FORM 10-QSB/**A**
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, 2001

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, 2001, was 25,023,903 shares.

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

 

 

 

INDEX

 

										        	Page

										          Number
PART  1  -  FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)  as restated

	Consolidated Balance Sheet

	 - September 30, 2001								   3

	Consolidated Statements of Operations

	 - Three and nine months ended September 30, 2001 and 2000			   4

	Consolidated Statements of Cash Flows

	 - Nine months ended September 30, 2001 and 2000				   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
**PART I  - Item 1**
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Unaudited)

As Restated - see Note 6

ASSETS							       September 30, 2001		

	Current Assets

	Cash  ....................................................................		$    8,577	

	Accounts receivable, net of allowance for

	   doubtful accounts of 132,843 .............................		      201,290

	Miscellaneous receivables ..		196,323

	Inventories ..........................................................			2,260

	Deferred tax asset 			122,044

	Prepaid expenses .....................................................			34,679	

	   Total Current Assets ............................................		565,173		

	Receivables due for payment after 12 months 		43,750

	Property, plant and equipment, net of accumulated

	   depreciation of $203,585 .....		77,051

	Software, net of accumulated amortization of $534,520 .....		972,770

	Other assets ..........................................................		21,829	

TOTAL ASSETS ...........................................................		1,680,573		

		               		========	

LIABILITIES AND STOCKHOLDERS' EQUITY (IMPAIRMENT)

LIABILITIES

	Accounts payable and accrued expenses ................		683,169		

	Deferred revenue .................		231,867

	Dividends payable ...................................................		150,586		

	Loans and notes payable .........................................		617,390		

	Current maturities long-term debt ...........................		33,529		

	Current maturities lease obligations ........................		7,440		

	   Total Current Liabilities .......................................		1,723,981		

	Long-term debt, less current portion .......................		0		

	Lease obligations, less current portion ....................		6,118		

TOTAL LIABILITIES ...................................................		1,730,099		

STOCKHOLDERS' EQUITY (IMPAIRMENT)

	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 214,857 shares are issued and outstanding		215
	Common Stock, $0.0001 par value, 100,000,000 shares authorized,
	25,023,903 shares are issued and outstanding ........		2,502		
	Additional paid-in capital ..........................................		17,900,767		

	Accumulated deficit ...............................................		(17,953,010)		

TOTAL STOCKHOLDERS' EQUITY (IMPAIRMEN)......		  (49,526)		

TOTAL LIABILITIES AND EQUITY (IMPAIRMENT)...	$  	1,680,573		

                                                       ==========

See notes to consolidated financial statements

 

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

As Restated - see Note 6

				                	     Three Months Ended		      Nine Months Ended

	  	     	September 30,		                September 30,		

			      2001		      2000		      2001		      2000	
Total Revenues ..................................... 		$    34,150		$    253,787		292,708		601,790

	

	Cost of Goods Sold ................................			39,311		41,740		120,353		126,394	

Gross Profit ..................................................			(5,161)		212,047		172,355		475,396

	Selling expenses .....................................			256,275		441,140		990,942		1,046,219

	General & administrative expenses .........		556,438		641,478		1,762,632		1,774,331
Operating Income (Loss) ..............................			(817,874)		(870,571)		(2,581,219)		(2,345,154)

	Miscellaneous income ............................			        0		12		0		14,060

	Interest expense, net ...........................			(9,670)		(16,091)		(42,901)		(148,934)

	Miscellaneous expenses .........................			    (156,789)		(0)		(156,789)		(1,149)
Non-Operating Income (Expense) ................			(166,459)		(16,079)		(199,690)		(136,023)
Net Loss before taxes ..			(984,333)		(886,650)		(2,780,909)		(2,481,177)

	Provision for income taxes .			0		0		0		0

Net Loss ......................................................			$  (984,333)		$  (886,650)	$(2,780,909) 	$(2,481,177)

				=========	=	========	=	========	=	========

Dividends .....................................................			26,354		53,280		157,561		118,128

Net Loss after Dividends .............................			$ (1,010,687)		$ (939,930)		$(2,938,470)		$(2,599,305)

Loss per Common Share ...............................			$       (0.04)		$        (0.06)		$       (0.14)		$   (0.18)

			=	========	=	========	=	========	=	========

Weighted Average Number of 

	Common Shares Outstanding ..................		23,552,842		15,745,597 		20,285,553		14,599,500

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

As Restated - see Note 6

							     Nine Months Ended September 30,

			      2001		           2000		

Cash Flows from Operating Activities

	Net income (loss) ..............................................			$(2,780,909)		$ (2,481,178)	

