<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 September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER
000-28220
MIGRATEC, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 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, $0.001 Par Value Per Share
Transitional Small Business Disclosure Format (Check One):
Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
MIGRATEC, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C>
Consolidated Condensed Balance Sheets at September 30, 2000 (unaudited),
and December 31, 1999 3
Consolidated Condensed Statements of Operations for the three months and nine
months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
Comparison of the three months ended September 30, 2000 and 1999 16
Comparison of the nine months ended September 30, 2000 and 1999 17
Liquidity and Capital Resources 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
MIGRATEC, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 934,973 $ 1,417
Accounts receivable 127,149 160,700
Other current assets 136,847 28,216
----------------- -----------------
Total current assets 1,198,969 190,333
PROPERTY AND EQUIPMENT, NET 154,783 73,365
OTHER ASSETS
Deferred financing costs -- 30,000
Capitalized software cost, net of amortization of $60,025
and $37,500, in 2000 and 1999, respectively 30,892 52,500
Other assets 7,756 21,548
----------------- -----------------
Total other assets 38,648 104,048
----------------- -----------------
TOTAL ASSETS $ 1,392,400 $ 367,746
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable, net of unamortized discount of $0 and $20,797
in 2000 and 1999, respectively $ 70,036 $ 953,151
Accounts payable 271,108 449,750
Accrued expenses 394,303 158,590
Deferred income 168,000 12,000
Obligation under capital lease 1,047 11,313
----------------- -----------------
Total current liabilities 904,494 1,584,804
LONG-TERM LIABILITIES
Long-term portion of notes payable 3,772,161 28,765
Long-term portion of obligation under capital lease 4,539 --
----------------- -----------------
Total long-term liabilities 3,776,700 28,765
----------------- -----------------
TOTAL LIABILITIES 4,681,194 1,613,569
MINORITY INTEREST (3,752) (3,752)
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK
50,000,000 shares authorized; none issued or outstanding -- --
STOCKHOLDERS' DEFICIT
Common stock $0.001 par value in 2000 and no par value in 1999;
200,000,000 shares authorized; 90,752,878 and 78,660,189
shares issued at September 30, 2000 and December 31, 1999,
respectively 90,753 9,912,535
Additional paid-in capital 20,821,336 2,261,472
Treasury stock, at cost (9,864,449 shares in 2000 and 1999) (1,777,891) (1,777,891)
Deferred stock compensation (1,945,416) --
Accumulated deficit (20,473,824) (11,638,187)
----------------- -----------------
Total stockholders' deficit (3,285,042) (1,242,071)
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,392,400 $ 367,746
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
MIGRATEC, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Software licenses $ -- $ 152,923 $ -- $ 417,319
Consulting services 60,000 126,344 60,000 332,173
Software maintenance fees 3,000 -- 9,000 --
------------ ------------ ------------ ------------
TOTAL REVENUES 63,000 279,267 69,000 749,492
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of revenues 22,052 42,120 22,052 130,080
Selling and marketing 326,614 15,980 629,372 261,673
Research and development 669,997 337,047 1,820,978 1,074,312
General and administrative 694,252 1,119,610 2,633,868 1,838,496
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,712,915 1,514,757 5,106,270 3,304,561
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,649,915) (1,235,490) (5,037,270) (2,555,069)
Other income (expense)
Interest and financing expense (10,315) (62,194) (3,856,977) (347,571)
Other income, net 24,666 64 58,610 245
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 14,351 (62,130) (3,798,367) (347,326)
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY EXPENSE (1,635,564) (1,297,620) (8,835,637) (2,902,395)
EXTRAORDINARY EXPENSE FOR RESTRUCTURE OF DEBT -- (318,023) -- (318,023)
------------ ------------ ------------ ------------
NET LOSS $ (1,635,564) $ (1,615,643) $ (8,835,637) $ (3,220,418)
============ ============ ============ ============
LOSS BEFORE EXTRAORDINARY EXPENSE PER COMMON SHARE $ (0.0203) $ (0.0238) $ (0.1123) $ (0.0586)
EXTRAORDINARY EXPENSE PER COMMON SHARE -- (0.0058) -- (0.0064)
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.0203) $ (0.0296) $ (0.1123) $ (0.0650)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
ISSUED AND OUTSTANDING (BASIC AND DILUTED) 80,687,459 54,512,750 78,654,882 49,565,500
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
MIGRATEC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,835,637) $(3,220,418)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 186,371 123,300
Deferred stock compensation 909,584 --
Interest expense associated with beneficial conversion feature of 3,750,000 --
convertible debt
Financing fees -- 33,794
Warrants issued for financing fees 4,930 137,307
Amortization of discount on notes payable 20,797 25,359
Conversion of debt to common stock -- 8,490
Issuance of options - settlement with EAI Partners, Inc. -- 706,500
Extraordinary expense for restructure of debt -- 318,023
