086)
=============== ===============
Pro forma $ (0.080) $ (0.126)
=============== ===============
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plan.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes method option-pricing model. The following assumptions were used
for grants in 1999: dividend yield of 0%, volatility range of 104% to 120%,
risk free interest rate estimated as 5% with an expected life of 2 to 4 years.
The following assumptions were used for grants in 1998: dividend yield of 0%,
volatility of 86%, risk free interest rate estimated as 5% with an expected
life of 1 to 5 years.
The fair value of each option grant given to both employees and non-employees
is estimated on the date of grant using the Black-Scholes option pricing model.
The weighted average fair value of the option granted under this model when
fair value equaled the exercise price and when the fair value was greater than
the exercise price was $0.13 and $0.09 per option, respectively, for the
years ended December 31, 1999 and 1998.
The model is based on historical stock prices and volatility which, due to the
low volume of transactions, may not be representative of future price
variances.
F-22
<PAGE> 62
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14. CAPITAL STOCK, WARRANTS AND OPTIONS, (CONTINUED)
The following summarizes information about options granted to employees,
officers and directors and non-employees outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
---------------------------------- ------------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED AVG.
RANGE OF NUMBER REMAINING AVG. NUMBER EXERCISABLE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Employees
$0.1719 to $ 0.3906 1,689,209 3.73 years $ 0.2035 534,140 $ 0.2983
Officers and Directors
$ 0.20 6,825,000 N/A $ 0.20 6,825,000 $ 0.20
Non-Employees
$ 0.01 to $0.70 5,685,281 1.34 years $ 0.22 5,542,781 $ 0.22
</TABLE>
TOTAL OPTIONS AND WARRANTS OUTSTANDING AT DECEMBER 31, 1999
At December 31, 1999, the Company had options and warrants for the purchase of
common shares as follows:
<TABLE>
<S> <C>
Warrants 8,931,891
Stock Options:
Non-Employees 5,685,281
Directors, Officers and Employees 8,514,209
----------
Total 23,131,381
==========
</TABLE>
COMPENSATION EXPENSE FOR OPTIONS AND WARRANTS GRANTED TO NON EMPLOYEES
The Company has recorded compensation expense in 1999 and 1998 for all options
and warrants issued to non-employees. Such compensation expense was determined
using the Black-Scholes method option-pricing model, using assumptions
consistent with those noted above.
NOTE 15. EMPLOYEE SAVINGS PLAN
Effective January 1, 1994, the Company adopted a discretionary 401(k) savings
plan ("Plan") for its employees. This Plan is available to all employees
meeting certain eligibility requirements, as further described in the Plan
documents. No discretionary employer contributions were made for the years
ended December 31, 1999 and 1998. Participants are 100% vested in the portion
of the Plan representing employee contributions. Participants vest 20% in
employer contributions after two years of service (as defined by the Plan
document) and 20% each year thereafter.
NOTE 16. SUBSEQUENT EVENTS
During January 2000, the Company completed private placement of 2,451,000
shares of common stock at $0.125 per share yielding proceeds of $306,375.
On January 25, 2000 ("Initial Closing"), the Company closed the first stage of
a potential 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").
At the Initial Closing, 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 "Notes").
Pursuant to the Agreement, the Investors have provided an aggregate of
$2,500,000 through March 31, 2000. The Investors may also, at their election,
provide up to $1,250,000 of additional financing to the Company on or before
April 30, 2000.
