As filed with the Securities and Exchange Commission on November 21, 2001
Registration No. 333-____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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 75-77 North Bridge Street
Chester, New Jersey 07930 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
===============================================================================
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
- --------------------------------------- - -------------------------------------
Common Stock 11,693,288 shares $.195(1) $2,280,191 $691.00
$.0001 par value
per share
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(1) 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.
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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.
2
18
PROSPECTUS
MAGNITUDE INFORMATION SYSTEMS, INC.
11,058,007 SHARES OF COMMON STOCK
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1,000,000 SHARES OF COMMON STOCK
UNDERLYING SERIES C PREFERRED STOCK
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855,570 SHARES OF COMMON STOCK
UNDERLYING SERIES D PREFERRED STOCK
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11,707,633 SHARES OF COMMON STOCK
UNDERLYING COMMON STOCK PURCHASE WARRANTS
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3,349,866 SHARES OF COMMON STOCK
UNDERLYING STOCK OPTION GRANTS
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749,780 SHARES OF COMMON STOCK
UNDERLYING COMPANY OBLIGATION
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These shares of Common Stock, par value $.0001 per share, of Magnitude
Information Systems, Inc. (the "Company" or "Magnitude") covered by this
prospectus have been issued or are issuable under currently exercisable
warrants, convertible preferred stock , convertible notes, stock options, a
Company "Obligation", explained at page 23 below, and under a subscription
agreement. The common stock , warrants, convertible preferred stock, convertible
notes, stock options, the Company Obligation and subscription agreement were
issued and delivered by Magnitude to certain securityholders of Magnitude in
private transactions during the past two years. Up to 28,720,856 shares of
common stock covered by this prospectus and which have been either already
issued or are issuable, may be sold from time to time by or on behalf of certain
securityholders of Magnitude. See "Selling Securityholders" at page 17. Only the
Selling Securityholders identified in this prospectus are offering shares to be
sold in the offering. Magnitude is not selling any shares in the offering.
Magnitude's common stock is quoted on the Electronic Bulletin Board,
over-the-counter market under the symbol "MAGY." On November 19, 2001, the
average of the high and low prices reported for the common stock on the
Electronic Bulletin Board was $0.195
Magnitude will not receive any of the proceeds from the sale of the
common stock by the Selling Securityholders. Magnitude will receive the proceeds
from the cash exercise of any of the warrants and stock options. See "Use of
Proceeds". The selling stockholders may sell their shares from time to time
throughout the offering through any legally available means, including through
agents or brokers in public sales at market prices, directly or through agents
in private sales at negotiated prices. They may also sell shares in open market
transactions in reliance upon Rule 144 under the Securities Act, provided they
comply with the requirements of Rule 144.
You may contact Magnitude at Magnitude's 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.
3
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THIS INVESTMENT INVOLVES CERTAIN HIGH RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 10.
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The date of this prospectus is November ____, 2001
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.
4
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 rooms located at 450 Fifth Street, N.W.,
Washington, DC 20549, and its public reference facilities in New York, New York
and Chicago, Illinois. 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 securityholder 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).
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have authorized no
one to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of this document.
5
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PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS
THE COMPANY
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to Proformix
Systems, Inc., and on November 18, 1998, the Company changed its name to
Magnitude Information Systems, Inc. .
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name "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 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.
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On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several related
agreements with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian
designer, manufacturer and distributor of office furniture pursuant to which OS
acquired Magnitude, Inc.'s hardware product line comprised of ergonomic keyboard
platform products and accessories, and all related inventory and production
tooling and warehousing assets, and all intellectual property rights including
the Proformix name, against a cash consideration and certain royalty payments on
OS' sales of the Proformix hardware products. With the sale of the hardware
product line, the Company's business is now focused exclusively on the further
development and marketing of its new software products. This development comes
against the backdrop of the issuance of a patent by the US Patent and Trademark
Office on the Company's patent application for certain design principles
underlying its ErgoManagerTM software.
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THE OFFERING
Securities offered 28,720,856 Shares of Common Stock, $.0001 par value,
including 1,000,000 Shares of Common Stock issuable
upon conversion of Series C Preferred Stock;
855,570 Shares of Common Stock issuable upon the
conversion of Series D Preferred Stock; 11,707,633
Shares of Common Stock issuable upon the exercise of
Warrants; 3,349,866 Shares of Common Stock issuable
upon the exercise of stock options; 749,780 Shares
of Common Stock issuable upon the conversion of
a Company Obligation. See "Selling Securityholders"
at page 17.
Selling Securityholders The Selling Securityholders are identified in
this prospectus at page 18 together with the
maximum amount of Company Common Shares that each
may sell either outright or upon conversion or
exercise of rights under their respective preferred
stock, warrants, stock options, Company Obligation
or subsequent to consummation of the subscription
agreement. See "Selling Securityholders" at page 17.
Plan of Distribution Up to 28,720,856 Shares of Common Stock may be
offered and sold by the Selling Securityholders
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 The Company will not obtain any funds from the
sale of the Common Stock sold by the Selling
Securityholders.
Securities Outstanding The Company is authorized to issue up to an
aggregate 100,000,000 shares of Common Stock
and 3,000,000 shares of preferred stock of which
25,243,903 Common
8
Shares and 214,857 Preferred Shares were issued and
outstanding at November 19, 2001. If the Selling
Securityholders exercise all of their rights to
convert and/or exercise all of their preferred
shares, warrants, stock options, and the Company
Obligation, an additional 17,662,849 common
shares, representing part of the shares being
registered, will be outstanding, resulting in
42,906,752 total outstanding Common Shares. The
Company has in reserve an additional 2,785,143
authorized preferred shares that it may issue in one
or more series with such rights, preferences and
privileges as may be determined by the Company's
Board of Directors.
Risk Factors An investment in the Company's Common Shares is
highly speculative and any purchasers will suffer
substantial dilution per Common Share compared to
the purchase price. The Company has suffered losses
for the nine months period ended September 30, 2001
of$ 2,719,036, losses of $ 3,716,527 during 2000 and
$2,391,948 during 1999. The Company will need
additional funding. No person should invest in the
Common Shares of the Company who cannot afford to
risk the loss of his or her entire investment.
See "Risk Factors" at page 10.
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."
9
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, Magnitude's business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of the Magnitude common stock could
decline significantly.
Substantial Losses - Lack of Profitability.
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 $15,014,540 as of December 31, 2000 of
which approximately $7 million are attributable to its discontinued hardware
product line. For the fiscal years ended December 31, 2000 and 1999, we incurred
losses of $3,716,527 and $2,391,948, respectively. For the nine months period
ended September 30, 2001, we had additional losses of $2,719,036. 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 we are unable to achieve increased revenues, we will continue
to have losses and may not be able to continue our operations.
Additional Financing Requirements.
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.
Limited Operating History.
We have a limited operating history as a software product company and
have made only limited sales of our products. Our total revenues for software
sales and licenses for the years ended December 31, 2000 and 1999 were
approximately $646,035 and $260,703, respectively. For the nine month period
ended September 30, 2001 we have revenues of only $527,083.
10
Uncertainty of Market Acceptance.
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 December 31, 2000 revenue from our software products has been
approximately $933,000 (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, 2001, we had revenues from the sales of
software product licenses of $499,009. 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.
Lack of Distribution Network and Strategic Relationships.
Inability 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.
Possible Loss of Entire Investment.
The common stock offered hereby is 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.
Competition
Competitive pressures come from other ergonomic software products. 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.
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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. 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.
Dependence Upon Key Personnel.
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, we believes that our future prospects will depend in large
part upon our ability to attract, train and retain highly-skilled technical,
managerial, sales and marketing personnel. However, competition for personnel in
the software industry is intense, and, at times, we have had difficulty locating
candidates with appropriate qualifications within various desired geographic
locations, or with certain industry-specific expertise. If our competitors
increase their use of non-compete agreements, the pool of available technical
personnel may further narrow in certain jurisdictions, even if the non-compete
agreements are ultimately unenforceable. The failure to attract, train, retain
and manage productive sales and sales support personnel would have a material
adverse effect on our business, financial condition and results of operations.
If we lose the services of one or more of our key employees, 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. A number of key employees have vested stock options with exercise
prices lower than our current stock price. These potential gains provide these
employees the economic freedom to explore personal objectives both within and
outside of our Company, which may result in the loss of one or more key
employees during the coming years.
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It is widely recognized that the software industry in which we compete
is at or beyond a condition of full employment. We may not be able to attract,
train and retain the personnel it requires to develop, market, sell and support
new or existing software or to continue to grow. Also, to penetrate successfully
key vertical markets, we must attract, train and retain personnel with
industry-specific expertise.
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 involving 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.
The computer software industry and products developed for the computer
workplace face intense competition. We will be at a competitive disadvantage in
seeking to compete with other companies having more assets, larger technical
staffs, established market shares and greater financial and operational
resources than us. There can be no assurance that we will be able to meet the
competition and operate profitably.
Magnitude Has Limited 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:
13
o knowledge, ability and experience of our employees;
o frequent software product enhancements; and
o 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 in response to factors such as the
following:
o revenue or results of operations in any quarter failing to meet the
expectations, published or otherwise, of the investment community;
o announcements of technological innovations by us or our competitors;
o new products or the acquisition of significant customers by us or
our competitors;
o developments with respect to patents, copyrights or other
proprietary rights by us or our competitors;
o changes in recommendations or financial estimates by securities
analysts;
o conditions and trends in the software industry generally;
o general market conditions and other factors.
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.
14
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 in 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.
There Could Be Adverse Effects of Potential Securities Issuances
Of the 28,720,856 common shares offered in this prospectus, 11,058,007
common shares have already been issued to the Selling Securityholders. If the
Selling Securityholders were to fully exercise their rights under their
warrants, convertible preferred stock, stock options, and the Company Obligation
to purchase or convert into the remaining 17,662,849 common shares offered in
this prospectus and then sell them, the market price of our common stock could
be materially adversely affected. As of November 19, 2001, the substantial
majority of the warrants, and stock options had exercise prices above the
current market price of our common stock.
15
Arbitrary Determination of Offering Price
The prices at which any of the Company Common Shares may be offered for sale by
the Selling Securityholders 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 the Company's assets, 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 the
Company's Obligation 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
Common Shares.
16
USE OF PROCEEDS
The Selling Securityholders will receive all of the net proceeds from
the sale of any of the Company's Common Shares offered in this Prospectus.
Magnitude will not receive any of the proceeds from any sale of the shares by
the Selling Securityholders. Magnitude will receive the proceeds from the cash
exercise of any of the warrants and stock options and intends to use any such
cash proceeds received for general corporate purposes, which may include
repaying indebtedness, making additions to its working capital, funding future
acquisitions or for further developing its products and hiring additional
personnel.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common 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 the Company's 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
As of September 30, 2001, there were approximately 240 shareholders of
record for the Company's Common 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.
17
SELLING SECURITYHOLDERS
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 the Company Obligation issued or issuable by Magnitude to
the Selling Securityholders. Magnitude may from time to time supplement or amend
this prospectus, as required, to provide other information with respect to the
Selling Securityholders.
The following table sets forth certain information regarding ownership of
Magnitude's common stock by the Selling Securityholders as of November 19, 2001,
including their names, and the number of shares of common stock owned by them
and offered pursuant to this prospectus. The Selling Securityholders 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 Securityholders, not because they had
expressed an intent to immediately sell their shares.
18
Name of No. of Transaction
Selling Beneficial Holdings Common Shares Summary % of Class
Securityholder Before the Offering Offered Hereby Note Exhibits after Offering
- -------------------------------------------------------------------------------------------------------------------
929595 Ontario Ltd. 760 380 (9) 4.23 **
Abrams, P. 11,400 5,700 (9) 4.23 **
Alexander, I. 3,376 1,688 (9) 4.23 **
Angelastri, I. 1,312,500 600,000 (6) 4.9;4.12 1.03%
Angelastri, I. (see above} 250,000 (10)
Angelastri-Keller, S. 200,000 200,000 (6) 4.9;4.12 **
Aniso Stiftung 303,498 303,498 (6) 4.9;4.12 **
Barbaro, R.D. in Trust 22,392 11,196 (9) 4.23 **
Benoliel, I. 1,646 823 (9) 4.23 **
Berek, R. 25,000 25,000 (20) 4.28 **
Bischoff, D. 250,000 250,000 (20) 4.28 **
Bischoff, N. 125,000 125,000 (20) 4.28 **
Blue Fuel Corporation 2,306 1,153 (9) 4.23 **
Boehm-Raffay, T. 25,000 25,000 (20) 4.28 **
Bourke, R.L. 27,780 27,780 (19) 4.27 **
Bourke, D.J. 27,780 27,780 (19) 4.27 **
Brandstatter, A. 2,306 1,153 (9) 4.23 **
Brant Investment Ltd. 53,146 26,573 (9) 4.23 **
Burri, E. 200,000 200,000 (13) 4.9;4.14 **
Calter Associates 121,124 9,924 (17) **
Carrel, R. 603,400 222,200 (13) 4.15;4.18 **
Carrel, R. (see above} 166,700 (13) 4.9 **
Carrel, R. (see above} 27,000 (18) **
Carrel, R. (see above} 20,800 (17) **
Carrel, R. (see above} 166,700 (15) **
Carter, G. 14,819 14,819 (9) 4.23 **
Christoph, M. 100,000 100,000 (6) 4.9;4.12 **
Citrus Land & Developm. 962,222 240,000 (5) 4.3 **
Citrus Land & Developm (see above} 722,222 (20) 4.28 **
Consltg.f.Strat.Growth 600,000 600,000 (16) 4.25 **
Coop Bank 68,500 20,000 (6) 4.12 **
Corbett, W.&M. 100,000 100,000 (14) 4.19 **
Cumming, F. 33,619 5,000 (10) **
Curtis, J. 2,470 1,235 (9) 4.23 **
Cynamon Holding Corp. 8,232 4,116 (9) 4.23 **
Dean, M. 100,000 100,000 (5) 4.3 **
Dellelce, P. 1,646 823 (9) 4.23 **
DeWolf, K. 370,000 250,000 (20) 4.28 **
DeWolf, K. (see above) 120,000 (22) 4.29 **
Dina Partners 555,560 555,560 (19) 4.27 **
Duncan, J. 557,500 500,000 (10) **
ES-LEA Holdings Ltd. 15,072 7,536 (9) 4.23 **
Feld, I. 70,000 70,000 (20) 4.28 **
Ferrier Lullin Bank&Trust 4,940 2,470 (9) 4.23 **
Fiala, D. 14,819 14,819 (9) 4.23 **
19
Name of No. of Transaction
Selling Beneficial Holdings Common Shares Summary % of Class
Securityholder Before the Offering Offered Hereby Note Exhibits after Offering
- ------------------------------------------------------------------------------------------------------------
Fireworks Creative Inc. 658 329 (9) 4.23 **
GGD Associates 275,000 275,000 (10) **
Goebel, J.-P. 100,000 100,000 (20) 4.28 **
Gomez, L.M. 55,560 55,560 (19) 4.27 **
Gort, S. 20,000 20,000 (20) 4.28 **
Gray, S. 533,100 297,000 (5) 4.3 **
Groconi Holdings, Inc. 1,120 560 (9) 4.23 **
Hauschild, R. 60,000 60,000 (20) 4.28 **
Heuberger, 200,000 200,000 (6) 4.9;4.12 **
Hinst, R. and S. 100,000 100,000 (5) 4.3 **
Jackson Hewitt Invest.Svc 400,000 400,000 (8) 4.3;4.13 **
Kaemper, S.D. 500,000 500,000 (20) 4.28 **
Keenan, L. 6,838 3,419 (9) 4.23 **
Kesselring, R. 555,500 555,500 (13) 4.9 **
Klaube, J. 285,517 100,000 (10) **
Kroll, S. 137,602 0 (3) 4.10;4.11 **
Kroll, S. (see above) 119,866 (10) **
Kroll, S. (see above) 17,736 (17) **
Kutkrvicius, J. 3,294 1,647 (9) 4.23 **
Lalande, A. 824 412 (9) 4.23 **
Lands, L.A. 111,120 111,120 (19) 4.27 **
Langheck, A.M. 338,000 338,000 (20) 4.28 **
Liebel, P. 2,305 2,305 (9) 4.23 **
Liechtensteinische Lbank 4,323, 040 500,000 (13) 4.9;4.14 **
Liechtensteinische Lbank (see above} 1,667,250 (13) 4.16;4.17 **
Liechtensteinische Lbank (see above} 1,600,000 (20) 4.28 **
Liechtensteinische Lbank (see above} 555,760 (15) **
Logie, T. 1,646 823 (9) 4.23 **
Lu, L. 823 823 (9) 4.23 **
Luescher, D. 40,000 40,000 (6) 4.9;4.12 **
Lynch, T. 2,306 1,153 (9) 4.23 **
Manis, W. 6,586 3,293 (9) 4.23 **
Martin, M. 1,750,000 1,000,000 (7) 4.20 2.51%
Martin, M. (see above} 100,000 (10) **
Masionis, S. 4,940 2,470 (9) 4.23 **
Meixger, A. 200,000 200,000 (20) 4.28 **
Merhavia Construct.Ltd. 1,520 760 (9) 4.23 **
Mette, T. 26,000 26,000 (20) 4.28 **
Miller, P. 100,000 100,000 (8) 4.3;4.13 **
MJE Partners 100,000 100,000 (2) 4.1;4.2;4.3;4.4**
Morton, J.W.&K.E. 250,000 250,000 (20) 4.28 **
Murphy, J. 11,400 5,700 (9) 4.23 **
Niro, G. 1,646 823 (9) 4.23 **
Oakes, G.A.II 60,000 60,000 (22) 4.29 **
20
Name of No. of Transaction
Selling Beneficial Holdings Common Shares Summary % of Class
Securityholder Before the Offering Offered Hereby Note Exhibits after Offering
- -----------------------------------------------------------------------------------------------------------
Pachino, J.&M. 150,000 150,000 (22) 4.29 **
Paine Webber C/F G.She 200,000 200,000 (2) 4.1;4.2;4.3;4.4 **
Pisani, B.M. 516,890 200,000 (4) 4.6;4.7 **
Pisani, B.M. (see above) 150,000 (20) 4.28 **
Pisani, B.M. (see above) 377,780 (19) 4.27 **
Pisani, M.B. 22,000 22,000 (4) 4.6;4.7 **
Print-O-Plast Ltd. 2,306 1,153 (9) 4.23 **
RAM Trading 555,560 555,560 (19) 4.27 **
Reiter, S. 950 950 (9) 4.23 **
Reimann-Dubbers, N. 600,000 600,000 (20) 4.28 **
Reman Partners AG 275,000 150,000 (13) 4.9;4.14 **
Reman Partners AG (see above) 125,000 (15) **
Rodman & Renshaw 50,000 50,000 (16) 4.26 **
Rogivue, N. 405,562 250,000 (13) 4.15;4.18 **
Rogivue, N. (see above} 125,000 (13) 4.9 **
Rogivue, N. (see above} 10,000 (13) 4.9 **
Rogivue, N. (see above} 20,562 (13) 4.9 **
Roni Excavating Ltd. 1,520 760 (9) 4.23 **
Rudnik, S. 4,975,475 150,000 (11) **
Rudnik, S. (see above} 749,780 (12) 4.21 **
Rudnik, S. (see above} 1,325,000 (10) **
Rudnik, S. (see above} 75,000 (21) **
Sal Investments Inc. 5,700 5,700 (9) 4.23 **
Saperia, E. 4,446 2,223 (9) 4.23 **
Schuerch, S. 540,000 540,000 (20) 4.28 **
Schuerch Asset MgmtGm 120,000 120,000 (6) 4.9;4.12 **
Schuerch, K. 250,000 250,000 (10) **
Schuerch, U. 2,307,144 400,000 (6) 4.9;4.12 **
Schuerch, U. (see above} 69,500 (13) 4.9 **
Schuerch, U. (see above} 139,000 (13) 4.15;4.18 **
Schuerch, U. (see above} 200,000 (10) **
Schuerch, U. (see above} 400,000 (19) 4.27 **
Schuerch, U. (see above} 200,000 (20) 4.28 **
Schuerch, U. (see above} 23,644 (17) **
Schuerch, U. (see above} 625,000 (15) **
Shear Holdings Ltd. 950 475 (9) 4.23 **
Shear, E. 4,116 2,058 (9) 4.23 **
Shemano, G. 100,000 100,000 (14) 4.19;4.22 **
Sheppard, T. 1,647 1,647 (9) 4.23 **
Shoemaker, J.&A. 200,000 200,000 (20) 4.28 **
Shulenberger, C. 5,928 2,964 (9) 4.23 **
Siegel, H. 1,101,275 815,500 (5) 4.3;4.4;4.5 **
Siegel, H. (see above} 50,000 (11) **
Solid Rock Corp.. 222,000 222,000 (5) 4.3 **
21
Name of No. of Transaction
Selling Beneficial Holdings Common Shares Summary % of Class
Securityholder Before the Offering Offered Hereby Note Exhibits after Offering
- ----------------------------------------------------------------------------------------------------------
Spinnaker Ventures LLC 250,000 250,000 (20) 4.28 **
Stangel, G. 366,500 111,000 (13) 4.15;4.18 **
Stangel, G. (see above} 200,000 (10) **
Stangel, G. (see above} 55,500 (13) 4.9 **
Staiger, J.M. 239,800 200,000 (20) 4.28 **
Staiger, J.M. (see above) 39,800 (18) **
Stanley, T. 14,819 14,819 (9) 4.23 **
Strasler, B. 2,470 2,470 (9) 4.23 **
Tarek, P. 5,598 2,799 (9) 4.23 **
Tauss, M. 25,000 25,000 (20) 4.28 **
Thomas, D. 32,930 32,930 (9) 4.23 **
Trull, R. 200,000 200,000 (2) 4.1;4.2;4.3;4.4 **
Twomey, L. 210,000 210,000 (2) 4.1;4.2;4.3;4.4 **
Unternaehrer, S. 1,111,000 1,111,000 (13) 4.15;4.18 **
Ushter Holdings Inc. 1,300 650 (9) 4.23 **
Vanity Software PublCo. 4,508 2,254 (9) 4.23 **
Stuart Zimmerman R/T 600,000 600,000 (1) 4.8;4.9 **
Von Mitschke-Collande,C . 125,000 125,000 (20) 4.28 **
Wagner, T. 20,000 20,000 (6) 4.9 **
Ward, D. 100,000 100,000 (5) 4.3 **
Watson, K. 7,410 3,705 (9) 4 23 **
Wider, H. 34,000 34,000 (20) 4.28 **
Xonnel Holdings Ltd. 14,923 9,223 (9) 4.23 **
Ziraldo, D. 6,586 3,293 (9) 4.23 **
---------- ----------
33,256,001 28,720,856
** less than 1 percent
Description of Selling Securityholders and Magnitude Transactions
(1) Private Placement Pursuant to Section 4(2)
The Company is registering shares on behalf of an institutional investor, such
shares having been issued pursuant to his election to convert a convertible
promissory note dated April 23, 1999, into 660,000 common shares of the Company;
and 600,000 shares underlying a stock purchase warrant issued to the same
investor concurrent with the convertible note. The Company's net proceeds from
this transaction not including any proceeds that may accrue from exercise of the
warrant, totaled $300,000. The securities were issued in reliance upon
exemptions provided by Section 4(2) of the Securities Act, as a private
transaction with an accredited investor. A copy of the note and the form of the
warrant are attached hereto as Exhibits 4.8 and 4.9.
22
(2) Private Placement Pursuant to Section 4(2)
The Company is registering shares on behalf of four private investors, such
shares having been issued pursuant to their election to convert convertible
promissory notes issued during June 1999, into an aggregate 550,000 common
shares of the Company; and 500,000 shares underlying stock purchase warrants
issued to the same investors concurrent with the convertible notes. The
Company's net proceeds from these transactions not including any proceeds that
may accrue from exercise of the warrants, totaled $250,000. The securities were
issued pursuant to subscription agreements certifying these investors as
accredited investors, and in reliance upon exemptions provided by Section 4(2)
of the Securities Act. The form of the subscription agreements, notes and
warrants are attached hereto as Exhibits 4.1, 4.2, 4.3 and 4.4 .
(4) Private Placement Pursuant to Section 4(2)
The Company is registering shares on behalf of a private investor and his
assignee, such shares having been issued pursuant to his election to convert a
convertible promissory note dated May 28, 1999, into 220,000 common shares of
the Company; and 200,000 shares underlying a stock purchase warrant issued to
the same investor concurrent with the convertible note. The Company's net
proceeds from this transaction not including any proceeds that may accrue from
exercise of the warrant, totaled $100,000. The securities were issued in
reliance upon exemptions provided by Section 4(2) of the Securities Act, as a
private transaction with an accredited investor. Copies of the note and warrant
are attached hereto as Exhibits 4.6 and 4.7 .
(5) Private Placement Pursuant to Section 4(2)
The Company is registering shares on behalf of a private investor and five
transferees of the investor, one of whom , Mr. Ivano Angelastri, is a director
of the Company, such shares having been issued pursuant to his election to
convert several convertible promissory notes dating between June 1999 and
November 1999 into a total of 990,000 common shares of the Company; and 900,000
shares underlying stock purchase warrants issued concurrent with the convertible
notes. The Company's net proceeds from these transactions not including any
proceeds that may accrue from exercise of the warrants, totaled $450,000. The
securities were issued in reliance upon exemptions provided by Section 4(2) of
the Securities Act, as a private transaction with an accredited investor. The
form of the subscription agreements, notes and warrants are attached hereto as
Exhibits 4.1, 4.2, 4.3, 4.4 and 4.5 .
(6) Private Placement Pursuant to Section 4(2)
The Company is registering shares on behalf of nine private foreign investors
who include Mr. Ivano Angelastri, a director of the Company, and one assignee,
of which 1,252,332 shares were issued pursuant to private placement
subscriptions entered into between the Company and such investors between
October 1999 and December 1999, and 1,252,332 shares underlying stock purchase
warrants issued to the same investors concurrent with the shares. The Company's
net proceeds from these transactions not including any proceeds that may accrue
from exercise of the warrants, totaled $626,166. The securities were issued
pursuant to subscription agreements certifying these investors as accredited
investors, and in reliance upon exemptions provided by Section 4(2) of the
Securities Act. The form of the subscription agreements and warrants are
attached hereto as Exhibits 4.9 and 4.12 .
23
(7) Resignation Agreement of Former Chairman
The shares to be registered represent shares underlying 1,000,000 shares of
Series C Senior Convertible Preferred Stock issued to the former chairman of the
Company pursuant to the terms of his Resignation Agreement dated January 28,
2000 (see Exhibit to Registration Statement on Form S-8 filed with the
Commission January 31, 2000). Exhibit 4.20 refers to the Certificate of
Designations for the Series C Senior Convertible Preferred Stock.
(8) Private Placement Pursuant to Section 4(2)
The Company is registering shares on behalf of two private investors, of which
400,000 shares were issued pursuant to private placement subscriptions entered
into between the Company and such investors in January and February 2000, and
300,000 shares underlying stock purchase warrants issued to the same investors
concurrent with the shares. The Company's net proceeds from these transactions
not including any proceeds that may accrue from exercise of the warrants,
totaled $200,000. The securities were issued pursuant to subscription agreements
certifying these investors as accredited investors, and in reliance upon
exemptions provided by Section 4(2) of the Securities Act. The form of the
subscription agreements and warrants are attached hereto as Exhibits 4.3 and
4.13 .
(9) Shares Underlying Warrants Issued Pursuant to Acquisition
The shares to be registered underlie warrants issued to 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 at a price of $5.00 per share.
Such warrants carried "piggy-back" registration rights. The major asset of
Vanity was a proprietary ergonomic software package sold under the name
ErgoBreak(TM) that the Company integrated into its own software products suite
marketed under the ErgoManager(TM) label. The issuance of the aforesaid shares
and warrants was made pursuant to exemptions provided by Section 4(2) of the
Securities Act. Vanity subsequently offered to their shareholders which numbered
approximately fifty, an exchange of their shares in Vanity into a ratably
calculated number of units comprised of one common share of the Company and a
warrant for the purchase of one common share of the Company at the price of
US$5.00 each. Substantially all Vanity shareholders elected to accept this offer
following which Vanity requested, and the Company agreed to, cancel the shares
and warrant issued to Vanity and replace them with like securities issued in the
name of the individual Vanity shareholders. The form of warrant issued to the
former Vanity shareholders is attached hereto as Exhibit 4.23 .