Change in assets and liabilities:
(Increase) decrease in accounts receivable - billed 33,551 59,456
(Increase) decrease in accounts receivable - unbilled -- (38,160)
(Increase) decrease in shareholder advance -- (2,390)
(Increase) decrease in deferred financing costs 30,000 --
(Increase) decrease in other current assets (190,049) (14,816)
Increase (decrease) in accounts payable (178,642) 114,663
Increase (decrease) in accrued expenses 235,713 (3,933)
Increase (decrease) in deferred income 156,000 15,000
----------- -----------
Total adjustments 4,958,255 1,482,593
----------- -----------
Net cash used by operating activities (3,877,382) (1,737,825)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (175,385) (5,328)
Retirement of property and equipment 11,539 --
Decrease in security deposits 13,792 --
(Increase) in capitalized software costs (917) (90,000)
----------- -----------
Net cash provided by (used in) in investing activities (150,971) (95,328)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,750,000 617,500
Proceeds from issuance of common stock 2,128,152 1,397,799
Payments under obligations of capital lease (5,727) (22,377)
Repayment of shareholder advances -- (30,000)
Repayment of notes payable (910,516) (140,198)
----------- -----------
Net cash provided by financing activities 4,961,909 1,822,724
----------- -----------
Net increase (decrease) in cash 933,556 (10,429)
CASH - BEGINNING 1,417 17,389
----------- -----------
CASH - ENDING $ 934,973 $ 6,960
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 98,288 $ 159,093
----------- -----------
Issuance of stock upon conversion of debt to equity $ -- $ 720,572
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
MigraTEC, Inc., a Delaware corporation (the "Company"), is a developer and
provider of software technology and expertise 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 and 2000 were related to research and development
activities.
The Company provides migration services and consulting to customers. The Company
also 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.
The Company is the parent of a majority owned foreign subsidiary, One Up
Computer Services, Ltd. ("One Up, Ltd."), incorporated under the laws of the
Province of Ontario, Canada. One Up, Ltd. ceased its operations in 1997. At
December 31, 1999, a reserve was provided for all of the assets of One Up, Ltd.
in the amount of $36,808, which the Company does not expect to be realizable.
Liabilities of One Up, Ltd. of $45,736 will remain until the obligations are
resolved.
The accompanying unaudited consolidated condensed financial statements reflect,
in the opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows of the Company. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to rules and regulations promulgated by the Securities and
Exchange Commission. These statements should be read together with the audited
financial statements and notes thereto for the years ended December 31, 1999 and
1998, included in the Company's Form 10-KSB for the fiscal year ended December
31, 1999 on file with the Commission. The results of operations for the interim
periods shown herein are not necessarily indicative of the results to be
expected for any future interim period or for the entire year.
PRINCIPLES OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of the
Company and One Up, Ltd., collectively referred to as "the Company."
Intercompany transactions and balances have been eliminated in consolidation.
INDUSTRY SEGMENT
The Company operates in a single industry segment, the developing and providing
of software technology that automates the process of upgrading or migrating
software.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The Company provides for depreciation on the straight-line basis
over the estimated useful life of 3 to 5 years for the related assets. Leasehold
improvements are amortized over the life of the improvements or the lease term
if shorter on a straight-line basis.
Major repairs or replacements of property and equipment are capitalized.
Maintenance, repairs and minor replacements are expensed as incurred.
6
<PAGE> 7
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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 the first nine months of 2000 and 1999 was $22,525 and
$22,500, 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 September 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. Consulting services revenues includes
revenue related to the Company's contract with Dell. This contract is a multiple
elements agreement for which revenue is recognized pro rata over the contract
term.
7
<PAGE> 8
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
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 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 26,009,263 and
23,264,609 shares as of September 30, 2000 and 1999, respectively, would be
anti-dilutive due to the Company's losses in 2000 and 1999 and, accordingly, are
not included in the computation of diluted earnings per share for the respective
periods.
If the convertible secured promissory notes discussed in Note 3 are converted,
an additional 30,000,000 shares of the Company's common stock would be
outstanding.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could vary from estimates used.