F-23
<PAGE> 63
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 16. SUBSEQUENT EVENTS, (CONTINUED)
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. The Agreement requires the
Company to use its best efforts to create, as soon as practical and in any
event by June 30, 2000, a new series of preferred stock designated as
Convertible Preferred Stock, Series A, $.01 par value per share (the "Series A
Preferred Stock"), into which the Notes will be convertible. Upon the creation
of the Series A Preferred Stock, the Notes automatically convert into such
Series A Preferred Stock on the basis of one share of Series A Preferred Stock
for each $.125 in principal amount of Notes outstanding at the time of
conversion. Shares of Series A Preferred Stock will be convertible into shares
of common stock at the initial conversion rate of one share of common stock for
each share of Series A Preferred Stock converted. As of March 31, 2000, the
Notes may be converted, at the election of the Investors, into 20,000,000
shares of common stock. If the Investors provide the maximum amount of funding
that may be provided to the Company under the Agreement, the Notes will be
convertible into an aggregate of 30,000,000 shares of common stock.
Pursuant to the Agreement, the Company also agreed to issue to the Investors
warrants to purchase shares of common stock. 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 Company issued to the
Investors additional warrants to purchase up to an additional 2,000,000 shares
of common stock. If the Investors provide the maximum amount of funding that
may be provided to the Company under the Agreement, the Investors will receive
warrants to purchase a total of 6,000,000 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.
Simultaneous with the Initial Closing of the Agreement, the Board of Directors
of the Company elected a representative of each of the Investors as new members
to the Company's Board of Directors.
Subsequent to December 31, 1999, certain officers and employees were granted,
under the 2000 Plan, options to purchase common stock of the Company, the terms
of which 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 $2.87 644,800 1.057 681,360
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
---------- ---------- ----------
5,534,800 $ 0.498 $2,753,860
========== ========== ==========
</TABLE>
The Company recorded total deferred compensation of $2,855,000 related to the
stock options granted at less than market value. Such amount will be amortized
as compensation expense over the respective vesting periods, which are
principally 36 months. The expense related to the year ending December 31, 2000
will be $1,114,000.
F-24
<PAGE> 64
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 16. SUBSEQUENT EVENTS, (CONTINUED)
The following summarizes common stock options and warrants exercised and common
stock purchases during the period from January 1, 2000 through March 31, 2000:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Common Stock Private Placement Sales 2,451,000
Aggregate warrants and stock options exercised 8,130,198
----------
10,581,198
==========
</TABLE>
Subsequent to December 31, 1999, the Company fully repaid notes payable
aggregating approximately $714,000.
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. Below 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>
F-25
<PAGE> 65
MIGRATEC, INC. AND SUBSIDIARY
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.
F-26
<PAGE> 66
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.
F-27
<PAGE> 67
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.
F-28
<PAGE> 68
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.
F-29
<PAGE> 69
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.
F-30
<PAGE> 70
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.
F-31
<PAGE> 71
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.
F-32
<PAGE> 72
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>
F-33
<PAGE> 73
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;
F-34
<PAGE> 74
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.
F-35
<PAGE> 75
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, RESERVED SHARES AND CONVERTIBLE DEBT
In 1997, the Company established a stock option plan (the "1997 Plan"); however
the Plan was not approved by its stockholders within the time specified and was
terminated in 1999. Options issued pursuant to the 1997 Plan were canceled in
March 1999 and reissued under a new stock option plan (the "1999 Plan") and
repriced to the then current market price. At June 30, 2000, repriced options
for the purchase of approximately 900,000 shares remained outstanding.
Compensation expense associated with these repriced options will be measured and
recognized in accordance with the recently issued Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," beginning July 1, 2000.
