As filed with the Securities and Exchange Commission on October 24, 2002
Registration No. 333-73992
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 2 to FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAGNITUDE INFORMATION SYSTEMS, INC.
(Name of small business issuer in its charter)
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Delaware 7372 75-2228828
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Address and telephone number of principal executive offices and
place of business)
Steven D. Rudnik Joseph J. Tomasek, Esq.
401 State Route 24, Chester, New Jersey 07930 75-77 North Bridge Street, Somerville, New Jersey 08876
(908) 879-2722 (908) 429-0030
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462 (c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462 (d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]
The prospectus forming a part of this registration statement combines securities offered pursuant to a previously filed and currently effective registration statement on Form SB-2, Registration No. 333-34512, pursuant to Rule 429(a).
Calculation Of Registration Fee
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PROPOSED PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE
TO BE TO BE PRICE PER OFFERING AMOUNT OF
REGISTERED(1) REGISTERED SHARE PRICE REGISTRATION FEE
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Common stock11,693,288 shares(1)$.195(2)$ 2,280,191$691.00
$.0001 par value per share
Additional
Common Stock
Registered by 22,144,152 shares(3) $.235(4) $ 5,285,747 $487.00
Amendments No.1/ No. 2
Total Common Stock
Being Registered in
this Form SB-2_________33,837,440 shares_________________________________________________ ______________
Common Stock 19,482,086 shares(5) $1.91 $37,210,784 $11,276
Previously Registered in
this Form SB-2
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(1) Common shares included in this Form SB-2 registration Statement as filed with the Securities and Exchange Commission on November 21, 2001.
(2)Estimated solely for the purpose of computing the registration fee required by Section 6(B) Of the Securities Act and computed pursuant to Rule 457(C) under the Securities Act Based upon the average of the high and low prices of the common stock on November 19, 2001 as reported on the Electronic Bulletin Board Over-The-Counter Market maintained by The National Association of Securities Dealers, Inc.
(3) Additional common shares being registered in Amendments No. 1 and No. 2 to Form SB-2 registration statement.
(4) Estimated solely for the purpose of computing the registration fee required by Section 6(B) Of the Securities Act and computed pursuant to Rule 457(C) under the Securities Act Based upon the average of the high and low prices of the common stock on June 4, 2002 as reported on the Electronic Bulletin Board Over-The-Counter Market maintained by The National Association of Securities Dealers, Inc.
(5) The Prospectus included in and forming a part of this Registration Statement includes the balance of 12,389,402 common shares of the original 19,482,086 common shares previously registered on a prior Form SB-2 Registration Statement, filed with the Securities and Exchange Commission on April 11, 2000, Registration No. 333-34512, declared effective on August 24, 2000. The filing fee paid of $11,276 was based upon the average of the high and low prices of the common stock of $1.91 as reported on the Electronic Bulletin Board, Over-The-Counter Market maintained by The National Association of Securities Dealers, Inc. on April 5, 2000, and was computed pursuant to Rule 457(C) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus
Magnitude Information Systems, Inc.
28, 642,334Shares of Common Stock
1,000,000 Shares of Common Stock
Underlying Series C Preferred Stock
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805,570Shares of Common Stock
Underlying Series D Preferred Stock
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7,180,172Shares of Common Stock
Underlying Common Stock Purchase Warrants
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5,849,866Shares of Common Stock
Underlying Stock Option Grants
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2,748,900Shares of Common Stock
Underlying ConvertibleNote
This prospectus covers a total of 46,226,842 common shares registered on behalf of selling shareholders for resale. These total shares include 33,837,440 new common shares we are currently registering as well as 12,389,402 common shares that we previously registered in August, 2000. This prospectus covers all 46,226,842 of these common shares. Some of these common shares have been issued already or may be issued under our warrants, stock options and convertible preferred stock owned by selling shareholders. We are also registering 2,748,900 common shares that our President and Chief Executive Officer may obtain by converting his convertiblenote. All of the 46,226,842 common shares covered in this prospectus may be sold from time to time by the named selling shareholders. We are not selling any of these common shares and will not receive any of the proceeds from their sale. We will receive the proceeds from any cash exercises of any of the warrants and stock o ptions by the selling shareholders. Our common shares are quoted on the Electronic Bulletin Board, Over-The-Counter Market under the symbol "MAGY". On October 21,2002, the average of the high and low prices paid for our common stock was $.105.See "Selling Shareholders" and "Use of Proceeds".
You may contact us at our principal executive offices located at 401 State Route 24, Chester, New Jersey 07930 or by phone at (908)879-2722. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
This Investment Involves Certain High Risks. See "Risk
Factors" Beginning on Page __.
The date of this prospectus is October __, 2002
Neither the Securities And Exchange Commission nor any state Securities Commission has approved or disapproved of these Securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Prospectus Summary
This Summary Is Qualified In Its Entirety By The More Detailed Information Appearing Elsewhere In This Prospectus
The Company
We are a corporation that was organized under the laws of the State of Delaware (the "Company" or "Magnitude") on April 19, 1988 under the name Fortunistics Inc. On March 4, 1993, we changed ourname 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 "ErgoManagerTM" 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 heal th 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 entered into an acquisition agreement whereby it acquired substantially all of the outstanding stock 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 hereafter referred to as Magnitude, Inc. The business combination took the form of a reverse acquisition. 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 ErgoManagerTM software product.
The Offering
Securities offered 46,226,842 shares of common stock, $.0001 par value, including 1,000,000 shares of common stock issuable upon conversion of Series C Preferred Stock; 805,570 shares of common stock issuable upon the conversion of Series D Preferred Stock; 7,180,172shares of common stock issuable upon the exercise of Warrants; 5.849,866shares of common stock issuable upon the
exercise of stock options; 2,748,900shares of common stock issuable upon the conversion of a convertible note. See "Selling Shareholders" at page __.
Selling Shareholders The selling shareholders are identified in this prospectus at
page __ together with the maximum amount of ourcommon shares that each may sell either outright or upon
conversion or exercise of rights under their respective preferred
stock, warrants, stock options and the convertiblenoteor subsequent to consummation of the subscription
agreement. See "Selling Shareholders" at page __.
Plan of Distribution Up to 46,226,842shares of common stock may be
offered and sold by the selling shareholders through agents or
brokers, acting as principal, agent in transactions, which may
involve block transactions, on the Electronic Bulletin Board,
over-the-counter market or on other exchanges on which the
shares are then listed, pursuant to the rules of the applicable
exchanges or in the over-the-counter market, or otherwise, at
market prices prevailing at the time of sale, at negotiated
prices or at fixed prices; through brokers or agents in private sales
at negotiated prices; or by any other legally available means.
Offering Price At prevailing market prices on the Electronic Bulletin Board or on
other exchanges on which the shares are then listed or at negotiated prices.
Use of Proceeds We will not obtain any funds from the sale of the
common stock sold by the selling shareholders. We will receive
up to $10,934,707 in proceeds from the cash exercise of the
warrants and stock options currently outstanding and included
in this prospectus. However, due to current market conditions
as well as the fact that the exercise prices of these warrants and options have been higher than the current market price of our stock, it is unlikely that we will realize the receipt of any proceeds from the exercise of these warrants and options. If the market price for our common stock increases to permit the exercise of these warrants and options, we intend to use any such cash proceeds received for general corporate purposes, which may include repaying indebtedness, making additions to our working capital, funding future acquisitions or for further developing our products and hiring additional personnel.
Securities Outstanding We areauthorized to issue up to an aggregate
100,000,000 shares of common stock and 3,000,000
shares of preferred stock of which 53,518,986common
shares and 195,968preferred shares were issued and
outstanding at October 21, 2002. If the selling
shareholders exercise all of their rights to convert and/or exercise
all of their preferred shares, warrants, stock options, and the
convertible note,an additional 17,584,508common shares, representing part of the shares being registered, will be outstanding, resulting in 71,103,494total outstanding common shares. We have in reserve an additional 2,804,032authorized preferred shares that it may issue in one or more series with such rights, preferences and privileges as may be determined by ourBoard of Directors.
Risk Factors An investment in our common shares is highly speculative and any
purchasers will suffer substantial dilution per common share
compared to the purchase price. We have suffered losses for the
ninemonths period ended September 30, 2002of 2,276,745,losses of $3,244,389 during 2001 andlosses of $3,716,527 during 2000. We will need additional funding. No person should invest in our common shares who cannot afford to risk the loss of his or her entire investment. See "Risk Factors" at page __.
RISK FACTORS
You should carefully consider the risks described below when evaluating your ownership of the Magnitude common stock. The risks and uncertainties described below are not the only ones Magnitude faces. Additional risks and uncertainties we are presently not aware of or that we currently consider immaterial may also impair Magnitude's business operations.
If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of ourcommon stock could decline significantly.
We Continue to Suffer Financial Losses in our Business.
We have a history of losses and if we do not achieve profitability we may not be able to continue our business in the future. We have incurred substantial operating losses since our inception, which has resulted in an accumulated deficit of approximately $18,259,030as of December 31, 2001of which approximately $7 million are attributable to its discontinued hardware product line. For the fiscal years ended December 31, 2001and 2000, we incurred losses of $3,244,389 and $3,716,527, respectively. For the ninemonths period ended September 30, 2002, we had additional losses of 2,276,745. We have financed our operations primarily through the sales of equity and debt securities. Our expense levels are high and our revenues are difficult to predict. We anticipate incurring additional losses until we increase our client base and revenues. We may never achieve or sustain significant revenues or profitability. If w e are unable to achieve increased revenues, we will continue to have losses and may not be able to continue our operations.
Our Auditors Have Rendered An Opinion Raising Doubts as to Whether We Can Continue Operations.
Our auditors have expressed their opinion that based upon our financial condition as shown in our financial statements for our fiscal year that ended on December 31, 2001, they have substantial doubts whether or not we will be able to continue in business as an operating company. See "Financial Statements".
We Need Additional Financing.
We could be required to cut back or stop operations if we are unable to raise or obtain needed funding. Our ability to continue operations will depend on our positive cash flow, if any, from future operations or our ability to raise additional funds through equity or debt financing. At present, we have not received firm commitments for private financings in amounts sufficient to cover the working capital necessary to continue to finance our operations and execute our business plan. Although we anticipate that future revenues and new capital from private and institutional investors with whom we are currently in negotiations will be sufficient to fund our current operations and capital requirements for the current fiscal year, we cannot give you any assurance that these negotiations will result in definite agreements that will provide such needed capital. We could be required to cut back or stop operations if we are unable to raise or obtain funds when needed.
We Do Not Have A Proven Software Sales Record
We do nothave a provensoftware sales recordand have made only limited sales of our software products. Our total revenues for software sales and licenses and support services for the years ended December 31, 2001 and 2000 were approximately $609,214and $646,035, respectively. For the nine month period ended September 30, 2002,we have revenues of only $105,474.As a result of our lack of proven sales success and lack of evidence that the business or consumer marketplaces have accepted our software products, you and other investors may not have enough or sufficient financial and operational information about us that is necessary in order to properly evaluate the risks of making any investment in our stock.
We Are Not Certain That Customers Will Buy Our Products.
Our revenues depend on sales of our specialized software products and we are uncertain whether there will be broad market acceptance of these products. Our revenue growth for the foreseeable future is largely dependent upon increased sales of our ErgoManagerTM suite of software products. Since the introduction of our ErgoManagerTM software products in November, 1998 and through September 30,2002,revenue from our software products has been approximately1,637,000(prior to this time, we had sales of approximately $63,000 based upon a predecessor version of the ErgoManagerTM software}.
For the nine months period ended September 30,2002,we had revenues from the sales of software product licenses and support servicesof $105,474. Our future financial performance will depend upon the successful introduction and customer acceptance of our ErgoManagerTM software products as well as the development of new and enhanced versions of this product as well as other related software products that may be developed in the future. Revenue from products such as ErgoManagerTM depend on a number of factors, including the influence of market competition, technological changes in the ergonomic workplace market, our ability to design, develop and introduce enhancements on a timely basis and our ability to successfully establish and maintain distribution channels. If we fail to achieve broad market acceptance of our ErgoManagerTM products, it would have a material adverse effect on our business, operating results and financial condition.
We Do Not Have An Established Sales Distribution Network.
We do not have an established sales distribution network through which to sell our software products. Ourinability to enter into strategic relationships with indirect channel partners could have a material adverse effect on us. As part of our sales and marketing efforts, we are seeking to develop strategic relationships with indirect channel partners, such as original equipment manufacturers and resellers. We have limited financial, personnel and other resources to undertake extensive marketing activities ourselves. Therefore, our software products will depend on our ability to develop and maintain strategic marketing relationships with indirect channel partners and their ability to market and distribute our software products. If we are unable to enter into and maintain such arrangements or if such arrangements do not result in the successful commercialization of our software products, then this could have a material adverse effect on our business, operating results and financial condition.
You Could Lose Your Entire Investment.
Our common stock offered in this prospectusis highly speculative, involves a high degree of risk and should not be purchased by any person who cannot afford the loss of his entire investment. A purchase of our common stock in this offering would be unsuitable for a person who cannot afford to sustain such a loss.
If We Were To Lose The Services of Our President Our Business Would Suffer
We are substantially dependent upon the continued services of Steven D. Rudnik, our President and Chief Executive Officer. The loss of the services of Mr. Rudnik through incapacity or otherwise would have a material adverse effect upon our business and prospects. To the extent that his services become unavailable, we will be required to retain other qualified personnel, and there can be no assurance that we will be able to recruit and hire qualified persons upon acceptable terms. We do, however, maintain key person life insurance on the life of Mr. Rudnik in the amount of $1 Million.
In addition to Mr. Rudnik, if we were tolose the services of one or more of our key employees, such as Joerg Klaube, our Chief Financial Officer, or Mark Fuller, our Senior Vice President of Marketing and Sales, our business, operating results, financial condition or business prospects could be materially adversely affected. We have several programs in place to retain key personnel, including granting of stock options that vest annually over four or five years. All of these outstanding options are at exercise prices above the current market price of our common stock.
Penny Stock Regulations
The Securities Enforcement Penny Stock Act of 1990 requires specific disclosure to be made available in connection with trades in the stock of companies defined as "penny stocks". The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (I) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years; (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years; or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction invol ving a penny stock, of a disclosure schedule explaining the penny stock market and the risk associated therewith as well as the written consent of the purchaser of such security prior to engaging in a penny stock transaction. The regulations on penny stocks may limit the ability of the purchasers of our securities to sell their securities in the secondary marketplace. Our common stock is currently considered a penny stock.
There is Intense Competition in the Industry
The market for ergonomic application software is expected to become intensely competitive. Although we are not aware of any ergonomic software that competes with our ErgoManagerTM software products currently, competitors will certainly enter this marketplace. Although we believe our success will be due in part to our early entry into the computer workplace market, we expect other software product manufacturers to develop and sell similar products.
Intense competition could lead to increased price competition in the market, forcing us to reduce prices. As a result, our gross margins may decline and we may lose our first-to-market advantage which, in turn, could have a material adverse effect on our business, financial condition and results of operations. In addition, we may be unable to compete successfully with any new competitors which are better financed, have larger technical staffs and operational resources. There can be no assurances, therefore, that our software products will be able to successfully compete in the marketplace.
We haveLimited Protection of Intellectual Property and Proprietary Rights and May Potentially Infringe Third Party Intellectual Property Rights
We consider certain aspects of our software and documentation to be proprietary, and rely on a combination of contract, patent, copyright, trademark and trade secret laws and other measures to protect this information. Outstanding applications may not result in issued patents and, even if issued, the patents may not provide any meaningful competitive advantage. Existing copyright laws afford only limited protection. We believe that the rapid pace of technological change in the computer software industry has made patent, trade secret and copyright protection less significant than factors such as:
- knowledge, ability and experience of our employees;
- frequent software product enhancements; and
- timeliness and quality of support services.
Patent, trade secret and copyright protections may be inadequate, and our competitors may independently develop ergonomic software products that are substantially equivalent or superior to our software products. We do not believe that our software products, our trademarks or other proprietary rights infringe on the property rights of any third parties. However, third parties may assert infringement claims against us and our products. These assertions could require us to enter into royalty arrangements or could result in costly litigation.
Magnitude May Experience Product Liability Claims
Although our license agreements contain provisions designed to limit our exposure to potential product liability claims, these provisions could be invalidated by unfavorable judicial decisions or by federal, state or local laws or ordinances. Although we have not experienced any product liability claims to date, use of our software in mission critical applications may create a risk that a third party may pursue a claim against us. Although we carry product liability insurance, if a product liability claim against us was successful, the resulting damages or injunctive relief could have a material adverse affect on our business, financial condition and results of operations.
Our Stock Price is Volatile and There is a Risk of Litigation
The trading price of our common stock has in the past and may in the future be subject to wide fluctuations. For example, during the first quarter of fiscal year 2000, the average high sales price for our common stock traded in the public market was $4.75 per share while the average low sales price during the same period was $0.41 per share. Similarly, $1.16 was the average high and $0.38 the average low trading prices of our stock during the first quarter of 2001 in contrast to the $0.29 per share high average and $0.08 per share low average trading prices witnessed during the first three quarters of this year.
Further, the stock market has experienced in recent months and may continue in the future to experience extreme price and volume fluctuations that particularly affect the market prices of equity securities of high technology companies that often are not related to or are disproportionate to the operating performance of such companies. These broad market fluctuations, as well as general economic, political and market conditions have, and may continue to have, a material adverse effect on the trading price of our common stock. fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. We cannot assure you that there will not be lawsuits in the future or that future lawsuits will not have a material adverse effect on our business, financial condition and results of operations.
Rapid Technological Change; Dependence on New Products
The market for software is characterized by rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements. The Company must respond rapidly to developments related to operating systems and applicable programming languages. Such developments will require the Company to continue to make substantial product development investments. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness or revenue.
The Company's future success will depend on its ability to continue to enhance its current product line and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments, satisfy diverse and evolving customer requirements and otherwise achieve market acceptance. There can be no assurance that the Company will be successful in continuing to develop and market on a timely and cust-effective basis fully functional product enhancements or new products that respond to technological advances by others, or that its enhanced and new products will achieve market acceptance. In addition, the Company has in the past experienced delays in the development, introduction and marketing of new or enhanced products, and there can be no assurance that the Company will not experience similar delays in the future. Any failure by the Company to anticipate or respond adequately to changes i n technology and customer preferences, or any significant delays in product development or introduction, would have a material adverse effect on the Company's business, financial condition and results of operations. See "Patents and New Products" and "Research and Development" below.
Remote Possibility of Contingent Liability
This year, while our registration statement was still pending and being reviewed by the Securities and Exchange Commission, the Company engaged in a private placement with select U.S. investors. This activity represented a technical violation of federal securities laws which required that our registration statement should have been cleared and ordered effective by the Securities and Exchange Commission before we engaged in this private placement with U.S. investors. There is a remote possibility that these U.S. investors could theoretically attempt to rescind their investments if it could be established that their investments resulted from a general solicitation. Since these U.S. investors had previous direct relationships with Company officers, directors, advisors and shareholders and management believes that these U.S. investors made their investment decision based in those relationships, the management of the Company firmly believes that the likelihood of rescission is extremely remote .
Any Further Stock Issuances Could Depress Our Share Trading Price
Of the 46,226,842common shares offered in this prospectus, 26,642,334common shares have already been issued to the selling shareholders. If the selling shareholders were to fully exercise their rights under their warrants, convertible preferred stock, stock options, and convertible note to purchase or convert into the remaining 17,584,508 common shares offered in this prospectus and then sell them, the market price of our common stock could be materially adversely affected. As of October 21,2002, the substantial majority of the warrants, and stock options had exercise prices above the current market price of our common stock.
Market Overhang
As of October 21, 2002, we had 53,518,986 common shares outstanding. As of September 30, 2002, we had 11,369,308 outstanding stock options, 7,398,164 outstanding common stock purchase warrants, 195,968 preferred shares convertible into 1,784,978 common shares and a convertible promissory note convertible into 2,748,900 common shares. If all the outstanding stock options, common stock purchase warrants, preferred shares and the convertible note were exercised and/or converted by their holders an additional 23,301,350 common shares would be outstanding; this would represent an approximate 44% increase in our outstanding common shares. The vast majority of these outstanding options and warrants are exercisable at prices currently above the public trading prices of our common stock. However, in the event that even a portion of these outstanding options and warrants were to be exercised, or portions of the preferred shares and/or the convertible promissory note converted, the resulting dilu tion could depress the public trading price of our common shares. In addition, we are registering 46,226,842 shares for sale by the Selling Shareholders; if a significant portion of these shares were sold by the Selling Shareholders in the public marketplace, such sales could also have a severe and adverse material affect on the public trading price of our common shares. Any increase in the amount of saleable shares increases significantly the possibility of large amounts of our shares offered for sale and, if sold, dramatically increases the selling price pressure for our shares which could result in a further depressed sales and market price for our stock.
The Market Price At Which The Selling Shareholders Resell Their Stock Offered In This Prospectus May Bear No Relationship To Our Value
The prices at which Selling Shareholders resell ourcommon shares will be determined by the then prevailing market prices of our common shares offered and sold on the Electronic Bulletin Board, over-the-counter market or on any other then applicable exchange where our Common Shares are traded, or may be at negotiated prices which, in all likelihood, will bare no relationship to ourassets, book value, net worth or other economic or recognized measure of value. All of the exercise and conversion prices and rates of the Company's outstanding warrants, stock options, convertible preferred stock, convertible promissory notes and convertible note were arbitrarily determined by us and, as well, bare no relationship to our assets, book value, net worth, or any other economic or recognized measure of value. These exercise prices or conversion rates should not be regarded as any indication of current or future market price for our co mmon shares.
FORWARD LOOKING STATEMENTS
When used in this Prospectus, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "projected," "intends to" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including but not limited to economic conditions, changes in laws or regulations, the Company's history of operating losses, demand for its software products and services, newly developed technologies and software, regulatory matters, protection of technology, lack of industry standards, the ability to obtain contracts and licensing sales, the effects of competition and the ability of the Company to obtain additional financing. Such factors, which are discussed in "Risk Factors," "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the notes to consolidated financial statements, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with undue reliance on any such forward-looking statements, which speak only as of the date made. See "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. Our Securities and Exchange Commission filings are available to the public over the Internet at the Securities and Exchange Commission's web site at http://www.sec.gov. You may also read and copy any document we file at the Securities and Exchange Commission's public reference room located at 450 Fifth Street, N.W., Washington, DC 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.
