FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT O SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 33-20432
MAGNITUDE INFORMATION SYSTEMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2228828
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(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
50 Tannery Road, Branchburg, New Jersey 08876
---------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(908) 534-6400
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(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No __
The number of shares of Registrant's Common Stock, $0.0001 par value,
outstanding as of June 30, 1999, was 8,424,491 shares.
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
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Page
Number
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PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- June 30, 1999 3
Consolidated Statements of Operations
- Three and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
- Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 - 12
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
FINANCIAL DATA SCHEDULE 17
2
<PAGE>
PART I - Item 1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1999
-------------
ASSETS
Current Assets
Cash ...................................................... $ 246,720
Accounts receivable, net of allowance for
doubtful accounts of 100,868 ............................... 93,307
Inventories ................................................ 17,963
Prepaid expenses ........................................... 501,779
------------
Total Current Assets .................................... 859,769
Property, plant and equipment .............................. 127,347
Acquired software assets ................................... 1,266,497
Other assets ............................................... 65,561
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TOTAL ASSETS .................................................... 2,319,174
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses ...................... 993,330
Dividends payable .......................................... 9,000
Prepayments received ....................................... --
Loans and notes payable .................................... 2,091,060
Current maturities long-term debt .......................... 46,529
Current maturities lease obligations ....................... 15,826
------------
Total Current Liabilities ............................... 3,155,745
Long-term debt, less current portion ....................... 950,000
Lease obligations, less current portion .................... 29,839
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TOTAL LIABILITIES ............................................... 4,135,584
STOCKHOLDERS' EQUITY
Preferred Stock Ser.A, $0.01 par value, 3,000,000
shares authorized, 0 shares issued ......................... --
Cumulative Preferred Stock, $0.001 par value,
10 shares issued and outstanding ........................... 0
Common Stock, $0.0001 par value, 30,000,000 shares
authorized, 8,424,491 issued and outstanding ............... 842
Contributed capital ........................................ 81,000
Additional paid-in capital ................................. 8,317,437
Accumulated deficit ........................................ (10,215,689)
------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ............................ (1,816,410)
TOTAL LIABILITIES AND EQUITY .................................... $ 2,319,174
============
See notes to consolidated financial statements
3
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<TABLE>
<CAPTION>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Hardware Revenues .................... $ 0 $ 1,422,521 $ 0 $ 2,408,826
Software Revenues .................... 65,673 6,554 110,180 32,667
----------- ----------- ----------- -----------
Total Revenues ....................... 65,673 1,429,075 110,180 2,441,493
Cost of Goods Sold .............. 43,563 703,391 86,439 1,195,128
----------- ----------- ----------- -----------
Gross Profit ......................... 22,110 725,684 23,741 1,246,365
Selling expenses ................ 191,363 552,412 356,834 851,609
General & administrative expenses 512,464 675,416 934,439 1,123,919
----------- ----------- ----------- -----------
Operating Income (Loss) .............. (681,717) (502,144) (1,267,532) (729,163)
Miscellaneous income ............ 23,921 333 87,596 333
Interest expense (net) .......... (58,161) (98,640) (109,998) (179,357)
Miscellaneous expenses .......... (6,004) (10,000) (19,689) (10,000)
----------- ----------- ----------- -----------
Non-Operating Income (Expense) ....... (40,244) (108,307) (42,091) (189,024)
----------- ----------- ----------- -----------
Net Loss ............................. $ (721,961) $ (610,451) $(1,309,623) $ (918,187)
=========== =========== =========== ===========
Loss per Common Share ................ $ (0.09) $ (0.12) $ (0.17) $ (0.22)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding ....... 8,372,824 4,960,143 7,833,959 4,203,492
</TABLE>
See notes to consolidated financial statements
4
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<TABLE>
<CAPTION>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1999 1998
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<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ....................................................... $(1,309,623) $ (918,187)
Adjustments to net income (loss)
Depreciation and Amortization ........................................ 92,819 144,891
Loss on disposition of certain assets ................................ 1,934 0
