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 September 30, 2000
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.
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2228828
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
401 State Route 24, Chester, New Jersey 07930
(Address of Principal Executive Office) (Zip Code)
(908) 879-2722
(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, $0.0001 par
value, outstanding as of September 30, 2000, was 16,193,314 shares.
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 2000 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 13
PART II - OTHER INFORMATION 14 - 15
SIGNATURES 16
FINANCIAL DATA SCHEDULE 17
OTHER EXHIBITS 18
2
<PAGE>
PART I - Item 1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, 2000
ASSETS
Current Assets
<S> <C>
Cash .....................................................................$ 680,866
Accounts receivable, net of allowance for
doubtful accounts of 6,646 ............................................. 461,401
Inventories ............................................................... 8,670
Deferred tax asset......................................................... 201,470
Prepaid expenses .......................................................... 427,677
-------------
Total Current Assets ................................................... 1,780,084
Property, plant and equipment, net of accumulated
depreciation of $176,978 ............................................... 118,054
Software, net of accumulated amortization of
$378,602 .............................................................. 1,128,688
Other assets .............................................................. 25,209
-------------
TOTAL ASSETS ................................................................... 3,052,035
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses ..................................... 779,414
Deferred revenue........................................................... 27,196
Dividends payable ......................................................... 89,973
Prepayments received ...................................................... 0
Loans and notes payable ................................................... 238,492
Current maturities long-term debt ....................................... 0
Current maturities lease obligations .................................... 6,938
-------------
Total Current Liabilities .............................................. 1,142,013
Long-term debt, less current portion ................................... 374,890
Lease obligations, less current portion ................................ 13,005
-------------
TOTAL LIABILITIES .............................................................. 1,529,908
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized:
2,500 shares have been designated Cumulative Preferred Stock,
of which 1 share is issued and outstanding ................................ 0
300,000 shares have been designated Series A Convertible Preferred Stock,
350,000 shares have been designated Series B Convertible Preferred Stock,
120,000 shares have been designated Series C Convertible Preferred Stock,
500,000 shares have been designated Series D Convertible Preferred Stock,
of which a combined total 490,448 shares are issued and outstanding 490
Common Stock, $0.0001 par value, 100,000,000 shares authorized,
16,193,314 shares are issued and outstanding............................... 1,619
Contributed capital ....................................................... 81,000
Additional paid-in capital ................................................ 15,341,180
Accumulated deficit ....................................................... (13,902,162)
------------
TOTAL STOCKHOLDERS' EQUITY............................... 1,522,127
TOTAL LIABILITIES AND EQUITY .................................... $ 3,052,035
=============
</TABLE>
See notes to consolidated financial statements
3
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total Revenues....................................$ 253,787 $ 52,250 $ 601,790 $ 162,430
Cost of Goods Sold .......................... 41,740 41,257 126,394 127,696
------------- ------------ ------------- ----------------
Gross Profit ..................................... 212,047 10,993 475,396 34,734
Selling expenses ............................ 441,140 210,383 1,046,219 567,217
General & administrative expenses ........... 641,478 499,253 1,774,331 1,433,692
------------- ------------ ------------- --------------
Operating Income (Loss) .......................... (870,571) (698,643) (2,345,154) (1,966,175)
Miscellaneous income ........................ 12 10,469 14,060 98,065
Interest expense, net........................ (16,091) (77,385) (148,934) (187,383)
Miscellaneous expenses ...................... (0) (49,417) (1,149) (69,106)
------------- ------------ ------------ ------------
Non-Operating Income (Expense) ................... (16,079) (116,333) (136,023) (158,424)
------------- ------------- ------------- ------------
Net Loss .........................................$ (886,650) $ (814,976) $(2,481,177) $ (2,124,599)
========== ============ =========== =============
Loss per Common Share ............................$ (0.06) $ (0.09) $ (0.17) $ (0.26)
========== =========== ============ ============
Weighted Average Number of
Common Shares Outstanding ................... 15,745,597 8,824,380 14,599,500 8,164,100
</TABLE>
See notes to consolidated financial statements
4
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) ........................... $(2,481,178) $ (2,124,599)
Adjustments to net income (loss)
Depreciation and amortization ............ 149,074 139,694