This prospectus is part of a Form SB-2 registration statement that we filed with the SEC. This prospectus provides you with a general description of the securities that may be offered for sale, but does not contain all of the information that is in the registration statement. To see more detail, you should read the entire registration statement and the exhibits filed with the registration statement. Copies of the registration statement and the exhibits are on file at the offices of the Commission and may be obtained upon payment of the fees prescribed by the Commission, or examined without charge at the public reference facilities of the Commission described above.
You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement. We have not authorized anyone to provide you with different information.
Neither Magnitude nor any selling shareholder is making an offer of the securities covered by this prospectus in any state where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement or in any other document incorporated by reference in this prospectus is accurate as of any date other than the date on the front of those documents.
Upon request, we will provide without charge a copy of our Annual, Quarterly and Current Reports we have filed electronically with the Commission as well as a copy of any and all of the information that has been or may be incorporated by reference in this prospectus. Requests for such copies should be directed to Magnitude Information Systems, Inc., 401 State Route 24, Chester, New Jersey 07930 (telephone: 908-879-2722).
USE OF PROCEEDS
The selling shareholders will receive all of the net proceeds from theresale of any of the Company's common shares offered in this prospectus. We will not receive any of the proceeds from any sale of the shares by the selling shareholders. We will receive up to $10,934,707in proceeds from the cash exercise of the warrants and stock options currently outstanding and included in this prospectusand we intend to use any such cash proceeds received for general corporate purposes, which may include repaying indebtedness, making additions to our working capital, funding future acquisitions or for further developing our products and hiring additional personnel. However, due to current market conditions and the fact that the exercise prices for most of these warrants and options are higher than the current market price for our common stock, it is unlikely that we will receive any funds from the exercise of these instruments.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Ourcommon stock currently trades on the Electronic Bulletin Board, over-the-counter market, under the symbol "MAGY". The following table sets forth, for the calendar quarters indicated, and for the last two years, the high and low sales prices for our common stock:
High/Ask Low/Bid
1999
First Quarter $ 1.37 $ 0.41
Second Quarter 0.81 0.53
Third Quarter 1.09 0.55
Fourth Quarter 0.76 0.42
2000
First Quarter $ 4.75 $ 0.42
Second Quarter 2.88 0.95
Third Quarter $ 1.44 $ 0.71
Fourth Quarter $ 0.97 $ 0.63
2001
First Quarter $ 1.16 $ 0.38
Second Quarter $ 0.62 $ 0.27
Third Quarter $0.54 $ 0.22
Fourth Quarter $0.30 $ 0.12
2002
First Quarter $0.29 $ 0.08
Second Quarter $0.29 $ 0.12
Third Quarter $0.23 $ 0.09
As of October 21, 2002, there were approximately 300shareholders of record for ourcommon stock. The number of record holders does not include shareholders whose securities are held in street name.
The Company has not declared or paid, nor has it any present intention to pay, cash dividends on its Common stock. The Company is obliged to pay cash dividends on its outstanding convertible preferred stock and, under certain circumstances, on its outstanding cumulative preferred stock. See "DESCRIPTION OF CAPITAL STOCK" - "The Series A Stock", "The Series B Stock", "The Series C Stock" and "The Series D Stock", below.
Selling Shareholders
All of the common stock offered is either already issued or is issuable upon the exercise or conversion of Company warrants, stock options, convertible preferred stock and convertible noteissued or issuable by Magnitude to the selling shareholders. Wemay from time to time supplement or amend this prospectus, as required, to provide other information with respect to the selling shareholders.
The following table sets forth certain information regarding ownership of Magnitude's common stock by the selling shareholders as of October 21,2002, including their names, and the number of shares of common stock owned by them and offered pursuant to this prospectus. The selling shareholders listed in the table do not necessarily intend to sell any of their shares. Magnitude filed the registration statement, which includes this prospectus, due to the registration rights granted to the selling shareholders, not because they had expressed an intent to immediately sell their shares.
%
Name of No. of of Class
Selling Beneficial Holdings Common Shares Transaction after
Securityholder Before the Offering Offered Hereby Note No. Offering
-------------------------------------------------------------------------------------------------------------------
929595 Ontario Ltd. 760 380 8 **
Abrams, Philip 11,400 5,700 8 **
Acosta, Elbert R. II 1,800,000 1,250,000 23 1.0%
Alexander, Ian 3,376 1,688 8 **
Angelastri, Ivano 1,812,500 850,000 5,9 1.8%
Angelastri-Keller, Sophie 200,000 200,000 5 **
Aniso Stiftung 202,332 202,332 5 **
Ash, Howard 246,814 246,814 22,23 **
Barbaro, Ronald D. in Trust 22,392 11,196 8 **
Baumann, Luciano 10,000 10,000 23 **
Beck, Kurt N. 200,000 200,000 23 **
Benoliel, Ian 1,646 823 8 **
Berek, Roman 25,000 25,000 18 **
Bicking, David L. 200,000 200,000 23 **
Bischoff, Dieter 400,000 400,000 18,23 **
Bischoff, Nina 125,000 125,000 18 **
Blue Fuel Corporation 2,306 1,153 8 **
Boehm-Raffay, Thomasz 25,000 25,000 18 **
Boroski, Eugene 50,000 30,000 21 **
Bourke, Robert L. 47,780 27,780 17 **
Bourke, Delia J. 27,780 27,780 17 **
Brandstatter, Albert 1,153 1,153 8 **
Brant Investment Ltd. 26,573 26,573 8 **
Brooks, Adam 20,000 20,000 15 **
Brooks, Blake 20,000 20,000 15 **
Burgman, David 20,000 20,000 23 **
Burri, Erwin 200,000 200,000 12 **
Calter Associates 121,124 121,124 +12,16 **
Carrel, Rene 603,400 603,40012,14,16,18 **
Carter, Gary 14,819 14,819 8 **
Christoph, Marti 100,000 100,000 5 **
Citrus Land & Development Corp. 780,111 646,111 +18,21 **
Consulting for Strategic Growth 390,000 390,000 +15 **
Coop Bank 62,500 20,000 5 **
Corbett, William & M. 100,000 100,000 13 **
Cumming, Frederick 5,000 5,000 9 **
Curtis, Jeff 2,470 1,235 8 **
Cynamon Holding Corp. 8,232 4,116 8 **
Dean, Mike 50,000 50,000 4 **
Dellelce, Perry 1,646 823 8 **
__________
+Name of person having voting or investment control identified in the applicable Transaction Note.
DeWolf, Keith G. 820,000 820,000 18,20,23 **
Dina Partners 1,555,560 1,555,560 +17,21,23 **
Done Wright Termite & Pest Control Inc. 100,000 100,000 +23 **
Duncan, John C. 557,500 500,000 9 **
Edgerton, Walter L. 50,000 50,000 23 **
ES-LEA Holdings Ltd. 15,072 7,536 8 **
Feld, Ian 35,000 35,000 18 **
Ferrier Lullin Bank&Trust 2,470 2,470 8 **
Fiala, Drew 14,819 14,819 8 **
Fireworks Creative Inc. 658 329 8 **
Franz, Gerald J. 35,330 30,000 15 **
Fuller, Mark A. 1,250,000 450,000 21,22 1.49%
GGD Associates 275,000 275,000 9 **
Gamrasni, David 30,000 30,000 15 **
Gamrasni, Andre 41,667 41,667 25 **
Gamrasni Ahlen, Nina 41,667 41,667 25 **
Gamrasni, Kerstin 41,666 41,666 25 **
Gamrasni, David (Jr) 41,667 41,667 25 **
Gamrasni, Nicolai 41,667 41,667 25 **
Gamrasni, Ivan 41,666 41,666 25 **
Gibb, Dean A. 100,000 100,000 23 **
Goebel, Jean-Pierre 200,000 200,000 18,21,23 **
Gomez, L.M. 55,560 55,560 17 **
Gort, Stefan 50,000 50,000 18,21,23 **
Gray, Steven L. 2,592,840 1,050,829 18,21,22 2.88%
Gray, Virginia 50,000 25,000 23 **
Groconi Holdings, Inc. 1,120 560 8 **
Haering, Greg and Joy 10,000 10,000 21 **
Hauschild, Rudolf 60,000 60,000 18 **
Heuberger, Roland 185,000 185,000 5 **
Hinst, Raymond and Suzanne 100,000 100,000 4 **
Hoefig, Marc 100,000 100,000 23 **
Holian, John W. Jr. 140,000 120,000 21,23 **
Holt Revocable Trust UTA 5-15-97 300,000 300,000 23 **
Jackson Hewitt Investment Svc. 1,165,000 400,000 7 1.44%
Kaemper, Siegfried D. 500,000 500,000 18 **
Kaercher, William B. C/F Benjamin Kaercher 38,000 38,000 21 **
Kaercher, William B. C/F Sam Kaercher 47,000 47,000 21 **
Kaercher, William M. 50,000 50,000 23 **
Keenan, Lynne 6,838 3,419 8 **
Kesselring, Roland 555,500 555,500 12 **
Klaube, Joerg H. 860,517 100,000 9 1.41%
Kroll, Seymour 177,602 137,602 9,16 **
Kutkrvicius, John 3,294 1,647 8 **
Lalande, Audrey 824 412 8 **
_____________
+Name of person having voting or investment control identified in the applicable Transaction Note.
Lands, Larry A. 211,120 211,120 17,23 **
Langheck, Andreas M. 338,000 338,000 18 **
Liebel, Peter 2,305 2,305 8 **
Liechtensteinische Landesbank 3,109, 040 3,011,510 +12,14,18 **
Logie, Tim 823 823 8 **
Lu, Lixin 1,646 823 8 **
Luescher, Dieter 40,000 40,000 5 **
Luethi, Jules 50,000 50,000 23 **
Lynch, Terry 2,306 1,153 8 **
Manis, Warren 6,586 3,293 8 **
Marot, Richard & Charlene 250,000 250,000 23 **
Martin, Martin G. 1,750,000 1,100,000 6,9 1.20%
Masionis, Sal 4,940 2,470 8 **
McGrath, Thomas J. 190,000 125,000 23 **
Meixger, Andreas 200,000 200,000 18 **
Merhavia Construct.Ltd. 1,520 760 8 **
Merrill, Bryan G. 560,000 560,000 23 **
Mette, Tim 41,000 26,000 18 **
Mickelson, Sheldon 400,000 400,000 23 **
Miller, Philip C. 500,000 500,000 7,23 **
Miller, Philip C. SSB Keogh MP/PS 300,000 300,000 23 **
MJE Partners 100,000 100,000 2 **
Morton, James W.& Karen E. 225,000 125,000 18 **
Mueller, Klaus 100,000 100,000 23 **
Murphy, John K. 11,400 5,700 8 **
Niro, Giocondo 1,646 823 8 **
Noshagya, Jane L. 20,000 20,000 23 **
Oakes, Glenn A. II 130,000 130,000 20,23 **
Pachino, Joseph & Marlene 200,000 200,000 20,23 **
Paine Webber C/F Gary Shemano 200,000 200,000 2 **
Pisani, B.Michael 977,780 977,7803,17,18,23 **
Pisani, Michael B. 22,000 22,000 3 **
Print-O-Plast Ltd. 2,306 1,153 8 **
Purvis, Blakely W. 550,000 550,000 23 **
R&A Group Holdings 60,000 60,000 +15 **
RAM Trading 555,560 555,560 +17 **
Regency Capital Partners LLC 476,000 440,000 +22 **
Reidar's Retreat LLC 100,000 100,000 +23 **
Reiter, Sygney 950 950 8 **
Reimann-Dubbers, Nina 600,000 600,000 18 **
Reman Partners AG 150,000 150,000 12 **
Rodman & Renshaw 50,000 50,000 +15 **
Rogivue, Nicolas 530,562 530,56212,14,16,18 **
Rolls. Len 1,000,000 1,000,000 23 **
Roni Excavating Ltd. 1,520 760 8 **
Rubin, Richard 35,000 35,000 18 **
__________
+Name of person having voting or investment control identified in the applicable Transaction Note.
Rudnik, Steven D. 8,374,595 7,898,9009,10,11,19,24,27 0.91%
S & I Consulting 65,500 65,500 +21,23 **
Sal Investments Inc. 5,700 5,700 8 **
Santino, Dennis 1,000,000 1,000,000 23 **
Saperia, Eva 4,446 2,223 8 **
Schuerch, Siegfried 540,000 540,000 18 **
Schuerch Asset Mgmt. GmbH 120,000 120,000 5 **
Schuerch, Kerstin . 250,000 250,000 9 **
Schuerch, Ueli 1,457,144 1,457,1445,12,14,16,18 **
Shear Holdings Ltd. 950 475 8 **
Shear, Eleanore 4,116 2,058 8 **
Shemano, Gary J. 100,000 100,000 13 **
Sheppard, Tom 1,647 1,647 8 **
Shoemaker, John & Audrey 270,000 200,000 18 **
Shulenberger, Chris 5,928 2,964 8 **
Siegel, Howard G. 944,275 544,000 4,26 **
Solid Rock Corp. 222,000 222,000 4 **
Spinnaker Ventures LLC 630,000 525,000 +18,23 **
Stangel, Georg 255,500 255,500 9,12 **
Staiger, Jochen M. 279,800 279,800 18,23 **
Stanley, T. 14,819 14,819 8 **
Strasler, Brent 2,470 2,470 8 **
Studer, Marlies E. 25,000 25,000 23 **
T+T Vermoegensverwaltungs AG 500,000 500,000 +23 **
Tapio, John A.& Nels D.&Kyle J. JTWROS 1,000,000 1,000,000 23 **
Tapio, Roy W. and Shirley M. JTWROS 372,000 372,000 23 **
Tarek, Pamela 5,598 2,799 8 **
Tauss, Michael 831,000 831,00018,21,22,23 **
Thomas, David 32,930 32,930 8 **
Thornton, Robert G. 200,000 200,000 23 **
Tomas, Peter A. 50,000 50,000 23 **
Trull, Richard B. 200,000 200,000 2,23 **
Twomey, Lee J. 350,000 350,000 2,23 **
Ushter Holdings Inc. 1,300 650 8 **
Vanity Software Publ.Co. 4,508 2,254 8 **
Stuart H. Zimmerman Rev.Trust 1,091,389 1,000,000 1,21,23 **
Von Mitschke-Collande, Christopher 125,000 125,000 18 **
Wagner, Tomacz 20,000 20,000 5 **
Ward, Diana J. 50,000 50,000 4 **
Watson, Kemp 3,705 3,705 8 **
Wider, Harald 34,000 34,000 18 **
Wunderlich, Courtney 25,000 25,000 15 **
Wunderlich, Justin 25,000 25,000 15 **
+Name of person having voting or investment control identified in the applicable Transaction Note.
Xonnel Holdings Ltd. 11,400 9,223 8 **
Zaldastani, Nicholas & Kerri JT TEN 300,000 300,000 23 **
Ziraldo, Donald 6,586 3,293 8 **
__________ ___________
54,153,934 46,226,842
___________
** less than 1 percent
+Name of person having voting or investment control identified in the applicable Transaction Note.
_________________________________
Transaction Notes:Description of Selling Shareholders and certain transactions:
1)Private Placement Pursuant to Section 4(2)
The above table includes 500,000 shares underlying a stock purchase warrant, previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of an institutional investor, such warrant having been issued in connection with the conversion of a convertible promissory note dated April 23, 1999, and subsequently assigned to the below entity.
Previously registered on behalf of: Stuart H. Zimmerman Rev.Trust 500,000
(2)Private Placement Pursuant to Section 4(2)
The above table includes 200,000 shares already issued and 300,000 shares underlying stock purchase warrants, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of four private investors, such shares and warrants having been issued pursuant to their election to convert convertible promissory notes issued during June 1999.
Previously registered on behalf of: MJE Partners 100,000
Paine Webber C/F Gary Shemano 200,000
Trull, Richard B. 100,000
Twomey, Lee J. 100,000
Gary Shemano purchased his shares in the ordinary course of business and at which time had no agreement or understanding with the Company, directly or indirectly, to distribute these shares.
(3)Private Placement Pursuant to Section 4(2)
The above table includes 22,000 shares already issued and 200,000 shares underlying a stock purchase warrant, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of a private investor and his assignee, such shares and warrant having been issued pursuant to his election to convert a convertible promissory note dated May 28, 1999.
Previously registered on behalf of: Pisani, B.Michael 200,000
Pisani, Michael B. 22,000
(4)Private Placement Pursuant to Section 4(2)
The above table includes 236,000 shares already issued and 610,000 shares underlying stock purchase warrants, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of a private investor and four assignees of the investor. The shares had been issued pursuant to his election to convert several convertible promissory notes dating between June 1999 and November 1999 into common shares of the Company; the stock purchase warrants were issued concurrent with the convertible notes.
Previously registered on behalf of: Dean, Mike 50,000
Hinst, Raymond and Suzanne 100,000
Siegel, Howard G. 424,000
Solid Rock Corp. 222,000
Ward, Diana J. 50,000
(5)Private Placement Pursuant to Section 4(2)
The above table includes 1,555,000 shares already issued and 332,332 shares underlying stock purchase warrants, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of eight private foreign investors and one assignee. The investors include Mr. Ivano Angelastri, a director of the Company. The shares and warrants were issued pursuant to private placement subscriptions entered into between the Company and such investors between October 1999 and December 1999.
Previously registered on behalf of: Angelastri, Ivano 600,000
Angelastri-Keller, Sophie 200,000
Aniso Stiftung 202,332
Christoph, Marti 100,000
Coop Bank 20,000
Heuberger, Roland 185,000
Luescher, Dieter 40,000
Schuerch Asset Mgmt.GmbH 120,000
Schuerch, Ueli 400,000
Wagner, Tomacz 20,000
(6)Resignation Agreement of Former Chairman
The above table includes 1,000,000 shares underlying 100,000 shares of Series C Senior Convertible Preferred Stock and were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of the former chairman of the Company pursuant to the terms of his Resignation Agreement dated January 28, 2000
Previously registered on behalf of: Martin, Martin G. 1,000,000
(7)Private Placement Pursuant to Section 4(2)
The above table includes 400,000 shares already issued and 100,000 shares underlying stock purchase warrants, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of two private investors. The shares and warrants were issued pursuant to private placement subscriptions entered into between the Company and such investors in January and February 2000.
Previously registered on behalf of: Jackson Hewitt Investment Svc. 400,000
Miller, Philip C. 100,000
Jackson Hewitt Investment Svc. purchased its shares in the ordinary course of business and at which time had no agreement or understanding with the Company, directly or indirectly, to distribute these shares.
(8)Shares Underlying Warrants Issued Pursuant to Acquisition
The above table includes 209,074 shares underlying warrants previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of former shareholders of Vanity Software Publishing Corporation ("Vanity"), a Canadian software company. On April 30, 1998, the Company signed an agreement to acquire substantially all of the assets, subject to the assumption of certain liabilities, of Vanity in exchange for 224,000 restricted shares of the common stock of the Company and warrants to purchase an additional 224,000 shares
Previously registered on behalf of: 929595 Ontario Ltd 380
Abrams, Philip 5,700
Alexander, Ian 1,688
Barbaro, Ronald D. in Trust 11,196
Benoliel, Ian 823
Blue Fuel Corporation 1,153
Brandstatter, Albert 1,153
Brant Investment Ltd. 26,573
Carter, Gary 14,819
Curtis, Jeff 1,235
Cynamon Holding Corp. 4,116
Dellelce, Perry 823
ES-LEA Holdings Ltd. 7,536
Ferrier Lullin Bank&Trust 2,470
Fiala, Drew 14,819
Fireworks Creative Inc. 329
Groconi Holdings, Inc. 560
Keenan, Lynne 3,419
Kutkrvicius, John 1,647
Lalande, Audrey 412
Liebel, Peter 2,305
Logie, Tim 823
Lu, Lixin 823
Lynch, Terry 1,153
Manis, Warren 3,293
Masionis, Sal 2,470
Merhavia Construct.Ltd. 760
Murphy, John K. 5,700
Niro, Giocondo 823
Print-O-Plast Ltd. 1,153
Reiter, Sygney 950
Roni Excavating Ltd. 760
Sal Investments Inc. 5,700
Saperia, Eva 2,223
Shear Holdings Ltd. 475
Shear, Eleanore 2,058
Sheppard, Tom 1,647
Shulenberger, Chris 2,964
Stanley, T. 14,819
Strasler, Brent 2,470
Tarek, Pamela 2,799
Thomas, David 32,930
Ushter Holdings Inc. 650
Vanity Software Publ.Co. 2,254
Watson, Kemp 3,705
Xonnel Holdings Ltd. 9,223
Ziraldo, Donald 3,293
Brant Investment Ltd. received its shares in the ordinary course of business, as a shareholder of Vanity and had no agreement or understanding with the Company, directly or indirectly to distribute these shares.
(9)Shares Underlying Non-Statutory Stock Options
The above table includes 3,124,866 shares underlying non-statutory stock options issued to certain present and past key employees, all of which had previously been registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of such employees and their assignees.
Previously registered on behalf of: Angelastri, Ivano 250,000
Cumming, Frederick 5,000
Duncan, John C. 500,000
GGD Associates 275,000
Klaube, Joerg H. 100,000
Kroll, Seymour 119,866
Martin, Martin G. 100,000
Rudnik, Steven D. 1,325,000
Schuerch, Kerstin 250,000
Stangel, Georg 200,000
(10)Options Issued in Lieu of Cash Compensation to Officer
The above table includes 150,000 shares underlying stock options, previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of the current President and Chief Executive Officer of the Company.
Previously registered on behalf of: Rudnik, Steven D. 150,000
(11)Shares Underlying Convertible Note Issued to an Officer and Director
The above table includes 749,780 shares underlying a company obligation, previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of the current President and Chief Executive Officer of the Company. The obligation was incurred in connection with the acquisition by the Company of Rolina Corporation in February 1998, and has been described in detail in the above mentioned filing on Form SB-2 which is incorporated herein by reference. On February 20, 2002, the obligation was recast into a convertible note whereby the maturity of a portion of $274,890 was extended from March 31, 2002 to July 1, 2003, whicha portion is convertible, at the holder's option, into 2,748,900 shares.
Previously registered on behalf of: Rudnik, Steven D. 749,780
Newly registered on behalf of: Rudnik, Steven D. 1,999,120
(12)Private Placement Pursuant to Section 4(2)
The above table includes 1,813,150 shares already issued and 1,087,200 shares underlying stock purchase warrants, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended, on behalf of six private foreign investors and two assignees. These securities were issued pursuant to private placement subscriptions entered into between the Company and such investors, between January and March 2000.
Previously registered on behalf of: Burri, Erwin 200,000
Calter Associates 111,200
Carrel, Rene 388,900
Kesselring, Roland 555,500
Liechtensteinische Landesbank 855,750
Reman Partners AG 150,000
Rogivue, Nicolas 375,000
Schuerch, Ueli 208,500
Stangel, Georg 55,500
Rene A. Carrel is the person who has voting or investment control over the shares owned by Calter Associates. Messrs. M. Arnold and M. Barberio are the individuals who have voting or investment control over the shares beneficially owned by Liechtensteinische Landesbank.
