<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31,2000
COMMISSION FILE NUMBER
000-28220
MIGRATEC, INC.
(Name of Small Business Issuer in its Charter)
FLORIDA 65-0125664
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
11494 Luna Road
Suite 100
Dallas, Texas 75234-9421
(Address of principal executive offices)
Issuer's telephone number, including area code: (972) 969-0300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Per Share
Transitional Small Business Disclosure Format (Check One):
Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C>
Consolidated Condensed Balance Sheets at March 31, 2000
(unaudited), and December 31, 1999 3
Consolidated Condensed Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 (unaudited) 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Comparison of the Three Months Ended March 31, 2000 and
1999 15
Liquidity and Capital Resources 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURES
</TABLE>
2
<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,598,928 $ 1,417
Accounts receivable - billed -- 160,700
Other current assets 23,901 28,216
------------ ------------
Total current assets 2,622,829 190,333
PROPERTY AND EQUIPMENT, NET 119,478 73,365
OTHER ASSETS
Deferred financing costs -- 30,000
Capitalized software cost, net of
amortization of $45,000 and
$37,500, 2000 and 1999, respectively 45,000 52,500
Other assets 21,548 21,548
------------ ------------
Total other assets 66,548 104,048
------------ ------------
Total Assets $ 2,808,855 $ 367,746
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, net of unamortized
discount of $0 and $20,797 in 2000
and 1999, respectively $ 218,700 $ 953,151
Accounts payable 477,076 449,750
Accrued expenses 213,405 158,590
Deferred income 9,000 12,000
Obligation under capital lease 19,295 11,313
------------ ------------
Total current liabilities 937,476 1,584,804
LONG-TERM LIABILITIES
Long-term portion of notes payable 2,526,501 28,765
------------ ------------
Total long-term liabilities 2,526,501 28,765
------------ ------------
Total liabilities 3,463,977 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;
89,380,816 and 78,660,189
shares issued at March 31, 2000
and December 31, 1999, respectively 11,780,138 9,912,535
Additional paid-in capital 7,617,487 2,261,472
Treasury stock, at cost (9,864,449
shares in 2000 and 1999) (1,777,891) (1,777,891)
Deferred Stock Compensation (2,407,827) --
Accumulated deficit (15,863,277) (11,638,187)
------------ ------------
Total stockholders' deficit (651,370) (1,242,071)
------------ ------------
Total Liabilities and
Stockholders' Deficit $ 2,808,855 $ 367,746
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
<PAGE> 4
MIGRATEC, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Software licenses $ -- $ 264,396
Consulting services -- 71,180
Software maintenance fees 3,000 --
------------ ------------
Total revenues 3,000 335,576
------------ ------------
COSTS AND EXPENSES
Cost of revenues -- 31,251
Selling and marketing 66,125 182,844
Research and development 505,044 370,859
General and administrative 1,075,461 329,192
------------ ------------
Total costs and expenses 1,646,630 914,146
------------ ------------
LOSS FROM OPERATIONS (1,643,630) (578,570)
Interest and financing expense (2,587,471) (204,409)
Other income, net 6,011 171
------------ ------------
Net loss $ (4,225,090) $ (782,808)
============ ============
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.0563) $ (0.0173)
============ ============
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENTS ISSUED AND
OUTSTANDING (BASIC AND DILUTED) 74,983,972 45,243,109
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE> 5
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,225,090) $ (782,808)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 36,613 33,600
Change in assets and liabilities:
(Increase) decrease in accounts receivable-
billed 160,700 33,509
(Increase) decrease in accounts receivable-
unbilled -- 10,000
(Increase) decrease in deferred financing
costs 30,000 --
(Increase) decrease in other current
assets 4,315 9,405
Increase (decrease) in accounts payable 27,326 (25,730)
Increase (decrease) in accrued expenses 54,815 8,485
Increase (decrease) in deferred income (3,000) --
Deferred stock compensation 447,173 --
Interest expense associated with beneficial
conversion feature of convertible debt 2,500,000 --
Financing fees -- 15,993
Warrants issued for financing fees 1,015 131,300
Amortization of discount on notes payable 20,797 12,012
----------- -----------
Total adjustments 3,279,754 228,574
----------- -----------
Net cash used by operating activities (945,336) (554,234)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (75,226) (3,693)
----------- -----------
Net cash provided by (used in) in
investing activities (75,226) (3,693)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,500,000 417,500
Proceeds from issuance of common stock 1,867,603 264,585
Payments under obligations of capital lease 7,982 (7,342)
Proceeds from (repayment of) shareholder
advances -- (30,000)
Repayment of notes payable (757,512) (7,527)
----------- -----------
Net cash provided by financing activities 3,618,073 637,216
----------- -----------
Net increase (decrease) in cash 2,597,511 79,289
Cash - beginning 1,417 17,389
----------- -----------
Cash - ending $ 2,598,928 $ 96,678
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 79,141 $ 58,455
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
<PAGE> 6
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 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
systems.