STOCK-BASED COMPENSATION
The Company has elected to account for stock-based compensation to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation for stock options is measured
as the excess, if any, of the fair market value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Such excess is deferred and amortized as compensation expense over the
respective vesting periods, which are principally 36 months.
The Company accounts for stock-based awards issued to non-employees in
accordance with the fair value method of SFAS 123 and Emerging Issues Task Force
Issue No. 96-18. Accordingly, the Company measures the cost of such awards based
on the fair market value of the options using the Black-Scholes option pricing
model.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," was adopted by the Company as of January 1, 1998. The new rules require
the reporting of comprehensive income and its components; however, the adoption
of this statement had no impact on the Company's net loss, stockholders'
deficit, or the Company's disclosures.
8
<PAGE> 9
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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 nine
months ended September 30, 2000, the Company incurred a loss of $8,835,637 and
used operating cash of $3,877,382. 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 developing market for
software migration software, 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 in the
latter part of 2000 and potentially over the next twelve months to fund expanded
sales and marketing as well as development efforts and continued operations.
There can be no assurance that the Company will successfully raise additional
funds sufficient to finance its continued operations.
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
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 3. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(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 issued 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 issued a two-year warrant to purchase 50,000 shares of common
stock at $0.01 per share. -- 23,362
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 dated December
4 and 28, 1998. More fully described below. 1,775,000 --
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 dated December
4 and 28, 1998. More fully described below. 1,975,000 --
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 issued 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 issued 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. 61,636 232,545
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
issued 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. Beginning in September, 1999 two-year warrants
issued upon each renewal for 10,000 shares of the Company's common 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. 30,561 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. -- 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
issued a two-year warrant to purchase 6,150 shares of common stock at $0.01 per
share. -- 61,503
----------- ------------
Total outstanding, net of unamortized discounts 3,842,197 981,916
Less current portion (70,036) (953,151)
----------- ------------
Long-term portion $ 3,772,161 $ 28,765
=========== ============
</TABLE>
10
<PAGE> 11
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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"). Since January 25, 2000, each of
the Investors has had a representative on the Company's Board of Directors.
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 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 were 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 and final stage of this 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;
5) incurring additional debt in excess of $250,000;
6) incurring any single capital expenditure in excess of $150,000;
11
<PAGE> 12
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 3. NOTES PAYABLE (CONTINUED)
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 Certificate 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 nine months ended September 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 common stock, $0.001
par value per share, of which approximately 90,752,878 and 78,660,189 shares
were issued, inclusive of treasury stock, at September 30, 2000 and December 31,
1999, respectively. As discussed below, the Company reincorporated in Delaware
in August, 2000 and, in connection with the reincorporation, established a par
value of $0.001 per common share. Accordingly, the Board of Directors authorized
the stated capital of the Company to be adjusted to reflect this new par value,
with a corresponding adjustment to additional paid-in capital.
On June 23, 2000, the Company held its Annual Stockholders' Meeting, at which
the stockholders approved reincorporation in Delaware and the creation of blank
check preferred stock. The reincorporation was completed in August, 2000. As a
result, the Company's Board of Directors is now 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. The preferred stock authorized under the Company's
previous Florida Articles of Incorporation, none of which was outstanding at the
time of reincorporation, was cancelled at the time of reincorporation.
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
issued 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 September 30, 2000,
warrants to purchase 438,200 shares of common stock of the original 490,200
remain unexcercised.
EXERCISE OF OPTIONS AND WARRANTS
During the first three quarters of 2000, the Company issued 9,641,689 shares of
common stock upon exercise of options and warrants yielding proceeds of $
1,821,897.
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 Stockholders'
Meeting held June 23, 2000.
12
<PAGE> 13
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 4. CAPITAL STOCK, WARRANTS AND OPTIONS (CONTINUED)
As of September 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 OF WEIGHTED
RANGE OF EXERCISE PRICES UNDERLYING SHARES AVERAGE TOTAL
------------------------ ----------------- -------- -----
<S> <C> <C> <C>
Granted at market value
Officers and Directors
$0.75 to $1.375 1,550,000 $ 0.911 $ 1,412,500
Employees
$0.74 to $2.87 1,120,708 1.177 1,319,193
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
-------------- --------- -----------
6,410,708 $ 0.615 $ 3,941,693
============== ========= ===========
</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
$909,584 for the nine month period ended September 30, 2000.