Stock and debt issued for expenses........ 251,667 0
Loss on disposition of certain assets .... 1,122 8,993
Dividend payments......................... (42,000) 0
Decreases (increases) in Assets
Accounts receivable ...................... (401,277) 68,281
Miscellaneous receivables................. 15,227 0
Inventories .............................. 215 17,827
Prepaid expenses ......................... (38,795) (121,527)
Other assets ............................. (22,750) 1,852
Increases (decreases) in Liabilities
Prepayments received...................... 0 0
Deferred revenue.......................... 27,193
Accounts payable and accrued expenses .... (231,682) (711,686)
-------------- -------------
Net Cash Provided (Used) by Operating Activities (2,773,181) (2,721,165)
Cash Flows from Investing Activities
Purchases of equipment and fixtures ......... (52,182) (2,606)
Disposition of equipment and other assets ... 3,358 60,000
-------------- ------------
Net Cash Provided (Used) by Investing Activities (48,824) 57,394
Cash Flows from Financing Activities
Proceeds from notes payable ................. 250,000 1,247,235
Repayment of loans and notes ................ (484,534) (293,200)
Repayment of long-term debt ................. (0) (52,000)
Accrual of contingent liability.............. 0 374,890
Issuance of preferred stock.................. 2,937,836 0
Issuance of common stock ........... ........ 550,000 1,380,031
----------- -----------
Net Cash Provided (Used) by Financing Activities 3,253,302 2,656,956
Net Increase (Decrease) in Cash .................. 431,297 (6,815)
Cash at Beginning of Period ...................... 249,569 9,403
----------- ----------
Cash at End of Period ............................ $ 680,866 $ 2,588
================= ===========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
DESCRIPTION OF BUSINESS
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.
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name ErgoManager(TM) which are
designed to help individual computer users and businesses increase
productivity and reduce the risk of potentially preventable repetitive
stress injury (RSI). These software modules can be applied individually
or together in a comprehensive ergonomic and early intervention program
that seeks to modify a user's behavior by monitoring computer usage
patterns over time and warning the user when to break a dangerous trend
in repetitive usage of an input device, such as a keyboard or mouse.
The product was developed to train people working on computers, monitor
computer-use related activities and evaluate a user's risk exposure and
propensity towards injury or loss of effectiveness in connection with
his/her day-to-day work. Moreover, the software enables a company to
not only address the issue of health risks involving employees and to
minimize resulting potential liabilities, but delivers a powerful tool
to increase overall productivity.
BACKGROUND
On June 24, 1997, the Company, extended a stock exchange offer to the
shareholders of Proformix, Inc., a Delaware corporation and
manufacturer of ergonomic keyboarding systems. Proformix, Inc. in
November 1998 changed its name to Magnitude, Inc. and is now referred
to as Magnitude, Inc. At the time of this submission, holders of
99.1% of Magnitude, Inc. common stock have tendered their shares.
The business combination which took the form of a reverse acquisition
has been accounted for as a purchase. 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 ErgoManager(TM) software system.
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, all
related inventory and production tooling and warehousing assets, and
all intellectual property rights including the Proformix name, against
a cash consideration and certain royalty payments on OS' sales of the
Proformix hardware products.
6
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 the last two years 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 3-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets are amortized on the straight
line method over 10 years.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. 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 services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted
by the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
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, for Federal income tax purposes,
the benefit for income taxes has been offset entirely by a valuation
allowance against the related federal deferred tax asset for the year
ended December 31, 1999. For state income tax purposes, a partial
valuation allowance has been offset against the related state deferred
tax asset for the year ended December 31, 1999.
7
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 the licensing of proprietary software products is
recognized at the time of licensing provided that the resulting
receivable is deemed probable of collection. Revenue from software
maintenance contracts is recognized ratably as earned.
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.
DEFERRED TAX ASSET
During 1999, the Company had filed an application with the New Jersey
Economic Development Authority who administers the current New Jersey
Tax Certification program pursuant to the New Jersey Emerging
Technology and Biotechnology Financial Assistance Act to qualify for
and be the beneficiary of this program which will permit a participant
to liquidate its State NOL tax benefits against cash considerations.
The Company has been accepted under this program and has been issued
tax transfer certificates which will, upon liquidation, result in a
cash benefit in the amount stated.