During 1999, the Company 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 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 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, 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 in conjunction 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.
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.
6
<PAGE> 7
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
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 2000 and 1999 was $7,500 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.
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 March 31, 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.
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.
7
<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
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 24,886,754 and
23,971,124 shares as of March 31, 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
into the Company's common stock, an additional 20,000,000 and 30,000,000 shares
of the Company's common stock would be outstanding as of March 31, 2000 and as
of May 1, 2000, respectively. Subsequent to March 31, 2000, the final $1,250,000
was funded in connection with the private financing discussed in Note 3. In
connection with this final funding, the Investors were issued 2,000,000 warrants
in addition to the 4,000,000 which were issued as of March 31, 2000.
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 method 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.
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 has not had a material impact on the financial position or
results of operations of the Company.
8
<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
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 became effective for the first fiscal
quarter 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
quarter ended March 31, 2000, the Company incurred a loss of $4,225,090 and used
operating cash of $945,336. 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 as
of May 1, 2000 (See Note 3). 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, management anticipates seeking additional funds. The Company
anticipates that in 2000, its efforts to build relationships with industry
leaders will lead to revenues sufficient to return the Company to profitability.
However, there can be no assurance that the Company will successfully penetrate
the market for software migration services or that additional funds will be
received.
The financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or classification of
liabilities which may result from the inability of the Company to continue as a
going concern.
9
<PAGE> 10
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 3. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable include the following:
3/31/00 12/31/99
------- --------
(UNAUDITED)
<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. 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 outside 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 dated December 4 and
28, 1998. More fully described below. 1,183,333 --
Convertible note payable to an outside 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 dated December 4 and
28, 1998. More fully described below. 1,316,667 --
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. 196,233 232,545
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
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
2000.
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. 34,968 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 14,000 20,000
October 1, 2000
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 2,745,201 923,554
--------- ---------
Total outstanding, net of unamortized
discounts 2,745,201 981,916
Less current portion (218,700) (953,151)
---------- ---------
Long-term portion $2,526,501 $ 28,765
========== =========
</TABLE>
10
<PAGE> 11
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 3. NOTES PAYABLE, (CONTINUED)
On January 25, 2000 (the "Initial Closing"), 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").
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 as of March 31, 2000 and an aggregate of $3,750,000 as of May 1,
2000.
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, 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 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 and May
1, 2000, the Notes may be converted, at the election of the Investors, into
20,000,000 and 30,000,000 shares of common stock, respectively.
The parties to the Agreement are currently negotiating an amendment to the
Agreement that may eliminate the Company's obligation to create the Series A
Preferred Stock and cause the Notes to automatically convert into shares of
common stock on the terms described above in certain circumstances. As of the
date of this report, such amendment has not been finalized.
Pursuant to the Agreement, 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 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 will
record 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.
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.
11) Entering into contracts with any affiliate of the Company.