(13) Shares Underlying Warrants Issued for Services
The above table includes 200,000 shares underlying stock purchase warrants, all of which were previously registered with a registration statement on Form SB-2 originally declared effective in August 2000 and subsequently amended. The warrants were issued pursuant to a consulting agreement involving investor relations services, with an unrelated party.
Previously registered on behalf of: Corbett, William & M . 100,000
Shemano, Gary J. 100,000
(14)Shares Underlying Warrants Issued Pursuant to Conversion of Preferred Stock
By way of this amendment, the Company is registering (a) an aggregate 791,960 shares underlying warrants and 125,000 shares issued upon exercise of warrants for the same number of shares, all issued to four investors in connection with them exercising, between May 17, 2001 and June 30, 2001, their conversion rights on shares of Series B Senior Convertible Preferred Stock, and (b) 555,500 shares underlying warrants, exercisable at $0.50 per share, issued for consulting services in connection with the before mentioned conversions. The services, which are not continuing, were rendered during the first quarter 2002 based on verbal agreements as approved by the Company's board of directors and covered investor relations vis-à-vis foreign investors.None of the recipients of such warrants is a registered broker-dealer. The Company received $12,500 for the exercise of the warrants for the 125,000 shares.
Newly registered on behalf of: Carrel, Rene 166,700
Liechtensteinische Landesbank 555,760
Rogivue, Nicholas 125,000
Schuerch, Ueli 625,000
(15)Shares Underlying Warrants Issued for Services
By way of this amendment, the Company is registering 650,000 shares underlying warrants issued pursuant to two consulting agreements involving investor relations services with unrelated parties, one of which assigned warrants for 210,000 shares to five assignees. 150,000 of these warrants are exercisable at $0.50 per share, 250,000 are exercisable at $1.00 per share, and 250,000 are exercisable at $1.50 per share. Copies of the two consulting agreements are attached asExhibits 4.25 and 4.26.
Newly registered on behalf of: Brooks, Adam 20,000
Brooks, Blake 20,000
Consulting for Strategic Growth 390,000
Franz, Gerald J. 30,000
Gamrasni, David 30,000
R&A Capital Holdings 60,000
Rodman & Renshaw 50,000
Wunderlich, Courtney 25,000
Wunderlich, Justin 25,000
Ms. Meryl S. Wunderlich and Stanley Wunderlich are the persons who have voting or investment control over the shares beneficially owned by Consulting For Strategic Growth. Mr. Stanley Wunderlich is the person who has voting or investment control over the shares beneficially owned by R&A Group Holdings. Mr. Thomas G. Pinou is the person who has voting or investment control over the shares beneficially owned by Rodman & Renshaw. Rodman & Renshaw purchased its shares in the ordinary course of business at which time it had no agreement or understanding with the Company, directly or indirectly, to distribute these shares.
(16)Shares Underlying Warrants and Shares Issued Outright in lieu of Interest and Dividends
By way of this amendment the Company is registering 74,930 shares already issued and 17,736 shares underlying warrants, issued pursuant to the conversion, during May and June 2001, into such securities for an aggregate $46,333 of accrued dividends and interest. The warrants are exercisable at $0.90 per share.
Newly registered on behalf of: Calter Associates 9,924
Carrel, Rene 20,800
Kroll, Seymour 17,736
Rogivue, Nicolas 20,562
Schuerch, Ueli 23,644
(17)Private Placement Pursuant to Section 4(2)
By way of this amendment the Company is registering a total 1,711,140 shares on behalf of seven private investors pursuant to private placement subscriptions entered into between the Company and such investors, between September 2000 and March 2001. 805,570 of such shares underlie conversion privileges accruing to a total of 80,557 shares of Series D Senior Convertible Preferred Stock issued to or subscribed for by certain of these investors. 522,230 shares underlie Company Common Stock Purchase Warrants for the purchase of common shares at $0.50 per share issued to certain of these investors. 333,340 shares were issued pursuant to the exercise of warrants and 50,000 shares were issued upon conversion of 5,000 shares Series D Senior Convertible Preferred Stock. The Company received an aggregate $770,013 from these investment transactions. A copy of the subscription agreement utilized in these transactions is attached asExhibit 4.27 .
Newly registered on behalf of: Bourke, Robert L. 27,780
Bourke, Delia J. 27,780
Dina Partners 555,560
Gomez, L.M. 55,560
Lands, Larry A. 111,120
Pisani, B.Michael 377,780
RAM Trading 555,560
Mr. David Solomon is the person that has voting or investment control over the shares beneficially owned by Dina Partners. Mr. A. R. Thane Ritchie is the person who has voting or investment control over the shares beneficially owned by RAM Trading Co. RAM Trading Co. purchased its share in the ordinary course of business and at which time had no agreement or understanding with the Company, directly or indirectly, to distribute its shares.
(18)Private Placement Pursuant to Section 4(2)
By way of this amendment the Company is registering a total 6,962,022 shares on behalf of 27 private investors and three finders pursuant to private placement subscriptions entered into between the Company and such investors, between March 2001 and September 2001. 3,602,611 of such shares were issued outright to these investors; 2,258,371 shares were issued pursuant to subsequent exercises of stock purchase warrants issued to such investors against payment of $256,652, and 1,024,240 shares underlie Company Common Stock Purchase Warrants for the purchase of common shares at $0.90 per share and were issued to these investors. The above mentioned common shares include a total 160,000 shares that have been issued to one of the investors who also serves as a director of the Company, pursuant to his exercise of warrants for 160,000 shares, originally issued as part of the above transactions. In addition, the shares to be registered include 56,900 shares and 19,900 shares underlying stock pur chase warrants, exercisable at $0.60 per share, issued as compensation to the finders, none of whom is a registered broker-dealer. The Company received an aggregate $1,476,500 from these investment transactions, not counting the $256,652 received from the exercising of the warrants. A copy of the subscription agreement utilized in these transactions is attached asExhibit 4.28.
Newly registered on behalf of: Berek, Roman 25,000
Bischoff, Dieter 250,000
Bischoff, Nina 125,000
Boehm-Raffay, Thomasz 25,000
Carrel, Rene 27,000
Citrus Land & Development Corp. 521,111
DeWolf, Keith G. 250,000
Feld, Ian 35,000
Goebel, Jean-Pierre 100,000
Gort, Stefan 20,000
Gray, Steven L. 326,111
Hauschild, Rudolf 60,000
Kaemper, Siegfried D. 500,000
Langheck, Andreas M. 338,000
Liechtensteinische Landesbank 1,600,000
Meixger, Andreas 200,000
Mette, Tim 26,000
Morton, James W.& Karen E. 125,000
Pisani, B.Michael 150,000
Reimann-Dubbers, Nina 600,000
Rogivue, Nicholas 10,000
Rubin, Richard 35,000
Schuerch, Siegfried 540,000
Schuerch, Ueli 200,000
Shoemaker, John & Audrey 200,000
Spinnaker Ventures LLC 250,000
Staiger, Jochen M. 239,800
Tauss, Michael 25,000
Von Mitschke-Collande, Christopher 125,000
Wider, Harald 34,000
Mr. Patrick Bischoff is the person with voting or investment control over the shares beneficially owned by Spinnaker Ventures LLC.
(19)Shares Underlying Stock Option
By way of this amendment the Company is registering 75,000 shares on behalf of Steven D. Rudnik, its chief executive officer. These shares underlie a stock option issued pursuant to an agreement between the chief executive officer and the Company whereby in lieu of the 150,000 shares to be issued for compensation which shares werepreviously registered, Mr. Rudnik shall receive stock option for 225,000 shares, exercisable at $0.75 per share. Since 150,000 of such shares had previously been included in an earlier amendment of this registration and are already included in item (10) above. The Company is herewith registering the remaining 75,000 shares.
Newly registered on behalf of:Rudnik, Steven D. 75,000
(20)Private Placements Pursuant to Section 4(2)
By way of this amendment the Company is registering a total 330,000 shares on behalf of three private investors pursuant to private placement subscriptions entered into between the Company and such investors, between October 2001 and November 2001. 220,000 of such shares were issued outright to these investors; 50,000 shares were issued pursuant to subsequent exercises of warrants and 60,000 shares underlie Company Common Stock Purchase Warrants for the purchase of common shares, exercisable at $0.50 per share and were issued to these investors. The Company received an aggregate $55,000 from these investment transactions and $5,000 from the subsequent warrant exercises. A copy of the subscription agreement utilized in these transactions is attached asExhibit 4.29.
Newly registered on behalf of: DeWolf, Keith G. 120,000
Oakes, Glenn A. II 60,000
Pachino, Joseph & Marlene 150,000
(21)Private Placements Pursuant to Section 4(2)
By way of this amendment the Company is registering a total 2,100,000 shares on behalf of nine private investors, two of who purchased 900,000 of these shares and are officers and directors of the company, pursuant to private placement subscriptions entered into between the Company and such investors, between January 2002 and March 2002. The beneficiaries include five assignees of one of the investors. The Company received a total of $210,000 from these transactions. A copy of the subscription agreement utilized in these transactions is attached asExhibit 4.30.
Newly registered on behalf of: Boroski, Eugene 30,000
Citrus Land & Development Co. 125,000 Dina Partners 500,000
Fuller, Mark A. 300,000
Goebel, Jean-Pierre 50,000
Gort, Stefan 10,000
Gray, Steven L. 600,000
Haering, Greg and Joy 10,000
Holian, John W. Jr 50,000
Kaercher, William B
C/F Benjamin Kaercher 38,000
Kaercher, William B C/F Sam Kaercher 47,000
S&I Consulting 40,000
Tauss, Michael 50,000
Stuart H Zimmerman Rev.Trust 250,000
Mr. Michael Tauss is the person who has voting or investment control over the shares beneficially owned by S&I Consulting. Steven Gray, a Company director, is the person who has voting or investment control over the shares beneficially owned by Citrus Land & Development Co.
(22) Shares issued in exchange for debt and shares underlying stock award
By way of this amendment the Company is registering a total 987,532 shares on behalf of five creditors one of who is a director of the Company, in return for the cancellation, on various dates between February and May 2002, of an aggregate $98,753 company liabilities.
Newly registered on behalf of: Ash, Howard 116,814
Fuller, Mark A. 150,000
Gray, Steven L. 124,718
Regency Capital Partners LLC 440,000
Tauss, Michael 156,000
Mr. Mark Hill is the person who has voting or investment control over the shares beneficially owned by Regency Capital Partners LLC.
(23)Private Placements Pursuant to Section 4(2)
By way of this amendment the Company is registering a total 12,897,000 shares on behalf of 46 private investors pursuant to private placement subscriptions entered into between the Company and such investors, between March 2002 and June 2002. In addition, the Company is registering 165,500 shares issued as compensation to three foreign finders, none of whom is a registered broker-dealer. The Company received a total of $1,204,200 from these transactions. A copy of the subscription agreement utilized in these transactions is attached asExhibit 4.30.
Newly registered on behalf of:Acosta, Elbert R.II 1,250,000
Ash, Howard 130,000
Baumann, Luciano 10,000
Beck, Kurt N. 200,000
Bicking, David L. 200,000
Bischoff, Dieter 150,000
Burgman, David 20,000
DeWolf, Keith G. 450,000
Done Wright Termite
& Pest Ctrl.Inc. 100,000
Dina Partners 500,000
Edgerton, Walter L. 50,000
Gibb, Dean A. 100,000
Goebel, Jean-Pierre 50,000
Gort, Stefan 20,000
Gray, Virginia 25,000
Hoefig, Marc 100,000
Holian, John W. Jr. 70,000
Holt Revocable Trust UTA 5-15-97 300,000
Kaercher, William M. 50,000
Lands, Larry A. 100,000
Luethi, Jules 1,600,000 50,000
Marot, Richard & Charlene 250,000
McGrath, Thomas J. 125,000
Merrill, Bryan G. 560,000
Mickelson, Sheldon 400,000
Miller, Philip C. 400,000
Miller, Philip C.SSB Keogh M/PS 300,000
Mueller, Klaus 100,000
Noshagya, Jane L. 20,000
Oakes, Glenn A.II 70,000
Pachino, Joseph and Marlene 50,000
Pisani, B.Michael 250,000
Purvis, Blakely W. 550,000
Reidar's Retreat LLC 100,000
Rolls, Len 1,000,000
S&I Consulting 25,500
Santino, Dennis 1,000,000
Spinnaker Ventures LLC 275,000
Staiger, Jochen M. 40,000
Studer, Marlies E. 25,000
T+T Vermoegensverwaltungs AG 500,000
Tapio,RoyW.&Shirley M. JTWROS 372,000
Tapio, John A.&Nels D.
&Kyle J.HTWROS 1,000,000
Tauss, Michael 600,000
Thornton, Robert G. 200,000
Tomas, Peter A. 50,000
Trull, Richard B. 100,000
Twomey, Lee J. 250,000
Stuart H.Zimmerman Rev.Trust 250,000
Zaldastani, Nicholas & Kerri JT TEN 300,000
Messrs. William Wright, Robert Wright and Vaughn Hackney are the persons who have voting or investment control over the shares beneficially owned by Done Wright Termite & Pest Control Inc. Mr. Gil Carlson is the person who has voting or investment control over the shares beneficially owned by Reidar's Retreat LLC. Mr. Michael Tauss is the person with voting or investment control over the shares beneficially owned by T+T Vermoegensverwaltungs AG.
(24) Shares Issued in Lieu of Cash Compensation to Officer
By way of this amendment, the Company is registering 1,100,000 shares on behalf of the current President and Chief Executive Officer of the Company, such shares having been issued in lieu of $110,000 cash compensation payable during February through December of the year 2002.
Newly registered on behalf of: Rudnik, Steven D. 1,100,000
(25) Shares Issued for Services
By way of this amendment, the Company is registering 250,000 shares on behalf of a consultant and his assignees, for management and business consulting services rendered during the last quarter in 2001 and the first quarter in 2002 and which services shall continue through December 31, 2002, based upon a verbal agreement. Such shares have been issued pursuant to a corporate resolution approved by the Company's board of directors on May 2, 2002.
Newly registered on behalf of: Gamrasni, Andre 41,667
Gamrasni Ahlen, Nina 41,667
Gamrasni, Kerstin 41,666
Gamrasni, David (Jr) 41,667
Gamrasni, Nicolai 41,667
Gamrasni, Ivan 41,666
(26) Shares for Consultancy
By way of this amendment, the Company is registering 120,000 shares on behalf of a consultant, such shares to be issued for investor relations and management consulting servicesto be renderedduring the time July through December 2002pursuant to a verbal agreement.The issuance of such shares has been approved by the board of directors of the Company on June 3, 2002.
Newly registered on behalf of: Siegel, Howard G. 120,000
(27) Shares Underlying Stock Option Issued to Officer
By way of this amendment, the Company is registering 2,500,000 shares on behalf of the current President and Chief Executive Officer of the Company, such shares underlying a stock option issued in July 2001, which is exercisable at $0.50 per share.
Newly registered on behalf of: Rudnik, Steven D. 2,500,000
SHARES ELIGIBLE FOR FUTURE SALE
This prospectus covers 46,226,842 common shares of which 12,389,402 shares were part of the August 24, 2000 registration and 33,837,440 shares are being newly registered.
As of October 21, 2002, there are 53,518,986 common shares issued and outstanding of which 22,177,576 are freely tradable, including 4,886,910 common shares covered by the earlier, August, 2000 registration statement. In addition, 7,502,492 common shares underlying stock options, warrants, convertible preferred stock and convertible notes were also registered and included with this earlier, August, 2000 registration statement and will be eligible for resale upon the conversion of, or the exercise of rights associated with, such instruments.
Upon the effectiveness of this registration statement, (a) an additional 23,755,424 common shares already issued and (b) 10,082,016 common shares underlying stock options, warrants, convertible preferred stock and convertible notes, upon the conversion of, or the exercise of rights associated with, such instruments, will also be freely tradable.
In addition to the above,the 9,292,973 remaining shares of common stock presently outstanding that are restricted and/or affiliate securities and not included in this prospectus as well as 118,298 common shares underlying the issued and outstanding series A senior convertible preferred stock 217,992common shares underlying outstanding warrants, and 5,519,442 common shares underlying outstanding stock options, which, if converted or exercised, as the case may be, may not presently, but may in the future be sold into any public market that may exist for the common stock pursuant to Rule 144 promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act"). Sales of substantial amounts of this common stock in the public market could adversely affect the market price of the common stock.
In general, under Rule 144 as currently in effect, a person (or group of persons whose shares are aggregated), including affiliates of the Company, can sell within any nine month period, an amount of restricted securities that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or the reported average weekly trading volume during the four calendar weeks preceding the sale; provided at least one year has elapsed since the restricted securities being sold were acquired from the Company or any affiliate of the Company, and provided further that certain other conditions are also satisfied. If at least two years have elapsed since the restricted securities were acquired from the Company or an affiliate of the Company, a person who has not been an affiliate of the Company for at least three months can sell restricted shares under Rule 144 without regard to any limitations on the amount. Future sales by curr ent shareholders could depress the market price of the Common Stock in the public market.
PLAN OF DISTRIBUTION
This Prospectus and the registration statement in which it is included relates to the offer and sale of up to an aggregate 46,226,842common shares by the Selling Shareholders. The Selling Shareholders may sell some or all of their shares at any time and in any of the following ways. They may sell their shares:
- To underwriters who buy the shares for their own account and
resell them in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying
prices determined at the time of sale. Any public offering
price and any discount or concessions allowed or reallowed or
paid to dealers may be changed from time to time;
- Through brokers, acting as principal or agent, in
transactions, which may involve block transactions, on the
Electronic Bulletin Board, over-the-counter market or on other
exchanges on which the shares are then listed, in special
offerings, exchange distributions pursuant to the rules of the
applicable exchanges or in the over-the-counter market, or
otherwise, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated
prices or at fixed prices;
- Directly or through brokers or agents in private sales at
negotiated prices; or
- By any other legally available means.
The Selling Shareholders may, in some circumstances, be deemed "underwriters" of the Company Common Shares offered and sold in this Prospectus. Selling Shareholders may pay part of the proceeds from the sale of shares in commissions and other compensation to underwriters, dealers, brokers or agents who participate in the sales.
Certain states may require shares to be sold only through registered or licensed brokers or dealers. In addition, certain states may require the shares to be registered or qualified for sale unless an exemption from registration or qualification is available and complied with.
Magnitude has agreed to contribute to payments the Selling Shareholders may be required to make under the Securities Act.
LEGAL PROCEEDINGS
The Company is not a party in any legal proceedings.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
The names and ages of all directors and executive officers of the Company are
as follows:
Name Positions Term Served (Expires)
Steven D. Rudnik Director (Chairman Feb. 11, 2000 (2002)
of the Board)
President, Chief Executive Jan. 8, 1999(March 2, 2003)
Officer
Joerg H. Klaube Vice President, Secretary, Jul. .31, 1997 (April 15, 2002)
Chief Financial Officer
Steven W. Jagels Sr. Vice President Feb. 18, 1998
Mark A. Fuller Sr. Vice President Feb. 15, 2002
Steven L. Gray Director May 18, 2000 (2001)
Ivano Angelastri Director May 18, 2000 (2001)
Joseph J. Tomasek Director Feb. 11, 1999 (2001)
There are no family relationships among the Company's Officers and Directors. John C. Duncan resigned as an officer and director of the Company on May 18, 2001.
All Directors of the Company hold office until the next annual meeting of the shareholders and until successors have been elected and qualified. Executive Officers of the Company are appointed by the Board of Directors at meetings of the Company 's Directors and hold office until they resign or are removed from office.
Resumes:
Steven D. Rudnik , Age 42 - Chairman and Chief Executive Officer, President. Mr. Rudnik personally developed many of the copyrighted software products offered by Magnitude Information Systems. Mr. Rudnik co-founded Rolina Corporation in 1996. Prior to 1996, Mr. Rudnik had executive level positions in software product development and software company operations. In 1983, Mr. Rudnik joined Randall-Helms International, Inc. Over the next 13 years, he conceived and developed four independent families of stock market modeling software products aimed at the worldwide "large cap" institutional investor market. These product families generated over US$ 25 million in sales from more than 400 clients in 23 countries. Mr. Rudnik was Executive Vice President and Partner at Randall-Helms when it was sold in 1995.
Joerg H. Klaube , Age 60 - Chief Financial Officer. Joined Magnitude, Inc. in December 1994. From 1993 to 1994 he was Vice President Administration for Comar Technologies Inc., a computer retail firm, and from 1983 to 1993 Chief Financial Officer for Unitronix Corporation, a publicly traded software design and computer marketing firm. Prior to that, Mr.Klaube was employed for 16 years with Siemens Corp., the US subsidiary of Siemens AG, where he served most recently as Director of Business Administration for its Telecommunications Division. He graduated from the Banking School in Berlin, Germany, and holds an MBA degree from Rutgers University.
Steven W. Jagels, Age 42 - Senior Vice President Information Systems. Mr. Jagels joined Magnitude in February 1998. Mr. Jagels has 20 years of software development experience in such diverse disciplines as clinical laboratory analysis, stock market modeling, artificial intelligence, and retail business applications. Mr. Jagels also has experience in the software industry, including software management, project development, systems analysis, and training. Prior to his software career, Mr. Jagels had five years experience in biomedical engineering and management.
Mark A. Fuller, Age 45 - Senior Vice President Business Development. Mr. Fuller brings to Magnitude a strong background and extensive knowledge of enterprise software sales, branding and marketing. From August 2000 to February 2002 Mr. Fuller was Vice President of Sales for the Retail Energy Segment at LODESTAR. Fuller, built, implemented and managed a sales team to include alliance relationships with Siebel, Accenture, Oracle and AMS (American Management Systems). He was responsible for developing and managing alliance relationships with world-class companies that provide key processes and technologies for the retail market. Prior to LODESTAR Mr. Fuller was a corporate officer at Shell Energy Services and a key member of their Leadership Team, reporting directly to the President. Mr. Fuller directed staffing, developed infrastructure, formulated and implemented all business processes under a $100,000,000 budget.
Steven L. Gray, age 53 years, Mr. Gray was elected a director on May 18, 2000. For the past 3-1/2 years, Mr. Gray has served as the President and is a shareholder of a private Florida corporation engaged in the retail distribution of nutritional products. This corporation has a customer base in nine countries. Prior to that time, Mr. Gray ran his own real estate development company, specializing in the design and construction of multi-family housing.