	Adjustments to net income (loss)

	   Depreciation and amortization .......................			152,933		149,074	

	   Stock issued for debt and expenses ...			27,388		251,667

	   Disposition of certain assets /liabilities..........			0		1,122

	   Dividend payments 			(14,003)		(42,000)

	Decreases (increases) in Assets

	   Accounts receivable .......................................			102,432		(401,277)	

	   Miscellaneous receivables ..			(129,627)		15,227

	   Inventories ...................................................			240		215	

	   Prepaid expenses .........................................			319,138		(38,795)	

	   Other assets .................................................			2,600		(22,750)	

	Increases (decreases) in Liabilities

	   Prepayments received .			0		0

	   Deferred revenues 			204,548		0

	   Accounts payable and accrued expenses .........			95,915		(204,486)
Net Cash Provided (Used) by Operating Activities 			(2,019,345)		(2,773,181)

Cash Flows from Investing Activities

	Purchases of equipment and fixtures ..................			(944)		(52,182)

	Disposition of equipment and other assets .........			0		3,358
Net Cash Provided (Used) by Investing Activities			(944)		(48,824)

Cash Flows from Financing Activities

	Proceeds from notes payable ..............................			397,500		250,000

	Repayment of loans and notes ............................			(46,000)		(484,534)

	Reclassification of long-term debt .....................			(100,000)		(0)	

	Issuance of preferred stock 			145,004		2,937,836

	Issuance of common stock ........... .....................			1,594,661		550,000	

Net Cash Provided (Used) by Financing Activities			1,991,165		3,253,302		

Net Increase (Decrease) in Cash ..............................			(29,124)		431,297		

Cash at Beginning of Period ....................................			37,701		249,569	

Cash at End of Period ..............................................		$	8,577	$	680,866
 

 

 

 

 

 

See notes to consolidated financial statements

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(1) 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. 

Our primary product is an integrated suite of proprietary software modules marketed under the name ErgoManagerÔ 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.

(2) 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 99.4% 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 ErgoManagerÔ 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. 

.

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(3) NARRATIVE DESCRIPTION OF INDUSTRY AND MARKET

Magnitude Information Systems, Inc. is a pioneer in the Ergonomic Productivity Software****(EPS) market. With ErgoManagerÔ, an interactive suite of WindowsÔ software products, Magnitude has developed and delivered the first integrated systems approach to computer ergonomics.  Our patented proprietary software products provide business and government employers with a complete system for the evaluation and management of ergonomic and productivity risk factors with respect to the use of computers in the office environment.  ErgoManagerÔ is designed to help employers****minimize preventable Repetitive Stress Injuries ("RSI") and enhance productivity through:

-- Real-time monitoring of keyboarding activities to ensure proper posture and work pacing.

-- Pro-active dialogue with at-risk employees, including surveys and training in the best practices for

    wellness and productivity.

-- Strategic profiling and the management of computer use throughout an organization to employ best

    practices and to measure health, safety, and performance results.

-- Computer workstation assessment tools.

We have received a patent from the U.S. Patent and Trademark Office on our application relative to certain core inventions within its ErgoManagerÔ system and we have applied for several more patents for our products. 

As the utilization of computers in the office has increased significantly in the last decade, so has the rate of health problems believed to be related to the use of computers.  Computer ergonomics focus on optimizing the design of technology involved in the utilization of computers in the office, and also attempts to affect the manner in which people interact with computers, so as to minimize the associated health risks.  A successful technology delivery system positively impacts the cost of doing business by improving the comfort, productivity, job satisfaction and safety of the computer user, while reducing the costs of absenteeism and work related disability.

Repetitive stress injury (RSI) is a classification of diseases caused by the excessive use of joints.  It is a sub-classification of Cumulative Trauma Disorders (CTDs).  RSI accounts for a large portion of work-related illnesses, and the incidence of RSI is expected to grow as the number of people operating keyboards increases.  The impact of RSI is measured not only in the pain and suffering of its victims, but also in time lost from work and medical costs. The Company's 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 new study released in January 2001 by the National Academy of Sciences, originally commissioned by Congress and produced by the National Research Council, finds that work-related back, hand and wrist injuries affect about 1 million U.S. workers every year.  The total cost of the resultant disorders is between $45 billion and $54 billion in compensation, lost wages and lower productivity. Increased awareness of the health risks and associated costs led the State of California several years ago implemented an ergonomic regulation which directs qualifying employers to establish and maintain a program designed to minimize RSI's. Such program shall include work-site evaluation, control of the exposures that have caused RSI's, and training of employees.  State agencies and employers in California face fines of up to $25,000 per incident for violating these regulations. The State of Washington adopted similar regulations in 2000, and other states have indicated a willingness to follow suit. The Company believes that the growing recognition of these trends will give rise to a rapidly expanding market for the Company's products.