Decreases (increases) in Assets
Accounts receivable .................................................. 70,686 (936,562)
Inventories .......................................................... 8,827 (232,169)
Prepaid advertising .................................................. 0 (401,550)
Prepaid expenses ..................................................... (116,171) 33,935
Other assets ......................................................... (450) 450
Increases (decreases) in Liabilities
Accounts payable and accrued expenses ................................ (622,138) 202,765
----------- -----------
Net Cash Provided (Used) by Operating Activities ............................. (1,874,116) (2,106,427)
Cash Flows from Investing Activities
Rolina & Vanity acquisition ............................................. 0 (1,455,390)
Investment Input Technologies ........................................... 0 (25,776)
Capital expenditures .................................................... (1,049) (147,345)
----------- -----------
Net Cash Provided (Used) by Investing Activities ............................. (1,049) (1,628,511)
Cash Flows from Financing Activities
Proceeds from notes payable ............................................. 942,500 225,000
Conversion of equity subscriptions ...................................... 0 (275,000)
Repayment of loans and notes ............................................ (283,427) (235,000)
Repayment of long-term debt ............................................. (39,000) (128,584)
Issuance of common stock ................................................ 1,492,409 4,146,992
----------- -----------
Net Cash Provided (Used) by Financing Activities ............................. 2,112,482 3,733,408
Net Increase (Decrease) in Cash .............................................. 237,317 (1,530)
Cash at Beginning of Period .................................................. 9,403 4,546
----------- -----------
Cash at End of Period ........................................................ $ 246,720 $ 3,016
=========== ===========
</TABLE>
See notes to consolidated financial statements
5
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
BACKGROUND
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to
Whitestone Industries, Inc. On July 14, 1997, the Company changed its name
to Proformix Systems, Inc., and on November 18, 1998, the Company changed
its name to Magnitude Information Systems, Inc. .
In November, 1998, the Company sold its hardware product line comprised of
Magnitude, Inc.'s ergonomic keyboard platform products and accessories.
Prior to that, its business was primarily centered around the design,
development, manufacture, and marketing of research-based ergonomic
accessory products for the computerized workplace. In parallel, and
beginning with the February 1998 acquisition by the Company of Rolina
Corporation, which had developed an ergonomic software product that was
being marketed under the name "ErgoSentry", and the subsequent acquisition
in May 1998 of substantially all of the assets of Vanity Software
Publishing Corporation, which also included a certain ergonomic software
package known as "ErgoBreak", the Company engaged in the development of a
unique suite of software packages designed to increase productivity in the
computer related work environment which include the before mentioned
"ErgoSentry" and "ErgoBreak" products. These efforts resulted, in November
1998, in the release to the market of the proprietary "Proformix EMS"
(Ergonomic Management System) software system. With the sale of the
hardware product line, the Company's business is now focused exclusively
on the further development and marketing of these software products. The
Company has not yet realized material revenues from licensing its
software, and must currently be considered an enterprise in transition
(see Item2: "Management's Discussion and Analysis").
On June 24, 1997, the Company, Royal Capital, Inc., and Proformix, Inc., a
Delaware corporation and manufacturer of ergonomic keyboarding systems,
entered into an Acquisition Agreement. Proformix, Inc. in November 1998
changed its name to Magnitude, Inc. and is hereafter referred to as
Magnitude, Inc.. Pursuant to the Acquisition Agreement, Magnitude Inc.
shareholders were offered 1 share of the Company's common stock for every
3.4676 shares of Magnitude, Inc. common stock, and 1 share of preferred
stock for every 1 share of Magnitude, Inc. preferred stock. At the time of
this submission, holders of approximately 98% of Magnitude, Inc. common
stock have tendered their shares in exchange for Whitestone common shares.
The remaining 2% of Magnitude, Inc. stockholders hold a minority interest
which is valued at $0. For accounting purposes, the acquisition has been
treated as an acquisition of Whitestone by Magnitude, Inc. and a
recapitalization of Magnitude, Inc.. As a result, the Company and
Magnitude, Inc. remain as two separate legal entities whereby Magnitude,
Inc. operates as a subsidiary of Magnitude Information Systems, Inc.. The
operations of the newly combined entity are currently comprised solely of
the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software
developing firm, and on April 30, 1998, into an Asset Purchase Agreement
with Vanity Software Publishing Co., a Canadian developer of specialized
software, whereby the Company, in return for payments in form of cash and
equity, acquired the rights to certain software products and related
assets, with such software products subsequently forming the basis for the
further development, during the year, of the Company's proprietary
Proformix EMS Software System.