Ivano Angelastri, Age 39 - Director. Mr. Angelastri was elected to serve on the Board on May 18, 2000. He is a resident of Zurich, Switzerland. Mr. Angelastri has been active in portfolio management services for many years. Since January 24, 2001 he is the Managing Director of T&T Vermoegensverwaltungs AG, Zurich whose main business is portfolio management. Prior to his current position, Mr. Angelastri served as Managing Director of Megan Services where he also performed financial advisory and portfolio management services.
Joseph J. Tomasek , Age55- Director. Mr. Tomasek was appointed a director in February 2000. He has been engaged in the private practice of corporate and securities law in his own law firm for the last ten years. Mr. Tomasek was appointed to serve as general counsel for the Company in 1999. In addition to his work with the Company, Mr. Tomasek represents several other clients in the United States and Europe in corporate finance matters.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company is not subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive capacities for the fiscal year ended December 31, 2001, for each executive officer whose aggregate cash remuneration exceeded $100,000, for all executive officers as a group, and for two most highly compensated other employees:
Other Restricted Securities
Annual Stock Underlying
NameYearSalary(1)CompensationAwardsOptions
Capacity in which served
Steven D. Rudnik 2001 $ 120,000 $ 14,050 -(2)
2000 $ 122,185 $ 11,350 - -
Chief Executive Officer 1999 $ 34,615 $ 9,529 $ 66,667(3)
Joerg H. Klaube 2001 $ 120,000 $ 10,710 -(2)
2000 $ 116,923 $ 3,960 -
Sr. Vice President, CFO 1999 $ 100,025 $ 1,710 -
Steven W. Jagels 2001 $100,030 $ 9,000 -(2)
Sr. Vice President 2000 $ 95,000 $ 2,250 -
1999 $ 80,000 $ -- -
All executive officers
as a group (4 persons)(3) 2001 $ 340,030 $ 33,760(4) -
_______________________
- The value of other non-cash compensation, except for the items listed under (2), (4) and (5), that was extended to or paid for individuals named above did not exceed 10% of the aggregate cash compensation paid to such individual, or to all executive officers as a group.
- See table for "Stock Options" below.
(3 ) During 1999, the Board of Directors approved the issuance of 150,000 shares in lieu of $66,667 cash salary; this stock award was
subsequently converted into stock options for the purchase of 225,000 shares at a price of $0.75 per share.
(4) Consists of unallocated expense allowancesconsisting of automobile expenses, and personal insurance premiums.
The following table sets forth stock options granted during 2001 pursuant to the Company's 1997 Stock Option Plan and 2000 Stock Incentive Plan, to executive officers, certain other employees with highest remuneration, directors, and beneficial owners of more than 10 percent of any class of equity securities of the Company:
____________________________________________________________________________________
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted and Directors in FY Price ($/Sh.) Date .
I. Angelastri 112,500 4.3 % 0.75 2/8/06
I. Angelastri 75,000incl.in above 1.00 5/18/06
S. Gray 112,500 4.3% 0.75 2/8/06
S. Gray 75,000incl.in above 1.00 5/18/06
S. Jagels 37,500 3.5% 0.75 1/25/06
S. Jagels 50,000incl.in above1.00 9/4/06
S. Jagels 31,250incl.in above 0.75 6/30/06
S. Jagels 33,333incl.in above 1.00 6/30/06
J. Klaube 37,500 2.3% 0.75 1/25/06
J. Klaube 31,250incl.in above 0.75 6/30/06
J. Klaube 31,667incl.in above 1.00 6/30/06
S. Rudnik 37,500 64.5% 0.75 11/25/06
S. Rudnik 225,000incl.in above 0.75 2/8/06
S. Rudnik 31,250incl.in above 0.75 6/30/06
S. Rudnik 29,167incl.in above 1.00 6/30/06
J. Tomasek 112,500 4.3% 0.75 2/8/06
J. Tomasek 75,000incl.in above 1.00 2/11/06
The following table sets forth stock options granted during 2001 outside of the Company's 1997 Stock Option Plan and 2000 Stock Incentive Plan to executive officers, directors, and beneficial owners of more than 10 percent of any class of equity securities of the Company:
____________________________________________________________________________________
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted and Directors in FY Price ($/Sh.) Date .
S. Rudnik 2,500,000incl.in above 0.50 7/27/11
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
None of the named executive officers has exercised any options or SARs during the fiscal year-ended December 31, 2001.
None of the named executive officers had any exercisable options or SARs that were in-the-money at December 31, 2001.
1997 Stock Option Plan:
The Company's 1997 Stock Option Plan, as filed with Information Statement pursuant to Section 14(c) with the Commission on July 1, 1997, and with Registration Statement on Form S-8 with the Commission on September 8, 1997, is hereby incorporated by reference.
2000 Stock Incentive Plan:
The Company's 2000 Stock Incentive Plan, as filed with the Commission as an exhibit to the quarterly report on Form 10-QSB for the period ended March 31, 2000, is hereby incorporated by reference.
Compensation of Directors:
The Company currently pays no outside directors- fees. Outside directors are awarded stock options for 40,000 shares each upon commencement of their office. In addition, the three incumbent outside directors have been awarded, in January 2001, stock options for 112,500 shares each, and in September 2001, stock options for 75,000 shares each, for services rendered during 2000 and 2001.
During 2001, one outside director of the Company who also serves as the Company's general and securities counsel, was paid an aggregate $108,600 for legal services.
Employment Agreements
In April 2002, the Company entered into an employment agreement with Steven D. Rudnik, its current President and Chief Executive Officer, to serve as President and Chief Executive Officer of the Company for a period of five years, replacing an earlier employment agreement dated February 1998, as amended. Base salary under the agreement is $133,333 per year with predetermined increases effective upon the Company achieving certain revenue goals. The agreement also calls for the grant of certain stock awards and incentive and non-statutory stock options and eligibility for the Company's benefit programs. The Company will also provide reimbursement of ordinary and necessary business expenses and a monthly car allowance. The agreement provides for severance compensation to be determined pursuant to a formula established therein, payable to the officer if the employment agreement is terminated or is not renewed by the Company. A non-competition/non-solicitation restriction applies for 24 mon ths after termination of employment.
In February 2002, the Company entered into an employment agreement with Mark A. Fuller, its current Senior Vice President of Business Development, to serve in that capacity for a period of five years. Base salary under the agreement is $140,000 per year with predetermined increases effective upon the Company achieving certain revenue goals. The agreement also calls for the payment of sales commissions and for the grant of certain stock awards and incentive and non-statutory stock options and eligibility for the Company's benefit programs. The Company will also provide reimbursement of ordinary and necessary business expenses. The agreement provides for severance compensation to be determined pursuant to a formula established therein, payable to the officer if the employment agreement is terminated or is not renewed by the Company. A non-competition/non-solicitation restriction applies for 24 months after termination of employment.
In April 2002, the Company entered into an employment agreement with Joerg H. Klaube, its current Senior Vice President and Chief Financial Officer, to serve in that capacity for a period of five years, replacing an earlier employment agreement dated April 1996, as amended. Base salary under the agreement is $125,000 per year with predetermined increases effective upon the Company achieving certain revenue goals. The agreement also calls for the grant of certain stock awards and incentive and non-statutory stock options and eligibility for the Company's benefit programs. The Company will also provide reimbursement of ordinary and necessary business expenses and a monthly car allowance. The agreement provides for severance compensation to be determined pursuant to a formula established therein, payable to the officer if the employment agreement is terminated or is not renewed by the Company. A non-competition/non-solicitation restriction applies for 24 months after termination of employment .
In April 2002, the Company entered into an employment agreement with Steven W. Jagels, its current Senior Vice President Information Technology, to serve in that capacity for a period of five years. Base salary under the agreement is $108,333 per year with predetermined increases effective upon the Company achieving certain revenue goals. The agreement also calls for the grant of certain stock awards and incentive and non-statutory stock options and eligibility for the Company's benefit programs. The Company will also provide reimbursement of ordinary and necessary business expenses and a monthly car allowance. The agreement provides for severance compensation to be determined pursuant to a formula established therein, payable to the officer if the employment agreement is terminated or is not renewed by the Company. A non-competition/non-solicitation restriction applies for 24 months after termination of employment.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of October 21,2002, the record and beneficial ownership of common stock of the Company by each executive officer and director, all executive officers and directors as a group, and each person known to the Company to own beneficially, or of record, five percent or more of the outstanding shares of the Company:
Title Name and Address of Amount and Nature of Percent
of Class )*Beneficial OwnerBeneficial Ownership(1)of Class
Common Ivano Angelastri 1,512,500(2) 3.07 %
Stock Mark A. Fuller 1,250,000(3) 2.52 %
Steven L. Gray 1,812,729(4) 3.69 %
Steven W. Jagels 602,083(5) 1.22 %
Joerg H. Klaube 560,517(6) 1.13 %
Steven D. Rudnik 8, 074,595(7) 14.50 %
Joseph J. Tomasek 512,500(8) 1.04 %
Address of all persons above: c/o the Company.
All Directors and Executive Officers 14,324,924 24.41 %
as a Group (7 persons)
Liechtensteinische Landesbank 3,109,040(9) 6.30%
Zurich, Switzerland
* The Company also has issued and outstanding as of October 21,2002, 195,968 shares of its Senior Convertible Preferred Stock, with concentrations in excess of 10% for one or more of the holders of such stock, however, none of such shares bear any voting rights.
____________________________
- For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Common stock which such person has the right to acquire within 60 days of May 29, 2002. For purposes of computing the percentage of outstanding shares of Common stock held by each person or group of persons named above, any security which such person or persons has or have the right to acquire within such date is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnote to this table and pursuant to applicable community property laws, the Company believes based on information supplied by such persons, that the persons named in this table have sole voting and investment power with respect to all shares of Common stock which they beneficially own.
- Includes options to acquire 512,500 shares.
- Includes options to acquire 750,000 shares.
- Includes options to acquire 262,500 shares.
- Represents options to acquire the same number of shares.
- Includes options to acquire 560,417 shares.
- Includes options to acquire 4,147,917 shares and conversion rights for 2,748,900 shares.
- Includes options to acquire 312,500 shares.
- Includes warrants for 600,000 shares.
DESCRIPTION OF CAPITAL STOCK
Magnitude is currently authorized by its Certificate of Incorporation to issue an aggregate 103,000,000 shares of capital stock, including 100,000,000 shares of common stock, $.0001 par value per share of which 53,518,986were issued and outstanding as of October 21,2002and 3,000,000 shares of Preferred Stock, $0.01 par value per share of which: 2,500 shares have been designated as Cumulative Preferred Stock, par value $0.0001 per share, of which 1 share was outstanding as of October 21,2002, 300,000 shares have been designated as Series A Senior Convertible Preferred Stock (the "Series A Stock"), $0.001 par value per share of which 29,300 were issued and outstanding as of October 21,2002; 350,000 shares have been designated as Series B Senior Convertible Preferred Stock (the "Series B Stock"), par value $0.001 per share, of which no shares were outstanding as of October 21,2002, 120,000 shares have b een designated as Series C Senior Convertible Preferred Stock (the "Series C Stock") par value $0.001 per share of which 100,000 shares were outstanding as of October 21,2002, and; 500,000 shares have been designated as Series D Senior Convertible Preferred Stock (the "Series D Stock"), $.001par value per share of which 66,668were issued and outstanding as of October 21,2002.
Common stock
The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends as are declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common stock have the right to a ratable portion of assets remaining after the payment of all debts and other liabilities of the Company, subject to the liquidation preferences, if any, of the holders of any outstanding Preferred Stock. Holders of Common Stock have neither preemptive rights nor rights to convert their Common Stock into any other securities and are not subject to future calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common stock. The rights, preferences and privileges of the holders of Common Stock may be subject to, and may be adversely affected by, the rights of the holders of shares of Preferred Stock that the Company may designate and issue in the future. Preferred Stock
The Board of Directors of the Company recently took action to create and authorize the issuance of (1) up to 300,000 shares of Preferred Stock designated as Series A Senior Convertible Preferred Stock of which 29,300 shares were issued and outstanding as of October 21,2002(the "Series A Stock"); (2) up to 350,000 shares of Preferred Stock designated as Series B Senior Convertible Preferred Stock (the "Series B Stock') of which no shares were outstanding as of October 21,2002, (3) up to 120,000 shares of Preferred Stock designated as Series C Senior Convertible Preferred Stock (the "Series C Stock") of which 100,000 shares were outstanding as of October 21,2002, and; (4) up to 500,000 shares of Preferred Stock designated as Series D Senior Convertible Preferred Stock (the "Series D Stock") of which 66,668shares were outstanding as of October 21,2002.
The Series A Stock
The Series A Stock has no voting rights and their holders do not have a right to cast a vote on shareholder matters. The holders of Series A Stock are entitled to receive semi-annual cumulative dividends before any dividends are declared and paid upon the Common Stock, but on par with the holders of any Series B Stock and Series C Stock, calculated against their liquidation price of $5.00 per share at the rate of 7% annually during the first year of their issuance, increasing thereafter in increments of 1/2 of 1% per year for the next six years when the interest rate is fixed at 10% annually. In the event of a liquidation, dissolution or winding up of the affairs of Magnitude and after payment of its debts and liabilities, the holders are entitled to be paid out of the remaining assets a liquidation price of $5.00 per share of Series A Stock, on an equal basis with the holders of any Series B Stock and Series C Stock.
Magnitude has the right to redeem or buy back part or all of the Series A Stock three years after their issuance by paying to the holders the liquidation price ($5.00 per share), any accumulated but unpaid dividends and a payment (a "call premium") equal to 15% of the liquidation price. Holders of the Series A Stock can convert their shares into Magnitude Common stock at a conversion rate equal to 150% of the "market price" of Magnitude's Common Stock at the time of conversion. "Market price" is based upon the average bid and asked prices for Magnitude's Common Stock as quoted by the then stock exchange during the 20 consecutive trading day period immediately preceding the conversion.
The Series B Stock
The Series B Stock has no voting rights and their holders do not have a right to cast a vote on shareholder matters. The holders of Series B Stock are entitled to receive semi-annual cumulative dividends before any dividends are declared and paid upon the Common Stock, but on a par with the holders of any Series A Stock and Series C Stock, calculated against their liquidation price of $9.00 per share at the rate of 7% annually. In the event of a liquidation, dissolution or winding up of the affairs of Magnitude and after payment of its debts and liabilities, the holders are entitled to be paid out of the remaining assets a liquidation price of $9.00 per share of Series B Stock, on an equal basis with the holders of any Series A Stock and Series C Stock. Magnitude has the right to redeem or buy back part or all of the Series B Stock three years after their issuance by paying to the holders the liquidation price ($9.00 per share), any accumulated but un paid dividends and a payment (a "call premium") equal to 10% of the liquidation price. Holders of the Series B Stock can convert their shares into Magnitude Common Stock on the basis of 10 shares of Common stock for one share of Series B Stock at any time.
The Series C Stock
The Series C Stock has no voting rights and their holders do not have a right to cast a vote on shareholder matters. The holders of Series C Stock are entitled to receive monthly cumulative dividends before any dividends are declared and paid upon the Common Stock, but on par with the holders of any Series A Stock and Series B Stock, calculated against their liquidation price of $9.00 per share at the rate of 7% annually. In the event of a liquidation, dissolution or winding up of the affairs of Magnitude and after payment of its debts and liabilities, the holders are entitled to be paid out of the remaining assets a liquidation price of $9.00 per share of Series C Stock, on an equal basis with the holders of any Series A Stock and Series B Stock. Magnitude has the right to redeem or buy back part or all of the Series C Stock three years after their issuance by paying to the holders the liquidation price ($9.00 per share), any accumulated but un paid dividends and a payment (a "call premium") equal to 10% of the liquidation price. Holders of the Series C Stock can convert their shares into Magnitude Common Stock on the basis of 10 shares of Common stock for one share of Series C Stock at any time.
The Series D Stock
The Series D Stock has no voting rights and their holders do not have a right to cast a vote on shareholder matters. The holders of Series D Stock are entitled to receive semi-annually cumulative dividends before any dividends are declared and paid upon the Common Stock, but on par with the holders of any Series A Stock, Series B Stock and Series C Stock calculated against their respective stated value per share at the rate of 7% semi-annually. In the event of a liquidation, dissolution or winding up of the affairs of Magnitude and after payment of its debts and liabilities, the holders are entitled to be paid out of the remaining assets a liquidation price equal to their stated value for the Series D Stock, on an equal basis with the holders of any Series A Stock, Series B Stock and Series C Stock. Magnitude has the right to redeem or buy back part or all of the Series D Stock three years after their issuance by paying to the holders the stated value the reof, any accumulated but unpaid dividends and a payment (a "call premium") equal to 10% of the stated value. Holders of the Series D Stock can convert their shares into Magnitude Common stock on the basis of 10 shares of Common stock for one share of Series D Stock at any time.
Cumulative Preferred Stock
The Company has designated 2,500 shares as "Cumulative Preferred Stock", of which as of September 30, 2000, one share is issued and outstanding. The Cumulative Preferred Stock is non-voting. Each share shall be entitled to receive out of the surplus or net profits of the Company, cumulative dividends thereon at the rate of $9,000 per year, payable quarterly, semi-annually, or annually, as and when declared by the Board of Directors. The Cumulative Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution and rights upon redemption, rank prior to all classes and series of Common stock.
BUSINESS
Background
On June 24, 1997, the Company entered into an acquisition agreement whereby it acquired substantially all of the outstanding stock 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 hereafter referred to as Magnitude, Inc. The business combination took the form of a reverse acquisition. 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 ErgoManagerTM software product.
As of October 21,2002, there were outstanding53.518,986 common shares, 1 Cumulative Preferred Share, 29,300 shares of Series A Stock, no shares of Series B Stock, 100,000 shares of Series C Stock and 66,668shares of Series D Stock.
Narrative Description of Business
Until November 18, 1998, when the Company sold its hardware product line comprised of Magnitude, Inc.'s ergonomic keyboard platform products and accessories, its business was primarily centered around the design, manufacture, and marketing of accessory products for the computerized workplace. In parallel, and beginning with the February 1998 acquisition by the Company of Rolina Corporation, an early stage software business which had developed an ergonomic software product that was being marketed under the name "ErgoSentry", and thesubsequent acquisition in May 1998 of substantially all of the assets of Vanity Software Publishing Corporation, a Canadian software firm, 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 and prevent repetitive stress injury in the computer-related work environment which include the be fore mentioned "ErgoSentry" and "ErgoBreak" products. These efforts resulted, in November 1998, in the completion of the initial release of the proprietary ErgoManager(TM) software system. The Company's business is now focused exclusively on the further development and promotion of these and other software products. The Company has applied for several patents for its products, and has recently received a Notice of Allowance from the U.S. Patent and Trademark Office on its application relative to certain core inventions within its ErgoManager(TM) system. The Company has not yet realized material revenues from licensing its software. With new products targeted at relatively new markets the Company currently must be considered an enterprise in transition.
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 focuses 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). One common form of RSI is Carpal Tunnel Syndrome (CTS) which can be caused by excessive typing, among other activities, and can be aggravated by deficient - in the ergonomic sense - equipment and inappropriate work habits. The carpal tunnel is a channel in the wrist where tendons and the median nerve connect the arm to the hand. Through excessive use, the tendons become swollen and pinch the nerve. 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 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.
During 1996, the issues of repetitive stress injuries and the potential of liability to employers from the effects of carpal tunnel syndrome and other RSI's on employees were forcibly brought to the forefront of corporate consciousness through widely publicized suits involving a major computer maker. The US Bureau of Labor Statistics reported that already in 1995, there were approximately 70,000 cases of carpal tunnel syndrome and associated tendonitis, and that 25% of all injuries that result in lost work time are due to repetitive stress problems. They currently cost employers an estimated $20 billion a year in workers' compensation claims. The federal government estimates an additional $80 billion is lost in related costs such as absenteeism and reduced productivity. Increased awareness of the health risks and associated costs led the State of California to pass OSHA Title 8 which directs qualifying employers to establish and implement a program designed to minimize RSI's. Such program shall include work-site evaluation, control of exposures which have caused RSI's, and training of employees. The Company's proprietary software products deliver a comprehensive compliance tool. In a similar pursuit, the Clinton Administration, in January 2000, proposed that on a federal level, preventive guidelines be established, and the Occupational Safety and Health Administration plans to issue pertinent regulations this year. The RSI issues in the United States are mirrored in the rest of the developed world. The Company believes that the growing recognition of these trends will give rise to a rapidly expanding market for the Company's products.
The Industry
The Company operates in only one business segment: the development, marketing, and licensing of risk aversion and productivity enhancement software products for the computerized workplace environment. More specifically, the Company licenses highly sophisticated and proprietary software that provides computer based training, work pacing and monitoring tools, as well as a computer workstation assessment tool.
Potential customers for the Company's products are businesses of all sizes, as well as organizations and government departments and agencies that employ many staff in computer-related functions. The software industry in general is comprised of a remarkable variety of providers, ranging from small boutique-type designers to large international corporations. The industry is characterized by great dynamics, patterns of rapid growth and well-known success stories, but also by a high degree of volatility and risk. As such, the Company with its recent transition from the more stable environment of a supplier of ergonomic (hardware) accessories, to a software house addressing a specialized market, has entered new territory. Nevertheless, its chances for success, in management's opinion, are greatly enhanced by the timeliness of the introduction of its product into an increasingly receptive market, as described above.
The Company operates primarily in the United States of America, however, has introduced a Portuguese language version of its software products for the Brazilian market, and is preparing other language versions. The Company has not yet derived any material revenues from the licensing or sale of its software products, either domestically or in foreign markets.
Products, Patents, Trademarks
The Company's current primary product is a suite of seven proprietary software modules marketed under the name ErgoManager(TM) which are designed to help individual computer users and businesses deal with potentially preventable repetitive stress injury (RSI). The seven 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 package enables a company to not only address the issue of health risks involving employees and to m inimize resulting potential liabilities, but delivers a powerful tool to increase overall productivity.
The system is highly customizable for management, staff and employees. All components operate on any PC or workstation running the Microsoft Windows operating system. The ErgoManager(TM) suite employs the International RULA (Rapid Upper Limb Assessment) standard for compliance with California OSHA Title
The seven modules are described as follows:
ErgoSure : A postural risk-assessment tool that records how an employee is working; it determines injury potential and suggests improvements. It also can be used to evaluate workstation alternatives prior to purchase.