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(4) GOING CONCERN

The ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing. In their report for the fiscal year ended December 31, 2000, our auditors had expressed an opinion that, as a result of the losses incurred and the relative lack of working capital, there was substantial doubt regarding our ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might be necessary if the Company were unable to continue as a going concern. During the last year and the first three quarters in 2001 the Company has relied on the private placement of its common and preferred stock to fund its operations. Management's plans are to continue seeking additional working capital through equity and debt placements with private and institutional investors.  

 

(5) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of  Magnitude Information Systems, Inc. and its subsidiary Magnitude, Inc. All significant inter-company balances and transactions have been eliminated.

Inventories

Inventory consists of finished goods that 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

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

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, 2000.  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, 2000.

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

The Company's revenue recognition policy for software sales is in accordance with Accounting Statement of Position 97-2.  Revenue is recognized at the time of licensing provided that the resulting receivable position is deemed probable of collection and is fixed or determinable. Revenue from software maintenance contracts is recognized ratably as earned.  **Where a sales contract includes multiple elements, revenues are allocated to the various elements based on Company-specific objective evidence of fair value, regardless of any separate prices for each element that may be stated within the contract.**
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.
**(6) RESTATEMENT OF RESULTS

The Company has restated its financial statements for the nine months period ended September 30, 2001. The restated financial results reflect the correction of an error in its accounting procedures related to revenue recognition, the nature of which is recording of a contract with extended payment terms as revenue. The impact of this adjustment of the Company's financial results as originally reported is summarized below:

			      	9 Months Ended Sep.30,2001

			As Reported	As Restated
Retained earnings (deficit)			$(17,733,576)	$(17,953,010)

		Revenue			527,083	292,708

		Net (loss)			(2,561,475)	(2,780,909)

		Income (loss) per share			(0.13)	(0.14)

(7) DEFERRED TAX ASSET 

During 2000, 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.

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(8) PREPAID EXPENSES

Prepaid expenses at the end of the quarter included a position of $156,789 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 and have since been amortized as utilized.  At September 30, 2001, however, management concluded that the remaining asset was compromised due to the likelihood that there would be no further tangible benefits associated with this position. The residual balance of $156,789 was therefore written off.

(9) RECEIVABLES DUE AFTER 12 MONTHS

A major contract, entered into during the second quarter, provided for a deferred payment schedule of which portions amounting to $43,750 are due and payable in installments during the months October through December 2002.

(10) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following at September 30, 2001:

Equipment
$
164,891
Furniture and fixtures
69,976
Leasehold improvements
45,770
 
 

 
 

 
 

 
 

280,637
Less accumulated depreciation
 
 

 
 

 
 

203,585
                                   Total
 
 

 
 

$
77,051
**(11) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
****
Accounts payable and accrued expenses consisted of the following at September 30, 2001:

Accounts payable
$
434,876
Accrued interest
 
 

50,139
Accrued commissions
 
 

14,915
Accrued salaries and professional fees
 
 

112,296
Miscellaneous accruals
 
 

70,943
                      Total
$
683,169

(12) DEFERRED REVENUES

During the second quarter, the Company entered into a licensing and distribution agreement with a foreign distributor which resulted in a $175,000 receivables position with extended payment terms, whereby the associated revenue has been deferred until management has received more assurance with respect to the collectibility of the receivable.  

 

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

 

(13) LOANS AND NOTES PAYABLE

At September 30, 2001, 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 5% per year.  This note is overdue at September 30, 2001; no demand for payment has been made through today's date.
$
75,000
Note issued by Magnitude, Inc. originally maturing June 1996 and accruing interest at 12% per year.  This note is overdue at September 30, 2001; no demand for payment has been made through today's date. 

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 to discount the note is 8% per annum.

Cash advances from an officer and director of the Company, carrying interest at the rate of 7% p.a. 
25,000

 

33,529

 

       142,500   

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 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 liability was converted into a Company obligation maturing July 1, 2002, and carrying interest at the rate of 7% per year payable monthly, of which a portion of $100,000 has been reclassified as due on demand.  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. 
374,890

					_________	

		Total	$	   650,919						========

(14) INCOME TAXES

At December 31, 2000, the Company had net operating loss carry forwards approximating $14,000,000 for federal income tax purpose which expire between the years 2007 and 2020 and are subject to certain annual limitations.