(10) Shares Underlying Non-Statutory Stock Options
The Company is registering an aggregate 3,324,866 shares underlying
non-statutory stock options issued to certain present and past key employees, on
behalf of such employees and their transferees, as follows:
a) Options for 1,325,000 shares, issued in 1998 to the current President
and Chief Executive Officer of the Company;
b) Options for 100,000 shares, issued in 1997 and 1998 to the current
Chief Financial Officer of the Company;
24
c) Options for 500,000 shares, issued in 1999 to the current Executive
Vice President of the Company;
d) Options for 1,399,866 shares that were initially granted to a former
President and Chief Executive Officer of the Company in 1998 and
subsequently thereto, assigned to the named eight individual Selling
Securityholders, one of whom is a director of the Company.
(11) Shares Issued in Lieu of Cash Compensation to Officers
The current President and Chief Executive Officer of the Company had previously
agreed to accept 150,000 shares in lieu of cash remuneration during the period
May through December 1999, whereby such stock award carried "piggy-back"
registration rights. The current Vice President of Shareholder Relations had
agreed to accept a certain number of shares in lieu of cash compensation of
which 100,000 shares were to be issued on April 1, 2000, and whereby such stock
award carries "piggy-back" registration rights.
(12) Shares Underlying a "Company Obligation" Owed to an Officer and Director
In connection with the acquisition by the Company of Rolina Corporation in
February 1998, the Company issued 155,556 Common Shares to the former principal
of Rolina Corporation, Steven D. Rudnik who currently serves as the Company's
President and Chief Executive Officer, which shares were subject to a put option
exercisable by Mr. Rudnik at any time during the 90-day period commencing on
February 1, 2000, pursuant to which if exercised, the Company would be obligated
to purchase said 155,556 Company Common Shares for the purchase price of $2.41
per share. (the "Put Option"). In addition to receipt of the Put Option, the
Company, pursuant to the terms of the business transaction, made payments to Mr.
Rudnik of $125,000 and $100,000 following the closing and to secure its
obligation under the Put Option, gave Mr. Rudnik a lien on the software that the
Company acquired from his company. In order to exercise the Put Option, Mr.
Rudnik was required to give written notice of the exercise to the Company during
the mentioned 90-day period and upon the Company's payment at $2.41 per share,
Mr. Rudnik would surrender the 155,556 shares of the Company's Common Stock. On
March 25, 2000, Mr. Rudnik, gave notice to the Company of his exercise of the
Put Option. Accordingly, the Company incurred the obligation to pay $374,889.96
to Mr. Rudnik pursuant to the Put Option for the 155,556 Common Shares. Pursuant
to negotiations between the Company and Mr. Rudnik, a certain "Third Amendment
to Agreement and Plan of Merger and First Amendment to Put Option"* was
consummated in April, 2000, pursuant to which Mr. Rudnik agreed: (a) that the
Company's obligation to pay the $374,889.96 for the 155,556 shares tendered
under the Put Option would be deferred until March 31, 2002; (b) that the
Company would pay Mr. Rudnik monthly interest on the Company's Obligation at the
rate of 7% annually, commencing February 1, 2000; (c) that Mr. Rudnik would have
the right to convert part or all of the Company's Obligation into shares of the
Company's common stock at a conversion rate of $.50 per share; (d) that the
Company would issue to Mr. Rudnik 150,000 shares of the Company's common stock,
and; (e) that the Company would register a sufficient number of its common
shares in this offering in order to accommodate the full exercise by Mr. Rudnik
of the full amount of the potential conversion of the $374,889.97 and the
150,000 common shares included (the "Company Obligation"). *See Exhibit 4.21
attached hereto which contains all of the terms and conditions of this
agreement.
25
(13) Private Placement Pursuant to Section 4(2)
The Company is registering a total 5,583,850 shares on behalf of eight private
foreign investors pursuant to private placement subscriptions entered into
between the Company and such investors, between January and March 2000. 500,000
of such shares have been issued outright; an aggregate 3,055,900 shares underlie
conversion privileges accruing to a total of 305,590 shares of Series B Senior
Convertible Preferred Stock issued to or subscribed for by certain of these
investors; 500,000 shares underlie Company Common Stock Purchase Warrants for
the purchase of common shares at $1.00 per share issued to certain of these
investors; and 555,750 shares underlie Company Common Stock Purchase Warrants
for the purchase of shares at $0.90 per share, subscribed to by certain of these
investors. The common shares to be registered also include a total 972,200
shares underlying Company Common Stock Purchase Warrants for the purchase of
shares at $0.90 per share, which warrants have been assigned to certain of the
investors.
With respect to the Company's Series B Senior Convertible Preferred Stock (the
"Series B Shares") the Company issued 194,440 Series B Shares in March, 2000 to
Selling Securityholders pursuant to subscription agreements and upon receipt of
payment of the agreed upon subscription prices. On September 30, 2000 and on
July 31, 2000 and in compliance with the terms of its subscription agreement
with the Selling Securityholder, Liechtensteinische Lbank, pursuant to which the
Company agreed to sell 111,150 Series B Shares and Company Common Stock Purchase
Warrants for 555,750 Common Shares, the Company issued an additional 55,576
Series B Shares and Common Stock Purchase Warrants for 277,880 to this Selling
Securityholder. The Company is required under its subscription agreements with
the Selling Securityholders who acquired the 194,440 Series B Shares and Company
Common Stock Warrants as it is under the subscription agreement with this
Selling Securityholder to register a sufficient number of common shares
underlying the Series B Shares and the Company Common Stock Purchase Warrants
purchasable under its subscription agreement. Pursuant to the subscription
agreement with Liechtensteinische Lbank, the Company is required to issue an
additional 55,574 Series B Shares and Common Stock Purchase Warrants for 277,870
Common Shares during the months of August and September, 2000, upon receipt of
the subscription prices. As under the subscription agreements with the other
Selling Securityholders, the Company is obligated under its subscription
agreement with this Selling Securityholder to register a sufficient number of
its common shares to accommodate the full conversion of the entire 111,150
aggregate Series B Shares and the Company Common Stock Purchase Warrants for
555,750 Common Shares subscribed for within 30 days after their issuance. Each
Series B Share is convertible into 10 common shares at the election of a Selling
Securityholder and each of the Company Common Stock Purchase Warrants is
exercisable to purchase 5 Company common shares at the exercise price of $.90
per share. The Company is registering the 1,667,250 common shares in this
offering to accommodate the issuance and subsequent conversion or exercise of
all of the 111,150 Series B Shares and the 111,150 Company Common Stock Purchase
Warrants issued and to be issued pursuant to its subscription agreement with
Liechtensteinische Lbank. The Company's net proceeds from these transactions,
not including any proceeds that may accrue from the exercise of the warrants,
will total $2,725,000, of which $2,275,166 have been received as of July 31,
2000. The securities were issued or will be issued pursuant to subscription
agreements that contain certifications from these investors that they are
accredited investors, and in reliance upon exemptions provided by Section 4(2)
of the Securities Act. The form of the subscription agreements are attached
hereto as Exhibits 4.14, 4.15 and 4.16 , and of the warrants as Exhibits 4.9 and
4.17. Exhibit 4.18 refers to the Certificate of Designations for the Series B
Senior Convertible Preferred Stock.
26
(14) Shares Underlying Warrants Issued for Services
The Company is registering an aggregate 200,000 shares underlying two stock
purchase warrants issued pursuant to a consulting agreement with an unrelated
party. A copy of the consulting agreement is attached as Exhibit 4.22.
(15) Shares Underlying Warrants Issued Pursuant to Conversion of Preferred Stock
The Company is registering an aggregate 916,960 shares underlying warrants
issued to four investors in connection with them exercising their conversion
rights on shares of Series B Senior Convertible Preferred Stock, and 555,500
shares underlying warrants issued for services in connection with the before
mentioned conversions.
(16) Shares Underlying Warrants Issued for Services
The Company is registering 650,000 shares underlying warrants issued pursuant to
two consulting agreements with unrelated parties. Copies of the two consulting
agreements are attached as Exhibits 4.25 and 4.26.
(17) Shares Underlying Warrants and Shares Issued Outright in lieu of Interest
and Dividends The Company is registering an aggregate 74,930 shares and
17,736 sharesunderlying warrants, issued pursuant to the conversion into
such securities of an aggregate $46,333 accrued dividends and interest.
(18) Shares Underlying Warrants and Shares Issued Outright for Services
The Company is registering an aggregate 56,900 shares and 19,900 shares
underlying warrants, issued to three unrelated individuals pursuant to verbal
agreements, for them acting as finders in connection with placements of the
Company's stock with private accredited investors.
(19) Private Placement Pursuant to Section 4(2)
The Company is registering a total 2,111,140 shares on behalf of eight private
investors pursuant to private placement subscriptions entered into between the
Company and such investors, between September 2000 and March 2001. 855,570 of
such shares underlie conversion privileges accruing to a total of 85,557 shares
of Series D Senior Convertible Preferred Stock issued to or subscribed for by
certain of these investors; and 855,570 shares underlie Company Common Stock
Purchase Warrants for the purchase of common shares at $0.50 per share issued to
certain of these investors. The common shares to be registered also include a
total 400,000 shares that have been issued to one of the investors pursuant to
his conversion of 20,000 shares of Series D Senior Convertible Preferred Stock
and the exercise of Company Common Stock Purchase Warrants for 200,000 shares,
issued to this investor. The Company received an aggregate $1,050,013 from these
investment transactions. A copy of the subscription agreement utilized in these
transactions is attached as Exhibit 4.27 .
(20) Private Placement Pursuant to Section 4(2)
The Company is registering a total 6,885,222 shares on behalf of 26 private
investors 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; and 3,282,611 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 common shares
to be registered also 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. The Company received an aggregate $1,476,500 from these
investment transactions. A copy of the subscription agreement utilized in these
transactions is attached as Exhibit 4.28.
27
(21) Shares Underlying Stock Option
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 were described
in note (12) above, Mr. Rudnik shall receive stock option for 225,000 shares,
exercisable at $075 per share. Since 150,000 of such shares had previously been
included in an earlier amendment of this registration and are already included
elsewhere in this filing the Company is herewith registering the remaining
75,000 shares.
28
(22) Private Placement Pursuant to Section 4(2)
The Company is registering a total 330,000 shares on behalf of 3 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; and 110,000 shares underlie
Company Common Stock Purchase Warrants for the purchase of common shares at
$0.50 per share and were issued to these investors. The Company received an
aggregate $55,000 from these investment transactions. A copy of the subscription
agreement utilized in these transactions is attached as Exhibit 4.29.
29
SHARES ELIGIBLE FOR FUTURE SALE
Of the 25,243,903 shares of the Company's Common Stock outstanding as of
November 19, 2001, 13,059,462 shares are freely tradable or eligible to be sold
in the public market that exists for the Common Stock. In addition, upon the
effectiveness of this Registration Statement: (1) 11,058,007 Common Shares; (2)
1,000,000 Common Shares underlying the Series C Preferred Stock, subject to the
exercise of their conversion rights; (3) 855,570 Common Shares underlying the
Series D Preferred Stock, subject to the exercise of their conversion rights;
(4) 11,707,633 Common Shares underlying the Company Common Stock Purchase
Warrants, subject to the exercise of their purchase rights; (5) 3,349,866 Common
Shares underlying stock options, subject to the vesting requirements of each
individual grant; and (6) 749,780 Common Shares underlying the Company
Obligation, subject to the exercise of the conversion right, shall become freely
tradable by the Selling Securityholders. Furthermore, all of the remaining
shares of Common Stock presently outstanding that are restricted and/or
affiliate securities as well as 118,298 Common Shares underlying the issued and
outstanding Series A Senior Convertible Preferred Stock, 742,644 Common Shares
underlying outstanding Warrants, and 6,429,109 Common Shares underlying
outstanding stock options, which, if converted or exercised, as the case may be,
all of which are 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.
Recently, we terminated an equity line drawdown facility agreement with
a Bahamian Islands corporation, Torneaux Fund, Ltd. This drawdown facility would
have only permitted the Company to sell its securities if our public market
price traded at prices in excess of $1.00 per share. Based upon our below $1.00
stock price range, witnessed over the past several quarters, the Company decided
to terminate this equity drawdown facility, make application to the Securities
and Exchange Commission to withdraw its registration statement covering the
potential shares that could have been sold to Torneaux under this arrangement
and seek alternative equity financing in private placement transactions with
accredited investors and institutions.
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 three 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 current shareholders could depress the market price
of the Common Stock in the public market.
30
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 28,720,856 Common Shares by
the Selling Securityholders. The Selling Securityholders may sell some or all of
their shares at any time and in any of the following ways. They may sell their
shares:
o 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;
o 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;
o Directly or through brokers or agents in private sales at
negotiated prices; or
o By any other legally available means.
The Selling Securityholders may, in some circumstances, be deemed
"underwriters" of the Company Common Shares offered and sold in this Prospectus.
Selling Securityholders 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 Securityholders may
be required to make under the Securities Act.
LEGAL PROCEEDINGS
The Company is not a party in any legal proceedings.
31
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 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 - President, Chief Executive Officer, and
Director. Mr. Rudnik joined the Company in February 1998 with the acquisition of
Rolina Corporation, co-founded by Mr. Rudnik in 1996 and at that time, was
appointed President and CEO of Proformix Software. Mr. Rudnik was appointed
President and Chief Executive Officer, and elected to the Board of the Company,
in January 1999. Mr. Rudnik has extensive experience in software product
development and an operational background in software companies extending over
the past 20 years. 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 Institutional
Investor market. Over this time, these product families generated over $25
million in sales, to more than 400 clients in 23 countries. Mr. Rudnik was
Executive VP Development and Partner at the time Randall-Helms was sold in 1995.
32
Joerg H. Klaube , Age 60 - Chief Financial Officer. Joined Magnitude,
Inc. in December 1994 as Vice President Finance & Administration. >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 L. Gray, age 52 years, is a resident of Venice, Florida. 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 38 years, is a resident of Zurich, Switzerland.
Mr. Angelastri has served as Managing Director of T&T Capital Trading, a
securities brokerage firm located in Zug, Switzerland, since January, 1999,
offering to select and institutional clients financial advisory and portfolio
management services. 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 , Age 54 - 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.
33
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive
capacities for the fiscal year ended December 31, 2000, 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:
Restricted Securities
Other Stock Underlying
Name Year Salary (1) Compensation Awards Options
- ---------- -------- ---------- ------------ ---------- ----------
CAPACITY IN WHICH SERVED
Steven D. Rudnik 2000 $ 122,185 $ 11,350 - -
Chief Executive Officer 1999 $ 34,615 $ 9,529 $ 66,667 (4)
John C. Duncan* 2000 $ 122,308 $ 2,700 - (2)
President (1999:Exec.VP) 1999 $ 60,000 - -
Joerg H. Klaube 2000 $ 116,923 $ 3,960 - (2)
Vice President, CFO 1999 $ 100,025 $ 1,710 -
Howard G. Siegel 2000 $ 79,596 $ 2,250 $ 24,220 (5)(2)(6)
VP Shareh./Invest.Rel.
B.Gregory Buscetto 2000 $ 110,164 $ 5,250 - (2)
Vice President Sales 1999 $ 86,111 $ 6,088 -
All executive officers
as a group (4 persons)(3) 2000 $ 371,931 $ 18,010 -
- -----------------------
(1) 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.
(2) See table for "Stock Options" below.
(3) Does not include $61,105 paid to the former chairman as consulting fees
pursuant to the separation agreement entered into in January 2000
(4) 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.
(5) Represents the fair market value of 100,000 shares awarded as a hiring
bonus.
(6) Does not include stock options for the purchase of 268,750 shares at a
price of $0.75 per share, issued in February 2001for services performed
during the year 2000.
o Resigned as an officer and director on May 18, 2001.
34
o Stock Options :
The following table sets forth stock options granted during 2000 pursuant
to the Company's 1997 Stock Option Plan and 2000 Stock Incentive Plan, to
executive officers, two other employees with highest remuneration, directors,
and beneficial owners of more than 10 percent of any class of equity securities
of the Company:
- -------------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted and Directors in FY Price ($/Sh.) Date
- -------------------------------------------------------------------------------
I. Angelastri 35,000 4.3% 1.00 10/11/05
G. Buscetto 50,000 9.2% 1.00 10/11/05
G. Buscetto 25,000 incl.in above 1.00 3/29/06
J. Duncan 300,000 42.8% 1.00 7/1/06
J. Duncan 50,000 incl.in above 1.00 10/11/05
S. Gray 35,000 4.3% 1.00 10/11/05
J. Klaube 50,000 7.3% 1.00 10/11/05
J. Klaube 10,000 incl.in above 1.00 3/10/06
H. Siegel 50,000 7.3% 1.00 10/11/05
J. Tomasek 35,000 4.3% 1.00 10/11/05
The following table sets forth stock options granted during 2000
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
I. Angelastri 40,000 4.9% 1.00 5/18/07
S. Gray 40,000 4.9% 1.00 5/18/07
J. Tomasek 40,000 4.9% 1.00 3/10/07
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, for services
rendered during 2000.
35
Employment Agreements
In February 1998, 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 its software business
for a period of five years and one month. On January 8, 1999, and in
the aftermath of the Company's divestiture of its hardware product
line, his position and duties were expanded to those of President and
Chief Executive Officer for the Company as a whole. Base salary under
the agreement is $120,000 per year with annual increases determined by
the Board of Directors. The agreement also calls for the grant of
certain 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 to be paid to the
officer if the employment agreement is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months
after termination of employment
In April 1996, Magnitude, Inc. entered into an employment agreement
with Joerg Klaube, its current Vice President and Chief Financial
Officer In July 1999, and in the aftermath of the Company's merger with
Magnitude, Inc. his position and duties were expanded to those of Vice
President and Chief Financial Officer for the Company as a whole. The
agreement is for a term of three years, renewing by subsequent three
year terms and currently expiring April 14, 2002. Pursuant to the
agreement, the officer is to receive a salary of $100,000 per year
subject to annual review by the Board of Directors, and an annual bonus
as determined by the Board, as well as certain benefits. The agreement
restricts the officer from competing with Magnitude, Inc. for a period
of two years after the termination of his employment. The agreement
provides for severance compensation pursuant to a formula established
therein if the employment is not renewed upon expiration of the initial
or any renewal term thereof, his employment is terminated by Magnitude,
Inc. other than as permitted by the agreement, or if any successor to
Magnitude, Inc. after a change of control or other reorganization of
Magnitude, Inc. fails to assume the agreement.
36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of November 19, 2001, 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 Owner Title Beneficial Ownership(1) of Class
- -------- --------------- ----- ------------------------ ------------
Common Steven D. Rudnik,Pres., CEO, Director 4,975,475 (2) 16.51%
Stock Joerg H. Klaube, CFO, 285,517 (4) 1.12%
Joseph J. Tomasek, Director 312,500 (3) 1.22%
Ivano Angelastri, Director 1,312,500 (8) 5.02%
Steven Gray, Director 533,100 (9) 2.09%
Address of all persons above: c/o the Company.
All Directors and Officers 8,096,592 24.84%
as a Group (7 persons)
Michael G. Martin 1,750,000 (6) 6.79%
12 Tillman Ct., Bridgewater, NJ
Schuerch Asset Management 2,427,144 (7) 9.52%
Tellstrasse 21, St.Gallen, Switzerland
Liechtensteinische 4,323,040 (10) 16.67%
Landesbank
Zurich, Switzerland
** less than 1%
- ----------------------------
(1) 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 October 3, 2001. 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.
(2) Includes options to acquire 4,147,917 shares and conversion rights for
appr.750,000 shares.
(3) Represents options to acquire the same number ofshares.
(4) Includes options to acquire 285,417 shares.
(6) Includes options for 750,000 shares and preferred stock convertible into
1,000,000 shares.
(7) Includes options and warrants for 1,604,500 shares.
(8) Includes stock options to acquire 512,500 Shares and warrants to
purchase 400,000 Shares.
(9) Includes options and warrants to acquire 502,500 Shares
(10) Includes 1,911,520 Shares underlying warrants.
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 25,243,903 were
issued and outstanding as of October 3, 2001 and 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 3, 2001, 300,000 shares have been designated as Series
37
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 3, 2001;
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 3, 2001, 120,000 shares have been 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 3, 2001,
and; 500,000 shares have been designated as Series D Senior Convertible
Preferred Stock (the "Series D Stock"), $.001par value per share of which 85,557
were issued and outstanding as of October 3, 2001.
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 3, 2001 (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 3, 2001, (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 3, 2001, and; (4) up to 500,000
shares of Preferred Stock designated as Series D Senior Convertible Preferred
Stock (the "Series D Stock") of which 85,557 shares were outstanding as of
October 3, 2001.
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.
38
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 unpaid 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 unpaid 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.
39
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 thereof, 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
Magnitude Information Systems, Inc. (the "Company") was incorporated as
a Delaware corporation on April 19, 1988 under the name Fortunistics Inc. On
March 4, 1993, the Company changed its name to Whitestone Industries, Inc. On
July 14, 1997, the Company changed its name to Proformix Systems, Inc., and on
November 18, 1998, the Company changed its name to Magnitude Information
Systems, Inc.
On June 24, 1997, the Company, extended a stock exchange
offer to the shareholders of Proformix, Inc., a Delaware corporation
and manufacturer of ergonomic keyboarding systems. Proformix, Inc. in
November 1998 changed its name to Magnitude, Inc. and is now referred to as
Magnitude, Inc.. At the time of this submission, holders of 98.5% of
Magnitude, Inc. common stock have tendered their shares. The business
combination which took the form of a reverse acquisition has been accounted
for as a purchase. As a result, the Company and Magnitude, Inc. remain
as two separate legal entities whereby Magnitude, Inc. operates as a
subsidiary of Magnitude Information Systems, Inc.. The operations of the
newly combined entity are currently comprised solely of the operations of
Magnitude, Inc.
40
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software developing
firm, and on April 30, 1998, into an Asset Purchase Agreement with Vanity
Software Publishing Co., a Canadian developer of specialized software, whereby
the Company, in return for payments in form of cash and equity, acquired the
rights to certain software products and related assets, with such software
products subsequently forming the basis for the further development, during the
year, of the Company's proprietary ErgoManager(TM) software system.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several related
agreements with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian
designer, manufacturer and distributor of office furniture based in Holland
Landing, Ontario, Canada, pursuant to which OS acquired Magnitude, Inc.'s
hardware product line comprised of the Company's ergonomic keyboard platform
products and accessories, all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the Proformix
name, against a cash consideration and an ongoing contingent stream of royalty
payments on OS' sales of the Proformix hardware products.
The Company is currently subject to the reporting requirements of
Section 15(d) of the Securities Exchange Act of 1934. The Company has the
authority to issue an aggregate of One Hundred Million (100,000,000) Common
Shares, par value $.0001, and Three Million (3,000,000) Preferred Shares, par
value $0.001, of which at December 31, 2000, Two Thousand Five Hundred (2,500)
were designated as Cumulative Preferred Shares, par value $.001 . On January 31,
2000, the Company filed amendments to its Certificate of Incorporation,
designating from its "blank check" preferred stock pool 300,000 shares as Series
A Senior Convertible Preferred Stock, par value $0.001; 350,000 shares as Series
B Senior Convertible Preferred Stock, par value $0.001; 120,000 shares as Series
C Senior Convertible Preferred Stock, par value $0.001, and; on November 3,
2000, the Company filed an amendment to its Certificate of Incorporation,
designating from its "blank check" preferred stock pool 500,000 shares as Series
D Senior Convertible Preferred Stock, par value $0.001.
As of October 3, 2001, there were outstanding 24,023,903 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 85,557 shares 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 the
subsequent 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 before 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
41
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
42
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 minimize 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:
43
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.
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
44
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.
eFuel Announced, Patent Pending:
New patent-pending technology powering consumable software, web-sites
and deliverable content. eFuel can be used as an e-Commerce currency provided in
exchange for user information on their computer usage both online and offline.
Users build up rewards to apply towards product and service purchases.
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
Work Comp 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 rapidly growing
number of corporate and institutional clients. 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 targeted 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. An
45
important milestone was reached when the Company, in the fall of 1998 entered
into a joint venture agreement with AON Ergonomic Services, a division of AON,
one of the largest insurance services companies in the world, to market the
ErgoManager(TM) system. This agreement was renewed and expanded in July 1999. In
January 2000, Anderson Consulting LLP and the Company entered into an agreement
whereby Anderson will include the Company's products in their prestigious "Ideas
Exchange" showcase. This agreement is of special significance because it will
introduce the Company to a potentially large audience of key corporate clients.
During the second quarter, 2000, the Company entered into joint marketing and
distribution agreements with Automated Systems, Inc.. ("ASI"), a well-known,
high-level systems integrator based in Chicago, and Protegrity Services, Inc.,
one of the largest, privately held workers' compensation companies in the United
States, serving approximately 18,000 business customers in 17 States.
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., and in April 1999 by Version 3.05. The Company has scheduled Version 4.0
for release later this year.
The Company has expensed all expenditures related to the above efforts.
Such expenses totaled $162,600 for the year ended December 31, 1999, and
$130,460 for the year ended December 31, 1998.
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.
46
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.
Competition
Competitive pressures come from other ergonomic software products. 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. In all comparisons, ErgoManager provides more
features and better performance than competitive products. The differences
between ErgoManager and competing products are substantial.
47
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.
License Agreements
On December 1, 1997, the Company entered into a two year Software
Distribution and Option Agreement with Cornell Ergonomics Inc., a Delaware
corporation, pursuant to which it is licensed on an exclusive basis, to
distribute and sub-license a certain software product known as "ErgoSure" which
the Company currently markets in conjunction with its own proprietary software
products. On January 15, 2000, the Company acquired full title and ownership to
that product.
EMPLOYEES
As of September 30, 2001, the Company employed 12 persons, of whom six
were primarily engaged in research and development and software support
activities, six were primarily engaged in sales and marketing, and five in
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, and relocated its operations during April, 2000. This lease
agreement calls for monthly rental payments of $6,500 with nominal increases
after years No. 2, 3, and 4.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The financial information presented below is derived from the financial
statements of the Company and should be read in conjunction with the financial
statements and notes thereto as presented in our reports on Form 10-KSB for the
year ended December 31, 2000, and on Forms 10-QSB for the three month periods
ended March 31, June 30, and September 30, 2001, all of which are incorporated
herein by reference.
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 Sheet December 31,
2000 1999 .
Total assets ...................................... $ 2,168,199 $ 2,220,223
Current liabilities ............................... 917,658 4,465,413
Long-term debt .................................. 381,008 35,755
Working capital (deficit) ................... 24,302 (3,541,257)
Shareholders' Equity (deficit) ............ $ 869,533 $ (2,280,945)
Statement of Operations For The Year Ended December 31,
2000 1999 .
Total revenues ................................... $ 646,635 $ 263,553
Operating loss ................................... (3,546,457) (2,642,989)
Loss before extraordinary items ......... (3,627,149) (2,882,322)
Net loss ............................................ (3,515,473) (2,391,948)
Net loss per common share ................ $ (0.25) $ (0.28)
Number of shares used in computing
per share data .................................... 14,793,682 8,486,443
Summary
Fiscal Year 2000 was crucial in the Company's efforts to open up the
emerging new market of ergonomic productivity software - a highly specialized
but rapidly growing niche market. Recent Federal OSHA ergonomic regulatory
activity and the preceding and ensuing political struggle gave high visibility
to the health problems associated with ergonomically deficient workplace
environments and procedures and work habits, with a specific emphasis on
computer-use related repetitive stress injuries which result in huge remedial
costs and productivity losses - the exact area specifically addressed by the
Company's software products.
49
2000 was also the year when the Company achieved major milestones in
several areas - the introduction of new enhanced products, first major sales in
several market segments, the grant of patent protection for key aspects of its
software products, the completion of an important scientific study that
validates key assumptions underlying the functionality of the Company's premier
product - the ErgoManager(TM) software system.