TOTAL OPTIONS AND WARRANTS OUTSTANDING
At September 30, 2000, the Company had options and warrants outstanding for the
purchase of common shares as follows:
<TABLE>
<CAPTION>
<S> <C>
Warrants 8,941,008
Stock Options:
Non-employees 4,870,281
Directors, Officers and Employees 12,197,974
-------------
TOTAL 26,009,263
=============
</TABLE>
In August 1999, the Company entered into a Stock Option Agreement with EAI
Partners, Inc. ("EAI") which required the Company to file a registration
statement covering shares underlying the options no later than August 31, 2000.
On August 31, 2000, the Company filed the required registration statement.
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, (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 Mr. Dews $60,000 in full satisfaction, including
principal and accrued interest, of amounts he previously loaned to the Company,
(5) the Company
13
<PAGE> 14
MIGRATEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 5. RELATED PARTY TRANSACTIONS (CONTINUED)
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
shares, respectively, 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 a warrant to
purchase 100,000 shares of common stock at $0.10 per share, exercisable until
September 2001. As of September 30, 2000, this warrant has not been exercised as
to any shares of common stock.
A director was paid $0 and $300 in 2000 and 1999, respectively, as compensation
for legal services to the Company. During the nine months ended September 30,
2000, four directors of the Company have earned an aggregate of $60,000 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 $ 44,946
2001 179,784
2002 179,784
2003 104,874
2004 --
Thereafter --
----------
$ 509,388
==========
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
3RD QUARTER ENDED SEPTEMBER 30, 2000
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS DISCUSSED IN
THIS QUARTERLY REPORT ON FORM 10-QSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF MIGRATEC, INC. AND OUR SUBSIDIARY
(COLLECTIVELY REFERRED TO HEREIN AS "MIGRATEC") MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES ARE DISCUSSED WITH THE FORWARD-LOOKING
STATEMENTS THROUGHOUT THIS REPORT AND ARE SUMMARIZED IN THIS SECTION.
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to explain the major
factors affecting MigraTEC's results of operations and variance of results
between periods. The following discussion of MigraTEC's financial condition and
results of operations should be read along with the financial statements and
notes to the financial statements included elsewhere herein.
Management believes that the net loss for the quarter ended September 30, 2000
was primarily due to the Company's focus on development activities which did not
produce significant revenue 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 positioned MigraTEC for the introduction of its
technology into the market during the latter part of the third quarter of 2000.
A portion of MigraTEC's product line and services are designed for use with the
Intel(R) Itanium(TM) 64-bit processor. On April 17, 2000, subsequent to over six
months of testing of MigraTEC's 32 to 64-bit upgrade technology by Intel,
MigraTEC entered into a software license agreement with Intel. Under the terms
of the agreement, MigraTEC granted a royalty-free license to use its migration
software products to Intel for internal use. The license is perpetual, but may
be terminated by MigraTEC after 12 months upon 90 days' notice. The agreement
allows Intel to use MigraTEC's technology at Intel's Application Support Centers
to educate independent software vendors on the use and application of the
technology. The agreement also requires Intel and MigraTEC to use their best
efforts to create and execute a joint marketing plan related to the introduction
and dissemination of MigraTEC's technology. The implementation of the joint
marketing plan is intended to include website links, training, press releases,
industry event participation and testimonials.
The demand for MigraTEC's 32 to 64-bit migration products and services largely
depends on the introduction of the Intel(R) Itanium(TM) 64-bit processor, which
was originally expected in the early fall of 2000. During the quarter ended
September 30, 2000, Intel released an earnings report announcing that
introduction of the Itanium(TM) 64-bit processor would be delayed until the
first half of 2001. MigraTEC's management believes that this delay will result
in a similar delay in the demand for MigraTEC's initial products and services,
but will not substantially impact the longer term potential market for the
Company's products and services. However, if the Intel(R) Itanium(TM) 64-bit
processor is not successfully introduced in the first half of 2001, MigraTEC's
results of operations and financial condition will be materially adversely
affected.
In May 2000, MigraTEC entered into a consulting agreement with Dell to provide
migration technology expertise, migration process 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. MigraTEC believes that the Company
will have the opportunity to contract with these ISVs and customers to upgrade a
significant number of additional applications as a result of this agreement.
During the second quarter of 2000, MigraTEC also began working with IBM's
Monterey development team to adapt MigraTEC's software migration technology to
provide an automated path for migrating 32-bit applications to the 64-bit
Monterey environment. Management believes that this is the first step in
introducing MigraTEC's software migration technology to IBM's ISVs and the UNIX
marketplace.