11
<PAGE> 12
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 3. NOTES PAYABLE, (CONTINUED)
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 three months ended March 31, 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 89,380,816 and 78,660,189 shares were issued, inclusive of treasury stock,
at March 31, 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 March 31, 2000
and December 31,1999, no convertible preferred stock was issued or outstanding.
ISSUANCES OF COMMON STOCK
PRIVATE PLACEMENTS
During 2000, the Company completed private placements of 2,451,000 shares of
unregistered common stock and two-year warrants to purchase a total of 490,200
unregistered shares of common stock at $0.20 per share, at a price of $0.125 per
common 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 March 31, 2000, 438,200 warrants remain unexercised
out of the 490,200 issued.
EXERCISE OF OPTIONS AND WARRANTS
During 2000, the Company issued 8,269,627 shares of common stock upon exercise
of options and warrants, yielding proceeds of $1,561,228.
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.
As of March 31, 2000, certain directors, 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>
12
<PAGE> 13
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 4. CAPITAL STOCK, WARRANTS AND OPTIONS , (CONTINUED)
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
$447,173 for the three month period ended March 31, 2000.
TOTAL OPTIONS AND WARRANTS OUTSTANDING AT MARCH 31, 2000
At March 31, 2000, the Company had options and warrants for the purchase of
common shares as follows:
<TABLE>
<S> <C>
Warrants 7,808,253
Stock Options:
Non-employees 5,025,281
Directors, Officers and Employees 12,053,220
-----------
Total 24,886,754
===========
</TABLE>
NOTE 5. RELATED PARTY TRANSACTIONS
In January and February, 1998, the Company was extended an aggregate of $254,000
of short-term notes by 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, the
remaining 100,000 of these warrants were exercised.
Effective March 25, 1998, the Company reached an agreement with its former
principal executive officer, Mr. Richard Dews, regarding his actions as Chairman
and CEO, his efforts to sell restricted shares of the Company's common stock 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 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 services provided as the Company's legal counsel. 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 placement agent and consulting services related to the
Company's private stock offerings in 1998. In February, 2000, the Company issued
1,000,000 shares of its common stock pursuant to the exercise of these warrants.
13
<PAGE> 14
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 5. RELATED PARTY TRANSACTIONS, (CONTINUED)
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 March 31, 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 quarter of 2000, the Company
has paid a total of $15,000 to four directors as compensation for serving as
directors. No fees were paid or payable to directors in 1999.
NOTE 6. SUBSEQUENT EVENTS
On April 17, 2000, subsequent to over six months of testing of the Company's 32
to 64-bit upgrade technology by Intel Corporation ("Intel"), the Company entered
into a Software License Agreement with Intel. Under the terms of the agreement,
the Company granted a royalty-free license to use its migration software
products to Intel for internal use. The license is perpetual but may be
terminated by the Company after 12 months upon 90 days notice. The agreement
allows Intel to use the Company's technology at Intel's Application Support
Centers to educate independent software vendors on the use and application of
the Company's technology. The agreement also requires Intel and the Company to
use their best efforts to create and execute a joint marketing plan related to
the introduction and dissemination of the Company's technology. The
implementation of the joint marketing plan is intended to include website links,
training, press releases, industry event participation and testimonials.
On April 12, 2000, the Company executed a non-cancelable operating lease for its
office facility for a term of 39 months beginning May 1, 2000. The lease
provides for a monthly base rent of $14,982 with three months of free rent, with
the first rental payment due August 1, 2000. The following is a summary of the
base rents for the next five years:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ 74,910
2001 $179,784
2002 $179,784
2003 $104,874
2004 --
Thereafter --
--------
$539,352
========
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1ST QUARTER ENDED MARCH 31, 2000
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS DISCUSSED IN
THIS QUARTERLY REPORT ON FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF MIGRATEC, INC. AND ITS SUBSIDIARY
(COLLECTIVELY REFERRED TO HEREIN AS "MIGRATEC") MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES ARE DISCUSSED WITH THE FORWARD-LOOKING
STATEMENTS THROUGHOUT THIS REPORT AND ARE SUMMARIZED IN THIS SECTION.