6
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several
related agreements with 1320236 Ontario Inc. ("OS"), a publicly traded
Canadian designer, manufacturer and distributor of office furniture based
in Holland Landing, Ontario, Canada, pursuant to which OS acquired
Magnitude, Inc.'s hardware product line comprised of the Company's
ergonomic keyboard platform products and accessories, and all related
inventory and production tooling and warehousing assets, and all
intellectual property rights including the Proformix name, against a cash
consideration and an ongoing contingent stream of royalty payments on OS'
sales of the Proformix hardware products. The Company will continue to
market its proprietary software under the Proformix label. The Agreement
with OS also provided for the retirement of the Company's then existing
bank debt, out of the proceeds of the transaction. Further details
regarding this transaction may be obtained from the Company's related
filing of February 9, 1999, on Form 8-K, incorporated herein by reference.
Magnitude Inc.'s wholly owned subsidiary, Corporate Ergonomic Solutions,
Inc. (Ergonomics) was incorporated in the State of New Jersey during
October 1992. Ergonomics, which commenced operations in September 1997,
was formed primarily to market hardware products. Its operations during
1998 and 1999 have not been significant.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Magnitude
Information Systems, Inc. and its subsidiaries, Magnitude, Inc. and
Corporate Ergonomic Solutions, Inc. All significant intercompany balances
and transactions have been eliminated.
Inventories
Inventory consists of finished goods which are stated at the lower of cost
(determined by the first-in, first out method) or market.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is computed
on the straight line method over the estimated useful lives of such assets
between 5-10 years. Maintenance and repairs are charged to operations as
incurred. Software assets acquired pursuant to the Rolina and Vanity
agreements are amortized on the straight line method over 10 years.
Securities Issued for Services
The Company accounts for stock options issued for services by reference to
the fair market value of the Company's stock on the date of stock issuance
or option grant. Compensation expense is recorded for the fair market
value of the stock issued, or in the case of options, for the difference
between the stock's fair market value on the date of grant and the option
exercise price.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation". The statement generally suggests, but does not require,
employee stock-based compensation transactions be accounted for based on
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
7
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected to
be settled in the Company's income tax return. Certain items of revenue
and expense are reported for Federal income tax purposes in different
periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. The Company has incurred net operating
losses for financial-reporting and tax-reporting purposes. Accordingly,
the benefit for income taxes has been offset entirely by a valuation
allowance against the related deferred tax asset for the periods ended
June 30, 1999. Notwithstanding the above, the Company has filed an
application with the New Jersey Economic Development Authority who
administers the current NJ Technology Business Tax Certification program
to qualify for and be the beneficiary of this program which will permit a
participant to liquidate its State NOL tax benefits.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share" is computed by
dividing net loss by the weighted average number of shares of Common Stock
outstanding during the period. Common Stock equivalents have not been
included in this computation since the effect would be anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of shipment
provided that the resulting receivable is deemed probable of collection.
Revenue from software sales is recognized at the time of licensing
provided that the resulting receivable is deemed probable of collection.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PREPAID EXPENSES
Prepaid expenses include a position of $375,000 resulting from an
agreement in February 1998 with BNN Business News Network Inc., a
nationwide media advertising and radio network company , whereby the
Company purchased advertising time on the Business News Network's
broadcasts , usable over a period of three years and aggregating $900,000
in retail value, against issuance of 150,000 new and restricted common
shares. The services purchased were capitalized at the then fair market
value of the stock issued, for a total of $375,000. The resulting asset
will be amortized as utilized, over the time frame of the next two years.
As per the date of this report, no portion of this asset has been
utilized. The Company is currently analyzing the utility of this
advertising credit in light of current business strategies. If management
deems that it may not be able to economically utilize the entire amount
during the time allotted, it may elect to effect an accelerated
amortization or write-down of this asset position.
8
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30, 1999:
Equipment $196,952
Furniture and fixtures 66,093
Leasehold improvements 45,770
--------
308,815
Less accumulated depreciation 181,468
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Total $127,347
========
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at June 30,
1999:
Accounts payable $403,301
Accrued interest 310,790
Accrued commissions 53,821
Accrued salaries and professional fees 142,830
Miscellaneous accruals 82,588
========
Total $993,330
========
LOANS AND NOTES PAYABLE
At June 30, 1999, Magnitude, Inc. and the Company had borrowings under
short term loan agreements with the following terms and conditions:
Pursuant to three promissory notes signed throughout 1995 and $ 90,000
1996, an investor advanced Magnitude, Inc. a total of $90,000
payable upon demand with interest at 12% per annum.