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 to be utilized on stations
associated with Business News Network Inc., usable over a period of
three years, since then extended, 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. Management believes that the Company will derive economic
benefits commensurate with the value of this asset. If management were
to determine that it may not be able to economically utilize the entire
amount during the time allotted, it will effect an accelerated
amortization or write-down of this asset position.
8
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment consist of the following at September 30,
2000:
<S> <C>
Equipment $ 179,287
Furniture and fixtures 69,976
Leasehold improvements 45,770
--------------
295,033
Less accumulated depreciation 176,979
--------------
Total $ 118,054
==============
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at September
30, 2000:
Accounts payable $ 359,442
Accrued interest 66,921
Accrued commissions 30,176
Accrued salaries and professional fees (payable in cash) 59,997
Accrued salaries and professional fees (payable in equity) 173,711
Miscellaneous accruals 89,167
=============
Total $ 779,414
=============
LOANS AND NOTES PAYABLE
At September 30, 2000, Magnitude, Inc. and the Company had borrowings
under short term loan agreements with the following terms and conditions:
Note issued by Magnitude, Inc. originally maturing December 4, 1998
and accruing interest at $ 75,000
5% per year. This note is overdue at September 30, 2000; no demand
for payment has been made through today's date.
Note issued by Magnitude, Inc. originally maturing June 1996 and
accruing interest at 12% per year. This note is overdue at September
30, 2000; no demand for payment has been made through today's date. 25,000
Discounted present value of a non-interest bearing $70,000 settlement
with a former investor of Magnitude, Inc. to be paid in monthly
payments commencing July 1, 1997. The imputed interest rate used 33,529
to discount the note is 8% per annum. Balance of promissory note
issued to a former member of the board of directors of the Company 54,963
carrying interest at 12% p.a., maturing July 2000, convertible at
the holder's option into shares of the common stock of the Company at
the rate of $0.50 per share. Cash advance by an officer of the
Company, carrying interest at the rate of 7% p.a. 50,000
Total $ 238,492
==============
</TABLE>
9
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
LONG-TERM DEBT
<TABLE>
<CAPTION>
Pursuant to the February 2, 1998, Agreement and Plan of Merger with
Rolina Corporation (see "Background") the Company had issued 155,556
<S> <C>
shares (the "Shares") of its common stock to the principal of Rolina $ 374,890
Corporation who currently serves as the Company's President and
Chief Executive Officer, and had issued a Put Option for such Shares
at a price of $2.41 per share in accordance with the provisions
contained therein, with notice for exercise eligible to be given
at any time after February 1, 2000, and before 5:00 p.m. on the
90th day thereafter. This current liability was converted into a
Company obligation maturing March 31, 2002, and carrying interest at
the rate of 7% per year payable monthly. The obligation includes an
option to the holder for conversion of the outstanding principal into
shares of the Company's common stock at the rate of $0.50 per share.
INCOME TAXES
At December 31, 1999, the Company had net operating loss carry
forwards approximating which expire between the years 2008 $ 11,300,000
and 2013 and are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December 31,
1999 are as follows:
Total deferred tax asset $ 4,240,000
Less valuation allowance 4,240,000
Net deferred tax asset $ -
===============
</TABLE>
COMMITMENTS AND CONTINGENCIES
Lease Agreements
Magnitude, Inc. currently leases office space which contained its former
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, 2001.
This space has been sublet, generating $3,250 per month in offsetting
revenues.
On March 15, 2000, the Company entered into a lease agreement for office
space which is utilized for the Company's principal offices. Such lease
commenced April 15, 2000 and expires on March 31, 2005 and requires monthly
payments of $6,500 from April 15, 2000 through March 31, 2002; of $6,695
thereafter through March 31, 2003; of $6,896 thereafter through March 31,
2004; and of $7,103 thereafter through March 31, 2005.
10
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
RELATED PARTY TRANSACTIONS
On March 31, 2000, the Company and its President and Chief Executive
Officer agreed to convert a current liability payable to him in the amount
of $374,890 into a Company obligation maturing March 31, 2002, which among
others provides for a right to the holder to convert such obligation into
common stock of the Company (see "Long-term debt").
In September 2000, an officer of the Company extended a cash advance of
$50,000 to the Company, accruing interest at the rate of 7% per year.
This advance was repaid in October 2000.