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to explain the major
factors affecting MigraTEC's results of operations and variance of results
between periods. The following discussion of MigraTEC's financial condition and
results of operations should be read along with the financial statements and
notes to the financial statements included elsewhere herein.
Management believes that the net loss for the quarter ended March 31, 2000 was
primarily due to the Company's focus on development activities which were not
revenue producing but which, nevertheless, allowed MigraTEC to complete
principal development of its upgraded 32 to 64-bit migration technology as well
as enhancement of other automated migration tools.
Management believes that its development activity has positioned MigraTEC for
the introduction of its technology into the market during 2000. On April 17,
2000, subsequent to over six months of testing MigraTEC's 32 to 64-bit upgrade
technology by Intel, MigraTEC entered into a Software License Agreement with
Intel. Under the terms of the agreement, MigraTEC granted a royalty-free license
to use its migration software products to Intel for internal use. The license is
perpetual but may be terminated by MigraTEC after 12 months upon 90 days notice.
The agreement allows Intel to use MigraTEC's technology at Intel's Application
Support Centers to educate independent software vendors on the use and
application of the technology. The agreement also requires Intel and MigraTEC to
use their best efforts to create and execute a joint marketing plan related to
the introduction and dissemination of MigraTEC's technology. The implementation
of the joint marketing plan is intended to include website links, training,
press releases, industry event participation and testimonials.
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES
For the first quarter ended March 31, 2000, the Company's revenues decreased by
approximately 99% to $3,000, as compared to $335,576 for the first quarter ended
March 31, 1999. This decrease is attributable to the Company shifting its
strategic focus from selling Y2K products to development of its new technology.
15
<PAGE> 16
OPERATING EXPENSES
The Company's total operating expenses increased by approximately 80% to
$1,646,630 during the first quarter of 2000, as compared to $914,146 for the
first quarter of 1999.
The majority of the Company's operating expenses are related to compensation
costs. The Company's operating expenses were significantly higher in the first
quarter of 2000 as compared to the first quarter of 1999 because the Company
employed 38 individuals during the first quarter of 2000, as compared to 27
individuals in the first quarter of 1999.
Costs of revenues during the first quarter of 2000 were $0, as compared to
$31,251 in 1999. The Company did not earn any revenues in the first quarter of
2000 which had associated costs. This was the result of the Company's change in
focus from selling and servicing its Y2K product to developing its migration
technology.
Selling and marketing expenses decreased approximately 64% to $66,125 during the
first quarter of 2000, as compared to $182,844 for the first quarter of 1999.
This decrease is a result of the Company's change in focus from selling and
servicing its Y2K product to developing its migration technology.
Research and development expenses increased approximately 36% to $505,044 during
the first quarter of 2000, as compared to $370,859 for the first quarter of
1999. This was the result of the Company's change in focus from selling and
servicing its Y2K product to developing its migration technology.
General and administrative expenses increased 227% to $1,075,461 during the
first quarter of 2000, as compared to $329,192 for the first quarter of 1999.
This increase was due generally to the following: (i) replacement of the chief
financial officer in the first quarter of 2000, (ii) director fees of $15,000
were paid (none were paid in the first quarter of 1999) and (iii) accounting and
legal fees increased approximately $179,000 in the first quarter of 2000 as
compared to the first quarter of 1999. In the first quarter of 2000, the Company
issued options to purchase an aggregate of 3,740,000 shares of common stock to
directors, officers and employees with 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 quarter of 2000 was $447,173. In the first quarter of 1999, the
Company did not issue any stock options to directors, officers or employees
which were exercisable at per share prices below fair market value at the date
of grant, and the Company did not have any deferred compensation expense from
previous grants.
INTEREST AND FINANCING EXPENSE
The Company's interest and financing expense increased by approximately 1,166%
to $2,587,471 during the first quarter of 2000, as compared to $204,409 for the
first quarter of 1999. The two components of this expense are interest expense
and financing fees. Interest expense increased 4,376% to $2,556,456 during the
first quarter of 2000, as compared to $57,116 for the first quarter of 1999. For
the first quarter of 2000, the Company recorded $2,500,000 of interest expense
in accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios."