Products:
During the summer of 2000, Version 4.0 representing major enhancements
to the ErgoManager(TM) System was released to the market. Numerous important
feature enhancements and extensive design changes in the user interface and the
monitoring programs, coupled with new 32-bit client software, provide for
increased functionality and state of the art design. In addition, the Company
issued test versions of its new ErgoFUN! Ergonomic Software which was
specifically designed to teach children proper work habits when using computers,
and finalization of the first version of the Company's proprietary "eFuel"
application.
Key Strategic Partnerships:
During the year, the Company added depth to its strategic partnership
and marketing programs by negotiating new or expanded agreements with several
co-marketing partners and resellers that have access to or specialize in health
related enterprise software markets. With respect to the Government area, the
March 2000 award of a GSA contract will facilitate entry into one of the most
important market segments and has already resulted in a larger order from a
Government client.
Expansion of Client Base and First Sales Success':
The most promising clients are medium size to large companies,
Government agencies and organizations that employ a large staff in the data
entry or general computer related work environment, are cognizant of the
potential gains in productivity associated with preventive action and sensitive
to the health risks and liability potential arising out of unattended workplace
deficiencies, and are prepared to make the necessary investments in a remedial
and preventive solution such as offered by the ErgoManager(TM) System. During
2000, the Company succeeded in converting pilot programs into department- or
enterprise-wide installations in several areas that represent important
"firsts": the first enterprise-wide installation within the Federal Government
(Defense Threat Reduction Agency); the first department-wide installation within
a State Government (California State Controller's Office); the first
company-wide installation in a larger business enterprise (21st Century
Insurance Co.). Our largest contract to-date, for approximately $217,000, was
received from the California State Compensation Insurance Fund, in the fall of
2000. Other significant orders include, during the first quarter 2001, a
contract from Lockheed Martin for software and support services aggregating
approximately $140,000.
Recapitalization and Debt Restructuring:
As explained in more detail below, during 2000 management continued its
efforts to find new equity capital for financing the Company's ongoing
operations and the market introduction of its new software products, and was
successful in attracting approximately $4.2 million in new equity funding, as
well as converting substantial amounts of debt into equity. These transactions
resulted in significant improvements to the balance sheet of the Company.
50
Results of Operations for the Year Ended December 31, 2000
For the year ended December 31, 2000, the Company had revenues of
$646,635 which represents a 145% increase over 1999 sales which totaled
$263,553.
Gross profits amounted to $483,916 for a 74.8% gross margin (1999:
35.5%). 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 increase significantly with larger revenues, as shown in the comparative
figures for the last two years. After deducting selling -, research -, and
general and administrative expenses of $4,030,373 which increased sharply from
the $2,735,721 recorded in 1999, the Company realized an operating loss of
$3,546,457, compared to an operating loss of $2,642,989 in 1999. Non-operating
income exceeded expenses by $192,368 and include $158,548 net interest expense
and $84,191 in non-recurring income including an extraordinary credit of
approximately $60,000 for dissolution of certain prior year accruals. The
Company also realized an extraordinary gain of $122,044 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
$3,515,473. After accounting for dividend accruals on outstanding preferred
stock which totaled $201,054, the net loss applicable to common shareholders was
$3,716,527 or $0.25 per share, compared to a loss of $2,391,948 or $0.28 per
share for the previous year.
The relatively large increase in operating expenses is the result of
the Company's intensified efforts to create awareness in the marketplace for its
software products. These products represent direct and proven solutions for the
increasingly publicized challenges to business and government employers
resulting from the epidemic growth in repetitive stress injuries to employees in
the computerized work environment. The Company's products, however, do not
merely represent a remedial tool for employee well-being and risk management but
- - as important - give rise to increased productivity, as supported by several
studies. To convey this message to the business community, the Company during
the year invested substantial financial and personnel resources in promoting its
name and products, through increased participation in trade shows, radio and TV
advertising, dissemination of printed matter and other channels. In addition, it
significantly expanded its direct sales force and supporting infrastructure.
These efforts came with a price tag in form of a $1.3 million or 47% increase in
operating expenses, notably in the areas of marketing and promotional expenses
which in total increased from $136,000 in 1999 to $749,000 in 2000. Other
expense categories which experienced larger increases were outlays for research
and development that were entirely expensed, and legal expenses, the latter
primarily in connection with the negotiations and documentation of expanded
financing activities, the preparation and filing of registration statements with
regulatory authorities and - among others - the Company's annual meeting of
stockholders. Marked increases in G&A expenses were furthermore incurred in the
areas of computer and travel expenses and shareholder and investor relations.
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.
51
Results of Operations for the Nine Month Period Ended September 30, 2001
A number of major contracts were anticipated to close in September but
were delayed directly due to the events of September 11th, 2001. These are
building towards closure again, however, the delays resulted in lesser than
expected revenues during the period. It is worthwhile to note that in the time
since September, management has observed increased attention to cost-containment
at prospects and clients resulting in extraordinary interest in the Company's
products. Management expects future revenues to reflect this very positive
development in our industry. No major new contracts were signed during the
period, however, at the time of this writing the Company is in the process of
completing materials due under a purchase by an overseas distributor with whom
we had signed a license and purchase agreement during the second quarter, which
will result in the recognition of $175,000 in previously deferred revenues when
complete. We are in the process of negotiating similaragreements with both U.S.
distributors and other foreign distributors in the Far East and Europe..
Revenues for the quarter ended September30, 2001, totaled $34,150,
compared to $253,787 for the same period in 2000, all such revenues generated by
the Company's wholly owned subsidiary Magnitude, Inc. from the licensing of the
Company's proprietary ErgoManager(TM) software and related maintenance and
support services. The terms of two larger pourchase contracts received by the
Company during the second quarter provide for extended payment terms so that the
Company will receive cash only in installments through 2002 (see "Receivables
due after 12 months" in Notes to Financial Statements). Revenues for the nine
months period ended September 30, 2001, totaled $527,083 compared to $601,790 in
the first nine months of 2000. Gross profits during the quarter totaled negative
$5,161. The gross profits are burdened with a fixed charge for amortization of
software investments. Software assets underlying the Company's products are
being amortized on a straight line over 10 years, resulting in a level charge of
approximately $13,000 per month to cost-of-goods-sold. Since variable product
costs are low, the gross margin is expected to significantly increase as
revenues grow. After deducting selling expenses and general and administrative
expenses totaling $812,713 the Company realized an operating loss of $817,874,
compared to an operating loss of $870,571 for the third quarter in 2000.
Non-operating expenses totaled $166,459, primarily from the write-off of a
compromised asset position (see "Prepaid Expenses" in the Notes to Financial
Statements). The net result for the quarter, after accounting for dividends paid
and accrued on the Company's outstanding preferred stock, was a loss of
$1,010,687 or $0.04 per share, compared to a loss of $939,930 or $0.06 per share
for the same period last year. The nine month' result was a loss of $2,719,036
in 2001, and a loss of $2,599,305 in 2000.
In spite of a fifteen percent decrease in operating costs from the
preceding quarter, expenses continue to be high relative to revenues. Management
is striving to further reduce costs, however, is acutely aware of the necessity
to provide for an adequate infrastructure to maintain the Company's presence on
the marketplace. Savings vis-a-vis prior quarters were achieved in both selling
and general and administrative expenses through staffing reductions and the
elimination of certain non-critical marketing programs. Management expects to be
able to further reduce costs during the fourth quarter.
Our primary marketing focus is on medium to larger size companies that
may be candidates for enterprise-wide installation of our software. Such larger
contacts, however, typically are preceded by long and exhaustive trial and
evaluation cycles whose pace of progress are unpredictable. The timing of the
finalization of any major contract will significantly impact a given quarter's
results. Management is confident that its current sales approach remains valid
and will result in tangible revenue improvements during the upcoming quarters.
52
As a result of the slower than initially forecasted growth in the B2B
sector, the quarter concluded with a significant loss that cut further into the
Company's financial resources. A partial replenishment of these resources came
in the form of new working capital provided by private investors, however, the
amounts obtained were not sufficient to entirely offset the negative cash-flow
from operations, and came at the cost of occupying a growing part of
management's time and efforts. Since revenues from the licensing of software do
not yet cover operating expenses, and are not expected to do so in the immediate
future, the Company will continue to depend on new capital infusions to be able
to operate and pursue its marketing goals.
Liquidity and Capital Resources
The cash outflow from losses during the first three quarters could be
compensated by new equity investments through equity subscriptions by accredited
investors who purchased the Company's common stock and preferred stock in a
series of private placements, and the exercise of warrants and options to
purchase such stock. These transactions contributed approximately $1,640,000 in
cash, augmented by approximately $120,000 in cash advances by related parties.
These receipts were not sufficient to reverse the large deficit in the working
capital position which amounted to negative $1,021,405 at September 30, 2001,
including the effect of a reclassification to current status of certain notes
issued to the Company's chief executive officer, and continues to slow the
Company's marketing efforts.
Management is presently in discussion with several private lenders and
investors with the goal of securing a larger infusion of equity or debt capital.
The outcome of these discussions and the timing for any resulting capital
inflows can not, however, be predicted with certainty at this time, and there
can be no assurance that the necessary capital for an orderly continuation of
the Company's business and redemption of liabilities will be obtained in a
timely fashion. Should the Company be unable to successfully complete such
financing transactions we may have to severely curtail operations.
At the time of this submission, the Company had no bank debt. At
September 30, 2001, its short-term liabilities, aside from trade payables and
accruals, consisted of certain notes and loans aggregating approximately
$650,000 of which $520,000 are owed to the Company's chairman and chief
executive officer (see "Related Party Transactions"). Owing to present liquidity
constraints, the Company is currently in arrears with approximately $130,000 in
accrued unpaid dividends.
53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2000 the former Chairman and the Company entered into an
agreement pursuant to which he resigned as a director and officer. The agreement
provided, among other things, for (i) the termination of his employment
agreement; (ii) the conversion of cumulative preferred stock with a face value
of $900,000 and a convertible promissory note in the amount of $351,060 into (a)
900,000 shares of common stock of the Company and (b) 100,000 shares of Series C
Senior Convertible Preferred Stock with a face value of $900,000; (iii) a
restrictive covenant for which the Company will pay a monthly fee in the amount
of $5,555 over a 36-months term; and (iv) certain redemption privileges relating
to the Series C Senior Convertible Preferred Stock.
In February 2000, the President and Chief Executive Officer exercised a put
option for 155,556 shares of common stock issued in connection with the 1998
acquisition by the Company of Rolina Corporation which exercise resulted in a
$374,890 current liability to the Company. On March 31, 2000, the Company and
the President agreed to convert this current liability payable into a long-term
obligation maturing March 31, 2002 which among others provides for a right to
the holder to convert such obligation into common stock of the Company.
Between July and November 1999, an individual who in January 2000 joined
the Company in the capacity of Vice President for Shareholder Relations,
invested an aggregate $450,000 in the Company against issuance of convertible
promissory notes and warrants for the purchase of 900,000 common shares. In
February 2000, these promissory notes were converted into 900,000 common shares.
On March 31, 2000, the Company and its President and Chief Executive
Officer agreed to convert a current liability payable to him in the amount of
$374,890 into a Company obligation maturing June 30, 2001, which among others
provides for a right to the holder to convert such obligation into common stock
of the Company (see long-term debt.
During the first quarter 2001, several officers and directors of the
Company extended cash advances totaling $120,000 to the Company, accruing
interest at the rate of 7% per year. These advances are repayable upon demand.
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.
54
MAGNITUDE INFORMATION SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UnauditedConsolidated Financial Statements for the nine month period
ended September 30, 2001
Audited Consolidated Financial Statements as of December 31, 2000 and
for the years ended December 31, 2000 and 1999
Audited Consolidated Financial Statements as of December 31, 1999 and for
the years ended December 31, 1999 and 1998
55
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 2001 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6 - 12
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
56
PART I - Item 1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2001
ASSETS
Current Assets
Cash .................................................................... $ 8,577
Accounts receivable, net of allowance for
doubtful accounts of 132,843 .......................................... 353,634
Miscellaneous receivables................................................. 196,323
Inventories .............................................................. 2,260
Deferred tax asset........................................................ 122,044
Prepaid expenses ......................................................... 34,679
----------
Total Current Assets .................................................. 717,517
Receivables due for payment after 12 months............................... 125,781
Property, plant and equipment, net of accumulated
depreciation of $203,585............................................... 77,051
Software, net of accumulated amortization of $534,520 .................... 972,770
Other assets ............................................................. 21,829
---------
TOTAL ASSETS .................................................................. 1,914,948
========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses .................................... 698,110
Deferred revenue.......................................................... 231,867
Dividends payable ........................................................ 150,586
Loans and notes payable .................................................. 617,390
Current maturities long-term debt ........................................ 33,529
Current maturities lease obligations ..................................... 7,440
-----------
Total Current Liabilities ............................................. 1,738,922
Long-term debt, less current portion ..................................... 0
Lease obligations, less current portion .................................. 6,118
-----------
TOTAL LIABILITIES ............................................................. 1,745,040
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 214,857 shares are issued and outstanding 215
Common Stock, $0.0001 par value, 100,000,000 shares authorized,
25,023,903 shares are issued and outstanding.............................. 2,502
Additional paid-in capital ............................................... 17,900,767
Accumulated deficit ...................................................... (17,733,576)
------------
TOTAL STOCKHOLDERS' EQUITY............................... 169,908
TOTAL LIABILITIES AND EQUITY .................................... $ 1,914,948
==========
See notes to consolidated financial statements
57
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Total Revenues.................................... $ 34,150 $ 253,787 527,083 601,790
Cost of Goods Sold .......................... 39,311 41,740 120,353 126,394
------------- ------------- ------------- ---------
Gross Profit ..................................... (5,161) 212,047 406,730 475,396
Selling expenses ............................ 256,275 441,140 1,005,883 1,046,219
General & administrative expenses ........... 556,438 641,478 1,762,632 1,774,331
----------- ------------ ------------- -----------
Operating Income (Loss) .......................... (817,874) (870,571) (2,361,785) (2,345,154)
Miscellaneous income ........................ 0 12 0 14,060
Interest expense, net........................ (9,670) (16,091) (42,901) (148,934)
Miscellaneous expenses ...................... (156,789) (0) (156,789) (1,149)
Non-Operating Income (Expense) ................... (166,459) (16,079) (199,690) (136,023)
------------- ------------- ------------- -----------
Net Loss before taxes............................. (984,333) (886,650) (2,561,475) (2,481,177)
Provision for income taxes................... 0 0 0 0
Net Loss ......................................... $ (984,333) $ (886,650) $(2,561,475) $ (2,481,177)
========= ======== =========== ========
Dividends ........................................ 26,354 53,280 157,561 118,128
Net Loss after Dividends ......................... $(1,010,687) $ (939,930) $(2,719,036) $ (2,599,305)
Loss per Common Share ............................ $ (0.04) $ (0.06) $ (0.13) $ (0.18)
======== ======== ======== ========
Weighted Average Number of
Common Shares Outstanding .................... 23,552,842 15,745,597 20,285,553 14,599,500
See notes to consolidated financial statements
58
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2001 2000
Cash Flows from Operating Activities
Net income (loss) ............................ $(2,561,475) $ (2,481,178)
Adjustments to net income (loss)
Depreciation and amortization ............. 152,933 149,074
Stock and debt issued for expenses......... 27,388 251,667
Disposition of certain assets /liabilities. 0 1,122
Dividend payments........................ (14,003) (42,000)
Decreases (increases) in Assets
Accounts receivable ..................... (131,943) (401,277)
Miscellaneous receivables................ (129,627) 15,227
Inventories ............................. 240 215
Prepaid expenses ........................ 319,138 (38,795)
Other assets ............................ 2,600 (22,750)
Increases (decreases) in Liabilities
Prepayments received..................... 0 0
Deferred revenues........................ 204,548 0
Accounts payable and accrued expenses ... 110,856 (204,486)
-------------- ---------
Net Cash Provided (Used) by Operating Activities (2,019,345) (2,773,181)
Cash Flows from Investing Activities
Purchases of equipment and fixtures ........ (944) (52,182)
Disposition of equipment and other assets .. 0 3,358
-------------- ---------
Net Cash Provided (Used) by Investing Activities (944) (48,824)
Cash Flows from Financing Activities
Proceeds from notes payable ............... 397,500 250,000
Repayment of loans and notes .............. (46,000) (484,534)
Reclassification of long-term debt ........ (100,000) (0)
Issuance of preferred stock................ 145,004 2,937,836
Issuance of common stock ........... ...... 1,594,661 550,000
------------- -------
Net Cash Provided (Used) by Financing Activities 1,991,165 3,253,302
Net Increase (Decrease) in Cash ................ (29,124) 431,297
Cash at Beginning of Period .................... 37,701 249,569
---------- --------
Cash at End of Period .......................... $ 8,577 $ 680,866
============ =========
See notes to consolidated financial statements
59
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
DESCRIPTION OF BUSINESS
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to
Whitestone Industries, Inc. On July 14, 1997, the Company changed its
name to Proformix Systems, Inc., and on November 18, 1998, the Company
changed its name to Magnitude Information Systems, Inc.
Our primary product is an integrated suite of proprietary software
modules marketed under the name ErgoManager(TM) which are designed to
help individual computer users and businesses increase productivity and
reduce the risk of potentially preventable repetitive stress injury
(RSI). These software modules can be applied individually or together
in a comprehensive ergonomic and early intervention program that seeks
to modify a user's behavior by monitoring computer usage patterns over
time and warning the user when to break a dangerous trend in repetitive
usage of an input device, such as a keyboard or mouse. The product was
developed to train people working on computers, monitor computer-use
related activities and evaluate a user's risk exposure and propensity
towards injury or loss of effectiveness in connection with his/her
day-to-day work. Moreover, the software enables a company to not only
address the issue of health risks involving employees and to minimize
resulting potential liabilities, but delivers a powerful tool to
increase overall productivity.
BACKGROUND
On June 24, 1997, the Company, extended a stock exchange offer to the
shareholders of Proformix, Inc., a Delaware corporation and manufacturer of
ergonomic keyboarding systems. Proformix, Inc. in November 1998 changed its name
to Magnitude, Inc. and is now referred to as Magnitude, Inc. At the time of this
submission, holders of 99.4% of Magnitude, Inc. common stock have tendered their
shares. The business combination which took the form of a reverse acquisition
has been accounted for as a purchase. As a result, the Company and Magnitude,
Inc. remain as two separate legal entities whereby Magnitude, Inc. operates as a
subsidiary of Magnitude Information Systems, Inc.. The operations of the newly
combined entity are currently comprised solely of the operations of Magnitude,
Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of Merger
with Rolina Corporation, a privately held New Jersey software developing firm,
and on April 30, 1998, into an Asset Purchase Agreement with Vanity Software
Publishing Co., a Canadian developer of specialized software, whereby the
Company, in return for payments in form of cash and equity, acquired the rights
to certain software products and related assets, with such software products
subsequently forming the basis for the further development, during the
year, of the Company's proprietary ErgoManager(TM) software system.
On November 18, 1998, the Company and its wholly owned subsidiary Magnitude,
Inc. entered into an Asset Purchase Agreement and several related agreements
with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian designer,
manufacturer and distributor of office furniture based in Holland Landing,
Ontario, Canada, pursuant to which OS acquired Magnitude, Inc.'s hardware
product line comprised of the Company's ergonomic keyboard platform products and
accessories, all related inventory and production tooling and warehousing
assets, and all intellectual property rights including the Proformix name,
against a cash consideration and certain royalty payments on OS' sales of the
Proformix hardware products.
60
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NARRATIVE DESCRIPTION OF INDUSTRY AND MARKET
Magnitude Information Systems, Inc. is a pioneer in the Ergonomic
Productivity Software (EPS) market. With ErgoManager(TM), an
interactive suite of Windows(TM) software products, Magnitude has
developed and delivered the first integrated systems approach to
computer ergonomics. Our patented proprietary software products provide
business and government employers with a complete system for the
evaluation and management of ergonomic and productivity risk factors
with respect to the use of computers in the office environment.
ErgoManager(TM) is designed to help employers minimize preventable
Repetitive Stress Injuries ("RSI") and enhance productivity through:
-- Real-time monitoring of keyboarding activities to ensure proper
posture and work pacing.
-- Pro-active dialogue with at-risk employees, including surveys and
training in the best practices for
wellness and productivity.
-- Strategic profiling and the management of computer use throughout
an organization to employ best practices and to measure health,
safety, and performance results.
-- Computer workstation assessment tools.
We have received a patent from the U.S. Patent and Trademark Office on
our application relative to certain core inventions within its
ErgoManager(TM) system and we have applied for several more patents for
our products.
As the utilization of computers in the office has increased
significantly in the last decade, so has the rate of health problems
believed to be related to the use of computers. Computer ergonomics
focus on optimizing the design of technology involved in the
utilization of computers in the office, and also attempts to affect the
manner in which people interact with computers, so as to minimize the
associated health risks. A successful technology delivery system
positively impacts the cost of doing business by improving the comfort,
productivity, job satisfaction and safety of the computer user, while
reducing the costs of absenteeism and work related disability.
Repetitive stress injury (RSI) is a classification of diseases caused
by the excessive use of joints. It is a sub-classification of
Cumulative Trauma Disorders (CTDs). RSI accounts for a large portion of
work-related illnesses, and the incidence of RSI is expected to grow as
the number of people operating keyboards increases. The impact of RSI
is measured not only in the pain and suffering of its victims, but also
in time lost from work and medical costs. The Company's software
products are designed to help businesses deal with potentially
preventable repetitive stress injuries, by real-time monitoring of
keyboarding activities, pro-active dialog with at-risk employees, and
strategic profiling and management of computer use throughout an
organization.
A new study released in January 2001 by the National Academy of
Sciences, originally commissioned by Congress and produced by the
National Research Council, finds that work-related back, hand and wrist
injuries affect about 1 million U.S. workers every year. The total cost
of the resultant disorders is between $45 billion and $54 billion in
compensation, lost wages and lower productivity. Increased awareness of
the health risks and associated costs led the State of California
several years ago implemented an ergonomic regulation which directs
qualifying employers to establish and maintain a program designed to
minimize RSI's. Such program shall include work-site evaluation,
control of the exposures that have caused RSI's, and training of
employees. State agencies and employers in California face fines of up
to $25,000 per incident for violating these regulations. The State of
Washington adopted similar regulations in 2000, and other states have
indicated a willingness to follow suit. The Company believes that the
growing recognition of these trends will give rise to a rapidly
expanding market for the Company's products.
61
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
GOING CONCERN
The ability of the Company to continue its operations is dependent on
increasing sales and obtaining additional capital and financing. In their
report for the fiscal year ended December 31, 2000, our auditors had
expressed an opinion that, as a result of the losses incurred and the
relative lack of working capital, there was substantial doubt regarding our
ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might be necessary if the
Company were unable to continue as a going concern. During the last year
and the first three quarters in 2001 the Company has relied on the private
placement of its common and preferred stock to fund its operations.
Management's plans are to continue seeking additional working capital
through equity and debt placements with private and institutional
investors.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Magnitude
Information Systems, Inc. and its subsidiary Magnitude, Inc. All
significant inter-company balances and transactions have been
eliminated.
Inventories
Inventory consists of finished goods that are stated at the lower of
cost (determined by the first-in, first out method) or market.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is
computed on the straight-line method over the estimated useful lives of
such assets between 3-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets are amortized on the
straight-line method over 10 years.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-based Compensation". The
statement generally suggests, but does not require, employee
stock-based compensation transactions be accounted for based on the
fair value of the services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted
by the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established
62
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
when necessary to reduce deferred tax assets to the amount expected to
be realized. The Company has incurred net operating losses for
financial-reporting and tax-reporting purposes. Accordingly, for
Federal income tax purposes, the benefit for income taxes has been
offset entirely by a valuation allowance against the related federal
deferred tax asset for the year ended December 31, 2000. For state
income tax purposes, a partial valuation allowance has been offset
against the related state deferred tax asset for the year ended
December 31, 2000.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share" is computed by
dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
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.
DEFERRED TAX ASSET
During 2000, the Company had filed an application with the New Jersey
Economic Development Authority who administers the current New Jersey
Tax Certification program pursuant to the New Jersey Emerging
Technology and Biotechnology Financial Assistance Act to qualify for
and be the beneficiary of this program which will permit a participant
to liquidate its State NOL tax benefits against cash considerations.
The Company has been accepted under this program and has been issued
tax transfer certificates which will, upon liquidation, result in a
cash benefit in the amount stated.
PREPAID EXPENSES
Prepaid expenses at the end of the quarter included a position of
$156,789 resulting from an agreement in February 1998 with BNN Business
News Network Inc., a nationwide media advertising and radio network
company, whereby the Company purchased advertising time to be utilized
on stations associated with Business News Network Inc., usable over a
period of three years, since then extended, and aggregating $900,000 in
retail value, against issuance of 150,000 new and restricted common
shares. The services purchased were capitalized at the then fair market
value of the stock issued, for a total of $375,000 and have since been
amortized as utilized. At September 30, 2001, however, management
concluded that the remaining asset was compromised due to the
likelihood that there would be no further tangible benefits associated
with this position. The residual balance of $156,789 was therefore
written off.
63
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
RECEIVABLES DUE AFTER 12 MONTHS
Two major contracts, entered into during the second quarter, provided for
deferred payment schedules of which portions amounting to $125,781 are due
and payable in installments during the months October through December
2002.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at September 30,
2001:
Equipment $ 164,891
Furniture and fixtures 69,976
Leasehold improvements 45,770
--------------
280,637
Less accumulated depreciation 203,585
--------------
Total $ 77,051
==============
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at September
30, 2001:
Accounts payable $ 434,876
Accrued interest 50,139
Accrued commissions 41,231
Accrued salaries and professional fees 112,296
Miscellaneous accruals 70,943
=============
Total $ 709,485
=============
DEFERRED REVENUES
During the second quarter, the Company entered into a licensing and
distribution agreement with a foreign distributor which resulted in a
$175,000 receivables position with extended payment terms, whereby the
associated revenue has been deferred until management has received more
assurance with respect to the collectibility of the receivable
64
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
LOANS AND NOTES PAYABLE
At September 30, 2001, Magnitude, Inc. and the Company had borrowings
under short term loan agreements with the following terms and conditions:
Note issued by Magnitude, Inc. originally maturing December 4, 1998 and accruing interest at $ 75,000
5% per year. This note is overdue at September 30, 2001; no demand for payment has been made
through today's date.
Note issued by Magnitude, Inc. originally maturing June 1996 and accruing interest at 12% per
year. This note is overdue at September 30, 2001; no demand for payment has been made through 25,000
today's date.
Discounted present value of a non-interest bearing $70,000 settlement with a former investor
of Magnitude, Inc. to be paid in monthly payments commencing July 1, 1997. The imputed 33,529
interest rate used to discount the note is 8% per annum.
Cash advances from an officer and director of the Company, carrying interest at the rate of 7%
p.a. 142,500
Pursuant to the February 2, 1998, Agreement and Plan of Merger with Rolina Corporation (see
"Background") the Company had issued 155,556 shares (the "Shares") of its common stock to the $ 374,890
principal of Rolina Corporation who currently serves as the Company's President and Chief
Executive Officer, and had issued a Put Option for such Shares at a price of $2.41 per share in
accordance with the provisions contained therein, with notice for exercise eligible to be given
at any time after February 1, 2000, and before 5:00 p.m. on the 90th day thereafter. This
liability was converted into a Company obligation maturing July 1, 2002, and carrying interest
at the rate of 7% per year payable monthly, of which a portion of $100,000 has been
reclassified as due on demand. The obligation includes an option to the holder for conversion
of the outstanding principal into shares of the Company's common stock at the rate of $0.50 per
share.
Total $ 650,919
INCOME TAXES
At December 31, 2000, the Company had net operating loss carry forwards
approximating $14,000,000 for federal income tax purpose which expire
between the years 2007 and 2020 and are subject to certain annual
limitations.