On December 4, 1996, Magnitude, Inc. repurchased the equivalent 75,000
of 144,192 shares of its common stock and retired same against
issuance of a promissory note maturing twelve months thereafter
accruing interest at 5% per annum and due December 4, 1998. This
note is overdue at June 30, 1999 and no demand for payment has
been made through today's date.
9
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
LOANS AND NOTES PAYABLE continued
Pursuant to the Rolina Corporation Agreement & Plan of Merger 100,00
dated February 2, 1998 the Company was to deliver to Steven D.
Rudnik, current President and CEO of the Company, $100,000 eight
months from the closing date. This indebtedness has been recast
as a promissory note maturing 10/1/99 and accruing interest at
10% p.a.. In consideration of the indebtedness, Mr. Rudnik has a
lien on certain software products owned by the Company.
Note to the board chairman, principal due May 31, 2000, accruing 351,060
interest at a rate of 10% per annum. This note is secured by all
of Magnitude Inc.'s assets and property and guaranteed by the
Company.
Private Placement Offering: During February through June 1995, 1,475,000
an underwriter acting as placement agent, on behalf of
Magnitude, Inc. placed, in a private placement offering, an
aggregate 16 units, each consisting of a $100,000, 12%
promissory note and 10,000 shares of Magnitude, Inc.'s common
stock. The promissory notes were originally due on the earlier
of 12 months from their issuance or the completion of a public
or private financing of either debt or equity securities of
Magnitude, Inc., and were subsequently extended for an
additional 6 months, and further by an additional 9 months. In
May 1997 a restructuring agreement caused $1,075,000 of these
notes to be extended and modified to, among other, mature by
April 30, 2000. Two such notes, however, totaling $200,000 were
extended and modified to, among other, mature on dates ranging
from October 1, 1998 through April 30, 2000. The total amount of
notes outstanding at June 30, 1999 was $1,475,000.
----------
Total $2,091,060
==========
LONG-TERM DEBT
Long-term debt as of June 30, 1999 is comprised of the following: $ 750,000
Convertible promissory notes to seven private investors accruing
interest at 7% p.a. and $ 750,000 maturing in July and August
2000. The notes provide the holders with the option to convert
part or all of the outstanding principal amounts into shares of
the common stock of the Company at the rate of $0.50 per share.
Promissory note issued to a member of the board of directors of 200,000
the Company, carrying interest 200,000 at 12% p.a. and maturing
July 2000, convertible at the holders' option into shares of the
common stock of the Company at the rate of $0.50 per share.
Discounted present value of a non-interest bearing $70,000 33,529
settlement with a former investor 33,529 of Magnitude, Inc. to
be paid in monthly payments commencing July 1, 1997. The imputed
interest rate used to discount the note is 8% per annum.
Discounted present value of a non-interest bearing $176,000 13,000
settlement with former counsel of 13,000 Magnitude, Inc. to be
paid in 24 monthly payments commencing September 1, 1997. The
imputed interest rate used to discount the note is 8% per annum.
----------
Total 996,529
10
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Less current maturities 46,529
----------
Long-term debt, net of current maturities
$ 950,000
==========
11
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
INCOME TAXES
At December 31, 1998, the Company had net operating loss carry forwards
approximating $8,900,000 which expire between the years 2008 and 2013 and are
subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December
31, 1998 are as follows:
Total deferred tax asset $3,560,000
Less valuation allowance 3,560,000
Net deferred tax asset $ --
==========
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commences December 16, 1998
and expires on December 31, 2001 and requires monthly payments of $3,700
from December 16, 1998 to October 31, 1999 and $3,250 from November 1, 1999
to December 31,1999.
Licensing Agreement
Pursuant to an August 29, 1997 letter of intent, the Company may acquire
Cornell Ergonomics ("Cornell"), a software developer of a unique ergonomic
assessment tool. This agreement was subsequently revised on December 1,
1997 through a Software Distribution and Option Agreement whereby the
Company obtained a two-year exclusive license to distribute and sub-license
a certain software product and obtained the exclusive right, under certain
circumstances, to purchase either the assets of Cornell or all of the
issued and outstanding capital stock of Cornell.