The expense recorded relates to the convertible secured promissory notes payable
and related warrants issued with a conversion price below the market price of
the Company's common stock at the date of issuance. Financing fees decreased 79%
to $31,015 during the first quarter of 2000, as compared to $147,293 for the
first quarter of 1999. Financing fees in the first quarter of 1999 represent the
amortized portion of fees paid in connection with issuance of debt in prior
years. This debt was converted into common stock of the Company in 1999.
16
<PAGE> 17
OTHER INCOME AND EXPENSE
Other income in the first quarter of 2000 increased to $6,011 as compared to
$171 in the first quarter of 1999. In 2000, the Company was able to invest in
short-term interest bearing investments using funds from the private placement
funding of $2,500,000 in the first quarter of 2000.
PROVISION FOR INCOME TAXES
As a result of operating losses for 2000 and 1999, the Company has not had a
federal income tax obligation. No tax benefit has been recorded due to the
uncertainty that the Company will generate sufficient taxable income during the
carry forward period to realize the benefit of the net deferred tax asset. The
carry forward period will expire in 2014.
NET LOSS
For the first quarter ended March 31, 2000, the Company incurred a net loss of
$4,225,090 or $0.0563 per share, as compared with a net loss of $782,808 or
$0.0173 per share for the first quarter ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $945,336 for the first quarter of 2000
and $554,234 for the first quarter of 1999, which resulted from the operating
loss, decreased by net changes in assets and liabilities and non-cash expenses
and income of $3,279,754 for the first quarter of 2000 and $228,574 for the
first quarter of 1999.
At March 31, 2000, the Company had working capital of $1,685,353, as compared to
a working capital deficit of $1,394,471 at December 31, 1999.
At March 31, 2000, the Company had cash of $2,598,928 and no outstanding
accounts receivable.
At March 31, 2000, the Company's outstanding debt obligations included (i)
$2,500,000 in convertible debt held by two outside investors, (ii) $196,233 in
notes payable from outside investors and (iii) $48,968 in other notes payable
relating to settlements with a vendor and a former employee.
In the first quarter of 2000, the Company received proceeds of $3,618,073 from
financing activities. The Company received $1,867,603 in connection with the
issuance of common stock and $2,500,000 in proceeds from convertible debt from
two investors. The cash proceeds were offset by $749,530 expended for the
repayment of principal of short-term loans from various investors, directors, an
officer and obligations under a capital lease.
The Company had substantial operating losses during the first quarter of 2000
and the prior three years. The Company began active operations in January, 1991,
and while the Company has experienced certain periods of profitability since
inception, it has sustained substantial losses in recent years. For the first
quarter of 2000, the Company incurred a net loss of $4,225,090, and for the
years ended December 31, 1999, 1998, and 1997, the Company incurred net losses
of $4,184,078, $3,458,075 and $2,517,606, respectively. At March 31, 2000 and
December 31, 1999, the Company had accumulated deficits of $15,863,277 and
$11,638,187, respectively.
In January, 2000 the Company entered into a private placement agreement that has
provided it with $2,500,000 as of
17
<PAGE> 18
March 31, 2000. As of May 1, 2000, the Company has received an aggregate of
$3,750,000, the maximum funding under this agreement. Management believes that
the proceeds from this private placement and anticipated operating revenues will
meet working capital requirements for 2000. If operating revenues fall short of
management's projections, management anticipates seeking additional funds.
Results of operations in the future will be influenced by numerous factors
including, but not limited to:
o technological developments;
o further development of the Company's proprietary software products and
services;
o expansion of the Company's marketing program and market acceptance of
its products and services;
o capacity to further identify the Company as a migrations solutions
provider;
o the Company's ability to control increases in expenses associated with
sales growth and other costs;
o the availability of substantial additional funding; and
o the Company's ability to attract and maintain a skilled and cohesive
management group.