15
<PAGE> 16
During September, 2000, as part of MigraTEC's efforts to prepare for future
growth and increased market visibility, managerial responsibilities were
realigned. The Company's Chief Financial Officer, T. Ulrich Brechbuhl, assumed
the additional responsibilities of President of the Company, allowing the Chief
Executive Officer, W. Curtis Overstreet, to focus his attention increasingly on
external constituencies.
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES
For the third quarter ended September 30, 2000, the Company's revenues decreased
by approximately 77% to $63,000, as compared to $279,267 for the third quarter
ended September 30, 1999. Management believes that this decrease is attributable
to the Company shifting its strategic focus from selling Y2K products in 1999 to
development of its new technology. In the third quarter of 2000, the Company
recognized $60,000 of revenues as a result of its Dell consulting contract. The
balance of revenues in the third quarter of 2000 are from deferred software
maintenance fees associated with a 1999 Y2K software contract.
COSTS AND EXPENSES
The Company's total costs and expenses increased by approximately 13% to
$1,712,915 during the third quarter of 2000, as compared to $1,514,757 for the
third quarter of 1999.
The majority of the Company's costs and expenses are related to compensation
costs. The Company's operating expenses were higher in the third quarter of 2000
as compared to the third quarter of 1999 because the Company employed 44
individuals during the third quarter of 2000, as compared to 26 individuals in
the third quarter of 1999.
Costs of revenues decreased approximately 48% to $22,052 during the third
quarter of 2000, as compared to $42,120 for the third quarter of 1999. Costs of
revenues in 2000 and 1999 consist of personnel costs and benefits directly
attributable to the associated revenues. This decrease is a result of the
Company's change in focus from selling and servicing its Y2K product to selling
and marketing its software migration technology.
Selling and marketing expenses increased approximately 194% to $326,614 during
the third quarter of 2000, as compared to $15,980 for the third quarter of 1999.
This increase is a result of the Company's change in focus from selling and
servicing its Y2K product to selling and marketing its software migration
technology.
Research and development expenses increased approximately 78% to $669,997 during
the third quarter of 2000, as compared to $377,047 for the third quarter of
1999. This increase was the result of the Company's change in focus from selling
and servicing its Y2K product to developing its software migration technology.
General and administrative expenses decreased 38% to $694,252 during the third
quarter of 2000, as compared to $1,119,610 for the third quarter of 1999. The
decrease in general and administrative expenses in 2000, as compared to 1999,
was due to an expense of $706,500 incurred in the third quarter of 1999 as a
result of a settlement with EAI Partners, Inc. ("EAI"). In August, 1999, the
Company entered into a stock option agreement in settlement and replacement of a
prior stock option agreement entered into by the Company and EAI during
November, 1996. The decrease in general and administrative expenses was
partially offset by an increase in (i) legal and accounting fees, which
increased $102,492 (ii) insurance, which increased $42,453 (iii) director fees,
which increased $23,500 and (iv) SEC filing fees, which increased $17,811. In
the nine months ended September 30, 2000, the Company issued options to purchase
an aggregate of 3,740,000 shares of common stock to directors, officers and
employees, some of which with exercise prices less than the fair market value at
the date of grant. The aggregate excess of the fair market value as compared to
the exercise price 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 third quarter of 2000 was $204,688. In the first
nine months of 1999, the Company did not issue any stock options to directors,
officers or employees which were exercisable at 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 decreased to $10,315 during the
third quarter of 2000, as compared to $62,194 for the third quarter of 1999.
Interest expense decreased to $10,315 during the third quarter of 2000, as
compared to $56,187 for the third quarter of 1999. Interest expense decreased
between these two periods because the Company had $92,197 of interest-bearing
debt outstanding at September 30, 2000, as compared to $1,088,905 at
16
<PAGE> 17
September 30, 1999. Since September 30, 1999, the majority of this debt was
either repaid in the first quarter of 2000 or converted into common stock of the
Company in the fourth quarter of 1999. Financing fees decreased 100% to $0
during the third quarter of 2000, as compared to $6,007 for the third quarter of
1999. Financing fees in the third quarter of 1999 represent the amortized
portion of fees paid in connection with issuance of debt in prior years. This
debt was converted into common stock of the Company in 1999.
OTHER INCOME AND EXPENSE
Other income in the third quarter of 2000 increased to $24,666, as compared to
$64 in the third quarter of 1999. In 2000, the Company was able to invest in
short-term interest-bearing investments using funds received from the $3,750,000
private placement in the first and second quarters of 2000.