The Company's total deferred tax asset and valuation allowance at December 31, 2000 are as follows:
Total deferred tax asset $ 5,600,000
Less valuation allowance 5,600,000
Net deferred tax asset $ -
================
65
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
COMMITMENTS AND CONTINGENCIES
Lease Agreements
On March 15, 2000, the Company entered into a lease agreement for office
space which is utilized for the Company's principal offices. Such lease
commenced April 15, 2000 and expires on March 31, 2005 and requires monthly
payments of $6,500 from April 15, 2000 through March 31, 2002; of $6,695
thereafter through March 31, 2003; of $6,896 thereafter through March 31,
2004; and of $7,103 thereafter through March 31, 2005.
RELATED PARTY TRANSACTIONS
On March 31, 2000, the Company and its President and Chief Executive
Officer agreed to convert a current liability payable to him in the amount
of $374,890 into a Company obligation, of which $100,000 was subsequently
classified as due on demand with the remaining balance of $274,890
maturing July 1, 2002. The obligation among others provides for a right to
the holder to convert such obligation into common stock of the Company
(see "Loans and Notes Payable").
During the first three quarters in 2001, several officers and directors of
the Company extended cash advances to the Company of which a balance of
$142,500 at September 30, 2001 remains outstanding and which accrue
interest at the rate of 7% per year. These advances are repayable upon
demand. During the quarter ended September 30, 2001, a director of the
Company converted an aggregate $130,000 of such cash advances into 361,111
shares of the Company's common stock and warrants for the purchase of a
further 361,111 common shares, exercisable at $0.60 per share.
In July 2001, the board of directors of the Company acted on an earlier
decision with respect to founder's shares and authorized the grant of a
stock option for the purchase of 2.5 million common shares to the founder
and current Chief Executive Officer of the Company, exercisable over ten
years at a price of $0.50 per share. The option has a cash-less exercise
feature.
In September 2001, a director of the Company exercised warrants for the
purchase of 400,000 shares of the Company's common stock, at a price of
$0.25 per share.
66
[Letterhead of Rosenberg Rich Baker Berman & Company]
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, 2000 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 2000 and 1999. 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, 2000 and the consolidated
results of their operations and their cash flows for the years ended December
31, 2000 and 1999, 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
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
February 28, 2001
67
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2000
Assets
Current Assets
Cash $ 37,701
Accounts receivable net of allowance for doubtful accounts of $47,844 359,203
Due From Officer 24,500
Miscellaneous receivables 42,195
Deferred tax asset 122,044
Prepaid expenses 356,317
--------------
Total Current Assets 941,960
Property, plant and equipment, net of accumulated depreciation of $167,591 112,101
Software, net of accumulated amortization of $417,581 1,089,709
Other assets 24,429
==============
Total Assets 2,168,199
==============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 542,113
Deferred revenues 28,398
Dividends payable 91,178
Loans payable 150,000
Notes payable 65,000
Current maturities of long-term debt 33,529
Current maturities of capitalized lease obligations 7,440
--------------
Total Current Liabilities 917,658
Long term debt, less current portion 374,890
Obligations under capital leases, excluding current maturities 6,118
--------------
Total Liabilities 1,298,666
Minority Interest -
Stockholders' Equity
Preferred Stock, $.001 par value, non-voting, 3,000,000 shares authorized 524
Common stock, $.0001 par value, 100,000,000 shares authorized;
16,525,240 shares issued 1,652
and outstanding
Additional paid in capital 15,881,897
Accumulated deficit (15,014,540)
--------------
Total Stockholders' Equity 869,533
==============
Total Liabilities and Stockholders' Equity $ 2,168,199
==============
See notes to the consolidated financial statements.
68
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
----------------------------------
2000 1999
--------------- --------------
Net Sales
Hardware Products $ 600 $ 2,850
Software 646,035 260,703
--------------- --------------
Total Net Sales 646,635 263,553
Cost of Good Sold
Hardware Products 600 2,850
Software 162,119 167,971
--------------- --------------
Total Cost of Goods Sold 162,719 170,821
Gross Profit 483,916 92,732
Research and development costs 77,334 -
Selling, general and administrative expenses 3,953,039 2,735,721
--------------- --------------
(Loss) From Operations (3,546,457) (2,642,989)
Other Income (Expense)
Miscellaneous income 84,192 133,520
Interest income 16,528 -
Miscellaneous expense - (40,542)
Interest expense (176,337) (293,553)
Loss on disposition of assets (5,075) (38,758)
--------------- --------------
Total Other (Expense) (80,692) (239,333)
--------------- --------------
(Loss) Before Provision for Income Taxes (3,627,149) (2,882,322)
(Provision for) Benefit from Income Taxes 111,676 490,374
=============== ==============
Net (Loss) $ (3,515,473) $ (2,391,948)
=============== ==============
Dividends on Preferred Shares $ (201,054) $ -
=============== ==============
Net (Loss) Applicable to Common Shareholders $ (3,716,527) $ (2,391,948)
=============== ==============
Net (Loss) Per Common Share (0.25) (0.28)
=============== ==============
Weighted Average of Common Shares Outstanding 14,793,682 8,486,443
=============== ==============
See notes to the consolidated financial statements.
69
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 2000 and 1999
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
----------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
--------- ----------- --------- ----------- ------------- ----------
Balances, January 1, 1999 -$ - 10 $ - 6,431,113 $ 643
Issuances of common stock granted for services
performed - - - - 1,404,328 140
Issuances of common stock pursuant to stock option
exercise loan agreement - - - - 535,000 53
Issuance of common stock for conversion of loans
and accrued interest - - - - 767,332 77
Issuance of common stock pursuant to note penalty
clause - - - - 60,000 6
Contingent liability pursuant to put option
agreement - - - - - -
Exchange of the Company's common stock, 1 common
share for 3.4676 common shares of Magnitude, Inc. - - - - 7,210 1
Issuance of common shares pursuant to private
equity placements - - - - 1,050,000 105
Cancellation of previously issued common stock - - - - (7,500) (1)
Issuance of common stock pursuant to anti-dilution
clause - - - - 77,778 8
Issuance of common stock to suppliers pursuant to
grant - - - - 15,000 2
Issuance of convertible debt with attached warrants - - - - - -
Net loss, year ended December 31, 1999 - - - - - -
======== =========== ========= =========== ============= ==========
Balances, December 31, 1999 -$ - 10 $ - 10,340,261 $ 1,034
======== =========== ========= =========== ============= ==========
See notes to the consolidated financial statements.
70A
Total
Additional Accumulated Stockholders
Paid in Deficit Equity
Capital (Deficit)
-------------- -------------- ----------------
Balances, January 1, 1999 $ 6,913,728 $ (8,906,065) $ (1,991,694)
Issuances of common stock granted for services
performed 1,224,030 - 1,224,170
Issuances of common stock pursuant to stock option
exercise loan agreement 267,446 - 267,499
Issuance of common stock for conversion of loans
and accrued interest 383,590 - 383,667
Issuance of common stock pursuant to note penalty
clause (6) - -
Contingent liability pursuant to put option
agreement (374,890) - (374,890)
Exchange of the Company's common stock, 1 common
share for 3.4676 common shares of Magnitude, Inc. (1) - -
Issuance of common shares pursuant to private
equity placements 524,895 - 525,000
Cancellation of previously issued common stock 1 - -
Issuance of common stock pursuant to anti-dilution
clause (8) - -
Issuance of common stock to suppliers pursuant to
grant 5,249 - 5,251
Issuance of convertible debt with attached warrants 72,000 - 72,000
Net loss, year ended December 31, 1999 - (2,391,948) (2,391,948)
============== ============== ================
Balances, December 31, 1999 $ 9,016,034 $ (11,298,013) $ (2,280,945)
============== ============== ================
See notes to the consolidated financial statements.
70B
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 2000 and 1999
Convertible Cumulative
Preferred Shares 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 100 (9) - 700,000 70
preferred shares pursuant to resignation agreement 100,000
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
Amortization of advertising services - - - - - -
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
========= ========= ======== ========= ============ ========
71A
See notes to the consolidated financial statements.
Total
Additional Accumulated Stockholders
Paid in Deficit Equity
Capital (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 350,890 - 351,060
preferred shares pursuant to resignation agreement
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) - -
Amortization of advertising services - - 56,044
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
============ ============== ===============
71B
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
----------------------------------
2000 1999
-------------- ---------------
Cash Flows From Operating Activities
Net Income (Loss) $ (3,515,473) $ (2,391,948)
Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities
Depreciation and amortization 200,564 183,053
Amortization of prepaid advertising expense 56,044 -
Common stock issued for various expenses 119,000 474,119
Loss on disposition of assets 5,075 38,758
Bad debt provision 41,328 4,109
Forgiveness of debt (76,328) -
New debt issued for interest expense 32,318 5,400
Inventory write-off 6,170 16,770
Decreases (Increases) in Assets
Accounts receivable (341,807) 46,416
Miscellaneous receivables 4,432 58,951
Inventories 215 1,134
Deferred tax assets 79,426 (201,470)
Prepaid expenses (20,980) (3,273)
Other assets (21,970) 2,652
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses 79,157 (189,975)
Deferred revenue 28,398 -
-------------- ---------------
Net Cash (Used) by Operating Activities (3,324,431) (1,955,304)
-------------- ---------------
Cash Flows From (Used) by Investing Activities
Purchases of equipment, fixtures, and software (62,691) (6,486)
Sales of property and equipment 750 250
Loans made (55,000) -
Collections of loans 500 -
-------------- ---------------
Net Cash (Used) by Investing Activities (116,441) (6,236)
-------------- ---------------
Cash Flows From Financing Activities
Repayment of notes payable (498,250) -
Proceeds from long-term debt - 300,000
Proceeds from long-term debt with detachable warrants - 800,000
Repayment of long-term debt - (50,474)
Repayment of capital lease obligations (6,385) (7,747)
Proceeds from loans payable 125,000 726,181
Repayment of loans payable (156,284) (91,254)
Proceeds from issuance of common and preferred stock 3,883,799 525,000
Dividends paid (118,876) -
-------------- ---------------
Net Cash Provided by Financing Activities 3,229,004 2,201,706
-------------- ---------------
Net increase (decrease) in Cash (211,868) 240,166
Cash at beginning of period 249,569 9,403
============== ===============
Cash at end of period $ 37,701 $ 249,569
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 139,624 $ 153,313
Taxes Paid $ 2,582 $ 6,600
============== ===============
See notes to the consolidated financial statements.
72
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
------------------------------
2000 1999
-------------- --------------
Schedule of non-cash investing and financing activities
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 $ 374,890 $
and 155,556 previously issued common shares were cancelled
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 $ 351,060 $
new convertible preferred shares and 700,000 common shares were issued
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, 653,776common
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
In connection with the disposition of a 20% equity interest in Input Technologies
LLC, $20,392 of accounts payable and accrued expenses were written off $ 20,392
In connection with the trade-in of capitalized lease equipment for operating lease
equipment, $17,975 of capitalized lease obligations were written off $ 17,975
In connection with the Rolina Corporation merger agreement, a put option on
155,556 shares at $2.41 was set up as an accrued contingent liability $ 374,890
In connection with the retirement of a $100,000 promissory note and accrued
interest thereon, 202,332 common shares were issued $ 101,166
In connection with a stock option exercise, 535,000 common shares were issued
against the cancellation of loans and notes totaling $261,604 along with $ 267,500
the accrued interest thereon
In connection with the retirement of promissory notes totaling $256,959 plus
accrued interest thereon, 565,000 common shares were issued $ 282,500
In connection with the issuance of a promissory note totaling $119,735 , $29,735
of accrued interest on various notes was incorporated into a new note. $ 29,735
In connection with the issuance of common stock, 1,419,328 common shares
were issued for past services $ 721,619
In connection with the issuance of 1,000,000 common shares during the year ended
December 31, 1998, $276,230 for past services was relieved; notes
totaling $134,295 with accrued interest of $19,692 were retired, and loans
and advances of $77,585 were retired during the year ended December 31, 1999. $ 507,802
==============
See notes to the consolidated financial statements.
73
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 March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to
Proformix Systems, Inc., and on November 18, 1998, the Company changed
its name to Magnitude Information Systems, Inc.
The Company 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 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
the 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 EMS Software System.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several
related agreements with 1320236 Ontario Inc. ("OS"), a publicly traded
Canadian designer, manufacturer and distributor of office furniture
based in Holland Landing, Ontario, Canada, pursuant to which OS
acquired Magnitude, Inc.'s hardware product line comprised of the
Company's ergonomic keyboard platform products and accessories, and all
related inventory and production tooling and warehousing assets, and
all intellectual property rights including the Proformix name, against
cash consideration and on ongoing contingent stream of royalty payments
on OS' sales of the Magnitude hardware products. The Agreement with OS
also provided for the retirement of the Company's then existing bank
debt out of the proceeds of the transaction.
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, development, manufacture, and marketing of research-based
ergonomic accessory products for the computerized workplace. In
parallel, and beginning with the February 1998 acquisition by the
Company of Rolina Corporation, an early stage software business which
had developed an ergonomic software product that was being marketed
under the name "ErgoSentry", and the subsequent acquisition in May 1998
of substantially all of the assets of Vanity Software Publishing
Corporation, a Canadian software firm, which included a certain
ergonomic software package known as "ErgoBreak", the Company engaged in
the development of a unique suite of software packages designed to
increase productivity in the computer related work environment which
include the before mentioned "ErgoSentry" and "ErgoBreak" products.
These efforts resulted, in November 1998, in the release to the market
of the proprietary "Proformix EMS (Ergonomic Management System)"
software system. With the sale of the hardware product line, the
Company's business became focused exclusively on the further
development and marketing of these software products.
74
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 employees 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.
Inventories
Inventory consists of finished goods related to the Company's former
hardware product line which are stated at the lower of cost (determined
by the first-in, first out method) or market.
Depreciation
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is
computed on the straight line method over the estimated useful lives of
such assets between 5-10 years. Maintenance and repairs are charged to
operations as incurred. Repairs and maintenance which do not extend the
useful lives of the related assets are expensed as incurred.
Amortization
Software assets acquired pursuant to the Rolina and Vanity agreements
and the Cornell and IET acquisitions are capitalized at the fair value
of stock exchanged/granted upon acquisition and are amortized on the
straight line method over 10 years.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. Effective
January 1, 1996, the
75
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 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, 2000.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share," is computed
by dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of
shipment provided that the resulting receivable is deemed probable of
collection. Revenue from software sales is recognized at the time of
licensing provided that the resulting receivable is deemed probable of
collection. Revenue from software maintenance contracts is recognized
notably 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
As shown in the accompanying financial statements, the Company incurred net
losses of $3,515,473 and $2,391,948 during the years ended December 31, 2000
and 1999, 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 to alleviate this 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.
76
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
PREPAID EXPENSES
Prepaid Expenses include $318,956 resulting from an
agreement in February 1998 with BNN Business News Network, Inc., a
nationwide media advertising and radio network company, whereby the
Company purchased advertising time to be utilized on stations
associated with Business News Network, Inc., usable over a period of
three years, since then extended, and aggregating $900,000 in retail
value, against issuance of 150,000 new and restricted common shares.
The services were recorded at the then fair market value of the stock
issued, for a total of $375,000. The services are being amortized as
incurred, over the time frame of the next two years. For the years
ended December 31, 2000 and 1999 $56,044 and $0, respectively, of
advertising services were amortized.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 2000
Equipment $ 163,946
Furniture and fixtures 69,976
Leasehold improvements 45,770
--------------------
279,692
Less accumulated depreciation 167,591
====================
$ 112,101
====================
Depreciation expense charged to operations was $44,645 and $37,514 in 2000 and 1999, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 2000:
Accounts payable $ 244,933
Accrued interest 47,687
Accrued commissions 31,833
Accrued returns 35,719
Accrued legal settlement 20,000
Accrued professional fees 82,000
Accrued taxes 21,378
Accrued payroll 34,039
Miscellaneous accruals 24,524
===================
$ 542,113
===================
77
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan
agreements with the following terms and conditions at
December 31, 2000:
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, 2000 $ 75,000
and no demand for payment has been made through the date of our report.
Notes dated December 6, 2000 and December 28, 2000 representing cash advances by the
Company's Chief Executive Officer and Board Chairman. The notes are due on the
earlier of January 31, 2001 or the receipt by the Company of new investment funds in the 75,000
approximate amount of $250,000. The note carries an interest rate of 7% per annum. ==========
Total $ 150,000
==========
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 $1,050,000 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 holder
of $400,000 worth of notes agreed to accept partial repayment of $200,000
of the note balance payable in five equal monthly installments of $40,000
commencing September 8, 2000 and converted the remaining balance into
common shares. At December 31, 2000, there was one remaining installment
of $40,000. The total amount of nonconverted notes outstanding at
December 31, 2000 is $25,000 which is in default.
78
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LONG-TERM DEBT
Long-term debt as of December 31, 2000 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 $ 374,890
February 1, 2000, and before 5:00 p.m. on the 90th day thereafter. This liability was converted into a
Company obligation maturing March 31, 2002, and carrying interest at the rate of 7% per year payable
monthly. The obligation includes an option to the holder for conversion of the outstanding principal
into shares of the Company's common stock at the rate of $0.50 per share.
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 33,529
rate used to discount the note is 8% per annum.
-------------
Total 408,419
Less current maturities 33,529
=============
Long-term debt, net of current maturities $ 374,890
=============
Total maturities of long-term debt are as follows:
Year Ending December 31,
2000 $ 33,529
2001 -
2002 374,890
===============
$ 408,419
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, 2000 amounted to
$12,748 net of accumulated depreciation of $13,628.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 2000:
Year Ending December 31,
2001 $ 8,211
2002 6,316
---------------
Total minimum capital lease payments 14,527
Less amounts representing interest 969
---------------
Present value of net minimum capital lease payments 13,558
Less current maturities of capital lease obligations 7,440
---------------
Obligations under capital leases, excluding current maturities $ 6,118
===============
79
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
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, 2000 is $0 with a liquidation price of
$100,000. As of December 31, 2000 and 1999, there were $9,000 and $9,000,
respectively 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, 2000 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
entitled to 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 Cumulative 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 Company. 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.
(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").
80
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(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, 2000 there were $1,709 Series A Senior
Convertible Preferred share dividends in arrears representing
$.06 per share.
Series B of the Senior Convertible Preferred Stock series which was issued in
2000 has 350,000 shares designated, 305,592 shares issued and outstanding. The
total outstanding Series B Senior Convertible Preferred Stock at December 31,
2000 is $306 with a liquidation price of $2,750,328. 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
Company. 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.
(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").
81
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(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, 2000 there were $63,485 Series B Senior
Convertible Preferred share dividends in arrears representing
$.21 per share.
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, 2000 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 Company. 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.
(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").
82
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(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, 2000 there were $5,250 Series C Senior
Convertible Preferred share dividends in arrears representing
$.05 per share.
Series D of the Senior Convertible Preferred Stock series which was
issued in 2000 has 500,000 shares designated, 89,445 shares issued and
outstanding. The total outstanding Series D Senior Convertible Preferred
Stock at December 31, 2000 is $89 with a liquidation price of $805,004.
The following is a descriptionof 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 remaining net assets are insufficient to
cover all such payments to holders of Series A, B, C and D Senior
Preferred, the holders of these series shall receive payments on a
pro rata basis.
(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").
83
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(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, 2000 there were $11,734 Series D Senior Convertible
Preferred share dividends in arrears representing $.13
per share.
INCOME TAXES
The income tax provision (benefit) is comprised of the following:
Year Ended December 31,
-----------------------------------
2000 1999
--------------- ---------------
State current provision (benefit) $ (111,676) $ (490,374)
State deferred provision (benefit) - -
=============== ---------------
$ (111,676) $ (490,374)
=============== ===============
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 1999
and 2000, 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.
The total anticipated net proceeds of this transaction for 2000, which
represents the sale of the Company's 1999 New Jersey Net Operating Loss,
was $157,751; of which $35,707 was received by December 31, 2000 and the
remaining $122,044 was set up as a current deferred tax asset.
The Company's total deferred tax asset and valuation allowance are as
follows:
December 31,
------------------------------------
2000 1999
---------------- ----------------
Total deferred tax asset, noncurrent $ 5,600,000 $ 4,240,000
Less valuation allowance (5,600,000) (4,240,000)
---------------- ----------------
Net deferred tax asset, noncurrent $ - $ -
================ ================
84
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES - (Continued)
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,
---------------------------------
2000 1999
---------------- -------------
Tax benefit (40%) (40%)
Valuation allowance (40%) 40%
---------------- -------------
Effective tax rate - -
================ =============
At December 31, 2000, the Company has available approximately $14,000,000
of net operating losses to carryforward and which may be used to reduce
future federal taxable income and expire between December 31, 2007 and
2020.
At December 31, 2000, the Company has available approximately $3,400,000
of net operating losses to carryforward and which may be used to reduce
future state taxable income which expire December 31, 2007.
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 $20,718 and $9,592 for the years ended December 31, 2000 and
1999, respectively.
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 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 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.
85
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS - (Continued)
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,
-----------------------------------
2000 1999
----------------- ---------------
Outstanding, beginning of year 795,000 981,468
Granted during the year 193,000 605,000
Forfeited during the year (75,000) (791,468)
Outstanding, end of year (at prices ranging from $1.00 to $2.00 913,000 795,000
per share)
----------------- ---------------
Eligible, end of year for exercise (at prices ranging from $1.00 to 757,500 470,000
$2.00 per share) ================= ===============
At December 31, 2000 and 1999, the weighted average exercise price and
weighted average remaining contractual life is $1.10 and $1.13 per share
and 4 years 4 months and 4 years 9 months, respectively.
At December 31, 2000, there were 87,000 shares reserved for future option
grants.
Qualified and Non-Qualified
Shares Under Option Pursuant to
the 2000 Plan
December 31,
2000
---------------------------------
Outstanding, beginning of year -
Granted during the year 648,000
Forfeited during the year -
Outstanding, end of year (at prices ranging from $1.00 to $1.33) 648,000
Eligible, end of year for exercise (at prices ranging from $1.00 to $1.33) 528,000
=================================
At December 31, 2000 the weighted average exercise price and weighted
average remaining contractual life is $1.07 and 4 years 6 months,
respectively.
At December 31, 2000, there were 4,352,000 shares reserved for future option
grants.
86
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS - (Continued)
WARRANTS
The Company granted common stock purchase warrants between May 1, 1998 and
November 13, 2000.
At December 31, 2000, there were 7,344,742 shares eligible for exercise at
prices ranging from $.50 to $5.00 per share, of which 1,900,000 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
Magnitude, Inc. currently leases office space which contained its former
administrative offices pursuant to a lease agreement dated December 9,
1998. Such lease commenced December 16, 1998 and expires on December 31,
2001 and requires monthly payments of $3,700 from December 16, 1998 to
October 31, 1999 and $3,250 from November 1, 1999 to December 31, 2001.
This space has been sublet, generating $3,250 per month in offsetting
revenues.
On March 15, 2000, the Company entered into a lease agreement for office
space which is utilized for the Company's principal offices. Such lease
commenced April 15, 2000 and expires on March 31, 2005 and requires
monthly payments of $6,500 from April 15, 2000 through March 31, 2002; of
$6,695 thereafter through March 31, 2003; of $6,896 thereafter March 31,
2004; and of $7,103 thereafter through March 31, 2005.
The Company also leases office space for a sales office. Such lease
commenced September 1, 2000 and expires on August 31, 2000
and requires monthly payments of $1,000.
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,
2001 $ 86,000
2002 79,755
2003 82,149
2004 $ 84,615
2005 21,309
===============
Total $ 353,828
Included in general and administrative expenses is rent expense which
amounted to $84,160and $64,125 for the years ended December 31, 2000 and
1999, respectively.
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.
87
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
RELATED PARTY TRANSACTIONS
In November 1998, the Company entered into a consulting agreement with an
individual who subsequently, in January 1999, joined the Company's board of
directors, and pursuant to which the Company issued 1,000,000 shares of
common stock. Such shares were registered on Form S-8 on December 22, 1998.
During the first quarter of 1999, this individual, pursuant to the
consulting agreement, obtained the release of approximately $436,000 of the
Company's liabilities.
Between December 30, 1998, and March 31, 1999, a director and principal
shareholder extended working capital loans aggregating $395,560 to the
Company, of which a portion of $351,060 was the subject of a promissory note
bearing interest at the rate of 10% per annum During the same time, this
director and shareholder exercised options to purchase 450,000 shares of the
common stock of the Company, and was issued an additional 565,000 shares,
against a combination of cash payments and cancellation of debt owed by the
Company in the aggregate amount of $507,500.
In January 1999, the Chairman of the Board of Directors resigned. In
connection with this individual's resignation, $350,000 of the $900,000
principal amount cumulative preferred shares held by this individual were
exchanged for 700,000 shares of common stock of the Company. The remaining
principal balance of $550,000 along with a promissory note totalling
$351,060 were exchanged for a $900,000 principal amount of a new series of
convertible preferred shares which require 7% per annum dividend payments to
be made monthly. In connection with a termination agreement dated January
28, 2000 a restrictive covenant and confidentiality agreement was executed
whereby the Company agreed to pay this individual a monthly fee in the
amount of $5,555 over the 36 month term of that agreement along with this
individual's health and term life insurance for an 18 month period.
On March 31, 2000, the Company and its Board Chairman and Chief Executive
Officer agreed to convert a current liability payable to him in the amount
of $374,890 into a Company obligation maturing March 31, 2002, which among
others provides for a right to the holder to convert such obligation into
common stock of the Company (see "Long-term debt").
In September 2000, an officer of the Company extended a cash advance of
$50,000 to the Company, accruing interest at the rate of 7% per year. This
advance was repaid in October 2000. In December 2000, additional advances of
$75,000 were made to the Company accruing interest at the rate of 7% and are
due on the earlier of January 31, 2001 or the receipt by the Company of new
investment funds in the approximate amount of $250,000 (see "Loans
Payable").
In April 2000 an officer of the Company borrowed $25,000 from Magnitude,
Inc. accruing interest at the rate of 7% per year. This note was due on June
30, 2000. The outstanding balance on this note as of December 31, 2000 was
$24,500.
CHANGES IN KEY PERSONNEL
On October 11, 2000, the board of directors of the Company confirmed the
promotion of John C. Duncan, Executive Vice President, to the position of
President and Chief Operating Officer of the Company. Steven D. Rudnik
retains the title and position of Chief Executive Officer and Chairman of
the Board.
88
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
MAJOR CUSTOMERS
The Company had two major customers for the year ended December 31, 2000,
which comprised 19% and 29% of total sales. The Company had accounts
receivable balances due from these customers of $122,572 and $205,065,
respectively, at December 31, 2000.
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.
ACQUISITIONS
On January 15, 2000 the Company acquired all of the outstanding stock of
Internet Ergonomics Technologies Corp (IET) in exchange for 64,000 shares
of the Company's common stock carrying a fair market value of $28,150. The
purchase price was determined to approximate the value of the net assets of
IET. The following represents the unaudited proforma results of operations
as if the business combination had occurred at the beginning of the
respective year in which IET was acquired as well as the beginning of the
immediately preceding year.
December 31
-----------------------------------
2000 1999
---------------- ---------------
Net Sales $ 776,635 $ 263,553
Net Loss (3,515,473) (2,392,523)
(Loss) per share (0.25) (0.28)
On January 15, 2000 the Company acquired all of the outstanding stock of
Cornell Ergonomics, Inc. (Cornell) in exchange for 54,000 shares of the
Company's common stock carrying a fair market value of $23,750. The
purchase price was determined to approximate the value of the net assets of
Cornell. The following represents the unaudited proforma results of
operations as if the business combination had occurred at the beginning of
the respective year in which Cornell was acquired as well as the beginning
of the immediately preceding year.
December 31
-----------------------------------
2000 1999
---------------- ---------------
Net Sales $ 776,635 $ 286,053
Net Loss (3,515,473) (2,390,623)
(Loss) per share (0.25) (0.28)
89
GOING CONCERN
As show in the accompanying financial statements, the Company incurred net
losses of $3,515,473 and $2,391,948 during the years ended December 31, 2000
and 1999, 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 is currently in discussions with several potential investors to
obtain additional capital.