Put Option
Pursuant to the February 2, 1998, Agreement and Plan of Merger with Rolina
Corporation (see "Background") the Company had issued 155,556 shares (the
"Shares") of its common stock to the principal of Rolina Corporation who
currently serves as the Company's President and Chief Executive Officer,
and a Put Option for such Shares. This Put Option requires the Company to
repurchase up to 155,556 of the Shares at a price of $2.41 per share upon
notice of such option exercise in accordance with the provisions contained
therein, such notice eligible to be given at any time after February 1,
2000, and before 5:00 p.m. on the 90th day thereafter.
RELATED PARTY TRANSACTIONS
On June 4, 1999, a director and shareholder exercised options to purchase
85,000 shares of the common stock of the Company at a price of $0.50 per
share.
During the quarter ended June 30, 1999, a private investor who subsequently
joined the Company's board of directors, extended a loan of $200,000 to the
Company. Such loan accrues interest at 12% p.a. and matures in July 2000,
and is convertible at the holders' option into shares of the common stock
of the Company at the rate of $0.50 per share.
On April 1, 1999, the Company's board of directors authorized the issuance
of an option to the Company's President and CEO, holder of an outstanding
promissory note in the amount of $100,000, to convert the principal amount
of such note into common stock of the Company at the rate of $0.50 per
share.
12
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
RELATED PARTY TRANSACTIONS, continued
On July 21, 1999, the Company and two members of the board of directors
entered into a Resignation Agreement whereby these directors resigned from
all offices of the Company. In consideration of certain covenants and
releases the Company agreed to increase the number of shares to be awarded
these individuals pursuant to previous board resolutions, by 62,895 shares,
to be registered on Form S-8.
In July 1999 John Duncan became Executive Vice President in charge of Sales
and Marketing. The terms of his employment provide, among other, for the
issuance of stock options for 100,000 shares, and, conditionally, of up to
a further 400,000 shares depending upon achievement of certain revenue
goals for the Company.
CHANGES IN KEY PERSONNEL
In April 1999, John Duncan joined the Board of Directors of the Company. In
May 1999, Seymour Kroll was appointed to the Board of Directors of the
Company. In July 1999, J. Swon and B. Deichl resigned from the Company's
Board of Directors.
13
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Software Business and Results of Operations:
Effective with the sale of the hardware business in November 1998 to Office
Specialty (see "Background" in Notes to Financial Statements) no further
revenues were being generated from this product line, aside from royalties on
third party revenues from the sales of such hardware products which amounted to
$23,921 for the quarter and which are included in non-operating income. In the
aftermath of the Office Specialty transaction, the Company's revenue base is
being supplied solely by the licensing of the Company's proprietary software.
The Company has not yet realized material revenues from licensing its software,
and must currently be considered an enterprise in transition. The software
business accounted for less than 3% of total revenues during 1998 or $72,486. A
comparison of revenues to last year's fiscal quarters therefore is not
meaningful. Comparisons of operating expenses likewise are of limited
usefulness, and will therefore only be made where appropriate.
The Company is currently introducing to the market its new Proformix EMS(TM)
suite of software products. This unique product is the first integrated suite of
software tools that provides a complete system for evaluation and management of
ergonomic risk factors for the computer workplace. The software also provides an
effective productivity measuring tool that can make a verifiable difference in
any company's bottom line. The Company's proprietary software products are
designed to help businesses deal with potentially preventable repetitive stress
injuries, by real-time monitoring of keyboarding activities, pro-active dialog
with at-risk employees, and strategic profiling and management of computer use
throughout an organization. A significant step towards introducing EMS to the a
large number of potential corporate users was a 1998 joint venture agreement
with AON Ergonomic Services, a division of AON Worldwide Resources, to market
and sell this product.
The sales cycle for larger projects involving software related products is
relatively long, and while the Company is investigating strategies to shorten
it, the new products are not expected to yield significant new revenues before
the fourth quarter of this fiscal year and the first two quarters of the next
year. Revenues during the quarter ended June 30, 1999, totaled $65,673 and were
supplied primarily from what the Company classifies as "pilot projects".