The Company had options and warrants outstanding for the purchase of common
shares, shares reserved for future issuance of options under the 2000 Plan and
shares related to convertible debt outstanding as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000
----------
<S> <C>
Warrants 8,991,466
Stock Options:
Non-Employees 5,025,281
Directors, Officers and Employees 12,012,961
----------
26,029,708
Reserved for future issuance of stock options 1,309,200
Convertible notes payable 30,000,000
----------
Total 57,338,908
==========
</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,
F-36
<PAGE> 76
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>
F-37
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Delaware General Corporation Law
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present
or former director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsections (a) and (b) of Section 145. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (3) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
II-1
<PAGE> 78
Certificate of Incorporation
The Certificate of Incorporation of MigraTEC, as amended, a copy of
which is filed as Exhibit 3.1 to the Registration Statement, provides that a
director of MigraTEC shall not be liable to MigraTEC or its stockholders for
monetary damages for breach of fiduciary duty as a director, unless the breach
involves (i) a breach of the director's duty of loyalty to MigraTEC or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) liability for
unlawful dividend payments or stock purchases or redemptions or (iv) for a
transaction from which the director derived an improper personal benefit. The
Certificate of Incorporation provides MigraTEC will indemnify all persons whom
it may indemnify to the fullest extent permitted by the DGCL.
The Bylaws of MigraTEC, a copy of which is filed as Exhibit 3.2 to the
Registration Statement, provide that each person who at any time is or was a
director of MigraTEC, and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative (a "Proceeding"), by
reason of the fact that such person is or was a director of MigraTEC, or is or
was serving at the request of MigraTEC as a director, officer, partner,
venturer, proprietor, member, employee, trustee, agent or similar functionary of
another domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise, whether the basis of a Proceeding is alleged action in such person's
official capacity or in another capacity while holding such office, shall be
indemnified and held harmless by MigraTEC, against costs, charges, expenses
(including without limitation, court costs and attorneys' fees), judgments,
fines and amounts paid or to be paid in settlement actually and reasonably
incurred or suffered by such person in connection with a Proceeding, so long as
a majority of a quorum of disinterested directors, the stockholders or legal
counsel through a written opinion do not determine that such person did not act
in good faith or in a manner he reasonably believed to be in or not opposed to
the best interests of MigraTEC, and in the case of a criminal Proceeding, such
person had reasonable cause to believe his conduct was unlawful. The Amended and
Restated Bylaws also contain certain provisions designed to facilitate receipt
of such benefits by any such persons, including the prepayment of any such
benefits.
Indemnification Agreements
MigraTEC has entered into indemnification agreements pursuant to which
it will indemnify certain of its directors and officers against judgments,
claims, damages, losses and expenses incurred as a result of the fact that any
director or officer, in his capacity as such, is made or threatened to be made a
party to any suit or proceeding. Such persons will be indemnified to the fullest
extent now or hereafter permitted by the DGCL. The indemnification agreements
also provide for the advancement of certain expenses to such directors and
officers in connection with any such suit or proceeding.
Insurance
MigraTEC has a directors' and officers' liability insurance policy to
insure its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of MigraTEC,
including liabilities arising under the Securities Act.
II-2
<PAGE> 79
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered hereby, other than
the underwriting discount. All amounts are estimated except the Commission
registration fee.
<TABLE>
<S> <C>
SEC registration fee..........................................$
Blue Sky fees and expenses....................................
Accounting Fees and expenses..................................
Printing and engraving expenses...............................
Legal fees and expenses.......................................
Registrar and transfer agent's fees...........................
Miscellaneous fees and expenses...............................
Total.....................................................$
</TABLE>
Item 26. Recent Sales of Unregistered Securities
During the year ended December 31, 1999, 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 the first quarter of 1999, MigraTEC issued an aggregate of
1,843,000 shares of its common stock to fourteen investors at a price of $0.125
per share. In connection with this investment, such investors were issued
two-year warrants to purchase an aggregate of 368,600 shares of MigraTEC's
common stock at a price of $0.20 per share.
Effective January 29, 1999, MigraTEC entered into a short-term loan
agreement with an individual for $30,000 at an interest rate of 16% per annum.
In connection with this loan, MigraTEC issued a two-year warrant to purchase
3,000 shares of its common stock at $0.01 per share. This loan, including fees
and accrued interest, was paid in full on March 15, 1999, and the warrant was
exercised effective February 8, 1999.