SUBSEQUENT EVENTS
On October 11, 2000, the board of directors of the Company confirmed the
promotion of John C. Duncan, Executive Vice President, to the position of
President and Chief Operating Officer of the Company. Steven D. Rudnik
retains the title and position of Chief Executive Officer and Chairman of
the Board.
On October 11, 2000, the board of directors of the Company adopted a
resolution by which the By-Laws of the Company are amended in Article I,
Section 7, Subsection C, through insertion of the sentence "A special
meeting of stockholders of the Company may be called by stockholders
holding a majority of the issued and outstanding common shares of the
Company".
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
During the third quarter in 2000 Magnitude recorded the largest
software contract in its history yet, a firm commitment from California's State
Compensation Insurance Fund to install enterprise-wide the latest version of the
Company's ErgoSentry(TM) software. State Compensation Insurance Fund is
California's largest provider of workers' compensation coverage. The order was
placed after a successful, year-long pilot program involving 400 ErgoSentry(TM)
-equipped work places in selected State Fund offices throughout California, and
further validated the Company's marketing strategy of lowering entry barriers by
closely cooperating with larger potential clients in introducing its proprietary
software through pilot projects at selected worksites. Pilot project
installations are designed to impart credibility and awareness of the product's
unique potential in the areas of productivity enhancement and risk reduction
with respect to repetitive stress injuries in the office environment. Pilot
projects involving smaller numbers of employees also provide a potential client
with an opportunity to test the software's utility and reliability, systems and
network friendliness, and staff acceptance without incurring the perceived and
sometimes real risk associated with installing a new product on an
enterprise-wide scale.
Revenues for the quarter ended September 30, 2000, which include the
above State Fund contract increased to $253,787 compared to $52,250 for the same
period in 1999, all such revenues generated by the Company's wholly owned
subsidiary Magnitude, Inc. from the licensing of the Company's proprietary
ErgoManager(TM) software. The quarter also marked the passing of the $1 Million
milestone for aggregate revenues from the licensing of the Company's ergonomic
software. Gross profits during the quarter amounted to $212,047 for a 83% gross
margin. Gross profits are burdened with a fixed charge for amortization of
software investments. Software assets underlying the Company's products are
being amortized on a straight line over 10 years, resulting in a level charge of
approximately $13,000 per month to cost-of-goods-sold. Since variable product
costs are low, the gross margin is expected to further increase as revenues
grow. After deducting selling expenses and general and administrative expenses
of $1,082,618 the Company realized an operating loss of $870,571, compared to an
operating loss of $698,643 for the third quarter in 1999. Non-operating expenses
totaled $16,079 primarily in form of interest expense. The net result for the
quarter was a loss of $886,650 or $0.06 per share, compared to a loss of
$814,976 or $0.09 per share for the same period last year.
The quarter's net result was strongly affected by the continuing
expansion of marketing and sales operations resulting in a sharp increase of
selling expenses, which doubled from the level a year ago, and, to a lesser
degree, from higher general and administrative expenses. The Company is
undertaking pioneering efforts in educating future customers and the business
community at large about the merits of a pro-active stance in dealing with the
growing level of health risks and potential liabilities associated with
repetitive stress injuries in the computer workplace environment. Management
believes that these efforts are justified by the potential rewards accruing from
this "First to Market" approach which should lead to a strong competitive
advantage and a sizable market share during the years to come. The Company will
continue to invest in a comprehensive marketing campaign with the goal of
accelerating the education of potential clients and promoting the name and
products of the Company. This process, however, takes time and while management
is confident of the ultimate success of its strategy it is not in a position to
predict the timing with any degree of certainty.
12
<PAGE>
Liquidity and Capital Resources
During the third quarter, the Company moved aggressively to further
improve liquidity and working capital. New equity investments through private
placements with accredited investors who purchased an aggregate 138,920 Series B
and D Senior Convertible Preferred shares (convertible into common stock at the
rate of 1 preferred share for 10 common shares) and the conversion of $502,500
current debt into common equity added $1,752,500 to working capital, before
deduction of related expenses which totaled $112,500. These transactions further
improved the Company's balance sheet profile so that, at September 30, 2000 and
in spite of the loss from operations, stockholders' equity increased to
$1,522,127, from $826,314 at the end of the previous fiscal quarter. These
financing transaction also erased the working capital deficit manifest during
the previous periods. Working capital showed a positive balance of $638,071 at
the end of the quarter.