PROVISION FOR INCOME TAXES
As a result of operating losses for 2000 and 1999, the Company has not had a
federal income tax obligation. No tax benefit has been recorded due to the
uncertainty that the Company will generate sufficient taxable income during the
carry forward period to realize the benefit of the net deferred tax asset. The
carry forward period will expire in 2014.
EXTRAORDINARY EXPENSE
In July, 1999, the Company had senior secured promissory notes outstanding that
were in default at maturity. The Company successfully restructured $720,572 of
this debt with conversions of this debt into common stock of the Company. In
connection with the conversion of the senior secured promissory notes to equity
and extension of the term of the related warrants, the Company recognized a
restructuring expense of $318,023 as an extraordinary expense in the third
quarter of 1999.
NET LOSS
For the third quarter ended September 30, 2000, the Company incurred a net loss
of $1,635,564 or $0.0203 per share, as compared with a net loss of $1,615,643 or
$0.0296 per share for the third quarter ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES
For the nine months ended September 30, 2000, the Company's revenues decreased
by approximately 91% to $69,000, as compared to $749,492 for the first nine
months of 1999. In 2000, the Company recognized $60,000 of revenues as a result
of its Dell consulting contract. The balance of revenues in 2000 are from
deferred software maintenance fees associated with a 1999 Y2K software contract.
COSTS AND EXPENSES
The Company's total costs and expenses increased by approximately 55% to
$5,106,270 during the first nine months of 2000, as compared to $3,304,561 for
the first nine months of 1999.
The majority of the Company's costs and expenses are related to compensation
costs. The Company's operating expenses were significantly higher in the first
nine months of 2000 as compared to the first nine months of 1999 because the
Company employed 44 individuals during the first nine months of 2000, as
compared to 26 individuals in the first nine months of 1999.
Costs of revenues decreased approximately 83% to $22,052 during the third
quarter of 2000, as compared to $130,080 for the third quarter of 1999. Costs of
revenues in 2000 and 1999 consist of personnel costs and benefits directly
attributable to the associated revenues. This decrease is a result of the
Company's change in focus from selling and servicing its Y2K product to selling
and marketing its software migration technology.
Selling and marketing expenses increased approximately 141% to $629,372 during
the first nine months of 2000, as compared to $261,673 for the first nine months
of 1999. This increase is a result of the Company's change in focus from selling
and servicing its Y2K product to selling and marketing its software migration
technology.
17
<PAGE> 18
Research and development expenses increased approximately 70% to $1,820,978
during the first nine months of 2000, as compared to $1,074,312 for the first
nine months of 1999. This increase was the result of the Company's change in
focus from selling and servicing its Y2K product to developing its software
migration technology.
General and administrative expenses increased 43% to $2,633,868 during the first
nine months of 2000, as compared to $1,838,496 for the first nine months of
1999. The increase was due generally to the following: (i) legal and accounting
fees, which increased $333,782 (ii) insurance, which increased $64,173 (iii)
director fees, which increased $60,000 and (iv) SEC filing fees, which increased
$17,611. In the first nine months of 2000, the Company issued options to
purchase an aggregate of 3,740,000 shares of common stock to directors, officers
and employees, some of which with exercise prices less than the fair market
value at the date of grant. The aggregate excess of the fair market value as
compared to the exercise price 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 nine months of 2000 was
$909,584. In the first nine months of 1999, the Company did not issue any stock
options to directors, officers or employees which were exercisable at prices
below fair market value at the date of grant, and the Company did not have any
deferred compensation expense from previous grants. The increase in general and
administrative expenses in 2000, as compared to 1999, was partially offset by an
expense of $706,500 incurred in the third quarter of 1999 as a result of a
settlement with EAI described above.
INTEREST AND FINANCING EXPENSE
The Company's interest and financing expense increased to $3,856,977 during the
first nine months of 2000, as compared to $347,571 for the first nine months of
1999. Interest expense increased to $3,825,962 during the first nine months of
2000, as compared to $176,471 for the first nine months of 1999. For the first
nine months of 2000, the Company recorded $3,750,000 of interest expense in
accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios."
The expense recorded relates to the convertible secured promissory notes payable
and related warrants issued with a conversion price below the market price of
the Company's common stock at the date of issuance. Financing fees decreased 82%
to $31,015 during the first nine months of 2000, as compared to $171,101 for the
first nine months of 1999. Financing fees in the first nine months of 1999
represent the amortized portion of fees paid in connection with issuance of debt
in prior years. This debt was converted into common stock of the Company in
1999.