90
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 1999
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.............. 8-17
91
[Letterhead of
Rosenberg Rich Baker Berman & Company ]
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, 1999 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 1999 and 1998. 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, 1999 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
/s/Rosenberg Rich Baker Berman & Company
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 24, 2000
92
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1999
Assets
Current Assets
Cash $ 249,569
Accounts receivable net of allowance for doubtful accounts of $78,301 58,724
Inventories 8,885
Miscellaneous receivables 16,627
Deferred tax asset 201,470
Prepaid expenses 388,881
--------------
Total Current Assets 924,156
Property, plant and equipment, net of accumulated depreciation of $145,579 99,880
Software, net of accumulated amortization of $261,662 1,193,728
Other assets 2,459
==============
Total Assets 2,220,223
==============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 806,265
Accrued contingent liability 374,890
Dividends payable 9,000
Loans payable 754,541
Notes payable 1,475,000
Current maturities of long-term debt 1,038,779
Current maturities of capitalized lease obligations 6,938
--------------
Total Current Liabilities 4,465,413
Long term debt, less current portion 22,750
Obligations under capital leases, excluding current maturities 13,005
--------------
Total Liabilities 4,501,168
--------------
Minority Interest -
Stockholders' Equity (Deficit)
Preferred stock Series A, $.01 par value, authorized 3,000,000 shares; issued and
outstanding, 0 shares -
Cumulative preferred stock, $.001 par value; 2,500 shares authorized, 10 shares
issued and outstanding -
Common stock, $.0001 par value, 30,000,000 shares authorized; 10,340,261 shares issued
and outstanding 1,034
Contributed capital 81,000
Additional paid in capital 8,935,034
Accumulated deficit (11,298,013)
--------------
Total Stockholders' Equity (Deficit) (2,280,945)
--------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,220,223
==============
See notes to the consolidated financial statements.
93
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
----------------------------------
1999 1998
--------------- --------------
Net Sales
Hardware Products $ 2,850 $ 2,853,969
Software 260,703 72,486
--------------- --------------
Total Net Sales 263,553 2,926,455
--------------- --------------
Cost of Good Sold
Hardware Products 2,850 1,450,367
Software 167,971 140,073
--------------- --------------
Total Cost of Goods Sold 170,821 1,590,440
Gross Profit 92,732 1,336,015
Selling, general and administrative expenses 2,735,721 3,924,777
--------------- --------------
(Loss) From Operations (2,642,989) (2,588,762)
--------------- --------------
Other Income (Expense)
Miscellaneous income 133,520 86,872
Interest income - 1,384
Miscellaneous expense (40,542) (182,385)
Interest expense (293,553) (343,394)
Loss on disposition of assets (38,758) (104,336)
--------------- --------------
Total Other (Expense) (239,333) (541,859)
--------------- --------------
(Loss) From Continuing Operations Before Provision for Income Taxes (2,882,322) (3,130,621)
Provision for (Benefit from) Income Taxes 490,374 -
--------------- --------------
(Loss) From Continuing Operations (2,391,948) (3,130,621)
Discontinued Operations
Gain on disposal of hardware line of business (net of $0 income tax
effect) - 599,712
=============== ==============
Net (Loss) $ (2,391,948) $ (2,530,909)
=============== ==============
Net (Loss) Per Common Share:
(Loss) From Continuing Operations $ (.28) $ (.72)
Discontinued Operations - .14
Net (Loss) $ (.28) $ (.58)
--------------- --------------
Weighted Average of Common Shares Outstanding 8,486,443 4,324,292
=============== ==============
See notes to the consolidated financial statements.
94
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
------------ --------------- ------------------
Shares Amount Shares Amount Shares Amount
------------- ----- --------- ------------------
Balances, January 1, 1999 - $ - 10 $ - 6,431,113 $ 643
Issuances of common stock granted for
services performed - - - - 1,404,328 140
Issuances of common stock pursuant to stock option
exercise loan agreement - - - - 535,000 53
Issuance of common stock for conversion of loans
and accrued interest - - - - 767,332 77
Issuance of common stock pursuant to note penalty
clause - - - - 60,000 6
Contingent liability pursuant to put option
agreement - - - - - -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - - - - 7,210 1
Issuance of common shares pursuant to private
equity placements - - - - 1,050,000 105
Cancellation of previously issued common stock - - - - (7,500) (1)
Issuance of common stock pursuant to anti-dilution
clause - - - - 77,778 8
Issuance of common stock to suppliers pursuant to
grant - - - - 15,000 2
Issuance of convertible debt with attached warrants - - - - - -
Net loss, year ended December 31, 1999 - - - - - -
---- ------- ----- -------- ---------- ------
Balances, December 31, 1999 - $ - 10 $ - 10,340,261 $1,034
==== ======= ===== ======== ========== ======
See notes to the consolidated financial statements
95A
Total
Contributed Additional Accumulated Stockholder
Capital Paid in Deficit Equity
----------------- -------------- -------------- ---------------
Balances, January 1, 1999 $ 81,000 $ 6,832,728 $(8,906,065) $ (1,991,694)
Issuances of common stock granted for
services performed - 1,224,030 - 1,224,170
Issuances of common stock pursuant to stock option
exercise loan agreement - 267,446 - 267,499
Issuance of common stock for conversion of loans
and accrued interest - 383,590 - 383,667
Issuance of common stock pursuant to note penalty
clause - (6) - -
Contingent liability pursuant to put option
agreement - (374,890) - (374,890)
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - (1) - -
Issuance of common shares pursuant to private
equity placements - 524,895 - 525,000
Cancellation of previously issued common stock - 1 - -
Issuance of common stock pursuant to anti-dilution
clause - (8) - -
Issuance of common stock to suppliers pursuant to
grant - 5,249 - 5,251
Issuance of convertible debt with attached warrants - 72,000 - 72,000
Net loss, year ended December 31, 1999 - - (2,391,948) (2,391,948)
-------- ---------- -------------- --------------
Balances, December 31, 1999 $ 81,000 $8,935,034 $(11,298,013) $2,280,945)
========= =========== ============== ==============
See notes to the consolidated financial statements
95B
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ------------- --------
Balances, January 1, 1998 - $ - 10 $ - 2,898,507 $ 290
Accrued Dividends on cumulative preferred shares
reversed - - - - - -
Dividends on cumulative preferred shares waiver
reversed - - - - - -
Issuances of common stock to domestic private
individuals pursuant to an exemption under Rule - - - - 79,722 8
506
Issuances of common stock to foreign investors
pursuant to Reg. S. - - - - 1,453,644 145
Exchange of the Company's common stock, one
common share for 3.4676 common shares of - - - - 22,061 2
Magnitude, Inc.
Issuance of common stock for conversion of
accrued interest on private placement notes - - - - 10,411 1
Issuance of common stock in exchange for prepaid
advertising - - - - 150,000 15
Issuance of common stock pursuant to Rolina
Corporation merger - - - - 155,556 16
Issuance of common stock pursuant to Vanity
Software Publishing Corporation acquisition - - - - 224,000 22
Issuance of common stock granted for services
performed - - - - 1,080,177 108
Issuance of common stock for conversion of loan
and accrued interest - - - - 342,000 34
Issuance of common stock pursuant to sales
incentive awards - - - - 5,035 1
Issuance of common stock in exchange for product
rights - - - - 10,000 1
Net loss, year ended December 31, 1998 - - - - - -
-------- --------- -------- --------- ------------- --------
Balances, December 31, 1998 - $ - 10 $ - 6,431,113 $ 643
======== ========= ======== ========= ============= ========
See notes to the consolidated financial statement
96A
Total
Contributed Additional Accumulated Stockholders
Capital Paid in Deficit Equity
Capital (Deficit)
------------ ------------ --------------- ---------------
Balances, January 1, 1998 $ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
Accrued Dividends on cumulative preferred shares
reversed - - 18,000 18,000
Dividends on cumulative preferred shares waiver
reversed (162,000) - 162,000 -
Issuances of common stock to domestic private
individuals pursuant to an exemption under Rule - 199,992 - 200,000
506
Issuances of common stock to foreign investors
pursuant to Reg. S. - 2,586,855 - 2,587,000
Exchange of the Company's common stock, one
common share for 3.4676 common shares of - (2) - -
Magnitude, Inc.
Issuance of common stock for conversion of
accrued interest on private placement notes - 36,101 - 36,102
Issuance of common stock in exchange for prepaid
advertising - 374,985 - 375,000
Issuance of common stock pursuant to Rolina
Corporation merger - 388,874 - 388,890
Issuance of common stock pursuant to Vanity
Software Publishing Corporation acquisition - 559,978 - 560,000
Issuance of common stock granted for services
performed - 29,892 - 30,000
Issuance of common stock for conversion of loan
and accrued interest - 341,199 - 341,233
Issuance of common stock pursuant to sales
incentive awards - (1) - -
Issuance of common stock in exchange for product
rights - (1) - -
Net loss, year ended December 31, 1998 - - (2,530,909) (2,530,909)
------------ ------------ --------------- ---------------
Balances, December 31, 1998 $ 81,000 $ 6,832,728 $ (8,906,065) $ (1,991,694)
============ ============ =============== ===============
See notes to the consolidated financial statement
96B
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
----------------------------------
1999 1998
--------------- ---------------
Cash Flows From Operating Activities
Net Income (Loss) $ (2,391,948) $ (2,530,909)
Adjustments to Reconcile Net (Loss) to Net Cash (Used) by Operating
Activities
Depreciation and amortization 183,053 266,589
Common stock issued for various expenses 474,119 -
Loss on disposition of assets 38,758 112,112
Bad debt provision 4,109 94,287
Forgiveness of debt - (32,893)
New debt issued for interest expense 5,400 -
Deferred tax (benefit) (201,470) -
Inventory variance - 132,890
Inventory writeoff 16,770 -
Return reserve provision - 30,000
Decreases (Increases) in Assets
Accounts receivable 46,416 50,956
Miscellaneous receivables 58,951 (54,743)
Inventories 1,134 (317,650)
Prepaid expenses (3,273) 36,996
Other assets 2,652 414
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses (189,975) 403,405
Trade acceptance payable - (44,860)
--------------- ---------------
Net Cash (Used) by Operating Activities (1,955,304) (1,853,406)
--------------- ---------------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (6,486) (569,857)
Sales of property and equipment 250 716,926
--------------- ---------------
Net Cash Provided (Used) by Investing Activities (6,236) 147,069
--------------- ---------------
Cash Flows From Financing Activities
Repayment of notes payable - (25,000)
Proceeds from long-term debt 300,000 342,000
Proceeds from long-term debt with detachable warrants 800,000 -
Repayment of long-term debt (50,474) (750,577)
Repayment of capital lease obligations (7,747) (7,229)
Repayment of officer loans payable - (85,000)
Proceeds from loans payable 726,181 -
Repayment of loans payable (91,254) (275,000)
Proceeds from issuance of common stock 525,000 2,512,000
--------------- ---------------
Net Cash Provided by Financing Activities 2,201,706 1,711,194
--------------- ---------------
Net increase in Cash 240,166 4,857
Cash at beginning of period 9,403 4,546
=============== ===============
Cash at end of period $ 249,569 $ 9,403
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 153,313 $ 245,916
=============== ===============
Taxes Paid $ 6,600 $ 4,320
=============== ===============
See notes to the consolidated financial statements.
97
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
----------------------------------
1999 1998
-------------- ---------------
Schedule of non-cash investing and financing activities
In connection with the retirement of $36,102 of accrued interest on a promissory
note, 10,411 common shares were issued $ 36,102
===============
Capitalized lease obligations incurred for use of equipment $ 26,376
===============
In connection with the acquisition of a 20% equity interest in Input
Technologies LLC, $60,000 of accounts receivable were written off $ 60,000
===============
In connection with the Rolina Corporation merger, secured payment obligation
Incurred $ 100,000
===============
In connection with the obtaining of prepaid advertising, 150,000 common shares
were issued $ 375,000
===============
In connection with the Rolina Corporation merger, 155,556 common shares were
issued $ 388,890
===============
In connection with the Vanity Software Publishing Corporation acquisition,
224,000 common shares were issued $ 560,000
===============
In connection with the issuance of common stock, 72,677 shares were issued as
consideration for past services $ 30,000
===============
In connection with the retirement of a $316,849 promissory note and accrued
interest thereon, 342,000 common shares were issued $ 341,233
===============
In connection with the disposition of a 20% equity interest in Input
Technologies LLC, $20,392 of accounts payable and accrued expenses were
written off $ 20,392
==============
In connection with the trade-in of capitalized lease equipment for
operating lease equipment, $17,975 of capitalized lease obligations
were written off $ 17,975
==============
In connection with the Rolina Corporation merger agreement, a put option on
155,556 shares at $2.41 was set up as an accrued contingent liability $ 374,890
==============
In connection with the retirement of a $100,000 promissory note and accrued
interest thereon, 202,332 common shares were issued $ 101,166
==============
In connection with a stock option exercise, 535,000 common shares were issued
against the cancellation of loans and notes totaling $261,604 along with
accrued interest thereon. $ 267,500
==============
In connection with the retirement of promissory notes totaling $256,959 plus
accrued interest thereon, 565,000 common shares were issued $ 282,500
==============
In connection with the issuance of a promissory note totaling $119,735 , $29,735
of accrued interest on various notes was incorporated into a new note. $ 29,735
==============
In connection with the issuance of common stock, 1,419,328 common shares were
issued for past services $ 721,619
==============
In connection with the issuance of 1,000,000 common shares during the year ended
December 31, 1998, $276,230 for past services was relieved; notes totaling
$134,295 with accrued interest of $19,692 were retired, and loans and
advances of $77,585 were retired during the year ended December 31, 1999. $ 507,802
==============
See notes to the consolidated financial statements.
98
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 March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to
Proformix Systems, Inc., and on November 18, 1998, the Company changed
its name to Magnitude Information Systems, Inc.
The Company and Magnitude, Inc. remain as two separate legal
entities whereby Magnitude, Inc. operates as a subsidiary of the
Company. However, the operations of the newly 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 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
the 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 EMS Software System.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several
related agreements with 1320236 Ontario Inc. ("OS"), a publicly traded
Canadian designer, manufacturer and distributor of office furniture
based in Holland Landing, Ontario, Canada, pursuant to which OS
acquired Magnitude, Inc.'s hardware product line comprised of the
Company's ergonomic keyboard platform products and accessories, and all
related inventory and production tooling and warehousing assets, and
all intellectual property rights including the Proformix name, against
a cash consideration and on ongoing contingent stream of royalty
payments on OS' sales of the Magnitude hardware products. The Agreement
with OS also provided for the retirement of the Company's then existing
bank debt out of the proceeds of the transaction.
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, development, manufacture, and marketing of research-based
ergonomic accessory products for the computerized workplace. In
parallel, and beginning with the February 1998 acquisition by the
Company of Rolina Corporation, an early stage software business which
had developed an ergonomic software product. that was being marketed
under the name "ErgoSentry", and the subsequent acquisition in May 1998
of substantially all of the assets of Vanity Software Publishing
Corporation, 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 in the computer related work environment which
include the before mentioned "ErgoSentry" and "ErgoBreak" products.
These efforts resulted, in November 1998, in the release to the market
of the proprietary "EMS (Ergonomic Management System)" software system.
With the sale of the hardware product line, the Company's business is
now focused exclusively on the further development and marketing of
these software products. As such, the Company currently must be
considered an enterprise in transition, because it has not yet realized
material revenues from licensing its software.
99
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continuted)
Nature of Organization - (continued)
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 1998 and
1999 have not been significant.
Principles of Consolidation
The consolidated financial statements include the accounts of
Magnitude Information Systems, Inc. and its subsidiaries,
Magnitude, Inc. and Corporate Ergonomic Solutions, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories
Inventory consists of finished goods related to the Company's former
hardware product line which are stated at the lower of cost (determined
by the first-in, first out method) or market. The sale of the Company's
hardware product line resulted in a loss on disposal of inventory of
$74,736 in 1998.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is
computed on the straight line method over the estimated useful lives of
such assets between 5-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets acquired pursuant to the Rolina
and Vanity agreements are amortized on the straight line method over 10
years. Repairs and maintenance which do not extend the useful lives of
the related assets are expensed as incurred.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-based Compensation". The
statement generally suggests, but does not require, employee
stock-based compensation transactions be accounted for based on the
fair value of the services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted
by the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and
tax-reporting purposes. Accordingly, for Federal income tax purposes,
the benefit for income taxes has been offset entirely by a valuation
allowance against the related federal deferred tax asset for the year
ended December 31, 1999. For state income tax purposes, a partial
valuation allowance has been offset against the related state deferred
tax asset for the year ended December 31, 1999.
100
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continuted)
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share," is computed
by dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of
shipment provided that the resulting receivable is deemed probable of
collection. Revenue from software sales is recognized at the time of
licensing provided that the resulting receivable is deemed probable of
collection.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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.
INVENTORIES
Inventories consisted of the following at December 31, 1999:
Finished goods $ 8,885
---------------
$ 8,885
===============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1999:
Equipment $ 134,619
Furniture and fixtures 65,070
Leasehold improvements 45,770
----------------
245,459
Less accumulated depreciation 145,579
----------------
$ 99,880
================
Depreciation expense charged to operations was $37,514 and $107,928 in 1999
and 1998, respectively.
101
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, 1999:
Accounts payable $ 154,103
Accrued interest 342,994
Accrued commissions 43,222
Accrued returns 35,718
Accrued legal settlement 20,000
Accrued professional fees 72,698
Accrued taxes 4,300
Accrued payroll 98,268
Miscellaneous accruals 14,962
Accrued warranties 20,000
--------------------
$ 806,265
====================
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan agreements with the following terms and
conditions at December 31, 1999:
Pursuant to three promissory notes signed throughout 1995 and 1996, an investor advanced
Magnitude, Inc. a total of $90,000 payable upon demand with interest at 12% per annum. In
July, 1999 these obligations and accrued interest thereon totaling $29,735 were converted
into a new promissory note for $119,735 dated August 9, 1999 payable upon 30 days written
notice not to begin before January 2, 2000 of which $60,000 has been repaid. The note has
been subsequently converted into common shares. $ 59,735
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,
1999 and no demand for payment has been made through the date of our report. 75,000
Note dated February 11, 1999 issued to the board chairman, principal due May 31, 2000, accruing
interest at a rate of 10% per annum resulting from advances totaling $351,060 during February
and March 1999. This note is secured by all of Magnitude Inc.'s assets and property and is
guaranteed by the Company. The note has been subsequently converted into common shares. 351,060
Pursuant to a promissory note dated April 26, 1999, a member of the Board of Directors of the
Company advanced the sum of $200,000 which is due June 26, 2000 and accruing interest at the
rate of 12% per annum, convertible at the holders option into shares of the common stock of
the Company at the rate of .50(cent)per share. Repayments of $31,254 have been made on the note. 168,746
Pursuant to the Rolina Corporation Agreement & Plan of Merger dated February 2, 1998 the Company
was to deliver to its current Chairman and CEO of the Company, $100,000 eight months from
the closing date. This indebtedness has been recast as a promissory note maturing October
1, 1999 and accruing interest at 10% per annum. In consideration of the indebtedness, the
current Chairman and CEO has a lien on certain software products owned by the Company. The
note has been subsequently repaid by the Company in full. 100,000
---------------
Total $ 754,541
===============
102
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTES PAYABLE
Private Placement Offering
A private offering was completed in June 1995 resulting in Magnitude,
Inc. selling a total of sixteen (16) units and receiving net proceeds
of $1,364,061 after deducting private placement agent's commission and
legal fees amounting of $235,939. In connection therewith, Magnitude,
Inc. issued 160,000 shares of its $.001 common stock at par. The total
amount of such current notes outstanding at December 31, 1999 was
$1,475,000. The Company has subsequently extended an offer to convert
such notes into a portion of common shares or convertible preferred
shares. As of March 24, 2000, the holders of $1,050,000 worth of notes
have agreed to accept partial repayment of approximately 30% of the
note balance on April 30, 2000 and convert the remaining balance into
common shares or convertible preferred shares.
LONG-TERM DEBT
Long-term debt as of December 31, 1999 is comprised of the following:
Convertible promissory notes issued to seven individual private accredited investors
accruing interest at 7% and maturing from June 23, 2000 through January 20, 2001. The notes
provide the holders with the option to convert part or all of the outstanding principal $ 1,028,000
amounts into shares of the common stock of the Company at the rate of $0.50 per share.
Discounted present value of a non-interest bearing $70,000 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. 33,529
--------------
1,061,529
Total
Less current maturities 1,038,779
--------------
Long-term debt, net of current maturities $ 22,750
==============
Total maturities of long-term debt are as follows:
Year Ending December 31,
2000 $ 1,038,779
2001 22,750
---------------
$ 1,061,529
===============
ACCRUED CONTINGENT LIABILITY
Pursuant to the February 2, 1998, Agreement and Plan of Merger with
Rolina Corporation (see "Nature of Organization), the Company has issued
155,556 shares of its common stock to the principal of Rolina
Corporation who currently serves as the Company's President and Chief
Executive Officer, and has 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. In
view of the relative proximity of the exercise period of the option and
the fact that the market price for the Company's shares currently is
significantly lower than the option put price, the entire amount has
been recognized as an accrued contingent liability.
103
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
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, 1999 amounted to
$18,023 net of accumulated depreciation of $8,353.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1999:
Year Ending December 31,
2000 $ 8,211
2001 7,579
2002 6,316
---------------
Total minimum capital lease payments 22,106
Less amounts representing interest 2,163
---------------
Present value of net minimum capital lease payments 19,943
Less current maturities of capital lease obligations 6,938
---------------
Obligations under capital leases, excluding current
maturities $ 13,005
===============
INCOME TAXES
The income tax provision is comprised of the following:
Year Ended December 31,
-----------------------------------
1999 1998
--------------- ---------------
State current provision $ 490,374 $ -
State deferred provision - -
--------------- ---------------
$ 490,374 $ -
=============== ===============
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 1999,
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 ($497,238) were 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 is anticipated by the end of the third quarter of 2000.
The Company's total deferred tax asset and valuation allowance are as follows:
December 31,
---------------------------------
1999 1998
---------------- -------------
Total deferred tax asset, noncurrent $ 4,240,000 $ (3,560,000)
Less valuation allowance (4,240,000) (3,560,000)
---------------- -------------
Net deferred tax asset, noncurrent $ - $ -
-----------------------------------------================ -------------
104
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES - (Continued)
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,
------------------------------------
1999 1998
---------------- ----------------
Tax benefit (40%) (40%)
Valuation allowance 40% 40%
---------------- ----------------
Effective tax rate - -
================ ----------------
At December 31, 1999, the Company has available approximately $10,600,000
of net operating losses to carryforward and which may be used to reduce
future federal taxable income and expire between December 31, 2007 and
2019.
At December 31, 1999, the Company has available approximately $2,800,000
of net operating losses to carryforward and which may be used to reduce
future state taxable income which begin to expire through December 31,
2006.
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 $9,592 and $16,095 for the years ended December 31, 1999 and
1998, respectively.
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 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 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.
105
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS - (Continued)
Qualified and Non-Qualified
Shares Under Option December 31,
----------------------------------
---------------
1999 1998
--------------- ---------------
Outstanding, beginning of year 981,468 586,144
Granted during the year 605,000 501,162
Forfeited during the year (791,468) (105,838)
=============== ===============
Outstanding, end of year (at prices ranging from $1.00 to $4.50 795,000 981,468
per share)
=============== ===============
Eligible, end of year for exercise (at prices ranging from $1.00 to 470,000 292,597
$4.50 per share)
=============== ===============
At December 31, 1999 and 1998, the weighted average exercise price and
weighted average remaining contractual life is $1.13 and $2.56 per share
and 4 years 9 months and 5 years 4 months, respectively.
At December 31, 1999, there were 343,424 shares reserved for future grants.
WARRANTS
The Company issued common stock purchase warrants as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Exercise
Date of Grant No. of Price Per Exercise Term Vesting Rights
Shares Share
Start Expiration
May 1, 1997 10,000 $ 5.00 May 1, 1997 April 30, 2000 Upon Issue
May 1, 1998 224,000 5.00 May 1, 1998 April 30, 2003 Upon Issue
June 10, 1999 200,000 1.00 June 10, 1999 June 10, 2003 Upon Issue
June 21, 1999 200,000 1.00 June 21, 1999 June 21, 2003 Upon Issue
June 23, 1999 300,000 1.00 June 23, 1999 June 23, 2003 Upon Issue
June 25, 1999 200,000 1.00 June 25, 1999 June 25, 2003 Upon Issue
July 13, 1999 100,000 1.00 July 13, 1999 July 13, 2003 Upon Issue
July 20, 1999 100,000 1.00 July 20, 1999 July 20, 2003 Upon Issue
July 22, 1999 150,000 1.00 July 22, 1999 July 22, 2002 Upon Issue
July 28, 1999 150,000 1.00 July 28, 1999 July 28, 2006 Upon Issue
August 19, 1999 100,000 1.00 August 19, 1999 October 4, 2003 Upon Issue
August 30, 1999 100,000 1.00 August 30, 1999 October 4, 2003 Upon Issue
September 7, 1999 100,000 1.00 September 7, 1999 October 4, 2003 Upon Issue
September 21, 1999 50,000 1.00 September 21, 1999 October 4, 2003 Upon Issue
October 4, 1999 50,000 1.00 October 4, 1999 October 4, 2003 Upon Issue
October 8, 1999 400,000 1.00 October 8, 1999 October 8, 2004 Upon Issue
November 8, 1999 50,000 1.00 November 8, 1999 November 8, 2003 Upon Issue
November 16, 1999 100,000 1.00 November 16, 1999 November 16, 2003 Upon Issue
November 20, 1999 100,000 1.00 November 20, 1999 November 20, 2003 Upon Issue
December 28, 1999 100,000 1.00 December 28, 1999 December 28, 2004 Upon Issue
December 30, 1999 602,332 1.00 December 30, 1999 December 30, 2004 Upon Issue
At December 31, 1999, there were 3,386,332 shares eligible for exercise at
prices ranging from $1.00 to $5.00 per share, of which 1,600,000 eligible
shares are callable at $2.00 per share.
106
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commenced December 16,
1998 and expires on December 31, 2001 and requires monthly payments of
$3,700 from December 16, 1998 to October 31, 1999 and $3,250 from
November 1, 1999 to December 31, 2001. Under the lease agreement,
Magnitude, Inc. 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,
2000 $ 39,000
2001 39,000
---------------
Total $ 78,000
===============
In March 2000, the Company entered into a five year lease agreement and
will be relocating its administrative offices. The Company is
attempting to identify a subtenant with respect to its existing lease
obligation. The new lease payment will be $6,500 payable monthly with
nominal increases to the base rent in years three through five.
Included in general and administrative expenses is rent expense which
amounted to $64,125 and $103,580 for the years ended December 31, 1999
and 1998, respectively.
Licensing Agreement
On August 29, 1997, the Company signed a letter of intent to acquire
Cornell Ergonomics ("Cornell") a software developer of a unique
ergonomic assessment tool. This agreement was subsequently revised on
December 1, 1997 through a Software Distribution and Option Agreement
whereby the Company obtained a two-year exclusive license to distribute
and sub-license a certain software product. The Company also has the
exclusive right, under certain circumstances, to purchase either the
assets of Cornell or all of the issued and outstanding capital stock of
Cornell. In January 2000 the Company purchased all of the issued and
outstanding capital stock of Cornell.
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
In November 1998, the Company entered into a consulting agreement with
an individual who subsequently, in January 1999, joined the Company's
board of directors, and pursuant to which the Company issued 1,000,000
shares of common stock. Such shares were registered on Form S-8 on
December 22, 1998. During the first quarter of 1999, this individual,
pursuant to the consulting agreement, obtained the release of
approximately $436,000 of the Company's liabilities.
Between December 30, 1998, and March 31, 1999, a director and principal
shareholder extended working capital loans aggregating $395,560 to the
Company, of which a portion of $351,060 was the subject of a promissory
note bearing interest at the rate of 10% per annum During the same
time, this director and shareholder exercised options to purchase
450,000 shares of the common stock of the Company, and was issued an
additional 565,000 shares, against a combination of cash payments and
cancellation of debt owed by the Company in the aggregate amount of
$507,500.