Of the $1,250,000 raised through new equity investments a portion of
$750,000 was attributable to the $3 Million round of private placements
commenced in the spring of this year and constituted the last segment of this
financing transaction. The balance of $500,000 resulted from private placement
subscriptions by accredited investors under a new program designed to attract an
aggregate total of approximately $2 Million in equity funding through the
remainder of this year and the first quarter in 2001. Management believes that
funding expected to be generated from these capital transactions will provide
for sufficient financial resources, to cover present and anticipated future
needs well into the next fiscal year.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The Company is not a party in any legal proceedings.
Item 2 CHANGES IN SECURITIES - None
c) Issuance of unregistered securities
In addition to the issuance of unregistered securities previously noted in the
Company's report on Form 10-QSB for the quarter ended June 30, 2000,
incorporated herein by reference the Company, during the third quarter of 2000
and through October 31, 2000, issued the following unregistered securities:
(i) 109,926 shares of Common Stock pursuant to the conversion of $54,963
in convertible promissory notes, issued in reliance upon exemptions
provided under Section 4(2) of the Securities Act;
(ii) 12,000 shares of Common Stock for services rendered;
(iii) 11,535 shares of Common Stock in exchange against 40,000 common shares
of Magnitude, Inc., pursuant to the Company's stock exchange offer of
July 1997;
(iv) 617,616 shares of Common Stock and warrants for the purchase of
100,000 shares at a price of $1 per share, in exchange against the
cancellation of a $460,000 liability in form of a past-due promissory
note and accrued interest thereon;
(v) Warrants for the purchase of 36,000 shares of Common Stock at $1 per
share, for services rendered;
(vi) 83,364 shares of Series B Senior Convertible Preferred Stock
accompanied by warrants for the purchase of 416,820 shares at a price
of $0.90 per share, to a foreign investor pursuant to private
placement subscriptions under Regulation S and Section 4 (2)of the
Securities Act, which resulted in the receipt by the Company of
$750,276 in cash, whereby such shares, among other things, have the
following rights and privileges: (i) 7% annual preferential dividend,
payable semi-annually, (ii)conversion at the holders' option into
shares of Common Stock at a conversion rate of 10 common shares for 1
preferred share;
(vii) 55,556 shares of Series D Senior Convertible Preferred Stock
accompanied by warrants for the purchase of 555,560 shares at a
price of $0.50 per share, to two investors pursuant to private
placement subscriptions under Rule 506 of Regulation D and Section
4 (2) of the Securities Act, which resulted in the receipt by the
Company of $500,000 in cash, whereby such shares, among other things,
have the following rights and privileges: (i) 7% annual preferential
dividend, payable semi-annually, (ii) conversion at the holders'
option into shares of Common Stock at a conversion rate of 10 common
shares for 1 preferred share.
d) On August 24, 2000, the Securities and Exchange Commission approved a
registration statement on Form SB-2 for 19,467,160 common shares, filed by the
Company on behalf of certain holders of the Company's securities. There will be
no proceeds to the Company from the sale of any of these shares.
Item 3 DEFAULTS ON SENIOR SECURITIES - None
-----------------------------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
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Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit (3)(i) - Articles of Incorporation and Amendments thereto,
incorporated herein by reference to Exhibits of previous filings with
the Commission.
Exhibit (3)(ii) - By-laws of the Company, incorporated herein
by reference to Exhibits of previous filings with the Commission.
Exhibit (4) - Instruments defining the Rights of Holders - On
November 3, 2000, the Company filed an amendment to its
Certificate of Incorporation, designating from its "blank
check" preferred stock pool 500,000 shares as Series D Senior
Convertible Preferred Stock, par value $0.001. A copy of the
designation is attached hereto.
Exhibit (27) - Financial Data Schedule - attached hereto.
(b) Reports on Form 8-K:
On October 11, 2000, the Company filed a report on Form 8-K,
informing about the signing of an equity-line financing
agreement with Torneaux Fund Ltd., whereby the Company may sell up
to between $1.2 and $4.2 Million of its common stock.
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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: November 13, 2000 By: /s/ Steven D. Rudnik
-----------------------
Steven D. Rudnik
Chairman and Chief Executive Officer
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 4
CERTIFICATE OF POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE SHARES
OF THE PREFERRED STOCK OF
MAGNITUDE INFORMATION SYSTEMS, INC.