ErgoSentry(TM) : Employing patent-pending algorithms that measure rest against work in real time, the non intrusive program informs users when to break from high-risk trends (thresholds definable by the user or corporate safety officer) when keyboarding or using a mouse. ErgoSentry also includes an "ErgoPak" video or slides that depict correct workstation setup, posture and repetitive stress-reducing exercises. Surveyor(TM) : An electronic surveyor used by management to gather macro-information about employee populations and to gain a clear understanding of equipment usage, discomfort and comfort patterns, workstation configurations and employee habits. The ErgoSentry trademark has been registered with the United States Patent and Trademark Office on September 12, 2000 providing legal protection for a ten year period through September 12, 2010.
UserNotes(TM) : An easy, effective means for employees to report workplace discomfort so staff can address certain issues earlier, at lower cost and with greater likelihood of success. UserNotes encourages a proactive approach.
Guardian : Captures the frequency of mouse clicks and activation of individual keys, over time. It also can be used in a review process to assess attributes such as ease-of-use among competing applications. Guardian also is a good training tool. By measuring before-and-after results, Guardian can be used to determine the type of training program needed, measure each program's effectiveness and highlight needed improvements.
ErgoQuiz: An electronic testing system and awareness-building tool that measures employees' understanding of ergonomic principles.
ErgoManager(TM) Analyzer: A comprehensive report writer and analysis tool for manipulating, interpreting and evaluating the data collected in the ErgoSentry module - on the workstation-, department-, and company level.
In addition to the trademarks shown above which are owned by the Company, Magnitude has applied for other product designators to be afforded trademark protection, and has filed US Patent Application for certain design principles underlying several of its proprietary software products, including a patent application for its newest product, a new class of usage tracking and data collection software that is directed towards e-commerce and a wide range of other Internet related applications. There can be no assurance, however, that
such patents will be granted or, if granted, that a third party will not design products which perform the same or similar functions as the Company's products, using technology other than that covered by the Company's patents.
Patents and New Products
ErgoSentry - Patent Allowed:
A patent was issued to the Company on May 16, 2000 by the United States Patent and Trademark Office. The patent covers various innovations including a proven approach that helps computer users manage their activity to improve productivity and reduce the risk of repetitive motion injuries. Entitled "Computer Activity Monitoring Station", this patent provides protection under United States law through January 7, 2017.
ErgoPal Introduced, Patent Pending:
New patent-pending ErgoPal software -- a work pacing tool that helps users mitigate health risks and improve their productivity by gently alerting them to increases in stress and fatigue which are occurring before they realize it.
Business Strategy
The most important prospective customers for the Company's products are medium and large companies, organizations, and governmental departments and agencies that have a relatively large staff working in computer-related functions. These entities not only are more cognizant of the health risks and negative effect on productivity associated with many of the traditional tools of the computerized workplace and therefore tend to be more receptive to new remedial solutions and alternatives based on the science of Ergonomics, but also have a significant exposure in terms of legal liabilities if they fail to act addressing these potential risks. On an on-going basis, the increasing costs of worker's compensation insurance creates a growing incentive to deal with the underlying causes.
With its new proprietary ergonomic software the Company offers a comprehensive and effective tool for corporate clients to address the three major issues involved: (a) employee wellness, (b) cost containment and productivity enhancement, and (c) potential legal liabilities. While certain portions of the ErgoManager(TM) software suite have been previously marketed as individual modules, the release to the market, in November 1998, of an overall integrated solution in form of the ErgoManager(TM) system constituted a novel approach.
Since that time, the product has been installed by a growing number of corporate and institutional clients. For example, during fiscal year 2000 we acquired 43 new customers and in 2001, 36 new customers. Typically, in view of the new-ness of product and market, such 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. Many 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 and, thereby, to the targete d revenue stream. The key to economic success therefore lies in a comprehensive marketing approach that carries the Company's message to the largest possible number of prospective clients. Since its own financial resources are limited, the Company embarked on a strategy to seek marketing partnerships with entities and individuals in the risk management industry.
The Company intends to continue developing strategic marketing relationships with leading business consultants, to broaden its distribution channels to include tiered marketing arrangements, and to strengthen its direct sales force and support organization, thereby focusing on a marketing approach which emphasizes the advantages that accrue to a business from the unique combination of risk management and productivity enhancement tools provided by ErgoManager(TM).
Research and Development
Since early 1998 the Company has invested considerable resources in the further development of the overall ErgoManager(TM) system and the integration of certain software assets acquired pursuant to the agreements with Rolina Corporation and Vanity Software Publishing Corporation (see "Narrative Description of Business"), and in further enhancements to the products. Also during this time, a complete set of new and necessary documentation and marketing collateral was created. In late summer, the first official version of ErgoManager(TM), Version 1.78, was released, followed in October 1998 by Version 2.12., in April 1999 by Version 3.05 and in October, 2000 byVersion 4.0. The latest Version 5.0 was released in September, 2002.
The Company has expensed all expenditures related to the above efforts. Such expenses totaled $139,000 for the year ended December 31, 2001, and $209,000 for the year ended December 31, 2000.
Major University Study
Alan Hedge, Phd,, Professor of Ergonomics at Cornell University, in collaboration with Scott J. Evans, Manager of Facilities and ESH at Lockheed Martin Enterprise Information Systems, authored a Cornell University study testing the effects of using "ErgoManager", the Company's ergonomic management system ("EMS"), an ergonomic work pacing software, on 56 Lockheed Martin computer software programmers at that company's Orlando, Florida facility (the "Study"). Professor Hedge serves as the Chairman of the Company's Ergonomics Advisory Board and is a shareholder of the Company. In accordance with the policy of Cornell University, neither the results of the Study nor the fact of its publication, constitutes an endorsement by Cornell University of the Company's ErgoManager or EMS software products used in the Study.
The performance of the 56 studied-test participants was passively monitored using the EMS software for four weeks to establish a baseline, without activating the ErgoManager's icons at rest break capabilities. Following this initial four-week period, the full capabilities of ErgoManager were activated for all participants and their work performance was monitored for a further four-week period. Full activation permitted the EMS software to coach users to take periodic microbreaks throughout the workday depending upon their work rate.
The results of the Study displayed a significant 59% improvement in work accuracy following the activation of ErgoManager and the EMS software. The Study further disclosed that there was no difference in total keystrokes or in mouse use during either the initial four-week baseline period or the following four-week ErgoManager activation period, confirming previous research showing that alerting keyboard users to take more short rest and break periods did not impair their overall keystroke and mouse use but did improve their work accuracy. The Study proposed that further studies of this type of ergonomic workflow software could prove useful and beneficial in evaluating the effects of microbreaks on participants who are experiencing musculoskeletal problems and in quantifying the performance benefits of this software for a larger number of workers over a longer period.
Economic analysis showed that in this Study the performance benefits alone that accrued from using ErgoManager's ergonomic work pacing software would operate to provide a return on investment in less than one-week. This Study is available to the public on the Cornell University Website at : then clicking on the Study, entitled "Ergonomic Management Software and Work Performance".
Competition
Competitive pressures come from other ergonomic software products. Current competitors of the Company, their product names and locations are as follows:
CompanyProduct NameLocation
Great Attitudes, Inc. Compustretch Canada
ErgoWare ErgoWare RSI Manager San Diego, CA
Alen Jevsenak 3D Germany
Peak Technology Ltd. Kairos New Zealand
DITR Marketing, Inc. Mouse Tool California, USA
The key to ErgoManager winning the business appears to be finding someone at the prospective client who understands ergonomic issues and can appreciate why ErgoManager is a superior product.
The Company has ascertained, based on customer comments, that the Company's market share lead gives it the opportunity to be first to dominate this market niche. However, this market is in its infancy and there are no real competitors - higher or lower in cost compared to Magnitude - executing substantial marketing communications. Magnitude is left to finance and develop the market on its own.
The relatively small size of the existing marketplace , Magnitude, and its competitors provides a window of opportunity for companies with substantial resources to quickly enter and dominate the market, should they determine or suspect rapid growth. While such a move could lessen Magnitude's opportunity to be the overall market leader, it would greatly benefit the Company by drawing attention to and building the market.
From a marketing and sales perspective, Magnitude and its products do not currently have significant competition. There are several first and second-generation keystroke counters and egg timers but they do not provide the end user and the employer with the requisite compliance and usability that ErgoManager brings to the table. First-generation, or "egg timer" methodology focuses on counting time and then offering a typing break based upon a time threshold. Second-generation, or "odometer" methodology employs the counting of keystrokes and then offering a typing break based upon a total number of keystrokes threshold. Third-generation technology, which we utilize in our software, compares typing keystroke input over time to establish a correlation of typing work and rest for individual users, which once established proceeds to offer interrupting typing breaks based upon a user's typing patterns when typing work and rest patterns deviate from the previously establishe d norms.In all comparisons, ErgoManager provides more features and better performance than competitive products. The differences between ErgoManager and competing products are substantial.
At this time, there is no significant competitor offering a product suite of features comparable to ErgoManager. A number of competing products offer rudimentary reporting capabilities. Magnitude's ErgoSentry is the only Third Generation Workpacing software available today.
Seasonality and Dependency
The industry segment in which the Company does business is not seasonal. The Company's software related revenues until now have consisted primarily of smaller orders for pilot projects and field tests. The Company's future success is dependent upon its ability to follow up on such initial orders with enterprise-wide contracts where corporate clients introduce the Company's software products across the entire spectrum of computer workplaces throughout their company or certain divisions. There can be no assurance that the Company will succeed in doing so, or if it does succeed, that its business will generate enough revenues during the coming periods, in a timely manner and sufficient in scope, to finance and support the Company's planned future growth as expected by management.
EMPLOYEES
As of October 21,2002, the Company employed 13persons, of whom sixwere primarily engaged in research and development and software support activities,fourwere primarily engaged in sales and marketing, and threein general administrative and clerical functions. The Company has no collective bargaining agreements with its employees.
PROPERTIES
On March 15, 2000, the Company entered a five year lease for approximately 6,000 square feet of office space at 401 State Route 24, Chester, New Jersey. This lease agreement calls for monthly rental payments of $6,500 with nominal increases after years No. 2, 3, and 4.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
Except for historical information, the Company's reports to the Securities and Exchange
Commission on Form 10-KSB and Form 10-QSB and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company's products, and other risks and uncertainties identified in the Company's reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.
The selected financial information presented below under the captions "Statement of Operations" and "Balance Sheet" for the years ended December 31, 2001 and 2000 is derived from the financial statements of the Company and should be read in conjunction with the financial statements and notes thereto.
The financial data are those of Magnitude Information Systems, Inc. including the operations of Magnitude, Inc. All inter-company accounts and transactions have been eliminated in consolidation.
SELECTED FINANCIAL DATA
Balance SheetDecember 31,
2001
Total assets $ 1,632,961
Current liabilities 1,580,266
Long-term debt 274,890
Working capital (1,093,665)
Shareholders equity $ (222,195)
Statement of OperationsFor The Year Ended December 31,
2001 2000 .
Software Licenses $ 571,341 $ 615,829
Maintenance and Support 37,873 30,806
Total revenues 609,214 646,635
Operating income (loss) (3,096,648) (3,546,457)
Net (loss) (3,055,036) (3,515,473)
Net (loss) after dividends
On Preferred Shares (3,244,389) (3,716,527)
Net loss per common share $ (0.15) $ (0.25)
Number of shares used in computing
per share data 21,466,050 14,793,682
Results of Operations for the Year Ended December 31, 2001
Fiscal Year 2001 was a challenging year for the Company. A persistent shortage of cash the result of slower than expected revenue growth coupled with an inability to attract sufficiently large amounts of new working capital on terms acceptable to the Company - hampered efforts to implement a successful marketing program and delayed a restructuring of the sales organization to make it more effective in executing changes sought by management in response to the sales results of this year. During the year, much of management's time and efforts were dedicated to raising capital. At the same time, most available resources were focused on gaining access to a small number of potential key clients who management believes are crucial in creating the visibility and establishing the credibility that are needed to attract a larger audience for the Company's products which are new and address a new and rapidly evolving market. This highly selective marketing approach, partially dictated by a scarcity of personnel and financial resources, responded to what management perceives to be the most pressing need, a number of visible and substantial transactions that constitutes a "break-through", however, came at the price of somewhat neglecting other potentially promising marketing channels. As the year progressed, the requirement for broadening the Company's marketing approach became more obvious, and management's efforts towards a solution and affirmative action finally culminated in the hiring, in February 2002, of a senior marketing executive with the necessary track record and credentials. Simultaneously, the Company is concentrating its efforts in the financing area on exploring alternatives for a larger financial transaction that would supply the necessary capital to support the new marketing programs and, subsequently, free available management resources towards the task of growing the business.
For the year ended December 31, 2001, the Company had revenues of $609,214, slightly less than the $646,635 achieved in 2000. The 2001 figure does not include a major $175,000 contract with a new overseas distributor that was signed in 2001 but will be consumed only during 2002 and 2003. A major portion of the 2001 revenues was attributable to one account, a U.S reseller organization that specializes in ergonomic products and related problem solutions, which client accounted for approximately 38% of total revenues.
Gross profits amounted to $449,948 for a 73.9% 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 $12,000 per month to cost-of-goods-sold. Owing to the fact that variable cost-of-goods-sold expenses are in the vicinity of only 5%, the gross margins will increase further with larger revenues, as the portion of fixed expenses decreases relatively. After deducting selling -, research -, and general and administrative expenses of $3,546,596 which decreased by 10% from the $4,030,373 recorded in 2000, the Company realized an operating loss of $3,096,648, compared to an operating loss of $3,546,596 in 2000. Non-operating income and expenses of $51,849 included $80,772 net interest expense and $28,923 in non-recurring income consisting of an extraordinary credit for dissolution of certain pr ior year accruals. The Company also realized an extraordinary gain of $93,461 from the sale of net loss carry-forward tax credits pursuant to New Jersey Emerging Technology and Biotechnology Financial Assistance Act. The year concluded with a net loss of $3,055,036. After accounting for dividend accruals on outstanding preferred stock which totaled $189,353, the net loss applicable to common shareholders was $3,244,389 or $0.15 per share, compared to a loss of $3,716,527 or $0.25 per share for the previous year.
The decrease in operating expenses is primarily the result of lesser expenditures for certain marketing programs and of efforts to curtail general and administrative expenses across the board. Certain expense categories, however, experienced increases, such as non-sales related travel expenses and other expenditures associated with financing and other corporate undertakings. Management is committed to review the merit of all activities with respect to cost/benefit relations on an on-going basis and exercise due diligence in day-to-day operations with the goal of reducing all non-critical expenditures. Nevertheless, the Company's operating budget for the year 2002 foresees larger expenditures in the sales and marketing areas for certain new marketing initiatives and a planned enlargement of the sales organization. Such increases are expected to be front-end investments for a significant growth in revenues.
Results of Operations for the Quarter and Nine Months Periods Ended September 30,2002
In September 2002 the Company was awarded a major new sales contract, involving an enterprise license for Magnitude's Anti-Injury™ ergonomic software, for Lockheed Martin Corporation. Although the revenues from this transaction contributed only approximately $26,000 to this period's sales total, management because of the added visibility and credibility of such new client choosing these products as well as anticipated further revenues, expects the eventual impact on the Company's business and market posture to be much more substantial. Of the remaining revenues for the quarter, support and maintenance services contributed $13,142. The quarter's total revenues amounted to approximately $44,000, compared to $34,150 for the same period in 2001. During the current period, management implemented two new marketing initiatives that constituted the Company's first foray into the consumer products market, featuring two new versions of its patented ergonomic software, ErgoCoach and ErgoFun, that are specifically designed to address the adult and children consumer market. The previously announced campaign with ShopAmerica Network, focusing on TV-Based advertising, and a direct telephone marketing call-center initiative were launched. While initial results are as yet inconclusive, both of these undertakings are supplying valuable intelligence for the Company with respect to this new market segment. The Company's primary focus and sales efforts, however, continue to be directed towards expanding market awareness for the ErgoEnterprise version of its software, targeting the most important industry- and business segments.
Selling- and general and administrative expenses for the quarter totaled $821,494, slightly higher than the $812,713 recorded during the same period in 2001. Personnel expense and professional services, the latter primarily for marketing and investor relations consultancies and for legal services, constituted the majority of these outlays, accounting for 45% and 21% respectively of total expenses. Management also increased the reserve for allowance against receivables because collections on one major reseller-contract which originated during the previous year have been slower than anticipated and specified in the contractually agreed-upon terms. Notwithstanding this allowance, management expects to collect the entire remaining amount which totals approximately $197,000. For the thirds quarter as a total, the Company realized an operating loss of $822,131, compared to an operating loss of $817,874 in 2001. After accounting for non-operating income and expenses, and dividend accruals on outstanding preferred stock, the net loss applicable to common shareholders for the period was $821,074 or $0.02 per share, compared to a loss of $1,010,687 or $0.04 per share for the same quarter in the previous year. The total for the first nine months in 2002 was a net loss applicable to common shareholders of $2,368,359 or $0.06 per share, compared to a loss of $2,719,036 or $0.13 per share in 2001.
Liquidity and Capital Resources:
New private placements with accredited investors, and the exercise of certain stock purchase warrants, resulted in the receipt by the Company of approximately $379,000 in new equity capital in the form of cash, during the third quarter. The new equity placements were consummated by issuance of common stock to private investors in the U.S. and overseas. Details of those transactions can be found in the "Changes and Issuance of Securities" section of this report. The Company is currently filing an amendment to a previously filed registration statement on Form SB-2 which amendment includes the common shares directly issued, as well as the common shares underlying convertible preferred stock and warrants issued, in connection with past financing transactions. In accordance with applicable regulations, during pendency of this registration, placement of further securities with U.S. investors will be suspended.
At September 30, 2002, the deficit in working capital amounted to $919,259, up from a deficit of $446,720 at June 30, 2002. The deficit continues to challenge the Company's ability to aggressively proceed with certain marketing programs. The lack of adequate financing hinders long-term planning and continues to occupy management time and resources. Due to the presently decreased stock price management has moved more slowly on a planned larger capital raising transaction which would likely involve the issuance of significant numbers of additional common shares. Until such a financing can be completed, the probability and timing of which is uncertain at this time, the Company will continue to be forced to try obtaining necessary operating funds through series of smaller investments.
At the time of this submission, the Company had no bank debt. At September 30, 2002 its short-term liabilities consisted primarily of $245,662 trade payables, approximately $412,000 in various accruals and deferred revenues (see "Accounts Payable and Accrued Expenses" and "Deferred Revenues" in the Notes to Financial Statements section), and $238,607 in accrued dividends on outstanding preferred stock. Recognizing the absence of surplus funds, management presently has no firm plan to liquidate the latter position in the immediate future. Debt included approximately $275,000 is owed to the Company's chairman and chief executive officer and is evidenced by a promissory note maturing in July 2003, and $41,000 demand loans provided by the Company's chairman and one outside director.
Current cash reserves are inadequate when measured against needs projected for the upcoming quarter, and the Company's liquidity overall remains strained. While management firmly expects to be able to obtain necessary working capital, there can be no assurance that the desired funding can be secured in a satisfactory manner with respect to terms, timeliness and volume.
CERTAIN RELATIONSHIPS AND RELATED 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. On February 19, 2002, the maturity of the term portion of $274,890 was extended to July 2003, and the board of directors of the Company approved a change in the conversion option towards a rate of $0.10 per share.
In December 2001, a director of the Company exercised warrants for the purchase of 200,000 shares of the Company's common stock, at a price of $0.10 per share.
During 2001, one outside director of the Company who also serves as the Company's general and securities counsel, was paid an aggregate $108,600 for legal services.
In January 2002, the Company and its President and Chief Executive Officer agreed to issue 1,100,000 restricted shares of common stock bearing piggy-back registration rights, in lieu of $110,000 cash remuneration representing salary payments due to that individual for the time February through December 2002.
In January and February 2002, an outside director of the Company purchased common stock and exercised certain warrants for a total of 726,111 shares, at the price of $0.10 per share.
In February 2002, the Company and its President and Chief Executive Officer agreed to convert most of his base salary for the remainder of the year 2002 into restricted common stock in lieu of cash at the rate of $0.10 per share, for a total amount of $110,000.
During the first quarter in 2002, three outside directors of the Company were awarded stock grants for an aggregate 700,000 restricted common shares, for services rendered.
During the quarter ended September 30,2002, the Company issued common stock grants of 1,500,000 to certain of its officers and directors.
TRANSFER AGENT
The transfer agent for the Company is Securities Transfer Corporation, located at 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
ANNUAL REPORT
The Company intends to continue its practice of furnishing annual reports to its shareholders containing financial statements audited by independent certified public accountants.
MAGNITUDE INFORMATION SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Consolidated Financial Statements for thenine months period ended September 30,2002.
Audited Consolidated Financial Statements as of December 31, 2001 and for the years ended December 31, 2001, and 2000.