FORWARD-LOOKING STATEMENTS
The foregoing discussion may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
intended to be covered by the safe harbors created by such provisions. All
statements, other than statements of historical fact, included in or
incorporated by reference into this Form 10-QSB, are forward-looking statements.
The forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of MigraTEC.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, then actual results may vary materially from those
anticipated, estimated or projected. Although management believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove to have been correct.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by MigraTEC, management or any other person that
the objectives of MigraTEC will be achieved.
Key factors that could cause MigraTEC's actual results to differ materially from
expectations, estimates of costs, projected results or anticipated results
include, but are not limited to, the following risks:
o MigraTEC may not be able to generate sufficient cash flows to fund
operations or to obtain additional financing on favorable terms;
o MigraTEC may not be able to effectively penetrate its target markets
for migration products and sales;
o MigraTEC may not be able to successfully develop and/or protect its
technology
18
<PAGE> 19
o MigraTEC may not be able to effectively control increases in expenses
associated with sales growth and other costs;
o management may not be able to successfully implement the business plan
and sales strategy;
o MigraTEC may not be able to attract and retain a skilled and cohesive
management group; and
o unfavorable changes in economic and industry conditions and regulatory
requirements may develop.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1998, Carroll Independent School District filed suit against the
Company in District Court, Tarrant County, Texas, seeking payment for unpaid
business and personal property taxes related to 1996 (Carroll Independent School
District v. One Up Corporation, Cause No. L-14690). Judgment was entered on
January 27, 2000 for the plaintiff in the amount of $90,056.45, which includes
interest and court costs.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the shareholders' agreement between MigraTEC and certain of its
shareholders, dated as of January 25, 2000, MigraTEC may not declare or pay
dividends, or make any distribution with respect to, its capital stock without
the approval of 70% of its board of directors.
MigraTEC's agreement with MJ Capital Partners, III, L.P., dated as of November
16, 1998, restricts the Company's ability to declare or pay any dividends with
respect to its common stock as long as any obligation under such agreement
remains outstanding. MigraTEC is currently making monthly payments of principal
and interest under the agreement, which is scheduled to be paid in full by
December 31, 2000 under the current payment terms.
During the three months ended March 31, 2000, MigraTEC sold its unregistered
securities in the transactions described below. Unless stated otherwise below,
for each such transaction, exemption from registration of the sale of these
securities under the applicable federal and state securities laws is claimed by
MigraTEC under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and under comparable limited offering exemptions under state
securities laws, as a transaction by an issuer which does not involve a public
offering.
During January, 2000, MigraTEC issued an aggregate of 2,451,000 shares of its
common stock to thirteen 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 490,200 shares of MigraTEC's common stock at a price of $0.20
per share. Upon the exercise of such warrants, MigraTEC issued 52,000 shares of
its common stock during the first quarter of 2000.
During the first quarter of 2000, MigraTEC issued an aggregate of 1,995,789
shares of its common stock at an average price of $0.198 per share upon the
exercise of stock options by an aggregate of 24 employees, officers and
directors.
During the first quarter of 2000, MigraTEC issued an aggregate of 2,603,588
shares of its common stock to 26 investors pursuant to the exercise of warrants
at $.20 per share issued in connection with previous loans made to the Company.
During the first quarter of 2000, MigraTEC issued an aggregate of 1,662,000
shares of its common stock to six investors at a price of $.20 per share
pursuant to the exercise of warrants issued in 1998 as compensation for services
provided to MigraTEC.
During the first quarter of 2000, MigraTEC issued an aggregate of 850,000 shares
of its common stock to three investors at a price of $.10 per share upon the
exercise of warrants issued in connection with a private offering by the Company
in the third quarter of 1998.
During the first quarter of 2000, MigraTEC issued an aggregate of 84,000 shares
of its common stock to seven investors at a price of $.20 per share upon the
exercise of warrants issued in connection with a private offering by the Company
in the first quarter of 1999.