107
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
MAJOR CUSTOMERS
For the year ended December 31, 1998, the Company had a major customer,
sales of hardware products to which represented approximately 38% of the
Company's revenues. The Company had an accounts receivable balance due
from this customer of $35,730 at December 31, 1998. With the sale of the
hardware product line, the Company's business is now focused exclusively
on the further development and marketing of these software products. As
such, the Company currently must be considered an enterprise in
transition, because it has not yet realized material revenues from
licensing its software.
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.
SUBSEQUENT EVENTS
Changes in Key Personnel
In January 1999, the Chairman of the Board of Directors resigned. In
connection with this individual's resignation, $350,000 of the $900,000
principal amount cumulative preferred shares held by this individual
were exchanged for 700,000 shares of common stock of the Company. The
remaining principal balance of $550,000 along with a promissory note
totalling $351,060 were exchanged for a $900,000 principal amount of a
new series of convertible preferred shares which have rights of 7% per
annum dividend payments to be made monthly. In connection with a
termination agreement dated January 28, 2000 a restrictive covenant and
confidentiality agreement was executed whereby the Company agreed to
pay this individual a monthly fee in the amount of $5,555 over the 36
month term of that agreement along with this individual's health and
term life insurance for an 18 month period.
Conversion of Debt
As of March 24, 2000, the Company converted approximately $1,643,235 of
debt into 2,777,116 common shares and 90,287 preferred shares of the
Company.
Equity Placements
As of March 24, 2000, the Company had received $200,000 pursuant to
private equity placements under which 400,000 shares of common stock
was issued. In addition the Company received $1,990,900 pursuant to a
firm commitment equity financing transaction under which shares of
common stock and a new series of convertible preferred shares with
detachable common stock purchase warrants will be issued.
108
28,720,856 Shares
Magnitude Information Systems, Inc.
Common Stock
--------------
PROSPECTUS
--------------
November__, 2001
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
Securityholders....................................................
.
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 ________________, 2001 (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 directors 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.
109
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 2001
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), Rule 506 of Regulation D
and Regulation S of the Securities Act, which
resulted in the receipt by the Company of
approximately $423,000 in cash;
(ii) 79,403 shares of common stock to three creditors of the Company,
pursuant to the conversion of $31,800 in miscellaneous payables;
(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:
(v) 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), Rule 506
of Regulation D and Regulation S of the Securities
Act, which resulted in the receipt by the Company of
approximately $380,000 in cash;
(vi) 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;
(vii) 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;
110
(viii) 250,000 shares of common stock pursuant to the cash-less
exercise of certain warrants;
(ix) 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;
27,788 shares of Series B Senior Convertible Preferred Stock 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 $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.
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 ErgoManager(TM) 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;
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;
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;
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;
111
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;
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;
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) and Regulation S 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 S+ock at a conversion rate of 10 common shares for 1 preferred
share;
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), Rule 506 of Regulation D and Regulation S 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
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;
112
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.
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.
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.
Fiscal Year 1998
During fiscal year 1998, the Company placed the following unregistered
securities with accredited and institutional investors:
70,000 shares of Common Stock to a creditor of the Company pursuant to
that party's exercise of an option to convert debt into common stock, at $1.00
per share;
7,500 shares of Common Stock to two individuals who had invested in the
Company pursuant to a 506 Offering Memorandum;
56,000 shares of Common Stock to two outside consultants as
compensation for services rendered;
272,000 shares of Common Stock to a creditor of the Company pursuant to
that party's exercise of an option to convert debt into common;
14,419 shares of Common Stock to Proformix, Inc.shareholders pursuant
to the Company's acquisition of Proformix, Inc. and its subsequent exchange
offer to Proformix, Inc. shareholders. The Company issued these shares
pursuant to Section 4(2) of the Securities Act;
5,035 shares of Common Stock to independent sales representatives and
clients as awards for outstanding sales performance for the Company's products.
113
224,000 shares of Common Stock to Vanity Software Publishing
Corporation (see "Acquisition of Vanity Software Publishing Corporation" in the
Notes to Financial Statements included herein). The issuance of the aforesaid
shares was made pursuant to Section 4(2) of the Securities Act;
22,000 shares of Common Stock and warrants to purchase 22,000 shares at
a price of $4.50 per share, to one of the Company's board members in return for
an investment of $100,000 under Rule 506 of Regulation D promulgated under the
Securities Act of 1933, as amended;
70,972 shares of Common Stock to Proformix, Inc. shareholders
pursuant to the Company's acquisition of Proformix, Inc. and its subsequent
exchange offer to Proformix, Inc. shareholders. The Company issued these
shares pursuant to Section 4(2) of the Securities Act;
15,000 shares of Common Stock to an outside consultant as compensation
for services rendered, with an agreement that the Company register such shares
through a Registration Statement on Form S-8.
150,000 shares of Common Stock to an entity which provides a platform
for advertising the Company's products. The Company received as consideration
advertising credits equivalent to $900,000 in retail value. The issuance of the
aforesaid shares was made pursuant to Section 4(2) of the Securities Act;
50,000 shares of Common Stock at a purchase price of $2.00 per share to
an individual pursuant to a private placement under Section 4(2) of the
Securities Act.
100,644 shares of Common Stock to a management consulting firm pursuant
to their exercise of a stock option at $1.7338 per share. The stock option was
granted for services rendered, and the shares were issued pursuant to Section
4(2) of the Securities Act;
887,500 shares of Common Stock issued to foreign entities, thereby
raising $1,550,000 in gross proceeds, pursuant to Regulation S of the Securities
Act;
155,556 shares of Common Stock pursuant to Section 4(2) of the
Securities Act, to the principal of Rolina Corporation in the course of that
entity's acquisition by 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
114
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
4.23* 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.
respectively.
4.27 Form of Subscription Agreement.
4.28 Form of Subscription Agreement.
4.29 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.
115
10.6* Contract by and between Lockheed Martin and the Company, dated December
21, 2000.
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, 2000 and 1999 and
Forms 10-QSB for the quarters ended March 31, 2001, June 30, 2001 and September
30, 2001 with 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.
116
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 REGARDING FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT
DOCUMENTS BY REFERENCE
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement 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.
117
C. 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 Securities Act and will be governed by the final
adjudication of such issue.
D. UNDERTAKING PURSUANT TO RULE 430A
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of the prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective. (2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
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.
118
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
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 November 21, 2001
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
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
- ----------------------- Chief Executive Officer November 21, 2001
Steven D. Rudnik
/s/ Joerg H. Klaube Chief Financial Officer
- ---------------------- (Principal Financial Officer) November 21, 2001
Joerg H. Klaube
/s/ Steven L. Gray Director November 21, 2001
- ------------------
Steven L. Gray
/s/ Ivano Angelastri Director November 21, 2001
- ---------------------
Ivano Angelastri
/s/ Joseph J. Tomasek Director November 21, 2001
- ---------------------
Joseph J. Tomasek
119
May 8, 2001
Exhibit 4.25
Mr. Steven D. Rudnik
Chief Executive Officer
Magnitude Information Systems, Inc.
401 Route 24
Chester, New Jersey 07930
Dear Mr. Rudnik,
This letter shall serve as the Agreement, subject to approval of the board of
directors of Magnitude Information Systems, Inc. by and between Magnitude
Information Systems, Inc. with offices located at 401 Route 24, Chester, New
Jersey 07930 (the "Company") and Consulting for Strategic Growth, Ltd. (the
"Consultant") with offices located at 8 The Hemlocks, Roslyn, N.Y. 11576,
pursuant to which Consultant shall render to the Company the services described
below.
Consultant represents to the Company that it has experience in the investment
banking and financial services business and desires to provide the financial
advisory services (the "Services") set forth in Section 3 hereof to the Company,
and the Company has expressed its desire to retain Consultant, who will assign
its principal, Mr. Stanley Wunderlich, to provide on its behalf the Services to
the Company. Accordingly, we agree as follows:
1. Appointment. The Company hereby appoints Consultant, on a non-exclusive
basis, and Consultant agrees to be retained by the Company, to perform the
Services as a consultant to the Company on the terms and conditions set forth
herein. The parties agree that Consultant shall be retained by the Company as an
independent contractor on a consulting basis and not as an employee of the
Company.
2. Term. The term of this Agreement shall commence on the date hereof and shall
end on May 8, 2003, unless terminated earlier pursuant to Section 7 hereof.
3. Duties of Consultant. During the term of this Agreement Consultant shall
provide the Company with such regular and customary consulting advice as is
reasonably requested by the Company, within the scope of the Services enumerated
below. It is understood and acknowledged by the parties that the value of
Consultant's advice is not readily quantifiable, and that Consultant shall be
obligated to render advice upon the request of the Company, in good faith, but
not be obligated to spend any specific amount of time in so doing. Consultant's
duties shall include, but will not necessarily be limited to, providing
recommendations concerning one or more of the following financial and related
matters upon the request of the Board of Directors of the Company and/or its
CEO.
a. Assisting in the introduction of the Company to retail registered
representatives at various registered broker/dealers;
b. Arranging, on behalf of the Company, meetings with securities
analysts of nationally recognized and regional investment banking
firms on a quarterly basis or more frequently;
c. Arranging, on behalf of the Company, meetings in or within 50
miles of New York City and a major city close to Boston with
"small cap" money managers who manage funds in both North America
and Europe on a quarterly basis or more frequently;
d. Rendering advice with regard to any of the following corporate finance
matters:
1) changes in the capitalization of the company;
2) changes in the Company's corporate structure;
3) review budgets and business plans;
4) planning the Company's financial requirements;
e. Furnish advice to the Company in connection with the prospective
acquisition and/or merger candidates;
f. Participating, upon invitation, as an observer or advisor at meetings
of the Company's Board of Directors or any committee thereof;
g. Using its best efforts to cause at least two research reports
concerning the Company to be written and disseminated by at
least two regional investment banking firms;
h. Using its best efforts to provide the Company with four
market-makers in its Common Stock, which market makers have not
previously made a market in the Company's securities; and
i. Promptly upon request by the Company, preparing press releases for
the Company and promptly distributing them to the appropriate news
and wire services.
j. Send Bi-Monthly fax messages to a select list of institutional
accounts, and interested parties, which would include
analysts, brokers/dealers and retail brokers. (BLAST FAX)
4. Compensation. In consideration for the services rendered by Consultant to the
Company pursuant to this Agreement, the Company shall pay Consultant $3,500.00
for each month this Agreement is in effect, with the first such payment to be
made upon the signing of this Agreement. This fee will include all regular,
ongoing routine out of pocket expenses, including communications, mailings and
fax broadcasts. Unusual special requests would be paid for by the company i.e.
trip to New Jersey.
5. Confidentiality. Consultant acknowledges that as a consequence of its
relationship with the Company, it has been and will continue to be given access
to ideas, trade secrets, methods, customer information, business plans and other
confidential and proprietary information of the Company (collectively,
"Confidential Information"). Consultant agrees that it shall maintain in
confidence, and shall not disclose directly or indirectly, to any third parties
or use for any purposes (other than the performance hereof), any Confidential
Information for the term of this Agreement and a period of seven years
thereafter, unless previously approved by the Company in writing. Consultant
hereby acknowledges that its promises set forth in this paragraph represent a
material part of the consideration upon which the Company is relying in order to
execute and deliver this Agreement. Consultant hereby further acknowledges that
in the event of any breach of its promises made in this Section 5 would not be
able to be calculated and would result in direct irreparable damage to the
Company. Accordingly, Consultant agrees that the Company shall be entitled to an
injunction to prevent any actual breach or threatened breach of any of
Consultant's promises contained in this Section 5 and Consultant hereby consents
to the jurisdiction of any Federal or State court located within the State of
New Jersey for purposes of the Company's injunctive relief under this Section 5.
This provision shall not limit the Company's other remedies to which it may be
entitled at law or in equity.
6. Additional Incentive Compensation. The Company hereby agrees to issue to
Consultant three warrants (the "Warrants") to purchase a total of 600,000 shares
of Common Stock of the Company pursuant to the following terms and conditions :
i) One Warrant for 100,000 shares of Common Stock of the Company at an
exercise price of $0.50 per share,exercisable as to 25,000 shares each starting
with the successive dates of July 8, 2001, August 8, 2001, September 8, 2001,
October 8,2001, and
ii) One Warrant for 250,000 shares of Common Stock of the Company at an
exercise price of $1.00 per share, exercisable as to 62,500 shares each starting
with the successive dates of November 8, 2001, December 8, 2001,
January 8, 2002, February 8, 2002, and
iii) One Warrant for 250,000 shares of Common Stock of the Company at
an exercise price of $1.50 per share, exercisable as to 62,500 shares
each starting with the successive dates of March 8, 2002, April 8, 2002,
May 8, 2002, June 8, 2002.
iv) Notwithstanding anything to the contrary set forth herein, any of
the above Warrants shall automatically be canceled if not exercised prior to (1)
receipt by either the Company or Consultant of a written notice of termination
from the other or (2) at 5.00 p.m. eastern time on May 8, 2003.
v) The Company shall permit Consultant to assign part or all of the
Warrants issued pursuant to this Agreement provided and on condition that (i)
the assignee signs an affidavit agreeing to the terms and conditions governing
the exercise and other rights associated with the Warrants and (ii) Consultant
provides to the Company a legal opinion, in form satisfactory to Company's
counsel, providing a legal basis for an exemption or exemptions from the
registration requirements of the Securities Act of 1933, as amended (the "1933
Act") and applicable State registration requirements.
vi) The Company hereby agrees to register all of the common shares
underlying the Warrants and to include such shares in any appropriate
registration statement it shall file under the 1933 Act, registering any of its
securities on behalf of itself or other selling security holders (except,
however, that such shares shall not be included in any Form S-8 or Form S-4
registration statements or successor forms). By this "piggy-back" registration
right, the Company agrees to undertake such registration at its sole cost and
expense and to qualify such registration statement in the State of New York.
7. Termination: This agreement shall terminate upon the earlier of:
i) Expiration of the term of the agreement; or
ii) Thirty (30) days written notice by either party
8. Compliance with Law. Consultant acknowledges that in performing its duties
under this Agreement, that Consultant including its employees and agents, may
gain knowledge of certain material, non-public information concerning the
financial condition and /or operations of the Company and its business;
accordingly, Consultant hereby agrees to undertake whatever measures are
necessary to insure compliance with all of the rules and regulations and laws
applicable to the preservation and protection of such "insider information",
including but not limited to compliance with Section 16 of the Securities and
Exchange Act of 1934, as amended.
9. Indemnity. Consultant shall indemnify the Company, its directors, officers,
stockholders, representatives, agents and affiliates (collectively, the
"Affiliated Parties") from and against any and all losses, damages, fines, fees,
penalties, deficiencies, expenses, including expenses of investigation, court
costs and fees and expenses of attorneys, which the Company or its Affiliated
Parties may sustain at any time resulting from, arising out of or relating to
the breach or failure to comply with any of the covenants or promises of
Consultant contained in this Agreement.
10. Notices. Notices, other communications or deliveries required or permitted
under this Agreement shall be in writing delivered by hand against receipt,
certified mail return receipt, or reputable overnight courier to the addresses
set forth below or to such address as a party may designate in accordance with
this paragraph and shall be effective upon the earlier of:
i) actual receipt
ii)three (3) calendar days if sent by certified mail; or one (1) day if sent by
overnight courier.
A. To the Company at:
401Route 24
Chester, New Jersey 07930
Att: Steven D. Rudnik
CEO
B. To Consultant at:
8 The Hemlocks
Roslyn, N.Y. 11576
11. Applicable Law. This agreement shall be governed by the internal laws of the
State of New York without regard to its conflict of law provisions.
If the foregoing sets forth your understanding of our agreement, kindly
indicated your agreement by signing on the space provided below.
Very truly yours
Consulting for Strategic Growth, Ltd.
By: /s/ Stanley Wunderlich
--------------------------------
Name: Stanley Wunderlich, Chairman
Agreed and Accepted by:
By: ___________________________
Name: Steven D. Rudnik, CEO
Rodman & Renshaw, Inc.
1250 Broadway
14th Floor
New York, New York 10001
212/465-8220
Fax: 212/760-1080
Exhibit 4.26
jborer@rodmanandrenshaw.com
June 26, 2001
Mr. Steven D. Rudnik
Magnitude Information Systems, Inc.
401 Route 24
Chester, NJ 07930
Dear Mr. Rudnik:
Rodman & Renshaw, Inc. ("Rodman") is pleased to act as financial
advisor to Magnitude Information Systems, Inc. (the "Company") in connection
with providing general corporate finance advisory services to the Company.
This letter (the "Agreement")confirms the terms of our engagement.
1. Rodman will assist the Company by providing advice with respect to
financial matters including, but not limited to: (i) taking an active
interest in the Company and its common stock and introducing the Company to
select institutional investors; (ii) introducing the Company to qualified
financial institutions to provide financial services to the Company, as
appropriate; and (iii) assisting in the evaluation of financing
alternatives available to the Company, which may include (a) a public
equity financing (the "Public Offering") or (b) a private debt or equity
financing (the "Private Placement", collectively with the Public Offering,
the "Financing"). In the event of a Public Offering, Rodman will assist the
Company in selecting an underwriter or underwriters (including Rodman) to
be retained by the Company in order to execute the Public Offering. In the
event that the Company pursues a Private Placement, Rodman will assist in
recommending an agent (including Rodman) to be retained by the Company to
execute the Private Placement. Should Rodman act as an underwriter in the
Public Offering or as an agent in the Private Placement, the terms and
conditions of such arrangement shall be embodied in an additional
engagement letter to be signed at a later date.
2. In consideration for Rodman's financial advisory services hereunder, the
Company will pay Rodman: (i) a non-refundable retention fee of $5,000 per
month, payable in cash, monthly in advance, with the first payment due on
the date of this Agreement and (ii) 50,000 warrants for common stock of the
Company, issuable within ten days of the signing of this Agreement, with an
exercise of $0.50 per share and a term of five years. The warrants will
also contain other customary terms and conditions, including piggy-back
registration rights, cashless exercise (to be effective in the event that a
registration statement is not effective for such securities by July 1,
2002) and anti-dilution rights triggered by subsequent stock splits, stock
dividends, recapitalizations or similar occurrences which terms and
conditions will be embodied in documentation acceptable to the parties of
this Agreement.
3. In addition to any fees payable to Rodman hereunder, the Company will
reimburse Rodman, upon request made from time to time by Rodman, for all of
Rodman's reasonable out-of-pocket expenses incurred in connection with this
engagement. If such expenses exceed $5,000, Rodman will be required to
receive approval from the Company for additional $5,000 increments.
4. If the Company pursues a Financing during the initial one (1) year term of
this Agreement, then Rodman shall be given prior notice of such Financing
and afforded a fair and reasonable opportunity to bid for or otherwise
propose to act as the Company's managing underwriter, co-manager, agent or
co-agent, as the case may be, for such Financing. The acceptance of any
such bid or proposal by Rodman shall be subject to approval of the Board of
Directors of the Company, Rodman's Investment Committee, and the Financing
itself shall be consummated only after the good faith negotiation of
customary and mutually agreeable terms (the "Participation Right").
5. The Company will furnish Rodman with such information as Rodman believes
appropriate to its assignment hereunder (all such information so furnished
being the "Information"). The Company recognizes and confirms that Rodman
(i) will use and rely primarily on the Information and on information
available from generally recognized public sources in performing the
services contemplated by this Agreement without having independently
verified the same, (ii) does not assume responsibility for the accuracy or
completeness of the Information or such other information and (iii) will
not make an appraisal of any assets of the Company. To the best of the
Company's knowledge, the Information to be furnished by the Company, when
delivered, will be true and correct in all material respects and will not
contain any material misstatement of fact or omit any material fact
necessary to make the statements contained therein not misleading. The
Company will promptly notify Rodman if it learns of any material inaccuracy
or misstatement in, or material omission from, any Information theretofore
delivered to Rodman. Rodman will not be furnished with nor entitled to, any
material nonpublic information concerning the Company.
6. The Company agrees to the indemnification and other agreements set forth in
the Indemnification Provisions (the "Indemnification") attached hereto as
Addendum A, the provisions of which are incorporated herein by reference
and shall survive the termination, expiration or supersession of this
Agreement.
7. Rodman's engagement hereunder will be for the period of one (1) year. The
engagement may be terminated by either the Company or Rodman at any time
upon 30 days written notice to that effect to the other party, it being
understood that the provisions herein relating to expenses incurred prior
to such termination, the Participation Right and the Indemnification will
survive any termination.
8. This Agreement will be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to the conflict of law
principles thereof. This Agreement may not be assigned by either party
without the prior written consent of the other party. Any right to trial by
jury with respect to any dispute arising under this Agreement or any
transaction or conduct in connection herewith is waived. Any dispute
arising under this Agreement shall be brought in the courts of the State of
New York or of the United States of America for the Southern District of
New York and, by execution and delivery of this Agreement, the Company
hereby accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts.
9. This Agreement (including the Indemnification attached as Addendum A)
embodies the entire agreement and understanding between the parties and
their employees hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. If any provision of
this Agreement is determined to be invalid or unenforceable in any respect,
then such determination will not affect such provision in any other respect
or any other provision of this Agreement, which will remain in full force
and effect. This Agreement may not be amended or otherwise modified or
waived except by an instrument in writing signed by both Rodman and the
Company.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Rodman the enclosed duplicate copy of this Agreement.
Very truly yours,
RODMAN & RENSHAW, INC.
/s/ John J. Borer, III
-----------------------------
By: John J. Borer, III
Senior Managing Director
Accepted and Agreed to as of
the date first written above:
Magnitude Information Systems, Inc.
/s/ Steven D. Rudnik
- -----------------------------
By: Steven D. Rudnik
Chief Executive Officer
Magnitude Information Systems, Inc.
Indemnification Provisions
June 8, 2001
Page 2
ADDENDUM A
Indemnification Provisions
In connection with the engagement of Rodman & Renshaw, Inc. ("Rodman")
by Magnitude Information Systems, Inc. (the "Company") pursuant to a letter
agreement dated June 8, 2001 between the Company and Rodman, as it may be
amended from time to time (the "Agreement"), the Company hereby agrees as
follows:
1. To the extent permitted by law, the Company will indemnify Rodman and its
affiliates, stockholders, directors, officers, employees and controlling
persons (within the meaning of Section 15 of the Securities Act of 1933, as
amended, or Section 20 of the Securities Exchange Act of 1934) against all
losses, claims, damages or liabilities, as the same are incurred (including
the reasonable fees and expenses of counsel), relating to or arising out of
its activities hereunder, except to the extent that any losses, claims,
damages or liabilities (or actions in respect thereof) are found in a final
judgment by a court of law to have resulted from Rodman's willful
misconduct or gross negligence in performing the services described herein.
2. Promptly after receipt by Rodman of notice of any claim or the commencement
of any action or proceeding with respect to which Rodman is entitled to
indemnity hereunder, Rodman will notify the Company in writing of such
claim or of the commencement of such action or proceeding, and the Company
will assume the defense of such action or proceeding and will employ
counsel satisfactory to Rodman and will pay the fees and expenses of such
counsel. Notwithstanding the preceding sentence, Rodman will be entitled to
employ counsel separate from counsel for the Company and from any other
party in such action if Rodman reasonably determines that a conflict of
interests exists which makes representation by counsel chosen by the
Company not advisable. In such event, the reasonable fees and disbursements
of such separate counsel will be paid by the Company.
3. The Company agrees to notify Rodman promptly of the assertion against it or
any other person of any claim or the commencement of any action or
proceeding relating to a transaction contemplated by the Agreement.
4. If for any reason the foregoing indemnity is unavailable to Rodman or
insufficient to hold Rodman harmless, then the Company shall contribute to
the amount paid or payable by Rodman as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect not
only the relative benefits received by the Company on the one hand and
Rodman on the other, but also the relative fault of the Company on the one
hand and Rodman on the other that resulted in such losses, claims, damages
or liabilities, as well as any relevant equitable considerations. The
amounts paid or payable by a party in respect of losses, claims, damages
and liabilities referred to above shall be deemed to include any legal or
other fees and expense incurred in defending any litigation, proceeding or
other action or claim. Notwithstanding the provisions hereof, Rodman's
share of the liability hereunder shall not be in excess of the amount of
fees actually received by Rodman under the Agreement (excluding any amounts
received as reimbursement of expenses incurred by Rodman).
5. It is understood and agreed that, in connection with Rodman's engagement by
the Company, Rodman may also be engaged to act for the Company in one or
more additional capacities, and that the terms of any such additional
engagement may be embodied in one or more separate written agreements.
These Indemnification Provisions shall apply to the engagement under the
Agreement and to any such additional engagement and any modification of
such additional engagement; except to the extent expressly superseded by
separate indemnification and contribution provisions applicable to any such
additional engagement as may be mutually agreed upon.
6. These Indemnification Provisions shall remain in full force and effect
whether or not the Offering contemplated by the Agreement is completed and
shall survive the termination of the Agreement, and shall be in addition to
any liability that the Company might otherwise have to any Indemnified
Party under the Agreement or otherwise.
RODMAN & RENSHAW, INC.
/s/ John J. Borer III
----------------------------
By:John J. Borer III
Senior Managing Director
Accepted and agreed to as of the
date first written above:
Magnitude Information Systems, Inc.
/s/ Steven D. Rudnik
- -----------------------------
By: Steven D. Rudnik
Chief Executive Officer
Rodman & Renshaw, Inc.
1250 Broadway
14th Floor
New York, New York 10001
212/465-8220
Fax: 212/760-1080
jborer@rodmanandrenshaw.com
September 4, 2001
Mr. Steven D. Rudnik
Magnitude Information Systems, Inc.
401 Route 24
Chester, NJ 07930
Dear Mr. Rudnik:
Amendment To Financial Advisor Agreement Dated June 26, 2001
Reference is made to that agreement (the "Agreement") dated
June 26,2001 between Rodman & Renshaw, Inc. and Magnitude Information Systems,
Inc. The Agreement confirms the understanding and agreement between Magnitude
Information Systems, Inc. (the "Company") and Rodman & Renshaw, Inc. ("R&R"),
whereby the Company engages R&R as its financial advisor in connection with
the private placement of securities, which private placement must be an amount
and on terms satisfactory to the Company (collectively the "Offering
The Agreement is amended by inserting the following terms:
As compensation for the
services provided by R&R
hereunder, the Company
agrees to pay R&R certain
private placement agent
fees as follows:
(a) An amount, payable in cash upon the closing of an Offering (or upon a sale
of the Company's securities to a Covered Party within twelve months of the
Termination Date), equal to the sum of: (i) 7.0% of the gross proceeds
raised in the placement of junior capital in the form of equity or equity
linked securities, other than subordinated debt; (ii)5.0% of the gross
proceeds raised in the Offering in the form of subordinated debt, and;
(iii)1.5% of the gross commitment raised in the Offering in the form of
senior debt (including lines of credit or commitments to fund which are
undrawn at any closing of an Offering).
(b) An additional success fee, payable in warrants, to purchase an amount equal
to ten percent (10%) of the Company's equity securities (or equity security
equivalents) privately placed by Rodman in the Offering (or otherwise sold
to a Covered Party within twelve months of the Termination Date). The
warrants will be exercisable for five (5) years and will have an exercise
price of 100% of the actual or implied offering price per share of the
Company's common stock (if the Offering is only common stock); or the
actual or implied offering price per unit (if the Offering is a combination
of preferred stock, or other securities, and warrants), as determined by
the Offering. The warrants will also contain other customary terms and
conditions, including piggy-back registration rights and cashless exercise.
Except as expressly amended hereby, the Agreement remains unchanged and in full
force and effect.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Rodman the enclosed duplicate copy of this Agreement.
Very truly yours,
RODMAN & RENSHAW, INC.
/a/ John J. Borer III
-----------------------------
By:John J. Borer, III
Senior Managing Director
Accepted and Agreed to as of the
date first written above:
Magnitude Information Systems, Inc.