OTHER INCOME AND EXPENSE
Other income in the first nine months of 2000 increased to $58,610, as compared
to $245 in the first nine months of 1999. In 2000, the Company was able to
invest in short-term interest-bearing investments using funds received from the
$3,750,000 private placement in the first and second quarters of 2000.
PROVISION FOR INCOME TAXES
As a result of operating losses for 2000 and 1999, the Company has not had a
federal income tax obligation. No tax benefit has been recorded due to the
uncertainty that the Company will generate sufficient taxable income during the
carry forward period to realize the benefit of the net deferred tax asset. The
carry forward period will expire in 2014.
EXTRAORDINARY EXPENSE
In July, 1999, the Company had senior secured promissory notes outstanding that
were in default at maturity. The Company successfully restructured $720,572 of
this debt with conversions of this debt into common stock of the Company. In
connection with the conversion of the senior secured promissory notes to equity
and extension of the term of the related warrants, the Company recognized a
restructuring expense of $318,023 as an extraordinary expense in the third
quarter of 1999.
NET LOSS
For the nine months ended September 30, 2000, the Company incurred a net loss of
$8,835,637 or $0.1123 per share, as compared with a net loss of $3,220,418 or
$0.065 per share for the nine months ended September 30, 1999.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $3,877,382 for the first nine months
of 2000 and $1,737,825 for the first nine months of 1999, which resulted from
the operating loss, decreased by net changes in assets and liabilities and
non-cash expenses and income of $4,958,255 for the first nine months of 2000 and
$1,482,593 for the first nine months of 1999.
At September 30, 2000, the Company had working capital of $294,475, as compared
to a working capital deficit of $1,394,471 at December 31, 1999.
At September 30, 2000, the Company had cash of $934,973 and outstanding accounts
receivable of $127,149.
At September 30, 2000, the Company's outstanding debt obligations included (i)
$3,750,000 in convertible debt held by two investors, (ii) $61,636 in a note
payable to an investor and (iii) $30,561 in a note payable relating to a
settlement with a former employee.
In the first nine months of 2000, the Company received net proceeds of
$4,961,909 from financing activities. The Company received $2,128,152 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 $916,243
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 nine months of
2000 and the prior three years. The Company began active operations in January
1991, and while the Company has experienced certain periods of profitability
since inception, it has sustained substantial losses in recent years. For the
first nine months of 2000, the Company incurred a net loss of $8,835,637, 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 September 30,
2000 and December 31, 1999, the Company had accumulated deficits of $20,473,824
and $11,638,187, respectively.
In January, 2000, the Company entered into a private placement agreement that
has provided it with $3,750,000 as of September 30, 2000, which is the maximum
funding under this agreement. Management believes that the proceeds from this
private placement and anticipated operating revenues will meet working capital
requirements into the fourth quarter of 2000. The Company plans to raise
additional capital in the latter part of 2000 to fund expanded sales and
marketing as well as development efforts and continued operations. MigraTEC may
need substantial additional capital over the next twelve months to develop and
aggressively market its new products and services. Results of operations in the
future will be influenced by numerous factors including, but not limited to:
o internal technological developments and those of the Company's technology
partners, such as Intel, IBM and Dell;
o the successful introduction of the Intel(R)Itanium(TM)64-bit processor in
the first quarter of 2001;
o rapid and wide-spread adoption of automated migration technology;
o further development and protection 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.
19
<PAGE> 20
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 Technology creating demand for MigraTEC's products and services, such as
the Intel(R) Itanium(TM) 64-bit processor, may not be successfully or
timely introduced into the market;
o MigraTEC may not be able to effectively penetrate its target markets for
migration products and sales;
o MigraTEC may not be able to successfully develop and/or protect its
technology;
o MigraTEC may not be able to effectively control increases in expenses
associated with sales growth and other costs;
o management may not be able to successfully implement the business plan and
sales strategy;
o MigraTEC may not be able to attract and retain a skilled and cohesive
management group; and
o unfavorable changes in economic and industry conditions and regulatory
requirements may develop.
20
<PAGE> 21
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 as of that date. Interest continues to accrue.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the stockholders' agreement between MigraTEC and certain of its
stockholders, 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.
On June 23, 2000, the Company's stockholders approved reincorporation in
Delaware. The Company reincorporated in Delaware in August, 2000 and in
connection with the reincorporation established a par value of $0.001 per share
for its common stock. The Board of Directors authorized the stated capital of
the Company to be adjusted to reflect this new par value, with a corresponding
adjustment of $11,950,055 to additional paid-in capital.