20
<PAGE> 21
During the first quarter of 2000, MigraTEC issued an aggregate of 86,000 shares
of its common stock to six investors at a price of $.20 per share upon the
exercise of warrants issued in connection with a private offering by the Company
in the third quarter of 1999.
During the first quarter of 2000, MigraTEC issued an aggregate of 39,600 shares
of its common stock to three investors at a price of $.20 per share upon the
exercise of warrants issued in connection with a private offering by the Company
in the fourth quarter of 1999.
During the first quarter of 2000, MigraTEC issued an aggregate of 177,000 shares
of its common stock to five investors at prices ranging from $.01 to $.50 per
share upon the exercise of warrants issued in connection with consulting
agreements.
During the first quarter of 2000, MigraTEC issued an aggregate of 119,650 shares
of its common stock to three investors at a price of $.01 per share upon the
exercise of warrants issued in connection with loans made to the Company.
During the first quarter of 2000, MigraTEC issued an aggregate of 600,000 shares
of its common stock to its former principal executive officer at a price of $.25
per share upon the exercise of warrants issued in connection with an agreement
reached in March, 1998 with this individual.
During the first quarter of 2000, pursuant to Regulation D of the Securities
Act, MigraTEC issued convertible secured promissory notes in the aggregate
principal amount of $2,500,000 in a private financing agreement with MT
Partners, L.P., an affiliate of Cardinal Investment Company, Inc., and Mercury
Fund No. 1, Ltd., an affiliate of Mercury Ventures, Ltd. (collectively, the
"Investors"). The notes do not accrue interest and are convertible at any time,
at the election of the Investors, into shares of MigraTEC's common stock, on the
basis of one share of common stock for each $.125 in principal amount of the
notes outstanding at the time of conversion. The agreement requires MigraTEC to
use its best efforts to create, as soon as practical, 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 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
were convertible into 20,000,000 shares of MigraTEC's common stock. In
connection with this transaction, as of March 31, 2000, the Investors were also
issued warrants to purchase up to an aggregate of 4,000,000 shares of MigraTEC's
common stock at $0.20 per share, exercisable for a period of five years from the
date of issuance.
The parties to this transaction are currently negotiating an amendment to their
financing agreement that may eliminate MigraTEC's obligation to create the
Series A Preferred Stock and cause the notes to automatically convert into
shares of common stock on the terms described above in certain circumstances. As
of the date of this report, such amendment has not been finalized.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
21
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be furnished pursuant to this Item 6(a) are listed in
the Exhibit Index filed herewith, which Exhibit Index is hereby incorporated
herein by reference.
On March 10, 2000, MigraTEC filed a report on Form 8-K relating to the initial
closing of a $3,750,000 three-stage private financing to the Company, the
replacement of two members of its board of directors and the hiring of a new
chief financial officer.
On March 20, 2000, MigraTEC filed a report on Form 8-K reporting a change of its
independent accountants.
22
<PAGE> 23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on this 19th day of May, 2000.
MIGRATEC, INC.
By: /s/ W. Curtis Overstreet
--------------------------------------------
W. Curtis Overstreet
Chief Executive Officer and President
By: /s/ T. Ulrich Brechbuhl
--------------------------------------------
T. Ulrich Brechbuhl
Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- ------------------------------------------
<S> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Warrant to MT Partners, L.P. and Mercury
Fund No. 1, Ltd. (2)
10.1 Commercial Lease Agreement between the Company
and TDC Dallas Partners No. 2, Ltd. dated April
7, 1997 (1)