The Company's total deferred tax asset and valuation allowance at December 31, 2000 are as follows:

Total deferred tax asset
$
5,600,000
Less valuation allowance
5,600,000
Net deferred tax asset
$
-

 

MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(15) COMMITMENTS AND CONTINGENCIES

Lease Agreements

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.

 

(16) 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, of which $100,000 was subsequently classified as due on demand with the remaining balance of $274,890 maturing July 1, 2002. The obligation among others provides for a right to the holder to convert such obligation into common stock of the Company (see "Loans and Notes Payable").  

During the first three quarters in 2001, several officers and directors of the Company extended cash advances to the Company of which a balance of $142,500 at September 30, 2001 remains outstanding and which accrue interest at the rate of 7% per year.  These advances are repayable upon demand. During the quarter ended September 30, 2001, a director of the Company converted an aggregate $130,000 of such cash advances into 361,111 shares of the Company's common stock and warrants for the purchase of a further 361,111 common shares, exercisable at $0.60 per share.

In July 2001, the board of directors of the Company acted on an earlier decision with respect to founder's shares and authorized the grant of a stock option for the purchase of 2.5 million common shares to the foundr and current Chief Executive Officer of the Company, exercisable over ten years at a price of $0.50 per share.  The option has a cash-less exercise feature.

In September 2001, a director of the Company exercised warrants for the purchase of 400,000 shares of the Company's common stock, at a price of $0.25 per share.
**Item 2.		

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
**Results of Operations:**
A number of major contracts were anticipated to close in September but were delayed directly due to the events of September 11th, 2001. These are building towards closure again, however, the delays resulted in lesser than expected revenues during the period. It is worthwhile to note that in the time since September, management has observed increased attention to cost-containment at prospects and clients resulting in extraordinary interest in the Company's products.  Management expects future revenues to reflect this very positive development in our industry.  No major new contracts were signed during the period, however, at the time of this writing the Company is in the process of completing materials due under a purchase by an overseas distributor with whom we had signed a license and purchase agreement during the second quarter, which will result in the recognition of $175,000 in previously deferred revenues when complete.  We are in the process of negotiating similar agreements with both U.S. distributors and other foreign distributors in the Far East and Europe.

Revenues for the quarter ended September 30, 2001, totaled $34,150, compared to $253,787 for the same period in 2000, all such revenues generated by the Company's wholly owned subsidiary Magnitude, Inc. from the licensing of the Company's proprietary ErgoManagerÔ software and related maintenance and support services.  The terms of two larger purchase contracts received by the Company during the second quarter provide for extended payment terms so that the Company will receive cash only in installments through 2002 (see "Receivables due after 12 months" in Notes to Financial Statements).  Revenues for the nine months period ended September 30, 2001, totaled $292,708 compared to $601,790 in the first nine months of 2000. Gross profits during the quarter totaled negative $5,161.  The 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 significantly increase as revenues grow. After deducting selling expenses and general and administrative expenses totaling $812,713 the Company realized an operating loss of $817,874, compared to an operating loss of $870,571 for the third quarter in 2000.  Non-operating expenses totaled $166,459, primarily from the write-off of a compromised asset position (see "Prepaid Expenses" in the Notes to Financial Statements).  The net result for the quarter, after accounting for dividends paid and accrued on the Company's outstanding preferred stock, was a loss of $1,010,687 or $0.04 per share, compared to a loss of $939,930 or $0.06 per share for the same period last year.  The nine month result was a loss of $2,938,470 in 2001, and a loss of $2,599,305 in 2000.

In spite of a fifteen percent decrease in operating costs from the preceding quarter, expenses continue to be high relative to revenues. Management is striving to further reduce costs, however, is acutely aware of the necessity to provide for an adequate infrastructure to maintain the Company's presence on the marketplace.  Savings vis-à-vis prior quarters were achieved in both selling and general and administrative expenses through staffing reductions and the elimination of certain non-critical marketing programs.  Management expects to be able to further reduce costs during the fourth quarter.

Our primary marketing focus is on medium to larger size companies that may be candidates for enterprise-wide installation of our software.  Such larger contacts, however, typically are preceded by long and exhaustive trial and evaluation cycles whose pace of progress are unpredictable. The timing of the finalization of any major contract will significantly impact a given quarter's results.  Management is confident that its current sales approach remains valid and will result in tangible revenue improvements during the upcoming quarters.  