Effective February 8, 1999, MigraTEC issued an aggregate of 33,000
shares of its common stock to two investors, as a result of the exercise of
warrants to purchase shares at $0.01 per share, and an aggregate of 50,000
shares of its common stock to an individual investor upon exercise of warrants
previously granted to purchase shares at $0.10 per share.
Pursuant to certain short-term loans made to MigraTEC by nine investors
during the first quarter of 1999, the Company issued warrants to purchase an
aggregate of 635,000 shares of its common stock at an exercise price of $0.01
per share, fully vested at the date of grant. All of these warrants were
exercised prior to March 31, 1999.
During the first quarter of 1999, MigraTEC 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 1996 Employee
Stock Purchase Plan.
On March 30 and 31, 1999, MigraTEC issued an aggregate of 112,500
shares of its common stock to four investors as a result of the exercise of
warrants to purchase shares at $0.20 per share.
During the second quarter of 1999, MigraTEC issued an aggregate of
3,687,000 shares of its common stock to three investors at a price of $0.125 per
share. In connection with this investment, such investors were issued two-year
warrants to purchase an aggregate of 737,500 shares of MigraTEC's common stock
at a price of $0.20 per share.
During April and May of 1999, MigraTEC issued an aggregate of 200,000
shares of its common stock to two consultants upon exercise of warrants
previously granted to purchase shares at $0.12 per share.
II-3
<PAGE> 80
During the third quarter of 1999, MigraTEC issued an aggregate of
4,174,000 shares of its common stock to twenty-seven investors at a price of
$0.125 per share. In connection with this investment, such investors were issued
two-year warrants to purchase an aggregate of 834,800 shares of MigraTEC's
common stock at a price of $0.20 per share.
Effective July 1, 1999, MigraTEC issued to a former employee 348 shares
of its common stock representing its 50% matching of shares previously purchased
by the employee pursuant to the terms of MigraTEC's 1996 Employee Stock Purchase
Plan.
On July 1, 1999, MigraTEC was unable to meet its obligation to repay
senior secured promissory notes in the principal amount of $1,112,500 plus
accrued interest. Pursuant to a settlement agreement with the holders of such
notes, MigraTEC reduced the exercise price of warrants to purchase an aggregate
of 3,178,591 shares of its common stock issued in connection with the notes from
$0.35 to $0.20 per share. MigraTEC also agreed to convert the principal amount
of the notes plus any accrued interest into shares of its common stock at per
share prices of (i) $0.125 through November 30, 1999, (ii) $0.20 from December
1, 1999, through February 29, 2000, and (iii) $0.35 from March 1, 2000, through
May 31, 2000. As of March 31, 2000, MigraTEC has issued 9,059,605 shares of its
common stock to the senior secured note holders, who have converted notes in the
principal amount of $1,112,500 plus accrued interest of $19,949.
Effective July 1, 1999, pursuant to a two-year service agreement
between MigraTEC and a consultant, MigraTEC issued to the consultant a warrant
to purchase up to an aggregate of 180,000 shares of its common stock at $0.20
per share. The warrant vested at a rate of 7,500 shares per month beginning July
1, 1999. The agreement was terminated effective February 29, 2000, at which
point 60,000 shares were vested under the agreement and exercisable through
February 28, 2002.
Effective July 29, 1999, pursuant to a short-term loan made to MigraTEC
by one investor, MigraTEC issued a two-year warrant to purchase up to an
aggregate of 10,000 shares of its common stock at $0.01 per share, fully vested
and immediately exercisable upon the date of grant. Effective September 1, 1999,
pursuant to an agreement to extend the due date of the loan, MigraTEC agreed to
issue a two-year warrant to purchase up to an aggregate of 10,000 additional
shares of its common stock at $0.01 per share upon each monthly renewal, fully
vested and immediately exercisable upon the date of grant. In connection with
this agreement, on December 29, 1999, MigraTEC issued 50,000 shares of its
common stock pursuant to the exercise of warrants to purchase up to an aggregate
of 50,000 shares of common stock at $0.01 per share. The loan was repaid in
January 2000.