10.2 Employment Agreement between the Company and W.
Curtis Overstreet dated April 10, 1997 (1)
10.3 Employment Agreement between the Company and
Joseph B. Meredith dated June 1, 1997 (1)
10.4 Employment Agreement between the Company and
Rick J. Johnson dated July 1, 1997 (1)
10.5 Agreement between the Company and Electronic
Data Systems Corporation dated as of September
1, 1998 (1)
10.6 MigraTEC, Inc. Long-Term Incentive Plan (2)
10.7 Form of Incentive Stock Option Agreement
pursuant to the MigraTEC, Inc. Long-Term
Incentive Plan (2)
10.8 Form of Non-Qualified Stock Option Agreement
pursuant to the MigraTEC, Inc. Long-Term
Incentive Plan (2)
10.9 Warrant Agreement between MigraTEC, Inc. and MT
Partners, L.P. and Mercury Fund No. 1, Ltd.,
dated as of January 25, 2000 (2)
10.10 $1,975,000 Convertible Secured Promissory Note
by MigraTEC, Inc. to MT Partners, L.P., dated as
of January 25, 2000 (2)
10.11 $1,775,000 Convertible Secured Promissory Note
by MigraTEC, Inc. to Mercury Fund No. 1, Ltd.,
dated as of January 25, 2000 (2)
10.12 Security Agreement between MigraTEC, Inc. and MT
Partners, L.P. and Mercury Fund No. 1, Ltd.,
dated as of January 25, 2000 (2)
10.13 Shareholders' Agreement between MigraTEC, Inc.
and certain shareholders, dated as of January
25, 2000 (2)
10.14 Registration Rights Agreement between MigraTEC,
Inc. and certain shareholders, dated as of
January 25, 2000 (2)
10.15 Form of Director Indemnification Agreement
between MigraTEC, Inc. and Kevin C. Howe and
Drew R. Johnson, dated as of January 25, 2000
(2)
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.16 Office Lease Agreement between MigraTEC, Inc.
and Charter Crown Plaza Partners, L.P., dated as
of April 12, 2000. (2)
11.1 Statement re: Computations of Net Loss per Share
(3)
21.1 Subsidiary of MigraTEC, Inc. (2)
27.1 Financial Data Schedule (3)
</TABLE>
- ----------------------
(1) Incorporated by reference from Post-Effective Amendment No. 1 to MigraTEC's
Registration Statement on Form SB-2 filed May 7, 1999, File No. 333-65093.
(2) Incorporated by reference from the report on Form 10-KSB filed by MigraTEC
on April 14, 2000.
(3) Filed herewith.
25
<PAGE> 1
EXHIBIT 11.1
MIGRATEC, INC. AND SUBSIDIARY
Computations of Net Loss Per Share
The following table sets forth the computation of basic and diluted loss per
share as calculated in accordance with FASB 128.
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted loss per share -
Net loss $ (4,225,090) $ (782,808)
============ ============
Denominator:
Denominator for basic loss per share -
Weighted average shares 74,983,972 45,243,109
Effect of dilutive securities:
Stock options and warrants -- --
Dilutive potential common shares -- --
------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 74,983,972 45,243,109
============ ============
Basic loss per share $ (0.0563) $ (0.0173)
============ ============
Diluted loss per share $ (0.0563) $ (0.0173)
============ ============
</TABLE>
As MigraTEC incurred a net loss for the three months ended March 31, 2000 and
1999, there were no adjustments for potentially dilutive securities as the
adjustments would have been anti-dilutive.
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31,
2000, FILED AS PART OF FORM 10-QSB QUARTERLY REPORT FOR THE THREE MONTHS ENDED
MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-QSB QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,598,928
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,622,829
<PP&E> 914,318
<DEPRECIATION> (794,840)
<TOTAL-ASSETS> 2,808,855
<CURRENT-LIABILITIES> 937,476
<BONDS> 0
0
0
<COMMON> 11,780,138
<OTHER-SE> (11,128,768)
<TOTAL-LIABILITY-AND-EQUITY> 2,808,855
<SALES> 3,000
<TOTAL-REVENUES> 3,000
<CGS> 0
<TOTAL-COSTS> 1,646,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,587,471
<INCOME-PRETAX> (4,225,090)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,225,090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,225,090)
<EPS-BASIC> (0.056)
<EPS-DILUTED> (0.056)
</TABLE>