To Be Designated
Series D Senior Convertible Preferred Stock
Magnitude Information Systems, Inc., a Delaware corporation (the
"Corporation"), in accordance with Section 103 of the General Corporation Law of
the State of Delaware ("DGCL"), by its President, does hereby certify that
during a meeting on September 26, 2000, the Board of Directors of the
Corporation duly adopted the following resolutions providing for the issuance of
a series of Preferred Stock to be designated Series D Senior Convertible
Preferred Stock, par value $.001, and to consist of 500,000 shares:
RESOLVED, that the Corporation is hereby authorized to amend
its Certificate of Incorporation and to file a Certificate of
Designations of Preferred Stock to provide for 500,000 shares
of Series D Senior Convertible Preferred Stock, $.001 par
value ("Series D Senior Preferred"), pursuant to the terms and
conditions set forth in the Certificate of Designations;
RESOLVED, that the rights, privileges and limitations of each
share of Series D Senior Preferred shall be as follows:
1. Issuance. The series of Preferred Stock designated as Series D
Senior Preferred shall consist of 500,000 shares.
2. Dividends. The holders of said shares of Series D Senior Preferred
shall be entitled to receive cumulative dividends thereon at the rate of seven
percent (7%) per annum, payable semi-annually when declared by the Board of
Directors, before any dividend shall be declared, set apart for, or paid upon
the Common Stock of the Corporation. The Dividend Rate shall accrue on the
Stated Value (the "Stated Value"), which Stated Value shall be noted on the
certificate issued to the holder, of each share of the Series D Senior
Preferred. The dividends on the Series D Senior Preferred, payable in cash,
shall be cumulative, so that if the Corporation fails in any fiscal year to pay
such dividends on all the issued and outstanding Series D Senior Preferred, such
deficiency in the dividends shall be fully paid, but without interest, before
any dividends shall be paid on or set apart for the Cumulative Preferred Stock
or the Common Stock.
3. Priority. The Series D Senior Preferred shall with respect to
dividend rights and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with the Series A,
B and C Senior Convertible Preferred Stock.
4. Voting. Except as required by the DGCL and as provided in Section
(7) below, the holders of said shares of Series D Senior Preferred shall
not be entitled to any voting rights.
5. Cancellation. Shares of Series D Senior Preferred which have been
issued and reacquired in any manner, including shares purchased or converted
into Common Stock, exchanged or redeemed, shall be canceled on the books of the
Corporation and shall not be considered outstanding for any purpose.
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6. Liquidation. In the event of any liquidation, dissolution, or
winding up of the affairs of the Corporation, whether voluntary or otherwise,
after payment or provision for payment of the debts and other liabilities of the
Corporation, the holders of the Series D Senior Preferred shall be entitled to
receive, out of the remaining net assets of the Corporation, an amount equal to
the Stated Value of each share of Series D Senior Preferred held of record by
such holder, payable in cash or in shares of stock, securities or other
consideration, the value of which stock, securities or other consideration shall
be fixed by the Board of Directors, plus the amount of all dividends in arrears
on each such share up to the date fixed for distribution, provided, however,
that such remaining net assets are sufficient to cover all the before mentioned
payments and also like payments to holders of Series A, B and C Senior
Preferred, before any distribution shall be made to the holders of Common Stock
or Cumulative Preferred Stock of the Corporation. In case such remaining net
assets are insufficient to cover all such payments to holders of Series A, B, C
and D Senior Preferred, the holders of these series shall receive payments on a
pro rata basis.
7. Cumulative Dividends. During such time as there exist unpaid
cumulative dividends due on the Series D Senior Preferred, no reclassification
of the shares of the Corporation or capital reorganization of the Corporation in
any manner provided by law shall be valid unless (a) the holders of a majority
of all the Series D Senior Preferred approve, and (b) provision is made for the
payment of the aggregate unpaid cumulative dividends then in arrears.
8. Redemption.
(i) The Corporation shall have the right to redeem pro rata any or all
of its Series D Senior Preferred issued and outstanding at any time, with the
Board of Directors of the Corporation in its sole discretion deciding how many
shares to redeem, provided, however, that any such shares called for redemption
have been issued and outstanding for a minimum of three (3) years at the time of
notice of redemption to the holders of such shares, by paying to the holders
thereof the Stated Value for each share of Series D Senior Preferred held by
such holder plus a "call premium" of 10% of the Stated Value, together with the
amount of any accrued and unpaid dividends as may have accumulated thereon at
the time of redemption (the "Redemption Price").