/s/ Steven D. Rudnik
- -----------------------------
By: Steven D. Rudnik
Chief Executive Officer
Exhibit 4.27
SUBSCRIPTION AGREEMENT
Pursuant to Section 4 (2) and Rule 506 of the Securities Act of 1933
Subscription Agreement and Questionnaire of Magnitude Information Systems, Inc.
The undersigned hereby subscribes for the purchase of ________ Units, each
Unit consisting of one share (the "Shares") of the Series D Senior Convertible
Preferred Stock of Magnitude Information Systems, Inc. (the "Company"), the
designation of which is annexed hereto as Exhibit B and which Shares shall have
a Stated Value of $9.00 per Share, and a warrant for the purchase of ten (10)
common shares of the Company, a copy of which is annexed hereto as Exhibit A
(the "Warrant"), for the purchase price of US$_______ per Unit. The Shares and
the Warrant, as well as the shares underlying the Warrant, are sometimes
hereinafter collectively referred to as the "Security" or "Securities". The
entire purchase price is due and payable upon the execution of this Subscription
Agreement, and shall be paid by check, subject to collection, or by wire
transfer, made payable to the order of "Magnitude Information Systems, Inc." The
Company shall have the right to reject this subscription in whole or in part.
1 The undersigned, in order to induce the Company to accept this
Subscription Agreement represents, warrants and covenants to the Company as
follows:
(a) The undersigned acknowledges that (i) the Shares and
Warrant being purchased hereunder have not been registered under the Securities
Act of 1933, as amended ("Securities Act"), or the securities laws of any State;
(ii) absent an exemption from registration contained in those laws, the issuance
and sale of the Shares and Warrant would require registration; and (iii) the
Company's reliance upon any such exemption is invariably based upon the
undersigned's representations, warranties, and agreements contained in this
Subscription Agreement (the Subscription Agreement and the included Investor
Questionnaire are collectively referred to herein as the "Subscription
Documents").
(b) The undersigned agrees that this Subscription Agreement is
and shall be irrevocable unless it has not been accepted by the Company.
(c) The undersigned has carefully read the Company's Form
10-KSB for the fiscal year ended December 31, 1999 and Forms 10-QSB for the
quarters ended March 31, 2000, June 30, 2000, and September 30, 2000, this
Subscription Agreement as well as the Warrant and Designation attached hereto as
Exhibits A and B, respectively (collectively, the "Disclosure Materials") all of
which the undersigned acknowledges have been delivered to the undersigned. The
undersigned acknowledges that the undersigned has been given the opportunity to
ask questions of, and receive answers from, the Company concerning the terms and
conditions of this Subscription Agreement and the Disclosure Materials and to
obtain such additional written information, to the extent the Company possesses
such information or can acquire it without unreasonable effort or expense,
necessary to verify the accuracy of same, as the Undersigned desires in order to
evaluate the investment. The undersigned further acknowledges that the
undersigned has received no representations or warranties from the Company, or
their respective employees or agents in making this investment decision other
than as set forth in the Disclosure Materials.
(d) The undersigned acknowledges that the undersigned has
investigated the Company's business, financial conditions, current state of
affairs, planned business and other matters necessary in order for the
undersigned to make an informed investment decision regarding the purchase of
the Shares and Warrant.
(e) The undersigned acknowledges that the undersigned is
purchasing the Shares and Warrant without being furnished any prospectus or
written description of the Company, its business and/or its future plans, other
than the Disclosure Materials, and has relied solely upon the Disclosure
Materials and the undersigned's own investigation into the Company and its
proposed operations.
(f) The undersigned is aware that the purchase of the Shares
and Warrant is a speculative investment involving a high degree of risk and that
there is no guarantee that the undersigned will realize any gain from this
investment, and that the entire investment could be lost.
(g) The undersigned understands that no federal or state
agency has made any finding or determination regarding the fairness of this
private offering, or any recommendation or endorsement of this private offering.
(h) The undersigned is acquiring the Shares and Warrant for
its own account for investment only and not with a view towards. Or for resale
in connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, the undersigned does not agree to hold any of
the Shares for any minimum or other specified term and reserves the right to
dispose of the Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
(i) The undersigned will not maintain a net short position at
any time in the Company's shares. This net position includes the preferred
shares and warrants on an "as converted" basis and also freely trading shares.
(j) The undersigned is financially able to bear the economic
risk of this investment, including the ability to hold the Shares and Warrant
indefinitely or to afford a complete loss of the undersigned's investment in the
Shares and Warrant.
(k) The undersigned represents that the undersigned's overall
commitment to investments which are not readily marketable is not
disproportionate to its net worth, and the investment in the Shares and Warrant
will not cause such overall commitment to become excessive. The undersigned
understands that the statutory basis on which the Shares and Warrant are being
sold to the undersigned would not be available if the undersigned's present
intention were to hold the Shares and Warrant for a fixed period or until the
occurrence of a certain event. The undersigned realizes that in the view of the
Securities and Exchange Commission, a purchase now with a present intent to
resell by reason of a foreseeable specific contingency or any anticipated change
in the market value, or in the condition of the Company, or that of the industry
in which the business of the Company is engaged or in connection with a
contemplated liquidation, or settlement of any loan obtained by the undersigned
for the acquisition of the Shares and Warrant, and for which such Shares and
Warrant may be pledged as security or as donations to religious or charitable
institutions for the purpose of securing a deduction on an income tax return,
would, in fact, represent a purchase with an intent inconsistent with the
undersigned's representations to the Company, and the Securities and Exchange
Commission would then regard such sale as one for which no exemption from
registration is available. The undersigned will not pledge, transfer or assign
this Subscription Agreement.
(l) The undersigned represents that the funds provided for
this investment are either separate property of the Undersigned, other property
over which the undersigned has the right of control, or are otherwise funds as
to which the undersigned has the sole right of management.
(m) The address shown under the undersigned's signature at the
end of this Subscription Agreement is the undersigned's principal business
address if a corporation or other entity.
(n) The undersigned has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Shares and Warrant.
(o) The undersigned acknowledges that the certificates for the
securities comprising the Shares and the shares of Common Stock underlying the
Warrant which the undersigned will receive will contain a legend substantially
as follows:
THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO
DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A
SECURITY INTEREST, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS
AND UNTIL REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL TO THE HOLDER HEREOF
SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH
ACT.
(p) This Subscription Agreement and all representations,
warranties and statements made herein are true, complete and correct in all
material respects.
(q) The undersigned acknowledges that the Company, except as
set forth in the Shares and Warrant, is under no obligation to register the
Shares and Warrant under the Securities Act or any state securities laws, or to
take any action to make any exemption from any such registration provisions
available, except that the Company agrees to undertake to file a registration
statement under the Securities Act for the common shares underlying the
conversion option of the Shares and the Warrant, no later than 30 days after the
date the Company has completed its private placement for $2 Million of which
this Subscription Agreement is a part.
(r) This Subscription Agreement is a legally binding
obligation of the undersigned in accordance with its terms.
(s) The undersigned is an "accredited investor," as such term
is defined in Regulation D of the Rules and Regulations promulgated under the
Act.
(t) If the undersigned is a partnership, corporation, trust or
other entity, (i) the undersigned has enclosed with this Subscription Agreement
appropriate evidence of the authority of the individual executing this
Subscription Agreement to act on its behalf (e.g., if a trust, a certified copy
of the trust agreement; if a corporation, a certified corporate resolution
authorizing the signature and a certified copy of the articles of incorporation;
or if a partnership, a certified copy of the partnership agreement), (ii) the
undersigned represents and warrants that it was not organized or reorganized for
the specific purpose of acquiring the Shares and Warrant, and (iii) the
undersigned has the full power and authority to execute this Subscription
Agreement on behalf of such entity and to make the representations and
warranties made herein on its behalf, and (iv) this investment in the Company
has been affirmatively authorized, if required, by the governing board of such
entity and is not prohibited by the governing documents of the entity.
(u) The undersigned expressly acknowledges and agrees that the
Company is relying upon the Undersigned's representation contained in this
Subscription Agreement. The undersigned subscriber acknowledges that the
undersigned understands the meaning and legal consequences of the
representations and warranties which are contained herein and hereby agrees to
indemnify, save and hold the Company, and their respective officers, directors
and counsel harmless from and against any and all claims or actions arising out
of a breach of any representation, warranty or acknowledgment of the undersigned
contained in any Subscription Document. Such indemnification shall be deemed to
include not only the specific liabilities or obligation with respect to which
such indemnity is provided, but also all reasonable costs, expenses, counsel
fees and expenses of settlement relating thereto, whether or not any such
liability or obligation shall have been reduced to judgment.
(v) Except as otherwise specifically provided for hereunder,
no party shall be deemed to have waived any of his or her or its rights
hereunder or under any other agreement, instrument or papers signed by any of
them with respect to the subject matter hereof unless such waiver is in writing
signed by the party waiving said right. A waiver on any one occasion with
respect to the subject matter hereof shall not be construed as a bar to, or
waiver of, any right or remedy on any future occasion. All rights and remedies
with respect to the subject matter hereof, whether evidenced hereby or by any
other agreement, instrument, or paper, will be cumulative, and may be exercised
separately or concurrently.
(w) The parties have not made any representations or
warranties with respect to the subject matter hereof not set forth in this
Subscription Agreement, together with the Shares and Warrant executed
simultaneously herewith, constitutes the entire agreement between them with
respect to the subject matter hereof. All understandings and agreements
heretofore had between the parties with respect to the subject matter hereof are
merged in this Subscription Agreement and the Shares and Warrant which alone
fully and completely expresses their agreement.
(x) This Agreement may not be changed, modified, extended,
terminated or discharged orally, but only by an agreement in writing, which is
signed by all of the parties to this Agreement.
(y) The parties agree to execute any and all such other and
further instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Subscription Agreement and the intent and
purposes hereof.
(z) This Subscription Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey and the
undersigned hereby consents to the jurisdiction of the courts of the State of
New Jersey and/or the United States District Court for the District of New
Jersey.
(aa) The undersigned understands that this subscription is not
binding upon the Company until the Company accepts it, which acceptance is at
the sole discretion of the Company and is to be evidenced by the Company's
execution of this Subscription Agreement where indicated. This Subscription
Agreement shall be null and void if the Company does not accept it as aforesaid.
(bb) Intentionally Omitted.
(cc) Neither this Subscription Agreement nor any of the
rights of the undersigned hereunder may be transferred or assigned by the
undersigned.
(dd) Please check whether one or more of the following
definitions of "accredited investor," if any, applies to you. If none
of the following applies to you, please leave a blank.
(i) A Bank as defined in Section 3(a)(2) of the
Securities Act of 1933, as amended ("Securities Act"), or any savings and loan
association or other institution as defined in Section 3(a)(5)(A) of the
Securities Act whether acting in its individual or fiduciary capacity;
any broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); an insurance company
as defined in Section 2(13) of the Securities Act; an investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in Section 2(a)(48) of that act; a Small
Business Investment Company licensed by the U.S. Small Business Administration
under Section 301(c) or (d) of the Small Business Investment Act of 1958; any
plan established and maintained by a state, or its political subdivisions, or
any agency or instrumentality of a state or its political subdivisions for the
benefit of its employees, if such plan has total assets in excess of $5,000,000;
any employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of such act, which is either a bank, savings and loan
association, insurance company, or registered investment advisor, or if the
employee benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that are
Accredited Investors.
(ii) A Private Business Development Company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940.
(iii) An organization described in Section
501(c)(3) of the Internal Revenue Code or corporation, Massachusetts or similar
business trust, or partnership,not formed for the specific purpose of acquiring
the securities offered, with total assets in excess of $5,000,000.
(iv) A natural person whose individual net
worth, or joint net worth with that person's spouse, at the time of purchase
exceeds $1,000,000.
(v) A natural person who had an individual income
in excess of $200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year.
(vi) Any trust, with total assets in excess
of $5,000,000, not formed for the specific purpose of acquiring the Shares
and Warrant, whose purchase is directed by a sophisticated person as described
in Rule 506(b)(2)(ii) of Regulation D.
(vii) Any entity in which all of the equity owners
are Accredited Investors.
2. This following information is required pursuant to Article III,
Section 44 of the Rules of Fair Practice of the NASD and upon which the Company
will rely in making any statement to the NASD concerning the association or
affiliation of any officer, director or security holder of the Company with any
NASD member.
(i) State whether you or any of your Affiliates or any of your Associates (See
Definitions at the end of this Subscription Agreement) are
(a) Member of the National Association of Securities Dealers, Inc.
("NASD");
Yes____ No____
(b) a Person Associated with a Member of the NASD; or
Yes____ No____
(c) an Affiliate of a Member of the NASD.
Yes____ No____
(ii) State whether you or any of your Affiliates or any of your
Associates own stock or other securities of any member of the
NASD (other than securities purchased on the open market).
Yes____ No____
(iii) State whether you or any of your Affiliates or any of your
Associates have made a subordinated loan to any Member of the
NASD.
Yes____ No____
(iv) If you marked "Yes" to any of the questions above, please
briefly describe the facts below, giving the names of the
appropriate Members of the NASD to which your answers refer.
(v) The Undersigned has carefully reviewed the jurisdictional notices
listed below and agrees to abide by any restrictions contained therein
applicable to the undersigned.
JURISDICTIONAL NOTICES
THE SECURITIES OFFERED PURSUANT TO THE TERMS AND PROVISIONS OF THIS
SUBSCRIPTION AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATES OF THE UNITED STATES
OR ANY OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR ADEQUACY OF THE MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
IT IS THE RESPONSIBILITY OF THE SUBSCRIBER WISHING TO PURCHASE THE SHARES AND
WARRANT TO SATISFY ITSELF AS TO THE FULL OBSERVANCE OF THE LAWS OF ANY RELEVANT
TERRITORY OUTSIDE THE UNITED STATES IN CONNECTION WITH ANY SUCH PURCHASE,
INCLUDING OBTAINING ANY REQUIRED GOVERNMENTAL OR OTHER CONSENTS OR OBSERVING ANY
OTHER APPLICABLE FORMALITIES.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this __ day of ________ , 2001
Purchase Price for the Units: $______________ US.
Exact Name in Which Title is to be Held
Signature
Name (Please Print)
Title of Person Executing Agreement
Address: Number and Street
City State Zip Code
Tax Identification Number
Jurisdiction of Incorporation
Accepted this __ day of ___ , 2001, on behalf of
MAGNITUDE INFORMATION SYSTEMS, INC.
BY:
DEFINITIONS
Affiliate: An Affiliate of any person (for purposes hereof a "person"
includes a partnership, corporation or other legal entity such
as a trust or estate) is a person which controls, is
controlled by or is under common control with such person. For
purposes of this definition:
(i) a person should be presumed to control a Member if the
person beneficially owns 10% or more of the outstanding voting
securities of a Member which is a corporation, or beneficially
owns a partnership interest in 10% or more of the outstanding
voting securities of a person which is a corporation, or
beneficially own a partnership interest in 10% or more of the
distributable profits or losses of a person which is a
partnership; and
(ii) a Member should be presumed to control a person if the
Member and Persons Associated with the Member beneficially own
10% or more of the outstanding voting securities of a person
which is a corporation, or beneficially own a partnership
interest in 10% or more of the distributable profits or losses
of a person which is a partnership; and
(iii) a person should be presumed to be under common control
with a Member if:
(1) the same person controls both the Member and such
person by beneficially owning 10% or more of the
outstanding voting securities of the Member and other
such person which is a corporation, or by
beneficially owning a partnership interest in 10% or
more of the distributable profits or losses of the
Member and other such person which is a partnership;
or
(2) a person having the power to direct or cause the
direction of the management or policies of the Member
also has the power to direct or cause the direction
of the management or policies of the other entity in
question.
Associate: An Associate is
(i) any corporation or organization of which you are
an officer, director or partner, or of which you are
directly or indirectly the beneficial owner of 10% or
more of any class of equity securities.
(ii) any trust or other estate in which you have a
substantial beneficial interest or as to which you
serve as trustee or in a similar fiduciary capacity;
and
(iii) any relative or spouse of yours, or any
relative of such spouse who has the same home as you.
Member: A Member is any broker or dealer admitted to
membership in the NASD.
Person A "Person Associated with a Member" is every sole
proprietor, partner,
Associated officer, director or branch manager of any Member,
or any naturalperson
with a occupying a similar status or performing similar
functions, or any person
Member: engaged in the investment banking or securities
business who is directly or indirectly
controlling or controlled by such Member (for
example, any employee), whether or not any such
person is registered or exempt from registration with
the NASD.
Exhibit A
FORM OF COMMON STOCK PURCHASE WARRANT
For the Purchase of _________ Shares of Common Stock
of
MAGNITUDE INFORMATION SYSTEMS, INC.
(A Delaware Corporation)
THIS CERTIFIES THAT, for value received __________________, residing at
_________ ______________________________________ (the "Holder"), as owner of
this Warrant (sometimes referred to herein as "Warrant"), is entitled to
subscribe for, purchase and receive __________ fully paid and nonassessable
shares of common stock (the "Common Stock"), of Magnitude Information Systems,
Inc., a Delaware corporation (the "Company") at the price of $_________(U.S.)
per share of Common Stock (the "Exercise Price"), upon payment of the Exercise
Price in accordance with the provisions hereof at the principal office of the
Company. If the subscription rights represented hereby shall not be exercised on
or before the Expiration Date, this Warrant shall become and will be void
without further force or effect, and all rights represented hereby shall cease
and expire.
This Warrant may be exercised subject to the following terms and
conditions.
(i) Terms of Warrant.
Holder shall be entitled to purchase and receive ________
shares of Common Stock at the Exercise Price at any time on or before 5:00 PM on
[the third anniversary date hereof] (the "Expiration Date"), by paying the
Exercise Price to the Company. Any notices required hereunder shall be in
writing and may be delivered via U.S. Postal Service, personally or by any
commercial delivery or overnight service to the Holder or Company at the
respective addresses set forth herein for the same. Any attempted but
undelivered notice sent via any method and for which a proof of attempted
delivery therefor is issued and left at the appropriate address shall be deemed
to be effective delivery.
(ii) Exercise of Warrant.
This Warrant may only be exercised in whole or in part during
the Exercise Period by surrendering the form of subscription attached hereto
duly executed by the Holder, to the Company at its principal office at 401 State
Route 24, Chester, New Jersey 07930 or at such other address as may be
designated by the Company, and by simultaneously paying the Exercise Price in
cash or check to the Company. The date of exercise shall be the date on which
the completed subscription agreement, and Exercise Price are tendered to the
Company.
(iii) Restricted Nature of Underlying Stock.
Unless the Company receives an opinion from counsel
satisfactory to it that such a legend is not required, in order to assure
compliance with the Securities Act of 1933, as amended (the "1933 Act"), or any
applicable State Securities Laws, each certificate for shares of Common Stock
underlying this Warrant ("Underlying Shares") shall bear a legend reading
substantially as follows:
"The Securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"). Such
securities have been acquired for investment and may not be publicly
offered or sold in the absence of (1) an effective registration
statement for such securities under the Act; (2) An opinion of counsel
acceptable to the Company prior to any proposed transfer to the effect
that registration is not required under the Act; or (3) a letter
presented to the Company prior to any proposed transfer, from the staff
of the Securities and Exchange Commission, to the effect that it will
not take any enforcement action if the proposed transfer is made
without registration under the Act."
(iv) Disposition of Warrant or Underlying Shares.
The Holder, by acceptance hereof, agrees for itself that this Warrant
shall not be assignable or transferable in whole or in part by Holder under any
circumstances and any such attempted assignment or transfer shall immediately
cause this Warrant to expire and be rendered null and void. In addition to the
requirements set forth above, disposition of any of the underlying Shares shall
not be made unless and until:
(a) The Company has received an opinion from counsel for the
Holder, satisfactory to the Company, stating that no registration under the 1933
Act is required with respect to such disposition; or
(b) A registration statement or post-effective amendment to a
registration statement under the 1933 Act has been filed and made effective by
the Commission covering such proposed disposition.
(v) Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
of evidence satisfactory to it (in the exercise of its reasonable discretion) of
the ownership of and the loss, theft, destruction, or mutilation of this
Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
(vi) Warrant Holder Not a Shareholder. Any Holder of this Warrant, as
such, shall not be entitled by reason of this Warrant to any rights whatsoever
of a shareholder of the Company.
(vii) Taxes. The Company will pay all document and stamp taxes in
respect of the issue of this Warrant or the Common Shares issuable upon exercise
thereof.
(viii) Miscellaneous. References herein describing this instrument as a
"Warrant" or "Warrants", refer solely to the rights conferred upon Holder
hereby.
(ix) Warrant Subject to Restrictions under Securities Act. No sale,
offer to sell or transfer of the Warrants represented by this certificate can or
will be made in as much as the Warrant is not assignable or transferable under
any circumstances and any attempt to assign or transfer this Warrant shall cause
the same to immediately expire and be null and void in accordance with its
terms. No sale, offer to sell or transfer of the underlying shares shall be made
unless a registration statement under the 1933 Act, with respect to such shares
is then in effect or an exemption from the registration requirements of the 1933
Act is then in fact applicable to such shares. The availability of such
exemption shall be established to the reasonable satisfaction of the Company and
its counsel.
(x) Registration of Underlying Shares. The Company agrees to undertake
to file a registration statement under the Securities Act of 1933 (the "1933
Act") which includes the Underlying Shares of common stock represented hereby,
no later than 30 days after the date the Company has completed a private
placement for $1.5 Million of which this Subscription Agreement is a part.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
a duly authorized officer.
_______________, 2000 MAGNITUDE INFORMATION SYSTEMS, INC.
By: _________________________
Form to be used to exercise Warrant:
EXERCISE FORM
Date: ________, ______
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase _________ shares of Common Stock of Magnitude
Information Systems, Inc. called for thereby.
Signature: ________________________
Signature Guaranteed: __________________
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name _____________________________
Address __________________________
**************
NOTICE: The signature to the form to exercise must correspond with the name as
written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
Exhibit 4.28
SUBSCRIPTION AGREEMENT
Pursuant to Section 4 (2) and Rule 506 of the Securities Act of 1933
Subscription Agreement and Questionnaire of Magnitude Information Systems, Inc.
The undersigned hereby subscribes for the purchase of ___________
Units, each Unit consisting of one share (the "Shares") of the Common Stock
of Magnitude Information Systems, Inc. (the "Company"), and a warrant for
the purchase of one common share of the Company, exercisable at $_____ per
share, a copy of which is annexed hereto as Exhibit A (the "Warrant"), for
the purchase price of US$_____ per Unit. The Shares and the Warrant, as
well as the shares underlying the Warrant, are sometimes hereinafter
collectively referred to as the "Security" or "Securities". The entire
purchase price is due and payable upon the execution of this Subscription
Agreement, and shall be paid by check, subject to collection, or by wire
transfer, made payable to the order of "Magnitude Information Systems,
Inc." The Company shall have the right to reject this subscription in whole
or in part.
1 The undersigned, in order to induce the Company to accept this
Subscription Agreement represents, warrants and covenants to the Company as
follows:
(a) The undersigned acknowledges that (i) the Shares and
Warrant being purchased hereunder have not been registered under the Securities
Act of 1933, as amended ("Securities Act"), or the securities laws of any State;
(ii) absent an exemption from registration contained in those laws, the issuance
and sale of the Shares and Warrant would require registration; and (iii) the
Company's reliance upon any such exemption is invariably based upon the
undersigned's representations, warranties, and agreements contained in this
Subscription Agreement (the Subscription Agreement and the included Investor
Questionnaire are collectively referred to herein as the "Subscription
Documents").
(b) The undersigned agrees that this Subscription Agreement is
and shall be irrevocable unless it has not been accepted by the Company.
(c) The undersigned has carefully read the Company's Form
10-KSB for the fiscal year ended December 31, 2000 and Form 10-QSB for the
quarter ended March 31, 2001, this Subscription Agreement as well as the Exhibit
A, respectively (collectively, the "Disclosure Materials") all of which the
undersigned acknowledges have been delivered to the undersigned. The undersigned
acknowledges that the undersigned has been given the opportunity to ask
questions of, and receive answers from, the Company concerning the terms and
conditions of this Subscription Agreement and the Disclosure Materials and to
obtain such additional written information, to the extent the Company possesses
such information or can acquire it without unreasonable effort or expense,
necessary to verify the accuracy of same, as the Undersigned desires in order to
evaluate the investment. The undersigned further acknowledges that the
undersigned has received no representations or warranties from the Company, or
their respective employees or agents in making this investment decision other
than as set forth in the Disclosure Materials.
(d) The undersigned acknowledges that the undersigned has
investigated the Company's business, financial conditions, current state of
affairs, planned business and other matters necessary in order for the
undersigned to make an informed investment decision regarding the purchase of
the Shares and Warrant.
(e) The undersigned acknowledges that the undersigned is
purchasing the Shares and Warrant without being furnished any prospectus or
written description of the Company, its business and/or its future plans, other
than the Disclosure Materials, and has relied solely upon the Disclosure
Materials and the undersigned's own investigation into the Company and its
proposed operations.
(f) The undersigned is aware that the purchase of the Shares
and Warrant is a speculative investment involving a high degree of risk and that
there is no guarantee that the undersigned will realize any gain from this
investment, and that the entire investment could be lost.
(g) The undersigned understands that no federal or state
agency has made any finding or determination regarding the fairness of this
private offering, or any recommendation or endorsement of this private offering.
(h) The undersigned is acquiring the Shares and Warrant for
its own account for investment only and not with a view towards. Or for resale
in connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, the undersigned does not agree to hold any of
the Shares for any minimum or other specified term and reserves the right to
dispose of the Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
(i) The undersigned will not maintain a net short position at
any time in the Company's shares. This net position includes any preferred
shares and warrants on an "as converted" basis and also freely trading shares.
(j) The undersigned is financially able to bear the economic
risk of this investment, including the ability to hold the Shares and Warrant
indefinitely or to afford a complete loss of the undersigned's investment in the
Shares and Warrant.
(k) The undersigned represents that the undersigned's overall
commitment to investments which are not readily marketable is not
disproportionate to its net worth, and the investment in the Shares and Warrant
will not cause such overall commitment to become excessive. The undersigned
understands that the statutory basis on which the Shares and Warrant are being
sold to the undersigned would not be available if the undersigned's present
intention were to hold the Shares and Warrant for a fixed period or until the
occurrence of a certain event. The undersigned realizes that in the view of the
Securities and Exchange Commission, a purchase now with a present intent to
resell by reason of a foreseeable specific contingency or any anticipated change
in the market value, or in the condition of the Company, or that of the industry
in which the business of the Company is engaged or in connection with a
contemplated liquidation, or settlement of any loan obtained by the undersigned
for the acquisition of the Shares and Warrant, and for which such Shares and
Warrant may be pledged as security or as donations to religious or charitable
institutions for the purpose of securing a deduction on an income tax return,
would, in fact, represent a purchase with an intent inconsistent with the
undersigned's representations to the Company, and the Securities and Exchange
Commission would then regard such sale as one for which no exemption from
registration is available. The undersigned will not pledge, transfer or assign
this Subscription Agreement.
(l) The undersigned represents that the funds provided for
this investment are either separate property of the Undersigned, other property
over which the undersigned has the right of control, or are otherwise funds as
to which the undersigned has the sole right of management.
(m) The address shown under the undersigned's signature at the
end of this Subscription Agreement is the undersigned's principal business
address if a corporation or other entity.
(n) The undersigned has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Shares and Warrant.
(o) The undersigned acknowledges that the certificates for the
securities comprising the Shares and the shares of Common Stock underlying the
Warrant which the undersigned will receive will contain a legend substantially
as follows:
THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE,
AND MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A SECURITY
INTEREST, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE RECEIPT BY THE COMPANY OF AN OPINION OF
COUNSEL TO THE HOLDER HEREOF SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.
(p) This Subscription Agreement and all representations,
warranties and statements made herein are true, complete and correct in all
material respects.
(q) The undersigned acknowledges that the Company, except as
set forth in the Shares and Warrant, is under no obligation to register the
Shares and Warrant under the Securities Act or any state securities laws, or to
take any action to make any exemption from any such registration provisions
available, except that the Company agrees to undertake to file a registration
statement under the Securities Act for the Shares and the common shares
underlying the Warrant, no later than December 31, 2001.