During the three months ended September 30, 2000, MigraTEC sold its unregistered
securities in the transactions described below. Unless stated otherwise below,
for each such transaction, exemption from registration of the sale of these
securities under the applicable federal and state securities laws is claimed by
MigraTEC under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and under comparable limited offering exemptions under state
securities laws, as a transaction by an issuer which does not involve a public
offering.
During the third quarter of 2000, MigraTEC issued an aggregate of 308,857 shares
of its common stock at an average price of $0.2182 per share upon the exercise
of stock options by an aggregate of 7 employees, officers and directors.
During the third quarter of 2000, MigraTEC issued 142,858 shares of its common
stock at $.20 per share upon the exercise of a warrant issued in connection with
a previous loan made to the Company by an investor.
During the third quarter of 2000, MigraTEC issued 8,000 shares of its common
stock at $.20 per share to an investor upon the exercise of a warrant issued in
connection with a private placement by the Company in the first quarter of 1999.
During the third quarter of 2000, MigraTEC issued 51,600 shares of its common
stock at a price of $.20 per share to four investors upon the exercise of
warrants issued in connection with a private placement by the Company in the
third quarter of 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
<PAGE> 22
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be furnished pursuant to this Item 6 (a) are listed in
the Exhibit Index filed herewith, which Exhibit Index is hereby incorporated
herein by reference.
22
<PAGE> 23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on this 6th day of November 2000.
MIGRATEC, INC.
By: /s/ W. Curtis Overstreet
-------------------------------
W. Curtis Overstreet
Chief Executive Officer
By: /s/ T. Ulrich Brechbuhl
-------------------------------
T. Ulrich Brechbuhl
President and Chief Financial
Officer
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Common Stock Certificate (2)
4.2 Form of Warrant to MT Partners, L.P. and Mercury Fund No. 1, Ltd.
(3)
10.1 Employment Agreement between the Company and W. Curtis Overstreet
dated April 10, 1997 (2)
10.2 Employment Agreement between the Company and Joseph B. Meredith
dated June 1, 1997 (2)
10.3 Employment Agreement between the Company and Rick J. Johnson dated
July 1, 1997 (2)
10.4 Agreement between the Company and Electronic Data Systems
Corporation dated as of September 1, 1998 (2)
10.5 MigraTEC, Inc. Long-Term Incentive Plan (4), as amended and
restated
10.6 Form of Stock Option Agreement pursuant to Long-Term Incentive
Plan (4)
10.7 Warrant Agreement between MigraTEC, Inc. and MT Partners, L.P. and
Mercury Fund No. 1, Ltd., dated as of January 25, 2000 (3)
10.8 $1,975,000 Convertible Secured Promissory Note by MigraTEC, Inc. to
MT Partners, L.P., dated as of January 25, 2000 (3)
10.9 $1,775,000 Convertible Secured Promissory Note by MigraTEC, Inc. to
Mercury Fund No. 1, Ltd., dated as of January 25, 2000 (3)
10.10 Security Agreement between MigraTEC, Inc. and MT Partners, L.P. and
Mercury Fund No. 1, Ltd., dated as of January 25, 2000 (3)
10.11 Shareholders' Agreement between MigraTEC, Inc. and certain
shareholders, dated as of January 25, 2000 (3)
10.12 Registration Rights Agreement between MigraTEC, Inc. and certain
shareholders, dated as of January 25, 2000 (3)
10.13 Form of Director Indemnification Agreement between MigraTEC, Inc.
and Kevin C. Howe and Drew R. Johnson, dated as of January 25, 2000
(3)
10.14 Office Lease Agreement between MigraTEC, Inc. and Charter Crown
Plaza Partners, L.P., dated as of April 12, 2000 (3)
11.1 Statement re: Computations of Net Loss per Share (5)
21.1 Subsidiary of MigraTEC, Inc. (3)
27.1 Financial Data Schedule (5)
</TABLE>
----------
(1) Incorporated by reference from MigraTEC's registration statement on
Form SB-2 filed August 31, 2000, File No. 333-44946.
(2) 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.
(3) Incorporated by reference from MigraTEC's Form 10-KSB filed April 14,
2000, for the year ended December 31, 1999.
(4) Incorporated by reference from MigraTEC's registration statement on
Form S-8 filed November 6, 2000.
(5) Filed herewith.