As a result of the slower than initially forecasted growth in the B2B sector, the quarter concluded with a significant loss that cut further into the Company's financial resources.  A partial replenishment of these resources came in the form of new working capital provided by private investors, however, the amounts obtained were not sufficient to entirely offset the negative cash-flow from operations, and came at the cost of occupying a growing part of management's time and efforts. Since revenues from the licensing of software do not yet cover operating expenses, and are not expected to do so in the immediate future, the Company will continue to depend on new capital infusions to be able to operate and pursue its marketing goals. 

 
**Liquidity and Capital Resources**
	The cash outflow from losses during the second quarter could be compensated by new equity investments through equity subscriptions by accredited investors who purchased the Company's common stock in a series of private placements, and the exercise of warrants and options to purchase such stock. These transactions contributed approximately $850,000 in cash. These receipts were not sufficient to reverse the large deficit in the working capital position which amounted to negative $1,158,808 at September 30, 2001, including the effect of a reclassification to current status of certain notes issued to the Company's chief executive officer, and continues to slow the Company's marketing efforts.

	Management is presently in discussion with several private lenders and investors with the goal of securing a larger infusion of equity or debt capital. The outcome of these discussions and the timing for any resulting capital inflows can not, however, be predicted with certainty at this time, and there can be no assurance that the necessary capital for an orderly continuation of the Company's business and redemption of liabilities will be obtained in a timely fashion. Should the Company be unable to successfully complete such financing transactions we may have to severely curtail operations.

	At the time of this submission, the Company had no bank debt. At September 30, 2001, its short-term liabilities, aside from trade payables and accruals, consisted of certain notes and loans aggregating approximately $650,000 of which $520,000 are owed to the Company's chairman and chief executive officer (see "Related Party Transactions"). Owing to present liquidity constraints, the Company is currently in arrears with approximately $130,000 in accrued unpaid dividends.

 
** **
 
**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, 2001, incorporated herein by reference, the Company, during the third quarter of 2001, issued the following unregistered securities:

1,124,030 shares of common stock accompanied by warrants for the purchase of 1,118,700 shares of common stock exercisable at $0.60 per share, to four accredited investors pursuant to private placement subscriptions, issued in reliance upon exemptions provided under Section 4(2), Rule 506 of Regulation D and Regulation S of the Securities Act, which resulted in the receipt by the Company of approximately $423,000  in cash;

79,403 shares of common stock to three creditors of the Company, pursuant to the conversion of $31,800 in miscellaneous payables;

1,000,000 shares of common stock pursuant to the exercise of certain options and warrants by  two individuals, one of whom is a director of the Company (see "Related Party Transactions" above); resulting in the receipt by the Company of $250,000 in cash;

3,750 shares of common stock for services performed.

Item 3	DEFAULTS ON SENIOR SECURITIES

The Company, as of the date of this filing, is in arrears on the payment of certain dividends on its Series A, B, C, and D Senior Convertible Preferred Stock. Such arrears total approximately $130,000 .

 

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

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.

(b)	Reports on Form 8-K:      - None

 

 

 

 

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:   December 23, 2002				By: _____/s/  Steven D. Rudnik___________

		      		Steven D. Rudnik

					      	  		Chairman and Chief Executive Officer

					
**EXHIBIT 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**
In connection with **Amendment No. 1 to** the quarterly report of Magnitude Information, Inc. (the "Company") on Form 10-QSB for the quarter ended September 30, 2001 filed with the Securities and Exchange Commission (the "Report"), I, Steven D. Rudnik, President and Chief Executive Officer and I, Joerg H. Klaube,  Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  I have reviewed this **amended quarterly report** on Form 10-QSB of Magnitude Information Systems, Inc.; 

2.  Based on my knowledge, this **amended quarterly report** does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this **amended quarterly report**; 

3.  Based on my knowledge, the financial statements, and other financial information included in this **amended quarterly report**, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this **amended quarterly report**; 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 15d-14) for the registrant and I have: 

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this **amended quarterly report** is being prepared; 

b)  evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this **amended quarterly report**; and 

c)  presented in this **amended quarterly report** our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 

5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the registrant's board of directors (which performs the equivalent function): 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 

 

 

6. I have indicated in this **amended quarterly report** whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Dated:  December 23, 2002			MAGNITUDE INFORMATION SYSTEMS, INC.

By:_/s/ Steven D. Rudnik_____________    
     						      Steven D. Rudnik

      President and Chief Executive Officer

By:_/s/ Joerg H. Klaube_______________
						        Joerg H. Klaube

						        Chief Financial Officer

 ******