Effective August 1, 1999, pursuant to a marketing services agreement
between MigraTEC and a consultant, MigraTEC issued to the consultant a two-year
warrant to purchase up to an aggregate of 25,000 shares of its common stock at
$0.20 per share, fully vested and immediately exercisable upon the date of
grant.
Effective August 9, 1999 and August 31, 1999, MigraTEC issued to one
investor an aggregate of 1,333,333 shares of its common stock at $0.075 per
share, pursuant to a stock option agreement which grants an option to purchase
up to an aggregate of 5,903,614 shares of its common stock. The remaining
4,570,281 shares exercisable under the option may be purchased as follows: (1)
570,281 shares may be purchased at $0.075 per share, and such option expires 30
days after registration of the shares, (2) 2,000,000 shares may be purchased at
the greater of (i) $0.20 or (ii) 50% of the previous five-day average closing
bid price per share, and such option expires six months after registration of
the shares, and (3) 2,000,000 shares may be purchased at the greater of (i)
$0.20 or (ii) 50% of the previous five-day average closing bid price per share,
and such option expires 12 months after registration of the shares. The
agreement requires MigraTEC to file a shelf registration statement with the
Securities and Exchange Commission no later than August 31, 2000, in order to
register the 5,903,614 shares underlying the option. In the event MigraTEC fails
to file the registration statement by August 31, 2000, the investors will be
entitled to purchase an additional 600,000 shares of MigraTEC's common stock at
the greater of (i) $0.50 or (ii) 50% of the previous five-day average closing
bid price per share, and such option shall be fully vested and exercisable from
September 1, 2000, through August 31, 2001.
Effective September 8, 1999, pursuant to a consulting services
agreement and short-term loan made to MigraTEC by an individual, MigraTEC issued
20,000 shares of its common stock upon exercise of a compensatory warrant issued
on August 31, 1999, to purchase shares at $0.01 per share.
II-4
<PAGE> 81
During the fourth quarter of 1999, MigraTEC issued 1,975,000 shares of
its common stock to seven investors at a price of $0.125 per share. Such
investors received two-year warrants to purchase an aggregate of 395,000 shares
of common stock at a price of $0.20 per share.
On October 1, 1999, pursuant to a four-month loan made to MigraTEC by a
consultant, MigraTEC issued a two-year warrant to purchase up to an aggregate of
6,150 shares of its common stock at $0.01 per share.
Effective October 13, 1999, MigraTEC issued 200,000 shares of its
common stock to one investor upon the exercise of an outstanding warrant to
purchase shares at $0.01 per share.
Effective October 13, 1999, MigraTEC issued 704,878 shares of its
common stock to a consultant at a reduced exercise price of $0.125 per share
upon the exercise of outstanding warrants to purchase shares at prices which
originally ranged from $0.40 to $0.25625 per share.
Effective October 31, 1999, pursuant to an agreement with an investor
to modify and extend the payment terms of an existing debt owed by the Company,
MigraTEC issued a two-year warrant to purchase up to an aggregate of 100,000
shares of its common stock at $0.01 per share and a two-year warrant to purchase
up to an aggregate of 100,000 shares of its common stock at $0.20 per share.
On December 13, 1999, pursuant to a short-term loan made to MigraTEC by
an investor, MigraTEC issued a two-year warrant to purchase up to an aggregate
of 10,000 shares of its common stock at $0.01 per share. MigraTEC issued 10,000
shares of its common stock to the investor on December 29, 1999 pursuant to the
exercise of the warrant at a price of $0.01 per share.
On December 31, 1999, pursuant to a consulting services agreement,
MigraTEC issued a two-year warrant to purchase up to an aggregate of 10,000
shares of its common stock at $0.01 per share to an individual consultant.