Magnitude Information Systems, Inc. and Subsidiary
Consolidated Financial Statements
September 30, 2002
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 2002 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6 - 11
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 SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2002
ASSETS
Current Assets
Cash ....................................................................... $ 3,755
Accounts receivable, net of allowance for
doubtful accounts of 99,051 ................................. 311,453
Miscellaneous receivables ............... 26,800
Inventories .............................................................. 27,007
Prepaid expenses ......................................................... 66,206
Total Current Assets ................................................ 435,221
Property, plant and equipment, net of accumulated
depreciation of $252,113 ............... 41,275
Software, net of accumulated amortization of $690,439 ..... 816,850
Other assets ............................................................... 23,784
TOTAL ASSETS ............................................................... 1,317,130
========
LIABILITIES AND STOCKHOLDERS - EQUITY
LIABILITIES
Accounts payable and accrued expenses .................... 456,358
Deferred revenue .................. 201,629
Dividends payable ....................................................... 238,607
Loans and notes payable ............................................. 141,000
Current maturities long-term debt ............................... 308,419
Current maturities lease obligations ............................ 8,467
Total Current Liabilities ........................................... 1,354,480
Long-term debt, less current portion ........................... 0
TOTAL LIABILITIES ....................................................... 1,354,480
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 195,968 shares are issued and outstanding196
Common Stock,$0.0001 par value, 100,000,000 shares authorized,
53,518,986 shares are issued and outstanding ............... 5,352
Additional paid-in capital ............................................. 20,584,390
Accumulated deficit ...................................................(20,627,288)
TOTAL STOCKHOLDERS- EQUITY ............... (37,350)
TOTAL LIABILITIES AND EQUITY ........................... $ 1,317,130
==========
See notes to consolidated financial statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Total Revenues ....................................... $ 44,403 $ 34,150 $ 105,474 $ 527,083
Cost of Goods Sold ................................ 45,040 39,311 122,918 120,353
Gross Profit .................................................. (637) (5,161) (17,444) 406,730
Selling expenses ..................................... 233,525 256,275 592,832 1,005,883
General & administrative expenses ......... 587,969 556,438 1,672,912 1,762,632
Operating (Loss) .................................. (822,131) (817,874) (2,283,188) (2,361,785)
Miscellaneous income ....... 35,719 - 35,719 -
Miscellaneous expense ........ - (156,789) - (156,789)
Interest expense, net ............................ (5,845) (9,670) (29,276) (42,901)
Non-Operating Income (Expense) ............. 29,874 (166,459) 6,443 (199,690)
Net (Loss) before taxes .......... (792,257) (984,333) (2,276,745) (2,561,475)
Provision for income taxes ..... 0 0 0 0
Net (Loss) .................................................... $ (792,257) $ (984,333) $(2,276,745) $(2,561,475)
========= = ======== ========= =========
Dividends accrued on preferred stock........... 28,817 26,354 91,614 157,561
Net (Loss) applicable to common shareholders $ (821,074) $(1,010,687) $(2,368,359) $(2,719,036)
========= = ======== ========= =========
Loss per Common Share ............................... $ (0.02) $ (0.04) $ (0.06) $ (0.13)
= ======== = ======== ========= =========
Weighted Average Number of
Common Shares Outstanding .................. 52,097,880 23,552,842 42,745,948 20,285,553
========= = ======== ========= =========
See notes to consolidated financial statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2002 2001
Cash Flows from Operating Activities
Net (loss) ................................................ $(2,276,745) $(2,561,475)
Adjustments to net (loss)
Depreciation and amortization ....................... 153,531 152,933
Provision for bad debts .......... 87,028 -
Stock issued for debt and expenses ...... 443,379 27,388
Decreases (increases) in Assets
Accounts receivable ....................................... 110,294 (131,943)
Miscellaneous receivables .......... 18,720 (129,627)
Inventories ............... (24,857) 240
Prepaid expenses .......................................... (25,654) 319,138
Other assets ................ (1,955) 2,600
Increases (decreases) in Liabilities
Deferred revenues ........... (34,291) 204,548
Accounts payable and accrued expenses ......... (311,110) 110,856
Net Cash (Used) by Operating Activities (1,861,660) (2,005,342)
Cash Flows from Investing Activities
Purchases of equipment and fixtures .................. (12,751) (944)
Net Cash (Used) by Investing Activities (12,751) (944)
Cash Flows from Financing Activities
Proceeds from notes payable .............................. 76,000 397,500
Repayment of loans and notes ............................ (287,500) (146,000)
Dividend payments .......... - (14,003)
Issuance of common and preferred stock ........... 2,074,437 1,739,665
Net Cash Provided by Financing Activities 1,862,937 1,977,162
Net (Decrease) in Cash ......................................... (11,474) (29,124)
Cash at Beginning of Period .................................... 15,229 37,701
Cash at End of Period ..............................................$ 3,755$ 8,577
See notes to consolidated financial statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics Inc. 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 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.
On June 24, 1997, the Company extended a stock exchange offer to the shareholders of Magnitude, Inc., a Delaware corporation and manufacturer of ergonomic keyboarding systems. At the time of this submission, holders of 99.4% of Magnitude, Inc. common stock have tendered their shares. The remaining Magnitude, Inc. shareholders hold a minority interest which is valued at $0. 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 January 15, 2000, the Company acquired all of the issued and outstanding capital stock of Cornell Ergonomics, Inc. (Cornell) and Internet Ergonomics Technologies Corp. (IET), privately held New York corporations, whose only property was comprised of certain proprietary ergonomic software modules, in exchange for shares of the Company's common stock. These software modules were subsequently transferred to the Company and Cornell and IET were dissolved.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosure required for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001, and its reports on Form 10-QSB for the quarters ended March 31, 2002 and June 30, 2002.
In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of September 30, 2002, the results of operations for the three and nine months ended September 30, 2002 and 2001, and the cash flows for the nine months ended September 30, 2002 and 2001, have been included.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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. Software assets are capitalized at the fair value of stock exchanged/granted upon acquisition and are amortized on the straight line method on a product-by-product basis over the estimated economical life of the products which has been determined to be 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, 2001.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
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 our proprietary software products is recognized at the time of licensing provided that the resulting receivable is deemed probable of collection. In determining the amounts to be recognized, we follow the guidelines established by SEC Staff Accounting Bulletin SAB 101 and Statement of Position (SOP) 97-2. Revenue from software maintenance contracts and services are 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.
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, 2001, 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 2002 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.
PREPAID EXPENSES
Prepaid expenses at the end of the quarter included a position of $30,000 representing the unamortized portion of the Company's chief executive officer's base salary for the remainder of the current year which was prepaid in February 2002 in the form of restricted common stock, in lieu of cash.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in a financial institution which are insured by the Federal Deposit Insurance Corporation up to $100,000. Balances in these accounts may, at times, exceed the federally insured limits.
The Company provides credit in the normal course of business to customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at September 30, 2002:
Equipment | | | $ | 172,088 |
Furniture and fixtures | | | | 75,530 |
Leasehold improvements | | | | 45,770 |
| | | | 293,388 |
Less accumulated depreciation | | | | 252,113 |
Total | | | $ | 41,275 |
Depreciation expense charged to operations was $36,593 in the first nine months of 2002 and $35,995 in the first nine months of 2001.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at September 30, 2002:
Accounts payable | $ | 245,662 |
Accrued interest | | 51,649 |
Accrued commissions | | 29,591 |
Accrued salaries | | 4,285 |
Accrued professional fees | | 116,025 |
Miscellaneous accruals | | 9,146 |
Total | $ | 456,358 |
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
DEFERRED REVENUES
Deferred revenues at September 30, 2002, include $27,629 prepaid software maintenance and support charges which are amortized ratably over the remaining duration of the underlying maintenance agreements. Also included are $174,000 representing revenues from one software licensing agreement where the Company has not been reasonably assured of the collectibility of the associated receivable which was invoiced to a foreign entity with extended payment terms and which was deferred in its entirety.
LOANS AND NOTES PAYABLE
At September 30, 2002, 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, 2002; 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, 2002; no demand for payment has been made through today's date. Cash advances by two directors and officers of the Company, payable on demand, carrying interest at the rate of 10% p.a. | | 25,000 41,000 |
| | | |
Total $ 141,000 ========
LONG TERM DEBT
Long-term debt as of September 30, 2002, is comprised of the following:
Pursuant to the February 2, 1998, Agreement and Plan of Merger with Rolina Corporation 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 the 90th day thereafter. This liability was converted into a Company obligation maturing July 1, 2003, carrying interest at the rate of 7% per year payable monthly, of which a portion of $100,000 had been repaid in April 2002. 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 $0.10 per share. 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. This obligation is in default. | $ | 274,890 33,529 |
Total 308,419
Less current maturities 308,419
Long-term debt, net of current maturities $ 0 ========
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
INCOME TAXES
At December 31, 2001, the Company had net operating loss carry forwards approximating $17,000,000 for federal income tax purposes which expire between the years 2007 and 2021 and are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December 31, 2001 are as follows:
Total deferred tax asset | | | $ | 6,800,000 |
Less valuation allowance | | | | 6,800,000 |
Net deferred tax asset | | | $ | - |
COMMITMENTS AND CONTINGENCIES
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.
In November, 2001 and in June, 2002, the Company filed a registration statement and amendment with the Securities and Exchange Commission via the electronic EDGAR System, making it publicly available. During November and December 2001 and the current fiscal year, the Company engaged in a private placement with select U.S. accredited investors, receiving $1,493,200 in subscription funds and placing 14,932,000 common shares, while this registration statement was still publicly available yet not effective. The concurrent pendency of this registration statement and private placement activity represented a technical violation of federal securities law since it raised the issue of whether or not the publicly filed and pending registration statement acted as an advertising mechanism or a Company "general solicitation" of the private placement investors. If a general solicitation was found to have occurred, the private placement investors would have the legal right to rescind their subscription d uring the one year period following their investment. The Company, however, firmly believes that no such general solicitation, in fact, occurred and would vigorously defend against any such claims.
RELATED PARTY TRANSACTIONS
In February 2002, the Company and its President and Chief Executive Officer agreed to convert most of his base salary for the remainder of the year 2002 into restricted common stock in lieu of cash at the rate of $0.10 per share, for a total amount of $110,000.
During the first quarter in 2002, three outside directors of the Company were awarded stock grants for an aggregate 700,000 restricted common shares, for services rendered.
In January and February 2002, an outside director of the Company purchased common stock and exercised certain warrants for a total of 726,111 shares, at the price of $0.10 per share.
During the second quarter in 2002, an affiliate of an outside director of the Company received 25,000 newly issued restricted common shares, for services rendered.
In June 2002, an officer of the Company offered, and the Company accepted, the conversion of $15,000 liabilities into 150,000 shares of common stock.
During the third quarter in 2002, the directors and certain officers of the Company were awarded stock grants for an aggregate 1,500,000 restricted common shares, for services rendered.
In July 2002, an outside director of the Company and an affiliate exercised certain warrants for a total of 400,000 shares, at the price of $0.10 per share.
In August 2002, an outside director of the Company converted cash advances in the aggregate amount of $45,000, extended to the Company during June and July 2002, into 450,000 restricted common shares.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2001
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 2001
Page
Independent Auditors- Report 1
Financial Statements
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statement of Stockholders Equity (Deficit) 4-5
Consolidated Statements of Cash Flows 6-7
Notes to the Consolidated Financial Statements 8-21
[letterhead of
Rosenberg Rich Baker Berman & Company
380 Foothill Road, Bridgewater, New Jersey]
Independent Auditors' Report
To the Board of Directors and Stockholders of
Magnitude Information Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Magnitude Information Systems, Inc. and Subsidiaries as of December 31, 2001 and the related consolidated statements of operations, stockholders - equity (deficit), and cash flows for the two years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Magnitude Information Systems, Inc. and Subsidiaries as of December 31, 2001 and the consolidated results of their operations and their cash flows for the years ended December 31, 2001 and 2000, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the notes to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 27, 2002
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2001
Assets | | |
Current Assets | | |
Cash | $ | 15,229 |
Accounts receivable, net of allowance for doubtful accounts of $12,023 | | 383,150 |
Miscellaneous receivables | | 47,669 |
Prepaid expenses | | 40,553 |
Total Current Assets | | 486,601 |
Property, plant and equipment, net of accumulated depreciation of $215,521 | | 65,116 |
Software, net of accumulated amortization of $573,500 | | 933,790 |
Long-term receivables | | 125,625 |
Deposits | | 21,829 |
Total Assets | | 1,632,961 |
Liabilities and Stockholders- Equity (Impairment) | | |
Current Liabilities | | |
Accounts payable and accrued expenses | | 772,327 |
Deferred revenues | | 235,920 |
Deferred rental obligation | | 5,145 |
Dividends payable | | 182,378 |
Loans payable | | 217,500 |
Notes payable | | 125,000 |
Current maturities of long-term debt | | 33,529 |
Current maturities of capitalized lease obligations | | 8,467 |
Total Current Liabilities | | 1,580,266 |
Long term debt, less current portion | | 274,890 |
Total Liabilities | | 1,855,156 |
Stockholders- Equity (Impairment) | | |
Preferred Stock, $.001 par value, non-voting, 3,000,000 shares authorized; 214,858 shares issued and outstanding | | 215 |
Common stock, $.0001 par value, 100,000,000 shares authorized; 25,711,403 shares issued and outstanding | | 2,571 |
Additional paid in capital | | 18,033,948 |
Accumulated deficit | | (18,258,929) |
Total Stockholders- Equity (Impairment) | | (222,195) |
Total Liabilities and Stockholders- Equity (Impairment) | $ | 1,632,961 |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
| | | Year Ended December 31, |
| | | 2001 | | 2000 |
| | | | | |
Net Sales | | | | |
Hardware Products | $ | - | $ | 600 |
Software | | 609,214 | | 646,035 |
Total Net Sales | | 609,214 | | 646,635 |
| | | | | |
Cost of Good Sold | | | | |
Hardware Products | | 521 | | 600 |
Software | | 158,745 | | 162,119 |
Total Cost of Goods Sold | | 159,266 | | 162,719 |
Gross Profit | | 449,948 | | 483,916 |
Research and development costs | | 13,561 | | 77,334 |
Selling, general and administrative expenses | | 3,533,035 | | 3,953,039 |
(Loss) From Operations | | (3,096,648) | | (3,546,457) |
Other Income (Expense) | | | | |
Miscellaneous income | | 28,923 | | 84,192 |
Interest income | | 103 | | 16,528 |
Interest expense | | (80,875) | | (176,337) |
Loss on disposition of assets | | - | | (5,075) |
Total Other (Expense) | | (51,849) | | (80,692) |
(Loss) Before Provision for Income Taxes | | (3,148,497) | | (3,627,149) |
Benefit from Income Taxes | | 93,461 | | 111,676 |
Net (Loss) | $ | (3,055,036) | $ | (3,515,473) |
Dividends on Preferred Shares | $ | (189,353) | $ | (201,054) |
Net (Loss) Applicable to Common Shareholders | $ | (3,244,389) | $ | (3,716,527) |
Net (Loss) Per Common Share | $ | (0.15) | $ | (0.25) |
Weighted Average of Common Shares Outstanding | �� | 21,466,050 | | 14,793,682 |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders - Equity (Deficit)
Years Ended December 31, 2000 and 1999 - (A)
| | Convertible Preferred Shares | | Cumulative Preferred Shares | | Common stock | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
Balances, January 1, 2000 | | - | $ | - | | 10 | $ | - | | 10,340,261 | $ | 1,034 | |
Issuance of common stock granted for services performed | | - | | - | | - | | - | | 107,828 | | 11 | |
Issuance of common stock pursuant to stock option exercise | | - | | - | | - | | - | | 100,000 | | 10 | |
Issuances of common stock for conversion of loans | | - | | - | | - | | - | | 3,298,702 | | 330 | |
Issuances of common stock pursuant to registration penalty clause | | - | | - | | - | | - | | 160,000 | | 16 | |
Cancellation of previously issued common stock pursuant to put option agreement in exchange for note | | - | | - | | - | | - | | (155,556) | | (15) | |
Exchange of the Company's common stock, one common share for 3.4676 common shares of Magnitude, Inc. | | - | | - | | - | | - | | 11,535 | | 1 | |
Issuance of common stock pursuant to private equity placements | | - | | - | | - | | - | | 900,000 | | 90 | |
Conversion of previously issued cumulative preferred shares and note into common and convertible preferred shares pursuant to resignation agreement | | 100,000 | | 100 | | (9) | | - | | 700,000 | | 70 | |
Issuance of common stock pursuant to warrant exercise | | - | | - | | - | | - | | 200,000 | | 20 | |
Issuance of common stock to employee for compensation | | - | | - | | - | | - | | 16,854 | | 2 | |
Issuance of common stock in connection with hiring bonus to officer | | - | | - | | - | | - | | 100,000 | | 10 | |
Issuance of convertible preferred stock pursuant to private equity placements | | 395,037 | | 395 | | - | | - | | - | | - | |
Issuance of convertible preferred stock for conversion of loans | | 29,300 | | 29 | | - | | - | | - | | - | |
Issuance of common stock for conversion of loan and accrued interest | | - | | - | | - | | - | | 617,616 | | 62 | |
Issuance of common stock pursuant to the Cornell Ergonomics, Inc. Acquisition Agreement | | - | | - | | - | | - | | 54,000 | | 5 | |
Issuance of common stock pursuant to the Internet Ergonomics Corp. Acquisition Agreement | | - | | - | | - | | - | | 64,000 | | 5 | |
Issuance of common stock granted for private placement finders fee | | - | | - | | - | | - | | 10,000 | | 1 | |
Net loss, year ended December 31, 2000 | | - | | - | | - | | - | | - | | - | |
Dividends on convertible preferred stock | | - | | - | | - | | - | | - | | - | |
| | - | | - | | - | | - | | - | | - | |
Balances, December 31, 2000 | | 524,337 | $ | 524 | | 1 | $ | - | | 16,525,240 | $ | 1,652 | |
| | | | | | | | | | | | | | |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders- Equity (Deficit)
Years Ended December 31, 2000 and 1999 - (B)
| | | | | Additional Paid in Capital | | Accumulated Deficit | | Total Stockholders Equity (Deficit) |
| | | | | | | | | | | |
Balances, January 1, 2000 | | | | | | | 9,016,034 | $ | (11,298,013) | $ | (2,280,945) |
Issuance of common stock granted for services performed | | | | | | | 58,147 | | - | | 58,158 |
Issuance of common stock pursuant to stock option exercise | | | | | | | 99,990 | | - | | 100,000 |
Issuances of common stock for conversion of loans | | | | | | | 1,887,383 | | - | | 1,887,713 |
Issuances of common stock pursuant to registration penalty clause | | | | | | | (16) | | - | | - |
Cancellation of previously issued common stock pursuant to put option agreement in exchange for note | | | | | | | 15 | | - | | - |
Exchange of the Company's common stock, one common share for 3.4676 common shares of Magnitude, Inc. | | | | | | | (1) | | - | | - |
Issuance of common stock pursuant to private equity placements | | | | | | | 449,910 | | - | | 450,000 |
Conversion of previously issued cumulative preferred shares and note into common and convertible preferred shares pursuant to resignation agreement | | | | | | | 350,890 | | - | | 351,060 |
Issuance of common stock pursuant to warrant exercise | | | | | | | 99,980 | | - | | 100,000 |
Issuance of common stock to employee for compensation | | | | | | | 3,655 | | - | | 3,657 |
Issuance of common stock in connection with hiring bonus to officer | | | | | | | 24,210 | | - | | 24,220 |
Issuance of convertible preferred stock pursuant to private equity placements | | | | | | | 3,233,404 | | - | | 3,233,799 |
Issuance of convertible preferred stock for conversion of loans | | | | | | | 146,471 | | - | | 146,500 |
Issuance of common stock for conversion of loan and accrued interest | | | | | | | 459,938 | | - | | 460,000 |
Issuance of common stock pursuant to the Cornell Ergonomics, Inc. Acquisition Agreement | | | | | | | 23,745 | | - | | 23,750 |
Issuance of common stock pursuant to the Internet Ergonomics Corp. Acquisition Agreement | | | | | | | 28,143 | | - | | 28,148 |
Issuance of common stock granted for private placement finders fee | | | | | | | (1) | | - | | - |
Net loss, year ended December 31, 2000 | | | | | | | - | | (3,515,473) | | (3,515,473) |
Dividends on convertible preferred stock | | | | | | | - | | (201,054) | | (201,054) |
| | | | | | | - | | - | | - |
Balances, December 31, 2000 | | | | | | | 15,881,897 | | (15,014,540) | $ | 869,533 |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders- Equity (Deficit)
Years Ended December 31, 2001 and 2000 (A)
| | Convertible Preferred Shares | | Cumulative Preferred Shares | | Common stock | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
Balances, January 1, 2001 | | 524,337 | $ | 524 | | 1 | $ | - | | 16,525,240 | $ | 1,652 | |
Issuance of convertible preferred stock pursuant to private equity placement | | 16,112 | | 16 | | - | | - | | - | | - | |
Conversion of convertible preferred stock into common stock | | (325,592 | | (325) | | - | | - | | 3,255,920 | | 325 | |
Issuances of common stock for accrued dividends | | - | | - | | - | | - | | 74,930 | | 8 | |
Issuances of common stock for accrued interest | | - | | - | | - | | - | | 17,736 | | 2 | |
Issuances of common stock pursuant to conversion of debt | | - | | - | | - | | - | | 85,333 | | 9 | |
Issuances of common stock pursuant to exercise of options | | - | | - | | - | | - | | 200,000 | | 20 | |
Issuance of common stock pursuant to exercise of warrants | | - | | - | | - | | - | | 1,517,500 | | 152 | |
Issuance of common stock pursuant to private equity placements | | - | | - | | - | | - | | 3,662,611 | | 366 | |
Issuance of common stock granted for private placement finders- fees | | - | | - | | - | | - | | 52,230 | | 5 | |
Issuance of common stock pursuant to conversion of accounts payable | | - | | - | | - | | - | | 226,817 | | 23 | |
Issuance of common stock for services performed | | - | | - | | - | | - | | 93,086 | | 9 | |
| | | | | | | | | | | | | | |
Net loss, year ended December 31, 2001 | | - | | - | | - | | - | | - | | - | |
Dividends on convertible preferred stock | | - | | - | | - | | - | | - | | - | |
| | | | | | | | | | | | | |
Balances, December 31, 2001 | | 214,857 | $ | 215 | | 1 | $ | - | | 25,711,403 | $ | 2,571 | $ |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders- Equity (Deficit)
Years Ended December 31, 2001 and 2000 (B)
| | | Additional Paid in Capital | | Accumulated Deficit | | Total Stockholders Equity (Deficit) |
| | | | | | | |
Balances, January 1, 2001 | | | 15,881,897 | $ | (15,014,540) | $ | 869,533 |
Issuance of convertible preferred stock pursuant to private equity placement | | | 144,988 | | - | | 145,004 |
Conversion of convertible preferred stock into common stock | | | - | | - | | - |
Issuances of common stock for accrued dividends | | | 37,457 | | - | | 37,465 |
Issuances of common stock for accrued interest | | | 8,866 | | - | | 8,868 |
Issuances of common stock pursuant to conversion of debt | | | 39,991 | | - | | 40,000 |
Issuances of common stock pursuant to exercise of options | | | 49,980 | | - | | 50,000 |
Issuance of common stock pursuant to exercise of warrants | | | 330,282 | | - | | 330,434 |
Issuance of common stock pursuant to private equity placements | | | 1,429,024 | | - | | 1,429,390 |
Issuance of common stock granted for private placement finders- fees | | | (5) | | - | | - |
Issuance of common stock pursuant to conversion of accounts payable | | | 78,769 | | - | | 78,792 |
Issuance of common stock for services performed | | | 32,699 | | - | | 32,708 |
| | | | | | | | |
Net loss, year ended December 31, 2001 | | | - | | (3,035,036) | | (3,055,036) |
Dividends on convertible preferred stock | | | - | | (189,353) | | (189,353) |
| | | | | | | |
Balances, December 31, 2001 | | | 18,033,948 | | (18,258,929) | $ | (222,195) |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | Year Ended December 31, |
| | | 2001 | | 2000 |
Cash Flows From Operating Activities | | | | |
Net Income (Loss) | $ | (3,055,036) | $ | (3,515,473) |
Adjustments to Reconcile Net (Loss) to Net Cash (Used) by Operations | | | | |
Depreciation and amortization | | 203,848 | | 200,564 |
Common stock issued for various expenses | | 32,708 | | 119,000 |
New debt issued for interest expenses | | - | | 32,318 |
Loss on disposition of assets | | - | | 5,075 |
Bad debt provision (recovery) | | (35,821) | | 41,328 |
Forgiveness of debt | | (28,923) | | (76,328) |
Inventory writeoff | | - | | 6,170 |
Decreases (Increases) in Assets | | | | |
Accounts receivable | | (113,751) | | (341,807) |
Miscellaneous receivables | | 10,795 | | 4,432 |
Inventories | | - | | 215 |
Deferred tax asset | | 122,044 | | 79,426 |
Prepaid expenses | | 315,764 | | 35,064 |
Other assets | | 2,600 | | (21,970) |
Increases (Decreases) in Liabilities | | | | |
Accounts payable and accrued expenses | | 346,797 | | 79,157 |
Deferred revenue | | 207,522 | | 28,398 |
Deferred rental obligation | | 5,145 | | - |
Net Cash Provided by (Used) by Operating Activities | | (1,986,308) | | (3,324,431) |
Cash Flows From (Used) by Investing Activities | | | | |
Purchases of equipment, fixtures, and software | | (945) | | (62,691) |
Sales of property and equipment | | - | | 750 |
Loans made | | - | | (55,000) |
Collections of loans | | - | | 500 |
Net Cash (Used) by Investing Activities | | (945) | | (116,441) |
Cash Flows From (Used) by Financing Activities | | | | |
Repayment of note payable | | (40,000) | | (498,250) |
Repayment of capital lease obligations | | (5,091) | | (6,385) |
Proceeds from loans payable | | 107,500 | | 125,000 |
Repayment of loans payable | | - | | (156,284) |
Proceeds from officer loans | | 8,231 | | - |
Dividends paid | | (14,003) | | (118,876) |
Proceeds from issuance of common and preferred stock | | 1,908,144 | | 3,883,799 |
Net Cash Provided by Financing Activities | | 1,964,781 | | 3,229,004 |
Net (decrease) in Cash | | (22,472) | | (211,868) |
Cash at beginning of period | | 37,701 | | 249,569 |
Cash at end of period | $ | 15,229 | $ | 37,701 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | |
Interest Paid | $ | 26,836 | $ | 139,624 |
Taxes Paid | $ | 5,521 | $ | 2,582 |
See notes to the consolidated financial statements
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | Year Ended December 31, |
| | | 2001 | | 2000 |
Schedule of non-cash investing and financing activities | | | | |
In exchange for accrued dividends on preferred stock, 74,930 common shares were issued | $ | 37,465 | | |
In exchange for accrued interest in a promissory note, 17,736 common shares were issued | $ | 8,868 | | |
In connection with the retirement of a portion of a promissory note, 85,333 common shares were issued | $ | 40,000 | | |
In connection with the exercise of warrants against accrued dividends on preferred shares, 250,000 common shares were issued | $ | 46,684 | | |
In connection with the issuance of common stock, 226,817 common shares were issued as consideration for past services | $ | 78,792 | | |
In connection with the issuance of common stock, 93,086 shares were issued as consideration for current year services | $ | 32,708 | | |
In connection with the retirement of the balance of $162,462 remaining on a $200,000 promissory note, 324,926 common shares were issued | | | $ | 162,462 |
In connection with the Rolina Corporation merger agreement, an accrued contingent liability agreement was converted to long-term debt and 155,556 previously issued common shares were cancelled | | | $ | 374,890 |
In connection with the issuance of common stock, 174,632 common shares were issued for current services | | | $ | 74,269 |
In connection with the retirement of a $351,060 loan and conversion of 9 cumulative preferred shares pursuant to a resignation agreement, 100,000 new convertible preferred shares and 700,000 common shares were issued | | | $ | 351,060 |
In connection with the Cornell Ergonomics, Inc. and Internet Technologies, Corp. acquisitions, 118,000 common shares were issued | | | $ | 51,900 |
In connection with the issuance of common stock, 35,605 shares were issued as consideration for past services | | | $ | 11,765 |
In connection with the retirement of a $400,000 promissory note and accrued interest of $260,000 thereon, 617,616 common shares were issued and a $200,000 short-term installment obligation was issued | | | $ | 660,000 |
In connection with the retirement of a $59,735 loan, 120,000 common shares were issued | | | $ | 59,735 |
In connection with the retirement of $1,111,750 promissory notes, 653,776 common shares and 29,300 Series A Senior convertible preferred shares were issued | | | $ | 1,111,750 |
In connection with the retirement of $1,028,000 promissory notes, 2,200,000 common shares were issued | | | $ | 1,028,000 |
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company") was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics Inc. On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc.