Typically, in view of the new-ness of product and market, a client initially
purchases a license for a "pilot version" of the software, functionally complete
but limited to a smaller number of users. After undergoing a process of
familiarization and evaluation the client is expected to upgrade to the intended
ultimate number of users which, by definition, should encompass all personnel
exposed to the above described risks. Currently, more than 100 companies in a
broad cross selection of industries, among them insurance, risk management,
financial institutions, oil and energy, technology, and transportation, as well
as several state and federal agencies and several companies in the UK and
Brazil, are at various stages of evaluating the Proformix EMS software. Many
such tests and evaluations by third parties have confirmed to the Company's
satisfaction that its product is mature, stable, and effective. It is with a
high degree of confidence, therefore, that the Company expects many of the
ongoing trial installations to lead to larger enterprise orders during the
periods to come and thereby to the targeted revenue stream, despite some delays
that must be anticipated as a consequence of potential clients postponing
decisions involving software acquisitions due to the "Year-2000" phenomenon.
Software assets underlying the Company's products are being amortized on a
straight line over 10 years, resulting in a level charge of approximately
$12,000 per month to cost-of-goods-sold. Selling expenses amounted to $191,363
and general and administrative expenses totaled $512,464 for the quarter. The
relatively large amount of G&A expenses is attributable to the fact that most of
the Company's operating expenses currently have fixed or quasi-fixed character
covering the cost of maintaining an operational infrastructure required for the
business. The operating results for the quarter ended June 30, 1999, was a loss
of $681,717. The net loss for the quarter was $721,961 or $0.09 per share.
14
<PAGE>
Liquidity and Capital Resources
As a consequence of the operating losses the Company's liquidity remains
strained. The working capital deficit grew to $2,295,976 as of June 30, 1999 and
is expected to increase further as current long-term liabilities will reclassify
to short-term status as a consequence of approaching maturities. Even though
management is confident that - as a consequence of anticipated first larger
orders - the situation will improve somewhat during the remainder of the fiscal
year such development will be gradual and its impact may be incremental. Thus,
the need for additional cash to augment working capital from outside sources to
finance operations during the upcoming quarters will persist.
During the quarter ended June 30, 1999, the Company completed the placement of
an aggregate $950,000 in convertible debt with private investors which, at the
time of this submission has resulted in the receipt of approximately the same
amount in cash. This debt unless converted will mature during the third quarter
2000. As stated previously, anticipated future cash needs are planned to be met
from a variety of sources including relatively smaller additional debt
placements and a liquidation of unused NOL tax benefits on the State level which
are expected to generate approximately $500,000 during the fourth quarter 1999.
Thus, management expects to be able to meet cash needs throughout the rest of
the year and also that, by year end, cash flow from operations will have grown
sufficiently to finance future operations.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
In response to this item, reference is made to the Company's reports on Form
10-KSB for the year ended December 31, 1998, and on Form 10-QSB for the quarter
ended March 31, 1999, as previously submitted.
Item 2 CHANGES IN SECURITIES - None
Item 3 DEFAULTS ON SENIOR SECURITIES - None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule - is attached hereto.
(b) Reports on Form 8-K: - None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAGNITUDE INFORMATION SYSTEMS, INC.
Date: August 12, 1999 By: /s/Steven D. Rudnik
------------------------------------------
Steven D. Rudnik
President and Chief Executive Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 FINANCIAL STATEMENTS OF MAGNITUDE INFORMATION SYSTEMS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-END> Jun-30-1999
<CASH> 246,720
<SECURITIES> 0
<RECEIVABLES> 192,975
<ALLOWANCES> 100,868
<INVENTORY> 17,963
<CURRENT-ASSETS> 859,769
<PP&E> 308,815
<DEPRECIATION> 181,468
<TOTAL-ASSETS> 2,319,174
<CURRENT-LIABILITIES> 3,155,745
<BONDS> 950,000
0
0
<COMMON> 842
<OTHER-SE> (1,817,252)
<TOTAL-LIABILITY-AND-EQUITY> 2,319,174
<SALES> 110,180
<TOTAL-REVENUES> 110,180
<CGS> 86,439
<TOTAL-COSTS> 356,834
<OTHER-EXPENSES> 976,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,998
<INCOME-PRETAX> (1,309,623)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,309,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,309,623)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
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