(ii) At least 10 days but not more than 30 days prior to the date fixed
by the Board of Directors of the Corporation for the redemption of any shares of
the Series D Senior Preferred pursuant to subsection (i) above, a written notice
shall be mailed to the holder of record of such shares of Series D Senior
Preferred to be redeemed, at the address of such holder as shown on the records
of the Corporation, notifying such holder of the election of the Corporation to
redeem such shares, stating the date fixed for redemption thereof (hereinafter
referred to as the "Redemption Date"), and calling upon such holder to surrender
to the Corporation on the Redemption Date at the place designated in such notice
such holder's certificate or certificates representing the number of shares of
Series D Senior Preferred specified in such notice of redemption. On or after
the Redemption Date, each holder of shares of Series D Senior Preferred to be
redeemed shall present and surrender such holder's certificate or certificates
for such shares to the Corporation at the place designated in such notice and
thereupon the Redemption Price of such shares shall be paid to or to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. From and after
the Redemption Date (unless default shall be made by the Corporation in payment
if the Redemption Price), all dividends on the Series D Senior Preferred shall
cease to accrue and all rights of the holders thereof as stockholders of the
Corporation, except the right to receive the Redemption Price thereof upon the
surrender of certificates representing the same, without interest thereon, shall
cease and terminate and such shares shall not thereafter be transferred (except
with the consent of the Corporation) on the books of the Corporation and such
shares shall not be deemed to be outstanding for any purpose whatsoever.
(iii) The holder of any shares of Series D Senior Preferred notified by
the Corporation of the redemption of such shares pursuant to subsection (ii)
above shall have the right to exercise his option to convert such shares of
Series D Senior Preferred into Common Stock of the Corporation pursuant to
Section (9) below, by notifying the Corporation in writing or via facsimile
prior to the Redemption Date of his election to convert, in the form prescribed
therefore. The Corporation, after receipt of such notice shall remove such
shares from the shares to be redeemed.
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9. Conversion. Each share of Series D Senior Preferred shall be
convertible at any time prior to the Redemption Date, at the holder's option,
into shares of Common Stock of the Corporation on the basis of ten (10) shares
of Common Stock for 1 share of Series D Senior Preferred. The holder of any
shares of Series D Senior Preferred who elects to convert his or her Series D
Senior Preferred into Common Stock of the Corporation shall surrender, at the
principal office of the Corporation or at such other office or agency maintained
by the Corporation for that purpose, the certificate or certificates
representing the shares of Series D Senior Preferred to be converted, together
with a written affidavit informing the Corporation of his or her election to
convert such shares, whereby the date of receipt by the Corporation of such
certificates and affidavit shall constitute the "Conversion Date". As promptly
as practicable, and in any event within ten business days after surrender of
such certificates, the Corporation shall deliver or cause to be delivered
certificates representing the number of validly issued, fully paid and
non-assessable shares of Common Stock of the Corporation to which such holder of
Series D Senior Preferred so converted shall be entitled. Such conversion shall
be deemed to have been made at the close of business on the Conversion Date, so
that the rights of the holders of the Series D Senior Preferred shall thereafter
cease except for the right to receive Common Stock of the Corporation in
accordance herewith, and such converting holder of Series D Senior Preferred
shall be treated for all purposes as having become the record holder of such
Common Stock of the Corporation at such time.
10. Anti-Dilution. In the event that, prior to the conversion of the
Series D Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a re-capitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefore in the form of
cash, services or property, the conversion ratio of the Series D Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series D Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, a number of shares of Common Stock of the
Corporation representing the same percentage of common shares outstanding as
represented by the shares that he would have received had he converted his
Series D Senior Preferred Stock to Common Stock prior to such change in the
outstanding shares of Common Stock of the Corporation.
IN WITNESS WHEREOF, we, the undersigned, have executed and subscribed
this certificate on September 26, 2000
/s/ Steven D. Rudnik
----------------------------
Steven D. Rudnik, President
ATTEST:
/s/ Joerg H. Klaube
---------------------------
Joerg H. Klaube, Secretary
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