The Company and Magnitude, Inc. remain as two separate legal entities whereby Magnitude, Inc. operates as a subsidiary of the Company. However, the operations of the combined entity are currently comprised solely of the operations of Magnitude, Inc. The remaining 1% of Magnitude, Inc. stockholders hold a minority interest which is valued at $0.
On January 15, 2000, the Company acquired all of the issued and outstanding capital stock of Cornell Ergonomics, Inc. (Cornell) and Internet Ergonomics Technologies Corp. (IET), privately held Delaware Corporations, whose only property was comprised of certain proprietary ergonomic software modules, in exchange for the Company's common stock. These modules were subsequently transferred to the Company. The Company is currently in the process of dissolving both Cornell and IET.
The Company's primary product is an integrated suite of proprietary software modules marketed under the name ErgoManagerTM 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 e mployees and to minimize resulting potential liabilities, but delivers a powerful tool to increase overall productivity.
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 1998, was formed primarily to market Proformix's hardware products which has since been disposed of. Prior to that, its operations had not been significant. It's operations during 1999 and 2000 have not been significant. Ergonomics was dissolved on January 29, 2001.
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.
Depreciation
Property, plant and equipment are recorded at cost. Depreciation on equipment, furniture and fixtures and leasehold improvements is computed on thestraight line method over the estimated useful lives of such assets between 5-10 years. Maintenance and repairs are charged to operations as incurred. Repairs and maintenance which do not extend the useful lives of the related assets are expensed as incurred.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Amortization
Software assets are capitalized at the fair value of stock exchanged/granted upon acquisition and are amortized on the straight line method on a product-by-product basis over the estimated economic life of the products which has been determined to be 10 years.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expense was $166,767 and $127,241 for the years ended December 31, 2001 and 2000, respectively.
Evaluation of Long Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any of the long-lived asset over management's estimate of the anticipated undiscounted future net cash flows of the related long-lived asset. During 2001, the Company charged to operations certain prepaid advertising costs in the amount of $318,956 which had been scheduled to be amortized through December 31, 2002.
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 financi al 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 and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the year ended December 31, 2001.
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 software sales 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.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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.
GOING CONCERN
As shown in the accompanying financial statements, the Company incurred net losses of $3,055,036 and $3,515,473 during the years ended December 31, 2001 and 2000, respectively. The ability of the Company to continue as a going concern is dependent on increasing sales and obtaining additional capital and financing. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management's plans are to continue discussions with several potential investors to obtain additional capital in order to alleviate the situation.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which are insured by the Federal Deposit Insurance Corporation up to $100,000. Balances in these accounts may, at times, exceed the federally insured limits.
The Company provides credit in the normal course of business to customers located throughout the U.S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
RECEIVABLES WITH EXTENDED PAYMENT TERMS
Accounts receivable include $125,625 with extended payment terms, due for payment after December 31, 2002. The underlying revenues for the entire amount have been deferred and are included in the position "Deferred Revenues".
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 2001
Equipment | | $ | $ | 164,891 |
Furniture and fixtures | | | | 69,976 |
Leasehold improvements | | | | 45,770 |
| | | | | 280,637 |
Less accumulated depreciation | | | | 215,521 |
| | | $ | $ | 65,116 |
Depreciation expense charged to operations was $47,930 and $44,645 in 2001 and 2000, respectively.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at December 31, 2001
Accounts payable | $ | 402,536 |
Accrued interest | | 61,901 |
Accrued commissions | | 23,356 |
Accrued returns | | 35,719 |
Accrued legal settlement | | 10,000 |
Accrued professional fees | | 166,490 |
Accrued taxes | | 1,600 |
Accrued payroll | | 38,234 |
Miscellaneous accruals | | 32,491 |
| | $ | 772,327 |
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan agreements with the following terms and conditions at December 31, 2001:
On December 4, 1996, Magnitude, Inc. repurchased 500,000 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 December 31, 2001 and no demand for payment has been made through the date of our report. | $ | 75,000 |
Notes dated December 6, 2000, December 28, 2000, January 8, 2001, February 16, 2001, March 1, 2001, March 7, 2001, and May 16, 2001 representing cash advances by the Company's Chief Executive Officer and Board Chairman. The notes are due on demand. The notes carry an interest rate of 10% per annum. | | 142,500 |
Total | $ | 217,500 |
NOTES PAYABLE
At December 31, 1999 the Company had $1,475,000 of notes outstanding related to a June 1995 private placement offering. During 2000 the holders of $1,450,000 worth of notes agreed to accept partial repayment of approximately 30% of the note balances and converted the remaining balances into common shares or convertible preferred shares. The total amount of nonconverted notes outstanding at December 31, 2001 is $25,000 in which attempts to locate the holder of this note, to settle this liability, have been unsuccessful. | $ | 25,000 |
Current portion of Company obligation to the Company's Chief Executive Officer and Board Chairman, carrying interest at the rate of 7% per year payable monthly and due on demand (See Long-Term Debt below). | | 100,000 |
| | $ | 125,000 |
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LONG-TERM DEBT
Long-term debt as of December 31, 2001 is comprised of the following:
Pursuant to the February 2, 1998, Agreement and Plan of Merger with Rolina Corporation (see "Nature of Organization") 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 Chief Executive Officer and Board Chairman, 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 for $274,890 maturing March 31, 2002 and a demand loan for $100,000 both 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. | $ | 274,890 |
Discounted present value of a non-interest bearing $70,000 settlement with a former investor of Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The imputed interest rate used to discount the note is 8% per annum. This obligation is in default. | | 33,529 |
Total | | 308,419 |
Less current maturities | | 33,529 |
Long-term debt, net of current maturities | $ | 274,890 |
Total maturities of long-term debt are as follows:
Year Ending December 31,
2001 | $ | 33,529 |
2002 | | 274,890 |
| | $ | 308,419 |
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under non-cancelable capital lease agreements expiring between October 26, 2002 and October 27, 2002. The capital lease obligations have been recorded at the present value of future minimum lease payments, discounted at an interest rate of 7.00%. The capitalized cost of equipment at December 31, 2001 amounted to $7,473 net of accumulated depreciation of $18,903.
The following is a schedule of minimum lease payments due under capital leases at December 31, 2001:
Year Ending December 31, | | |
2002 | $ | 8,841 |
Total minimum capital lease payments | | 8,841 |
Less amounts representing interest | | 374 |
Present value of net minimum capital lease payments | | 8,467 |
Less current maturities of capital lease obligations | | 8,467 |
Obligations under capital leases, excluding current maturities | $ | - |
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
DEFERRED REVENUES
Deferred revenues at December 31, 2001, amounted to $235,920. These include $43,970 prepaid software maintenance and support charges which are amortized ratably over the duration of the underlying maintenance agreements. The remainder of $191,950 represents revenues from software licensing agreements where the Company has not been reasonably assured of the collectibility of the associated receivables, primarily because a majority portion of $125,625 was invoiced with extended payment terms, due after December 31, 2002. (See Receivables With Extended Payment Terms)
PREFERRED STOCK
Preferred stock is non-voting, $.001 par value per share with 3,000,000 shares authorized. Cumulative Preferred Stock has 2,500 shares designated of which 1 share is issued and outstanding. The total Cumulative Preferred Stock at December 31, 2001 is $0 with a liquidation price of $100,000. As of December 31, 2001, there was $9,000 of cumulative preferred dividends in arrears representing $9,000 per cumulative preferred share.
Series A of the Senior Convertible Preferred Stock series which was issued in 2000 has 300,000 shares designated, 29,300 shares issued and outstanding. The total outstanding Series A Senior Convertible Preferred Stock at December 31, 2001 is $29 with a liquidation price of $146,500. The following is a description of the Series A convertible preferred stock:
(1) The holders of said shares of Series A Senior Preferred shall be entitledto receive cumulative dividends at the rate of seven percent (7%) per annum during the first annual period after issuance, increasing by increments of one half of one percent for every year thereafter until the rate reaches ten percent (10%) per annum at which time it will remain at 10% 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 Company. The Dividend Rate shall accrue on the Liquidation Price of each share of the Series A Senior Preferred. The dividends on the Series A Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series A 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 Cum ulative Preferred Stock or the Common stock.
(2) The Series A 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 B and C Senior Convertible Preferred Stock.
(3) In the event of any liquidation, of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series A Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of Five ($5.00) Dollars for each share of Series A Senior Preferred (the "Liquidation Price") 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 B and C Senior Preferred, before any distribution shall be made to the holders of Common stock or Cumulative Preferred Stock of the C ompany. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B and C Senior Preferred, the holders of these series shall receive payments on a pro rata basis.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of its Series A Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company 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 Liquidation Price for each share of Series A Senior Preferred held by such holder plus a "call premium" of 15% of the Liquidation Price, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").
(5) Each share of Series A Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder's option, into such number (the "Conversion Ratio") of shares of the Common stock of the Company as arrived at by dividing the Liquidation Price by one hundred fifty (150) percent of the market price of the Common stock of the Corporation ("Market Price") on the earlier of the dates such share of Series A Senior Preferred is subscribed for or issued (the "Effective Date").
As of December 31, 2001 there were $11,964 Series A Senior Convertible Preferred share dividends accrued and unpaid representing $0.41 per share.
Series B of the Senior Convertible Preferred Stock series which was issued in 2000 has 350,000 shares designated, no shares issued and outstanding. The total outstanding Series B Senior Convertible Preferred Stock at December 31, 2001 is $0. The following is a description of the Series B Senior Convertible Stock:
(1) The holders of said shares of Series B 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 Company. The Dividend Rate shall accrue on the Liquidation Price of each share of the Series B Senior Preferred. The dividends on the Series B Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series B 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.
(2) The Series B 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 and C Senior Convertible Preferred Stock.
(3) In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series B Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of nine ($9.00) Dollars for each share of Series B Senior Preferred (the "Liquidation Price") 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 and C Senior Preferred, before any distribution shall be made to the holders of Common stock or Cumulative Preferred Stock of the Co mpany. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B and C Senior Preferred, the holders of these series shall receive payments on a pro rata basis.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of its Series B Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company 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 of the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series B Senior Preferred held by such holder plus a "call premium" of 10% of the Liquidation Price, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").
(5) Each share of Series B 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 Company on the basis of ten (10) shares of Common stock for 1 share of Series B Senior Preferred.
As of December 31, 2001 there were $35,385 Series B Senior Convertible Preferred share dividends accrued and unpaid. These dividends pertain to 111,000 shares issued in 2000 that were converted into common stock during 2001.
Series C of the Senior Convertible Preferred Stock series which was issued in 2000 has 120,000 shares designated, 100,000 shares issued and outstanding. The total outstanding Series C Senior Convertible Preferred Stock at December 31, 2001 is $100 with a liquidation price of $900,000. The following is a description of the Series C Senior Convertible Stock:
(1) The holders of said shares of Series C Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable monthly, before any dividend shall be declared, set apart for, or paid upon the Common stock of the Company. The Dividend Rate shall accrue on the Liquidation Price (as hereinafter defined) of each share of the Series C Senior Preferred. The dividends on the Series C Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series C 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.
(2) The Series C 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 and B Senior Convertible Preferred Stock.
(3) In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series C Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of nine ($9.00) Dollars for each share of Series C Senior Preferred (the "Liquidation Price") 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 and B Senior Preferred, before any distribution shall be made to the holders of Common stock or Cumulative Preferred Stock of the Co mpany. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B and C Senior Preferred, the holders of these series shall receive payments on a pro rata basis.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of its Series C Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company 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 Liquidation Price for each share of Series C Senior Preferred held by such holder plus a "call premium" of 10% of the Liquidation Price together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").
(5) Each share of Series C 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 Company on the basis of ten (10) shares of Common stock for 1 share of Series C Senior Preferred.
As of December 31, 2001 there were $63,000 Series C Senior Convertible Preferred share dividends accrued and unpaid representing $0.63 per share.
Series D of the Senior Convertible Preferred Stock series which was issued in 2000 has 500,000 shares designated, 85,557 shares issued and outstanding. The total outstanding Series D Senior Convertible Preferred Stock at December 31, 2001 is $86 with a liquidation price of $770,013. The following is a description of the Series D Senior Convertible Stock:
(1) 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 Company. 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 Company 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.
(2) 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.
(3) In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series D Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, 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 Company. In case such re maining 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.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of its Series D Senior Preferred issued and outstanding at anytime, with the Board of Directors of the Company 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").
(5) 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.
As of December 31, 2001 there were $63,029 Series D Senior Convertible Preferred share dividends accrued and unpaid representing $0.74 per share.
At the time each Convertible Preferred Stock Series was issued, the respective conversion features were in excess of the then market value of the Company's common stock.
INCOME TAXES
The income tax provision (benefit) is comprised of the following:
| | Year Ended December 31, |
| | 2001 | | 2000 |
State current provision (benefit) | $ | (93,461) | $ | (111,676) |
State deferred provision (benefit) | | - | | - |
| $ | (93,461) | $ | (111,676) |
In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss ("NOL") Carryover and Research and Development Tax Credits ("R&D Credits) to corporate taxpayers in New Jersey. During 2000 and 2001, the Company entered into an agreement under which it retained a third party broker to identify a buyer for its NOL Carryover. The total anticipated net proceeds of this transaction for 1999 ($497,238) was recorded as a current deferred tax asset ($201,470) and a tax benefit of $295,768 in the accompanying financial statements.
Due to limitations placed by the State of New Jersey on the total amount of NOL Carryover and R&D Credits eligible to be sold in any one year, the sale of only a portion of the Company's NOL Carryover ($295,768) was completed in 1999. The receipt of these funds was recorded as a reduction to the non-current deferred tax asset in the accompanying financial statements. The sale of the remaining balance of the Company's NOL Carryover was completed in 2000; however the deferred amount of $201,470 was subsequently reduced by the State to $164,450.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES - (Continued)
The total anticipated net proceeds of this transaction for 2001, which represents the sale of the Company's 2000 New Jersey Net Operating Loss, was $291,093; of which $93,411 was received by December 31, 2001 and the remaining $197,682 has not been set up as a current deferred tax asset due to the uncertainty of the program given the current budget crisis in the State of New Jersey.
The Company's total deferred tax asset and valuation allowance are as follows:
| | December 31, |
| | 2001 | | 2000 |
Total deferred tax asset, noncurrent | $ | 6,800,000 | $ | 5,600,000 |
Less valuation allowance | | (6,800,000) | | (5,600,000) |
Net deferred tax asset, noncurrent | $ | - | $ | - |
The differences between income tax benefits in the financial statements and the tax benefit computed at the combined state and U.S. Federal statutory rate of 40% are as follows:
| | Year Ended December 31, |
| | 2001 | | 2000 |
Tax benefit | | 40% | | (40%) |
Valuation allowance | | 40% | | (40%) |
Effective tax rate | | - | | - |
At December 31, 2001, the Company has available approximately $17,000,000 of net operating losses to carry-forward and which may be used to reduce future federal taxable income and expire between December 31, 2007 and 2021.
At December 31, 2001, the Company has available approximately $3,050,000 of net operating losses to carry-forward and which may be used to reduce future state taxable income which expire December 31, 2008.
401(k) PLAN
The Company adopted the qualified Magnitude, Inc. sponsored 401(k) plan covering substantially all full time employees under which eligible employees may elect to contribute, within statutory limits, a percentage of their annual compensation. The Company matches up to 50% of the employee's contribution of which the match may not exceed 3% of the employee's total compensation for the plan year. Contributions to the plan were $22,711 and $20,718 for the years ended December 31, 2001 and 2000, respectively.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS
In April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan ("the 1996 Plan"). The 1996 Plan provides that certain options granted thereunder are intended to qualify as "incentive stock options" (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial plan and subsequent amendments provided for authorization of up to 480,000 shares. Pursuant to the above described stock exchange offer on July 2, 1997, all options under the 1996 Plan were converted into shares of the Company at a rate of 3.4676 shares of Magnitude, Inc. to 1 share of the Company.
In September 1997, the Company adopted its 1997 Stock Incentive Plan ("the 1997 Plan"). The 1997 Plan provides that certain options granted thereunder are intended to qualify as "incentive stock options" (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial plan and subsequent amendments provided for the grant of options for up to 1,000,000 shares. The purchase price per share of common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes of the Company's common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of grant and the term of the option shall no t exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a committee established by the Board of Directors with the condition that such prices shall not be less than 85% of the fair market value of the common stock at the time of grant.
In May, 2000 the Company adopted its 2000 Stock Incentive Plan ("the 2000 Plan"). The 2000 Plan provides that certain options granted thereunder are intended to qualify as "incentive stock options" (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while nonqualified options may also be granted under the Plan. The initial Plan provides for the grant of options for up to 5,000,000 shares. The purchase price per share of common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes of the Company's common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of the grant, and the term of the option shall not exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a compensation committee established by the Board of Directors.
| | | Qualified and Non-Qualified Shares Under Option Pursuant to the 1997 Plan December 31, |
| | | 2001 | | 2000 |
Outstanding, beginning of year | | 913,000 | | 795,000 |
Granted during the year | | - | | 193,000 |
Forfeited during the year | | (56,000) | | (75,000) |
Outstanding, end of year (at prices ranging from $1.00 to $2.00 per share) | | 857,000 | | 913,000 |
Eligible, end of year for exercise (at prices ranging from $1.00 to $2.00 per share) | | 853,000 | | 757,500 |
At December 31, 2001 and 2000, the weighted average exercise price and weighted average remaining contractual life is $1.06 and $1.10 per share and 3 years 5 months and 4 years 4 months, respectively
At December 31, 2001, there were 143,000 shares reserved for future option grants.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS - (Continued)
| | Qualified and Non-Qualified Shares Under Option Pursuant to the 2000 Plan December 31, |
| | | 2001 | | 2000 |
Outstanding, beginning of year | | 648,000 | | - |
Granted during the year | | 2,153,109 | | 648,000 |
Forfeited during the year | | (100,000) | | - |
Outstanding, end of year (at prices ranging from $0.50 to $1.33) | | 2,701,109 | | 648,000 |
Eligible, end of year for exercise (at prices ranging from $0.50 to $1.33) | | 2,673,609 | | 528,000 |
At December 31, 2001 and 2000 the weighted average exercise price and weighted average remaining contractual life is $0.85 and $1.07 per share and 3 years 10 months and 4 years 6 months, respectively.
At December 31, 2001, there were 2,298,891 shares reserved for future option grants.