On December 31, 1999, MigraTEC issued a two-year compensatory warrant
to purchase up to an aggregate of 3,500 shares of its common stock at $0.01 per
share to an individual pursuant to a short-term loan and services agreement.
During the first quarter of 2000, MigraTEC issued 2,451,000 shares of
its common stock at a price of $0.125 per share and two-year warrants to
purchase a total of 490,200 shares of common stock at $0.20 per share.
Item 27. Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
3.1 Certificate of Incorporation (3)
3.2 Bylaws(3)
4.1 Form of Common Stock Certificate(4)
4.2 Form of Warrant to M.T. Partners, L.P. and Mercury Fund
No. 1, Ltd. (2)
5.1 Opinion of Winstead Sechrest & Minick P.C. (4)
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)
II-5
<PAGE> 82
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 M.T.
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 M.T. Partners, L.P., dated as of
January 25, 2000(2)
10.10 $1,775,000 Convertible Secured Promissory Note by
MigraTEC, dated as of January 25, 2000(2)
10.11 Security Agreement between MigraTEC, Inc. and M.T.
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(2)
21.1 Subsidiary of MigraTEC, Inc. (2)
23.1 Consent of King Griffin & Adamson P.C. (3)
23.2 Consent of Ernst & Young LLP (3)
23.3 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1) (4)
27.1 Financial Data Schedule(3)
----------
(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, for the year ended December 31, 1999.
(3) Filed herewith.
II-6
<PAGE> 83
(4) To be filed by amendment.
Item 28. Undertakings
Rule 415
MigraTEC will:
(1) File, during any period in which it offers or sells securities, a
post- effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Commission Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
MigraTEC pursuant to the foregoing provisions, or otherwise, MigraTEC has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, MigraTEC will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Rule 430A
MigraTEC will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by MigraTEC under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
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<PAGE> 84
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-8
<PAGE> 85
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Dallas,
State of Texas, on August 31, 2000.
MIGRATEC, INC.
By: /s/ T. ULRICH BRECHBUHL
------------------------------------
T. Ulrich Brechbuhl
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KEVIN C. HOWE Director, Chairman of the Board August 31, 2000
-------------------------------
Kevin C. Howe
/s/ W. CURTIS OVERSTREET Director, President and Chief August 31, 2000
-------------------------------
W. Curtis Overstreet Executive Officer (Principal
Executive Officer)
/s/T. ULRICH BRECHBUHL Chief Financial Officer and Secretary August 31, 2000
-------------------------------
T. Ulrich Brechbuhl (Principal Accounting Officer)
/s/ RICHARD A. GRAY, JR. Director August 31, 2000
-------------------------------
Richard A. Gray, Jr.
/s/ DREW R. JOHNSON Director August 31, 2000
-------------------------------
Drew R. Johnson
/s/ DEANE C. WATSON, JR. Director August 31, 2000
-------------------------------
Deane C. Watson, Jr.
</TABLE>
S-1
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1 Certificate of Incorporation, as amended(3)
3.2 Bylaws(3)
4.1 Form of Common Stock Certificate(4)
4.2 Form of Warrant to M.T. Partners, L.P. and Mercury Fund No. 1,
Ltd. (2)
5.1 Opinion of Winstead Sechrest & Minick P.C. (4)
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 M.T. 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 M.T. Partners, L.P., dated as of January 25, 2000(2)
10.10 $1,775,000 Convertible Secured Promissory Note by MigraTEC,
dated as of January 25, 2000(2)
10.11 Security Agreement between MigraTEC, Inc. and M.T. 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)
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
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(2)
21.1 Subsidiary of MigraTEC, Inc. (2)
23.1 Consent of King Griffin & Adamson P.C. (3)
23.2 Consent of Ernst & Young LLP (3)
23.3 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1) (4)
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, for the year ended December 31, 1999.
(3) Filed herewith.
(4) To be filed by amendment.