WARRANTS
The Company granted common stock purchase warrants between May 1, 1998 and November 26, 2001.
At December 31, 2001, there were 11,780,472 shares eligible for exercise at prices ranging from $.50 to $5.00 per share, of which 1,460,000 eligible shares are callable at $2.00 per share. All warrants vested upon issuance and expire between July 22, 2002 and February 24, 2006.
COMMITMENTS AND CONTINGENCIES
Lease Agreement
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 March 31, 2004; and of $7,103 thereafter through March 31, 2005.
Under the lease agreements, the Company is required to make future minimum lease payments as follows in addition to a pro-rata share of certain operating expenses:
Year Ending December 31, | | |
2002 | $ | 79,755 |
2003 | | 82,149 |
2004 | | 84,615 |
2005 | | 21,309 |
Total | $ | 267,828 |
Included in general and administrative expenses is rent expense which amounted to $99,626 and $84,160 for the years ended December 31, 2001 and 2000, respectively.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, (Continued)
Employment Agreements
The Company has entered into employment agreements with certain key personnel which provide for a base salary, yearly bonuses in common stock and/or options of the Company and other benefits. Termination of the agreements may be made by either party with advance notice.
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. On February 19, 2002, the maturity of the term portion of $274,890 was extended to July 2003, and the board of directors of the Company approved a change in the conversion option towards a rate of $0.10 per share.
In December 2001, a director of the Company exercised warrants for the purchase of 200,000 shares of the Company's common stock, at a price of $0.10 per share.
In January 2002, the Company and its President and Chief Executive Officer agreed to issue 1,100,000 restricted shares of common stock bearing piggy-back registration rights, in lieu of $110,000 cash remuneration representing salary payments due to that individual for the time February through December 2002.
MAJOR CUSTOMERS
The Company had two major customers for the year ended December 31, 2001, which comprised 39% and 28% of total sales. For the year ended December 31, 2000, the Company had two other major customers which comprised 19% and 29% of total sales. The Company had accounts receivable balances due from such customers of $224,641 and $327,637, at December 31, 2001 and December 31, 2000. Such customers accounted for $405,320 and $310,385 of total revenues in each year. The Company's revenue profile consists of a larger number of small transactions interspersed with very few large contracts which, if they were not to materialize, would significantly alter period revenues. This unpredictability and volatility represents a risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable, accrued expenses, notes payable, long-term debt and capitalized lease obligations:
The carrying amount approximates fair value because of the short-term maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on relevant information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
46,226,842Shares
Magnitude Information Systems, Inc.
Common stock
____________
PROSPECTUS
October __, 2002
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
Where You Can Find More Information | |
Prospectus Summary | |
Risk Factors | |
Use of Proceeds | |
Market for Company's Common Equity & | |
Dividend Policy | |
Selling Shareholders | |
Shares Eligible for Future Sale | |
Plan of Distribution | |
Legal Proceedings | |
Management | |
Principal Shareholders | |
Description of Capital Stock | |
Business | |
Management's Discussion and Analysis | |
Certain Transactions | |
Financial Statements | |
UNTIL ________________, 2002 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
As permitted by the Delaware General Corporation Law, Magnitude has included in its Certificate of Incorporation a provision to eliminate the personal liability of it's directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, the Bylaws of Magnitude require the Company to (i) indemnify the officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and (ii) advance expenses to the officers and directors as incurred in connection with proceedings against them for which they may be indemnified. Magnitude has entered into indemnification agreements with the officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the companies, among other things, to indemnify such officers and directo rs against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance expenses incurred as a result of any proceeding against them as to which they may be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. Magnitude believes that these charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
Magnitude understands that the staff of the Securities and Exchange Commission is of the opinion that statutory, charter and contractual provisions as are described above have no effect on claims arising under the federal securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Magnitude will pay all expenses incident to the offering and sale to the public of the shares being registered other than any commissions and discounts of underwriters, dealers or agents and any transfer taxes. Such expenses are set forth in the following table. All of the amounts shown are estimates except the Securities and Exchange Commission ("SEC") registration fee.
Legal fees and expenses 5,000.00
Accounting fees and expenses 1,000.00
Printing expenses 2,500.00
Miscellaneous expenses 1,000.00
Total $ 9,500.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
FISCAL YEAR 2002
During the quarter ended September 30, 2002, the Company issued the following unregistered securities:
(i) 2,290,000 shares of common stock to 4 accredited investors and 5 assignees of an outside director of the Company pursuant to private placement subscriptions, issued in reliance upon exemptions provided under Section 4(2) S of the Securities Act, and 1,500,067 shares of common stock pursuant to the exercise of stock purchase warrants previously issued, altogether resulting in the receipt by the Company of approximately $379,000 in cash;
(ii) 30,000 shares of common stock to two employees pursuant to the terms of their employment agreements;
(iii) 138,890 shares of common stock pursuant to the conversion of 13,889 shares of the Company's Series D Convertible Preferred Stock;
(iv) 367,000 shares of common stock for marketing consulting and investor relations services
performed;
(v) 1,500,000 shares of common stock pursuant to stock grants to certain directors and officers of the Company;
(vi) 353,854 shares of common stock pursuant to the conversion of accrued dividends on shares of convertible preferred stock, at the rate of $0.10 per share.
During the quarter ended June 30, 2002, the Company issued the following unregistered securities:
i) 8,245,000 shares of common stock to 38 accredited U.S. investors and certain non-U.S. investors pursuant to private placement subscriptions, issued in reliance upon exemptions provided under Section 4(2) and, in the case of the non-U.S. investors, provided by Regulation S of the Securities Act, and 1,789,240 shares of common stock pursuant to the exercise of stock purchase warrants previously issued, which resulted in the receipt by the Company of approximately $960,000 in cash. All of the accredited investors had a pre-existing relationship with the Company and no general solicitation or advertisement was utilized to solicit any of the accredited investors. Each of the accredited investors (a) executed and delivered to the Company a subscription agreement which included the investor's representations that such investor qualified as an accredited investor, had the financial experience and resources to appreciate the risk of such investment and (b) had the time to ask questi ons and make inquiries to the Company before their investment funds were accepted. Of the 38 accredited investors, 1 is a current Company officer, 15 were pre-existing shareholders and 8 were non-U.S. residents. All of the Company's securities placed with these investors bore the appropriate restrictive legend, designating such securities as restricted securities;
(ii) 165,500 shares of common stock to three foreign individuals as finder's fee in connection with certain of the private placement subscription mentioned under (i) above which subscriptions were entered into by private foreign investors;
(iii) 341,814 shares of common stock pursuant to the conversion of certain payables into equity, at a rate of $0.10 per share;
(iv) 377,139 shares of common stock for investor relations services performed;
(v) 250,000 shares pursuant to a stock grant to a business consultant for the Company;
(vi) 20,000 shares pursuant to the exercise of options at a price of $0.10 per share.
During the quarter ended March 31, 2002, the Company issued the following unregistered securities:
(i) 6,977,000 shares of common stock to 22 U.S. accredited investors and non-U.S. investors pursuant to private placement subscriptions, issued in reliance upon exemptions provided under Section 4(2) and, in the case of the non-U.S. investors, Regulation S of the Securities Act; and 754,111 shares of common stock pursuant to the exercise of stock purchase warrants previously issued, which resulted in the receipt by the Company of approximately $753,000 in cash. All of the accredited investors had a pre-existing relationship with the Company and no general solicitation or advertisement was utilized to solicit any of the accredited investors. Each of the accredited investors (a) executed and delivered to the Company a subscription agreement which included the investor's representations that such investor qualified as an accredited investor, had the financial experience and resources to appreciate the risk of such investment and (b) had the time to ask questions and make inquiries to th e Company before their investment funds were accepted. Of the 22 accredited investors, 3 are current Company officers and directors, 8 were pre-existing shareholders and 4 were non-U.S. residents. All of the Company's securities placed with these investors bore the appropriate restrictive legend, designating such securities as restricted securities;
(ii) 50,000 shares of common stock pursuant to the conversion of 5,000 shares of the Company's Series D Convertible Preferred Stock;
(iii) 720,718 shares of common stock pursuant to the conversion of certain payables into equity, at a rate of $0.10 per share;
(iv) 1,250 shares of common stock for services performed;
(v) 700,000 shares as stock grants and 1,165,000 shares in lieu of compensation (see "Related Party Transactions").
FISCAL YEAR 2001
During the fourth quarter of 2001 the Company had issued the following unregistered securities:
(i) 220,000 shares of common stock accompanied by warrants for the purchase of 110,000 shares of common stock at a price of $0.50 per share, to three accredited investors pursuant to private placement subscriptions under Section 4(2) of the Securities Act, which resulted in the receipt by the Company of $49,500 in cash. All of the accredited investors had a pre-existing relationship with the Company and no general solicitation or advertisement was utilized to solicit any of the accredited investors. Each of the accredited investors (a) executed and delivered to the Company a subscription agreement which included the investor' s representations that such investor qualified as an accredited investor, had the financial experience and resources to appreciate the risk of such investment and (b) had the time to ask questions and make inquiries to the Company before their investment funds were accepted. All of the Company's securities placed with these investors bore the appropriate restrictive legend, designating such securities as restricted securities;;
(ii) Warrants for the purchase of 600,000 shares of common stock at various prices averaging $1.13 per
share to a consultant and his assignees for services rendered.
In addition, during the fourth quarter of 2001 and the first quarter of 2002 through March 26, 2002, the board of directors of the Company approved resolutions affecting previously issued or to be issued securities, as follows:
(i) During a meeting on October 16, 2001, the board approved a downward adjustment of the exercise price of previously issued warrants for the purchase of common stock, to $0.25 per share, for an aggregate of up to $500,000 i- proceeds from the exercise of such restated warrants;
(ii) During a meeting on December 26, 2001, the board approved a downward adjustment of the exercise price of warrants for the purchase of common stock previously issued to accredited private investors, to $0.10 per share, for an aggregate of up to $1,000,000 in proceeds from the exercise of such restated warrants;
(iii) During a meeting on January 3, 2002, the board approved the placement of common stock with accredited private investors pursuant to private placement subscriptions under Section 4(2) and Rule 506 of Regulation D of the Securities Act, at a price of $0.10 per share for an aggregate of up to $1,000,000 in proceeds.
During the Third Quarter ended September 30, 2001, the Company issued the following unregistered securities:
(i) 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) of the Securities Act, which resulted in the receipt by the Company of approximately $423,000 in cash. All of the accredited investors had a pre-existing relationship with the Company and no general solicitation or advertisement was utilized to solicit any of the accredited investors. Each of the accredited investors (a) executed and delivered to the Company a subscription agreement which included the investor's representations that such investor qualified as an accredited investor, had the financial experience and resources to appreciate the risk of such investment and (b) had the time to ask questions and make inquiries to the Company before their investment funds were accepted. All of the Compan y's securities placed with these investors bore the appropriate restrictive legend, designating such securities as restricted securities;
(ii) 79,403 shares of common stock to three creditors of the Company, pursuant to the conversion of $31,800 in miscellaneous payables. The Company negotiated these debt conversions with its corporate creditors with whom the Company had business relationships.
(iii) 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;
(iv) 3,750 shares of common stock for services performed.
During the Second Quarter Ended June 30, 2001, the Company issued the following unregistered securities:
(i) 932,200 shares of common stock accompanied by warrants for the purchase of 932,200 shares of common stock exercisable at prices of $0.60 and $0.90 per share, to ten accredited investors pursuant to private placement subscriptions, issued in reliance upon exemptions provided under Section 4(2) of the Securities Act, which resulted in the receipt by the Company of approximately $380,000 in cash. All of the accredited investors had a pre-existing relationship with the Company and no general solicitation or advertisement was utilized to solicit any of the accredited investors. Each of the accredited investors (a) executed and delivered to the Company a subscription agreement which included the investor's representations that such investor qualified as an accredited investor, had the financial experience and resources to appreciate the risk of such investment and (b) had the time to ask questions and make inquiries to the Company before their investment funds were accepted. All of the C ompany's securities placed with these investors bore the appropriate restrictive legend, designating such securities as restricted securities;
(ii) 2,033,920 shares of common stock pursuant to the conversion of 203,392 shares of Senior
Convertible Preferred Stock, Series B and D, of the Company;
(iii) 92,666 shares of common stock pursuant to the conversion into equity of accrued dividends on certain Convertible Preferred Stock and interest accrued on notes payable;
(iv) 250,000 shares of common stock pursuant to the cash-less exercise of certain warrants;
- (v) 3,750 shares of common stock for services performed.
During fiscal year 2000 and through the three month period ended March 31, 2001, the Company placed the following unregistered securities with accredited or institutional investors:
70,000 shares of Common stock pursuant to the conversion of $35,000 in convertible promissory notes, issued in reliance upon exemptions provided under Section 4(2) of the Securities Act;
(x) 27,788 shares of Series B Senior Convertible Preferred Stock to a foreign investor pursuant to private placement subscriptions under Section 4 (2) and Regulation S of the Securities Act, which resulted in the receipt by the Company of $250,092 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. The preferred shares are callable by the Company under certain terms and conditions. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
260,000 shares of Common stock pursuant to the conversion of an aggregate $130,000 in convertible promissory notes, issued in reliance upon exemptions provided under Section 4(2) of the Securities Act;
3,407 shares of Common stock to one outside consultants and suppliers for services rendered;
118,000 shares of Common stock to the principals of two privately held companies, Internet Ergonomic Technologies, Inc. and Cornell Ergonomics, Inc., purchased by the Company in January 2000, which companies owned certain software assets which have been made part of and integrated into the Company's proprietary ErgoManagerÔ software system
100,000 shares to an officer of the Company pursuant to the terms of his employment agreement;
77,976 shares of Common stock to three outside consultants and suppliers for services rendered;
14,445 shares of Common stock to a director and shareholder of the Company pursuant to a 1997 transaction approved by the Board of Directors of the Company;
16,854 shares of Common stock to an employee in lieu of salary, for services rendered;
2,120,000 shares of Common stock pursuant to the conversion of an aggregate $1,060,000 in convertible promissory notes, issued in reliance upon exemptions provided under Section 4(2) of the Securities Act;
(xi) 160,000 shares of Common stock to seven private investors who had previously subscribed for certain convertible debt, such shares issued pursuant to the terms of the pertinent subscription agreement, and in reliance upon exemptions provided under Section 4(2) of the Securities Act. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
(xii) 400,000 shares of Common stock to two individual investors pursuant to private placement subscriptions under Section 4 (2) of the Securities Act, which resulted in the receipt by the Company of $200,000 in cash. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
(xiii) 500,000 shares of Common stock to three individual foreign investors pursuant to private placement subscriptions under Section 4 (2) of the Securities Act, which resulted in the receipt by the Company of $250,000 in cash. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
(xiv) 194,440 shares of Series B Senior Convertible Preferred Stock to five individual foreign investors pursuant to private placement subscriptions under Section 4 (2) of the Securities Act, which resulted in the receipt by the Company of $1,750,000 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 equivalent to $0.90 per share, and (iii) callable by the Company under certain terms and conditions. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
100,000 shares of Series C Senior Convertible Preferred Stock to the former chairman of the Company pursuant to the terms of a Resignation Agreement entered into between the Company and this individual, whereby such shares, among other things, have the following rights and privileges: (i) 7% annual preferential dividend, payable monthly, (ii) conversion at the holders - option into 1,000,000 shares of Common, and (iii) callable by the Company under certain terms and conditions.
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;
12,000 shares of Common stock for services rendered;
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;
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;
Warrants for the purchase of 36,000 shares of Common stock at $1 per share, for services rendered;
(xv) 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 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. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation.
(xvi) 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 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. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
Fiscal Year 1999
During fiscal year 1999, the Company placed the following unregistered securities with accredited and institutional investors:
1,250,332 shares of Common stock to seven individual foreign investors pursuant to private placement subscriptions under Section 4(2) of the Securities Act, which resulted in the receipt by the Company of $625,000 in cash, and; 60,000 shares of Common stock to an investor who had previously subscribed for certain convertible debt, pursuant to the terms of the pertinent subscription agreement, issued in reliance upon exemptions provided under Section 4(2) of the Securities Act. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation. or advertisement.
On September 1, 1999, the Company issued 7,210 shares of its common stock to a shareholder of Magnitude, Inc., f/k/a Proformix, Inc. in exchange for his 25,000 shares in Proformix, Inc., pursuant to the terms of the Company's stock exchange offer of July 2, 1997.
During the second and third quarters of 1999 the Company received an aggregate $1,225,000 in cash against issuance of convertible promissory notes in the same aggregate amount, to eight individual accredited private investors pursuant to transactions under Section 4 (2) of the Securities Act, all of them maturing at 14 months from date of issuance, convertible at the holders' option into shares of the common stock of the Company at the rate of $0.50 /share, and carrying interest at rates between 7% and 12% p.a. A portion of such notes was accompanied by stock purchase warrants for the purchase of an aggregate 1,450,000 shares at $1 per share, with such warrants being callable by the Company under certain circumstances, if and when the market price reaches $2 per share. The Company placed these investments with accredited investors with whom the Company had established a business relationship and without the use of any general solicitation or advertisement.
565,000 shares of Common stock to a director and principal shareholder in exchange against cancellation of promissory notes and interest thereon in the aggregate value of $282,500;
77,778 shares of Common stock to the former principal of Rolina Corporation and current President of the Company, pursuant to a Non-Dilution clause in the February 2, 1998 Agreement and Plan of Merger with Rolina Corporation;
54,100 shares of Common stock to three Magnitude, Inc. consultants and providers of services to the Company.
ITEM 27. EXHIBITS INDEX
SEC No.Document
2.2+ Agreement and Plan of Merger with Rolina Corporation and Steven D. Rudnik, and Employment Agreement with Steven D. Rudnik, both of the date February 2 , 1998, as filed as Exhibit to the Company's report on Form 10-KSB for the year ended December 31, 1998. Incorporated herein by reference.
3(i)+ Articles of Incorporation and Amendments thereto, incorporated herein by reference to Exhibits of previous filings with the Commission.
3(ii)+ Bylaws of the Company, incorporated herein by reference to Exhibits of previous filings with the Commission.
4.1* Term Sheet
4.2* Form of Subscription Agreement
4.3* Form of Common stock Purchase Warrant
4.4* Form of Convertible Promissory Note
4.5* Form of Subscription Agreement
4.6* Form of Convertible Grid Promissory Note
4.7* Form of Common stock Purchase Warrant
4.8* Form of Convertible Promissory Note
4.9* Form of Common stock Purchase Warrant
4.10* Loan Agreement with S.Kroll
4.11* Form of Convertible Promissory Note
4.12* Form of Subscription Agreement
4.13* Form of Subscription Agreement
4.14* Form of Subscription Agreement
4.15* Form of Subscription Agreement
4.16* Form of Subscription Agreement
4.17* Form of Common stock Purchase Warrant
4.18* Amendment to the Company's Certificate of Incorporation as filed with the State of Delaware
on January 31, 2000, and amended on March 20, 2000, designating a new class of Series B Senior Convertible Preferred Stock.
4.19* Form of Common stock Purchase Warrant
4.20+ Amendment to the Company's Certificate of Incorporation as filed with the State of Delaware on January 31, 2000, and amended on March 20, 2000, designating a new class of Series C Senior Convertible Preferred Stock
4.21* Agreement with S.Rudnik, re: convertible debt
4.22* Consulting agreement with G.Shemano
- *Form of Common stock Purchase Warrant
4.24+ Amendment to the Company's Certificate of Incorporation as filed with the State of Delaware on January 31, 2000, and amended on March 20, 2000, designating a new class of Series A Senior Convertible Preferred Stock.
4.25 Letter Agreement by and between the Company and Consulting for Strategic Growth, Ltd., dated May 8, 2001.
4.26 Letter Agreements by and between the Company and Rodman & Renshaw, Inc. dated June 26, 2001 and September 4, 2001, respectively.
4.27 Form of Subscription Agreement.
4.28 Form of Subscription Agreement.
4.29 Form of Subscription Agreement.
4.30 Form of Subscription Agreement.
5.1 Legal opinion and consent of Joseph J. Tomasek, Esq.
10.1* Resignation Agreement dated July 21, 1999, between J. Swon and B. Deichl and the Company, incorporated herein by reference to the Exhibit of Form S-8 filed with the Commission on August 3, 1999.
10.2* Resignation Agreement dated January 28, 2000, between M. Martin and the Company, incorporated herein by reference to the Exhibit of Form S-8 filed with the Commission on January 31, 2000.
10.3* Employment Agreement, dated April 15, 1996 between the Company and Joerg Klaube, incorporated herein by reference and previously filed as an Exhibit to the Company's Form 10-KSB for the fiscal year ended December 31, 1997 with the Commission.
10.4* Employment Agreement, dated July 1, 1999 between the Company and John C. Duncan.
10.5+ Termination Agreement, dated as of August 1, 2001, by and between the Company and Torneaux
Fund, Ltd.
10.6* Contract by and between Lockheed Martin and the Company, dated December 21, 2000.
10.7 Employment Agreement, dated April 15, 2002 between the Company and Steven D. Rudnik.
10.8 Employment Agreement, dated February 15, 2002 between the Company and Mark Fuller.
10.9 Employment Agreement, dated April 15, 2002 between the Company and Joerg Klaube.
10.10 Employment Agreement, dated April 15, 2002 between the Company and Steven Jagels
23.1 Independent Auditors' Consent
______
+Documents incorporated by reference to Magnitude's Annual Report previously filed on Forms 10-KSB for the fiscal years ended December 31,20022001and2000 and Forms 10-QSB for the quarter ended March 31,2002, June 30, 2002 and September 30, 2002with the Securities and Exchange Commission.
*Previously filed as exhibits to the Registration Statement and amendments thereto filed on Form SB-2, Registration No. 333-34512, with the Commission.
ITEM 28. UNDERTAKINGS
A. UNDERTAKING PURSUANT TO RULE 415
The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of this offering.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Sec urities Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, MAGNITUDE INFORMATION SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware, has duly caused this Amendment No. 2 to Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Chester, State of New Jersey, on October 24, 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 (Chief Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven D. Rudnik, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Registration Statement on Form SB-2, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Steven D. Rudnik_____ President and
Steven D. Rudnik Chief Executive Officer October 24, 2002
/s/ Joerg H. Klaube Chief Financial Officer October 24, 2002
Joerg H. Klaube (Principal Financial Officer)
/s/ Steven L. Gray Director October 24, 2002
Steven L. Gray
/s/ Ivano Angelastri Director October 24, 2002
Ivano Angelastri
/s/ Joseph J. Tomasek Director October 24, 2002
Joseph J. Tomasek
Magnitude Amen. No. 2 to SB-2 Aug 2002 bold