(r) This Subscription Agreement is a legally binding
obligation of the undersigned in accordance with its terms.
(s) The undersigned is an "accredited investor," as such term
is defined in Regulation D of the Rules and Regulations promulgated under the
Act.
(t) If the undersigned is a partnership, corporation, trust or
other entity, (i) the undersigned has enclosed with this Subscription Agreement
appropriate evidence of the authority of the individual executing this
Subscription Agreement to act on its behalf (e.g., if a trust, a certified copy
of the trust agreement; if a corporation, a certified corporate resolution
authorizing the signature and a certified copy of the articles of incorporation;
or if a partnership, a certified copy of the partnership agreement), (ii) the
undersigned represents and warrants that it was not organized or reorganized for
the specific purpose of acquiring the Shares and Warrant, and (iii) the
undersigned has the full power and authority to execute this Subscription
Agreement on behalf of such entity and to make the representations and
warranties made herein on its behalf, and (iv) this investment in the Company
has been affirmatively authorized, if required, by the governing board of such
entity and is not prohibited by the governing documents of the entity.
(u) The undersigned expressly acknowledges and agrees that the
Company is relying upon the Undersigned's representation contained in this
Subscription Agreement. The undersigned subscriber acknowledges that the
undersigned understands the meaning and legal consequences of the
representations and warranties which are contained herein and hereby agrees to
indemnify, save and hold the Company, and their respective officers, directors
and counsel harmless from and against any and all claims or actions arising out
of a breach of any representation, warranty or acknowledgment of the undersigned
contained in any Subscription Document. Such indemnification shall be deemed to
include not only the specific liabilities or obligation with respect to which
such indemnity is provided, but also all reasonable costs, expenses, counsel
fees and expenses of settlement relating thereto, whether or not any such
liability or obligation shall have been reduced to judgment.
(v) Except as otherwise specifically provided for hereunder,
no party shall be deemed to have waived any of his or her or its rights
hereunder or under any other agreement, instrument or papers signed by any of
them with respect to the subject matter hereof unless such waiver is in writing
signed by the party waiving said right. A waiver on any one occasion with
respect to the subject matter hereof shall not be construed as a bar to, or
waiver of, any right or remedy on any future occasion. All rights and remedies
with respect to the subject matter hereof, whether evidenced hereby or by any
other agreement, instrument, or paper, will be cumulative, and may be exercised
separately or concurrently.
(w) The parties have not made any representations or
warranties with respect to the subject matter hereof not set forth in this
Subscription Agreement, together with the Shares and Warrant executed
simultaneously herewith, constitutes the entire agreement between them with
respect to the subject matter hereof. All understandings and agreements
heretofore had between the parties with respect to the subject matter hereof are
merged in this Subscription Agreement and the Shares and Warrant which alone
fully and completely expresses their agreement.
(x) This Agreement may not be changed, modified, extended,
terminated or discharged orally, but only by an agreement in writing, which is
signed by all of the parties to this Agreement.
(y) The parties agree to execute any and all such other and
further instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Subscription Agreement and the intent and
purposes hereof.
(z) This Subscription Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey and the
undersigned hereby consents to the jurisdiction of the courts of the State of
New Jersey and/or the United States District Court for the District of New
Jersey.
(aa) The undersigned understands that this subscription is not
binding upon the Company until the Company accepts it, which acceptance is at
the sole discretion of the Company and is to be evidenced by the Company's
execution of this Subscription Agreement where indicated. This Subscription
Agreement shall be null and void if the Company does not accept it as aforesaid.
(bb) Intentionally Omitted.
(cc) Neither this Subscription Agreement nor any of the
rights of the undersigned hereunder may be transferred or assigned by the
undersigned.
(dd) Please check whether one or more of the following
definitions of "accredited investor," if any, applies to you. If none
of the following applies to you, please leave a blank.
(i) A Bank as defined in Section 3(a)(2) of the Securities Act of 1933, as
amended ("Securities Act"), or any savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the Securities Act whether
acting in its individual or fiduciary capacity; any broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); an insurance company as defined in Section 2(13) of the
Securities Act; an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in Section 2(a)(48) of
that act; a Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; any plan established and maintained by a state, or its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; any employee benefit plan within the meaning of
the Employee Retirement Income Security Act of 1974, if the investment decision
is made by a plan fiduciary, as defined in Section 3(21) of such act, which is
either a bank, savings and loan association, insurance company, or registered
investment advisor, or if the employee benefit plan has total assets in excess
of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are Accredited Investors.
(ii) A Private Business Development Company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
(iii) An organization described in Section 501(c)(3) of the Internal
Revenue Code or corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000.
(iv) A natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of purchase exceeds $1,000,000.
(v) A natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year.
(vi) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the Shares and Warrant, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii) of
Regulation D.
(vii) Any entity in which all of the equity owners are Accredited
Investors.
2. This following information is required pursuant to Article III,
Section 44 of the Rules of Fair Practice of the NASD and upon which the Company
will rely in making any statement to the NASD concerning the association or
affiliation of any officer, director or security holder of the Company with any
NASD member.
(i) State whether you or any of your Affiliates or any of your Associates
(See Definitions at the end of this Subscription Agreement) are
(a) Member of the National Association of Securities Dealers,
Inc. ("NASD");
Yes____ No____
(b) a Person Associated with a Member of the NASD; or
Yes____ No____
(c) an Affiliate of a Member of the NASD.
Yes____ No____
(ii) State whether you or any of your Affiliates or any of your
Associates own stock or other securities of any member of the
NASD (other than securities purchased on the open market).
Yes____ No____
(iii) State whether you or any of your Affiliates or any of your
Associates have made a subordinated loan to any Member of the
NASD.
Yes____ No____
(iv) If you marked "Yes" to any of the questions above, please
briefly describe the facts below, giving the names of the
appropriate Members of the NASD to which your answers refer.
(v) The Undersigned has carefully reviewed the jurisdictional notices
listed below and agrees to abide by any restrictions contained therein
applicable to the undersigned.
JURISDICTIONAL NOTICES
THE SECURITIES OFFERED PURSUANT TO THE TERMS AND PROVISIONS OF THIS
SUBSCRIPTION AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATES OF THE UNITED STATES
OR ANY OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR ADEQUACY OF THE MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
IT IS THE RESPONSIBILITY OF THE SUBSCRIBER WISHING TO PURCHASE THE SHARES AND
WARRANT TO SATISFY ITSELF AS TO THE FULL OBSERVANCE OF THE LAWS OF ANY RELEVANT
TERRITORY OUTSIDE THE UNITED STATES IN CONNECTION WITH ANY SUCH PURCHASE,
INCLUDING OBTAINING ANY REQUIRED GOVERNMENTAL OR OTHER CONSENTS OR OBSERVING ANY
OTHER APPLICABLE FORMALITIES.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this __ day of ________ , 2001
Purchase Price for the Units: $_________________ US.
Exact Name in Which Title is to be Held
Signature
Name (Please Print)
Title of Person Executing Agreement
Address: Number and Street
City State Zip Code
Tax Identification Number
Jurisdiction of Incorporation
Accepted this __ day of ___ , 2001, on behalf of
MAGNITUDE INFORMATION SYSTEMS, INC.
BY:
DEFINITIONS
Affiliate: An Affiliate of any person (for purposes hereof a "person"
includes a partnership, corporation or other legal entity such
as a trust or estate) is a person which controls, is
controlled by or is under common control with such person. For
purposes of this definition:
(i) a person should be presumed to control a Member if the
person beneficially owns 10% or more of the outstanding voting
securities of a Member which is a corporation, or beneficially
owns a partnership interest in 10% or more of the outstanding
voting securities of a person which is a corporation, or
beneficially own a partnership interest in 10% or more of the
distributable profits or losses of a person which is a
partnership; and
(ii) a Member should be presumed to control a person if the
Member and Persons Associated with the Member beneficially own
10% or more of the outstanding voting securities of a person
which is a corporation, or beneficially own a partnership
interest in 10% or more of the distributable profits or losses
of a person which is a partnership; and
(iii) a person should be presumed to be under common control
with a Member if:
(1) the same person controls both the Member and such
person by beneficially owning 10% or more of the
outstanding voting securities of the Member and other
such person which is a corporation, or by
beneficially owning a partnership interest in 10% or
more of the distributable profits or losses of the
Member and other such person which is a partnership;
or
(2) a person having the power to direct or cause the
direction of the management or policies of the Member
also has the power to direct or cause the direction
of the management or policies of the other entity in
question.
Associate: An Associate is
(i) any corporation or organization of which you are
an officer, director or partner, or of which you are
directly or indirectly the beneficial owner of 10% or
more of any class of equity securities.
(ii) any trust or other estate in which you have a
substantial beneficial interest or as to which you
serve as trustee or in a similar fiduciary capacity;
and
(iii) any relative or spouse of yours, or any
relative of such spouse who has the same home as you.
Member: A Member is any broker or dealer admitted to
membership in the NASD.
Person A "Person Associated with a Member" is every sole
proprietor, partner,
Associated officer, director or branch manager of any Member,
or any natural person
with a occupying a similar status or performing similar
functions, or any person
Member: engaged in the investment banking or securities
business who is directly or indirectly
controlling or controlled by such Member (for
example, any employee), whether or not any such
person is registered or exempt from registration with
the NASD.
Exhibit A
FORM OF COMMON STOCK PURCHASE WARRANT
For the Purchase of XXXXXXXX Shares of Common Stock
of
MAGNITUDE INFORMATION SYSTEMS, INC.
(A Delaware Corporation)
THIS CERTIFIES THAT, for value received XXXXXXXXXXXX, residing at
XXXXXX XXXXXXXXXXXXXXXXXXXXXXX (the "Holder"), as owner of this Warrant
(sometimes referred to herein as "Warrant"), is entitled to subscribe for,
purchase and receive XXXXXXXXXX fully paid and nonassessable shares of common
stock (the "Common Stock"), of Magnitude Information Systems, Inc., a Delaware
corporation (the "Company") at the price of $______(U.S.) per share of Common
Stock (the "Exercise Price"), upon payment of the Exercise Price in accordance
with the provisions hereof at the principal office of the Company. If the
subscription rights represented hereby shall not be exercised on or before the
Expiration Date, this Warrant shall become and will be void without further
force or effect, and all rights represented hereby shall cease and expire.
This Warrant may be exercised subject to the following terms and
conditions.
(i) Terms of Warrant.
Holder shall be entitled to purchase and receive XXXXXXX
shares of Common Stock at the Exercise Price at any time on or before 5:00 PM on
[the third anniversary date hereof] (the "Expiration Date"), by paying the
Exercise Price to the Company. Any notices required hereunder shall be in
writing and may be delivered via U.S. Postal Service, personally or by any
commercial delivery or overnight service to the Holder or Company at the
respective addresses set forth herein for the same. Any attempted but
undelivered notice sent via any method and for which a proof of attempted
delivery therefor is issued and left at the appropriate address shall be deemed
to be effective delivery.
(ii) Exercise of Warrant.
This Warrant may only be exercised in whole or in part during
the Exercise Period by surrendering the form of subscription attached hereto
duly executed by the Holder, to the Company at its principal office at 401 State
Route 24, Chester, New Jersey 07930 or at such other address as may be
designated by the Company, and by simultaneously paying the Exercise Price in
cash or check to the Company. The date of exercise shall be the date on which
the completed subscription agreement, and Exercise Price are tendered to the
Company.
(iii) Restricted Nature of Underlying Stock.
Unless the Company receives an opinion from counsel
satisfactory to it that such a legend is not required, in order to assure
compliance with the Securities Act of 1933, as amended (the "1933 Act"), or any
applicable State Securities Laws, each certificate for shares of Common Stock
underlying this Warrant ("Underlying Shares") shall bear a legend reading
substantially as follows:
"The Securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"). Such
securities have been acquired for investment and may not be publicly
offered or sold in the absence of (1) an effective registration
statement for such securities under the Act; (2) An opinion of counsel
acceptable to the Company prior to any proposed transfer to the effect
that registration is not required under the Act; or (3) a letter
presented to the Company prior to any proposed transfer, from the staff
of the Securities and Exchange Commission, to the effect that it will
not take any enforcement action if the proposed transfer is made
without registration under the Act."
(iv) Disposition of Warrant or Underlying Shares.
The Holder, by acceptance hereof, agrees for itself that this Warrant
shall not be assignable or transferable in whole or in part by Holder under any
circumstances and any such attempted assignment or transfer shall immediately
cause this Warrant to expire and be rendered null and void. In addition to the
requirements set forth above, disposition of any of the underlying Shares shall
not be made unless and until:
(a) The Company has received an opinion from counsel for the
Holder, satisfactory to the Company, stating that no registration under the 1933
Act is required with respect to such disposition; or
(b) A registration statement or post-effective amendment to a
registration statement under the 1933 Act has been filed and made effective by
the Commission covering such proposed disposition.
(v) Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
of evidence satisfactory to it (in the exercise of its reasonable discretion) of
the ownership of and the loss, theft, destruction, or mutilation of this
Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
(vi) Warrant Holder Not a Shareholder. Any Holder of this Warrant, as
such, shall not be entitled by reason of this Warrant to any rights whatsoever
of a shareholder of the Company.
(vii) Taxes. The Company will pay all document and stamp taxes in
respect of the issue of this Warrant or the Common Shares issuable upon exercise
thereof.
(viii) Miscellaneous. References herein describing this instrument as a
"Warrant" or "Warrants", refer solely to the rights conferred upon Holder
hereby.
(ix) Warrant Subject to Restrictions under Securities Act. No sale,
offer to sell or transfer of the Warrants represented by this certificate can or
will be made in as much as the Warrant is not assignable or transferable under
any circumstances and any attempt to assign or transfer this Warrant shall cause
the same to immediately expire and be null and void in accordance with its
terms. No sale, offer to sell or transfer of the underlying shares shall be made
unless a registration statement under the 1933 Act, with respect to such shares
is then in effect or an exemption from the registration requirements of the 1933
Act is then in fact applicable to such shares. The availability of such
exemption shall be established to the reasonable satisfaction of the Company and
its counsel.
(x) Registration of Underlying Shares. The Company agrees to undertake
to file a registration statement under the Securities Act of 1933 (the "1933
Act") which includes the Underlying Shares of common stock represented hereby,
no later than 30 days after the date the Company has completed a private
placement for $1.5 Million of which this Subscription Agreement is a part.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
a duly authorized officer.
_______________, 2001 MAGNITUDE INFORMATION SYSTEMS, INC.
By: _________________________
Form to be used to exercise Warrant:
EXERCISE FORM
Date: ________, ______
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase _________ shares of Common Stock of Magnitude
Information Systems, Inc. called for thereby.
Signature: ________________________
Signature Guaranteed: __________________
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name _____________________________
Address __________________________
**************
NOTICE: The signature to the form to exercise must correspond with the name as
written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
Exhibit 4.29
SUBSCRIPTION AGREEMENT
Pursuant to Section 4 (2) and Rule 506 of the Securities Act of 1933
Subscription Agreement and Questionnaire of Magnitude Information Systems, Inc.
The undersigned hereby subscribes for the purchase of xxxxxxxx Units, each
Unit consisting of two shares (the "Shares") of the Common Stock of Magnitude
Information Systems, Inc. (the "Company"), and one warrant for the purchase of
one common share of the Company, exercisable at $0.50 per share, a copy of which
is annexed hereto as Exhibit A (the "Warrant"), for the purchase price of
US$0.50 per Unit. The Shares and the Warrant, as well as the shares underlying
the Warrant, are sometimes hereinafter collectively referred to as the
"Security" or "Securities". The entire purchase price is due and payable upon
the execution of this Subscription Agreement, and shall be paid by check,
subject to collection, or by wire transfer, made payable to the order of
"Magnitude Information Systems, Inc." The Company shall have the right to reject
this subscription in whole or in part.
1 The undersigned, in order to induce the Company to accept this
Subscription Agreement represents, warrants and covenants to the Company as
follows:
(a) The undersigned acknowledges that (i) the Shares and
Warrant being purchased hereunder have not been registered under the Securities
Act of 1933, as amended ("Securities Act"), or the securities laws of any State;
(ii) absent an exemption from registration contained in those laws, the issuance
and sale of the Shares and Warrant would require registration; and (iii) the
Company's reliance upon any such exemption is invariably based upon the
undersigned's representations, warranties, and agreements contained in this
Subscription Agreement (the Subscription Agreement and the included Investor
Questionnaire are collectively referred to herein as the "Subscription
Documents").
(b) The undersigned agrees that this Subscription Agreement is
and shall be irrevocable unless it has not been accepted by the Company.
(c) The undersigned has carefully read the Company's Form
10-KSB for the fiscal year ended December 31, 2000 and Form 10-QSB for the
quarters ended March 31, 2001, and June 30, 2001, this Subscription Agreement as
well as the Exhibit A, respectively (collectively, the "Disclosure Materials")
all of which the undersigned acknowledges have been delivered to the
undersigned. The undersigned acknowledges that the undersigned has been given
the opportunity to ask questions of, and receive answers from, the Company
concerning the terms and conditions of this Subscription Agreement and the
Disclosure Materials and to obtain such additional written information, to the
extent the Company possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of same, as the
Undersigned desires in order to evaluate the investment. The undersigned further
acknowledges that the undersigned has received no representations or warranties
from the Company, or their respective employees or agents in making this
investment decision other than as set forth in the Disclosure Materials.
(d) The undersigned acknowledges that the undersigned has
investigated the Company's business, financial conditions, current state of
affairs, planned business and other matters necessary in order for the
undersigned to make an informed investment decision regarding the purchase of
the Shares and Warrant.
(e) The undersigned acknowledges that the undersigned is
purchasing the Shares and Warrant without being furnished any prospectus or
written description of the Company, its business and/or its future plans, other
than the Disclosure Materials, and has relied solely upon the Disclosure
Materials and the undersigned's own investigation into the Company and its
proposed operations.
(f) The undersigned is aware that the purchase of the Shares
and Warrant is a speculative investment involving a high degree of risk and that
there is no guarantee that the undersigned will realize any gain from this
investment, and that the entire investment could be lost.
(g) The undersigned understands that no federal or state
agency has made any finding or determination regarding the fairness of this
private offering, or any recommendation or endorsement of this private offering.
(h) The undersigned is acquiring the Shares and Warrant for
its own account for investment only and not with a view towards. Or for resale
in connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, the undersigned does not agree to hold any of
the Shares for any minimum or other specified term and reserves the right to
dispose of the Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
(i) The undersigned will not maintain a net short position at
any time in the Company's shares. This net position includes any preferred
shares and warrants on an "as converted" basis and also freely trading shares.
(j) The undersigned is financially able to bear the economic
risk of this investment, including the ability to hold the Shares and Warrant
indefinitely or to afford a complete loss of the undersigned's investment in the
Shares and Warrant.
(k) The undersigned represents that the undersigned's overall
commitment to investments which are not readily marketable is not
disproportionate to its net worth, and the investment in the Shares and Warrant
will not cause such overall commitment to become excessive. The undersigned
understands that the statutory basis on which the Shares and Warrant are being
sold to the undersigned would not be available if the undersigned's present
intention were to hold the Shares and Warrant for a fixed period or until the
occurrence of a certain event. The undersigned realizes that in the view of the
Securities and Exchange Commission, a purchase now with a present intent to
resell by reason of a foreseeable specific contingency or any anticipated change
in the market value, or in the condition of the Company, or that of the industry
in which the business of the Company is engaged or in connection with a
contemplated liquidation, or settlement of any loan obtained by the undersigned
for the acquisition of the Shares and Warrant, and for which such Shares and
Warrant may be pledged as security or as donations to religious or charitable
institutions for the purpose of securing a deduction on an income tax return,
would, in fact, represent a purchase with an intent inconsistent with the
undersigned's representations to the Company, and the Securities and Exchange
Commission would then regard such sale as one for which no exemption from
registration is available. The undersigned will not pledge, transfer or assign
this Subscription Agreement.
(l) The undersigned represents that the funds provided for
this investment are either separate property of the Undersigned, other property
over which the undersigned has the right of control, or are otherwise funds as
to which the undersigned has the sole right of management.
(m) The address shown under the undersigned's signature at the
end of this Subscription Agreement is the undersigned's principal business
address if a corporation or other entity.
(n) The undersigned has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Shares and Warrant.
(o) The undersigned acknowledges that the certificates for the
securities comprising the Shares and the shares of Common Stock underlying the
Warrant which the undersigned will receive will contain a legend substantially
as follows:
THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE,
AND MAY NOT BE SOLD, TRANSFERRED, MADE SUBJECT TO A SECURITY
INTEREST, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE RECEIPT BY THE COMPANY OF AN OPINION OF
COUNSEL TO THE HOLDER HEREOF SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.
(p) This Subscription Agreement and all representations,
warranties and statements made herein are true, complete and correct in all
material respects.
(q) The undersigned acknowledges that the Company, except as
set forth in the Shares and Warrant, is under no obligation to register the
Shares and Warrant under the Securities Act or any state securities laws, or to
take any action to make any exemption from any such registration provisions
available, except that the Company agrees to undertake to file a registration
statement under the Securities Act for the Shares and the common shares
underlying the Warrant, no later than December 31, 2001.
(r) This Subscription Agreement is a legally binding
obligation of the undersigned in accordance with its terms.
(s) The undersigned is an "accredited investor," as such term
is defined in Regulation D of the Rules and Regulations promulgated under the
Act.
(t) If the undersigned is a partnership, corporation, trust or
other entity, (i) the undersigned has enclosed with this Subscription Agreement
appropriate evidence of the authority of the individual executing this
Subscription Agreement to act on its behalf (e.g., if a trust, a certified copy
of the trust agreement; if a corporation, a certified corporate resolution
authorizing the signature and a certified copy of the articles of incorporation;
or if a partnership, a certified copy of the partnership agreement), (ii) the
undersigned represents and warrants that it was not organized or reorganized for
the specific purpose of acquiring the Shares and Warrant, and (iii) the
undersigned has the full power and authority to execute this Subscription
Agreement on behalf of such entity and to make the representations and
warranties made herein on its behalf, and (iv) this investment in the Company
has been affirmatively authorized, if required, by the governing board of such
entity and is not prohibited by the governing documents of the entity.
(u) The undersigned expressly acknowledges and agrees that the
Company is relying upon the Undersigned's representation contained in this
Subscription Agreement. The undersigned subscriber acknowledges that the
undersigned understands the meaning and legal consequences of the
representations and warranties which are contained herein and hereby agrees to
indemnify, save and hold the Company, and their respective officers, directors
and counsel harmless from and against any and all claims or actions arising out
of a breach of any representation, warranty or acknowledgment of the undersigned
contained in any Subscription Document. Such indemnification shall be deemed to
include not only the specific liabilities or obligation with respect to which
such indemnity is provided, but also all reasonable costs, expenses, counsel
fees and expenses of settlement relating thereto, whether or not any such
liability or obligation shall have been reduced to judgment.
(v) Except as otherwise specifically provided for hereunder,
no party shall be deemed to have waived any of his or her or its rights
hereunder or under any other agreement, instrument or papers signed by any of
them with respect to the subject matter hereof unless such waiver is in writing
signed by the party waiving said right. A waiver on any one occasion with
respect to the subject matter hereof shall not be construed as a bar to, or
waiver of, any right or remedy on any future occasion. All rights and remedies
with respect to the subject matter hereof, whether evidenced hereby or by any
other agreement, instrument, or paper, will be cumulative, and may be exercised
separately or concurrently.
(w) The parties have not made any representations or
warranties with respect to the subject matter hereof not set forth in this
Subscription Agreement, together with the Shares and Warrant executed
simultaneously herewith, constitutes the entire agreement between them with
respect to the subject matter hereof. All understandings and agreements
heretofore had between the parties with respect to the subject matter hereof are
merged in this Subscription Agreement and the Shares and Warrant which alone
fully and completely expresses their agreement.
(x) This Agreement may not be changed, modified, extended,
terminated or discharged orally, but only by an agreement in writing, which is
signed by all of the parties to this Agreement.
(y) The parties agree to execute any and all such other and
further instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Subscription Agreement and the intent and
purposes hereof.
(z) This Subscription Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey and the
undersigned hereby consents to the jurisdiction of the courts of the State of
New Jersey and/or the United States District Court for the District of New
Jersey.
(aa) The undersigned understands that this subscription is not
binding upon the Company until the Company accepts it, which acceptance is at
the sole discretion of the Company and is to be evidenced by the Company's
execution of this Subscription Agreement where indicated. This Subscription
Agreement shall be null and void if the Company does not accept it as aforesaid.
(bb) Intentionally Omitted.
(cc) Neither this Subscription Agreement nor any of the
rights of the undersigned hereunder may be transferred or assigned by
the undersigned.
(dd) Please check whether one or more of the following
definitions of "accredited investor," if any, applies to you. If none
of the following applies to you, please leave a blank.
(i) A Bank as defined in Section 3(a)(2) of the Securities Act of 1933, as
amended ("Securities Act"), or any savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the Securities Act whether
acting in its individual or fiduciary capacity; any broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); an insurance company as defined in Section 2(13) of the
Securities Act; an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in Section 2(a)(48) of
that act; a Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; any plan established and maintained by a state, or its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; any employee benefit plan within the meaning of
the Employee Retirement Income Security Act of 1974, if the investment decision
is made by a plan fiduciary, as defined in Section 3(21) of such act, which is
either a bank, savings and loan association, insurance company, or registered
investment advisor, or if the employee benefit plan has total assets in excess
of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are Accredited Investors.
(ii) A Private Business Development Company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
(iii) An organization described in Section 501(c)(3) of the Internal
Revenue Code or corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000.
(iv) A natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of purchase exceeds $1,000,000.
(v) A natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year.
(vi) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the Shares and Warrant, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii) of
Regulation D.
(vii) Any entity in which all of the equity owners are Accredited
Investors.
2. This following information is required pursuant to Article III,
Section 44 of the Rules of Fair Practice of the NASD and upon which the Company
will rely in making any statement to the NASD concerning the association or
affiliation of any officer, director or security holder of the Company with any
NASD member.
(i) State whether you or any of your Affiliates or any of your Associates
(See Definitions at the end of this Subscription Agreement) are
(a) Member of the National Association of Securities Dealers,
Inc. ("NASD");
Yes____ No____
(b) a Person Associated with a Member of the NASD; or
Yes____ No____
(c) an Affiliate of a Member of the NASD.
Yes____ No____
(ii) State whether you or any of your Affiliates or any of your
Associates own stock or other securities of any member of the
NASD (other than securities purchased on the open market).
Yes____ No____
(iii) State whether you or any of your Affiliates or any of your
Associates have made a subordinated loan to any Member of the
NASD.
Yes____ No____
(iv) If you marked "Yes" to any of the questions above, please
briefly describe the facts below, giving the names of the
appropriate Members of the NASD to which your answers refer.
(v) The Undersigned has carefully reviewed the jurisdictional notices
listed below and agrees to abide by any restrictions contained therein
applicable to the undersigned.
JURISDICTIONAL NOTICES
THE SECURITIES OFFERED PURSUANT TO THE TERMS AND PROVISIONS OF THIS
SUBSCRIPTION AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATES OF THE UNITED STATES
OR ANY OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR ADEQUACY OF THE MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
IT IS THE RESPONSIBILITY OF THE SUBSCRIBER WISHING TO PURCHASE THE SHARES AND
WARRANT TO SATISFY ITSELF AS TO THE FULL OBSERVANCE OF THE LAWS OF ANY RELEVANT
TERRITORY OUTSIDE THE UNITED STATES IN CONNECTION WITH ANY SUCH PURCHASE,
INCLUDING OBTAINING ANY REQUIRED GOVERNMENTAL OR OTHER CONSENTS OR OBSERVING ANY
OTHER APPLICABLE FORMALITIES.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this __ day of ________ , 2001
Purchase Price for the Units: $xxxxxxxxxxx US.
Exact Name in Which Title is to be Held
Signature
Name (Please Print)
Title of Person Executing Agreement
Address: Number and Street
City State Zip Code
Tax Identification Number
Jurisdiction of Incorporation
Accepted this __ day of ___ , 2001, on behalf of
MAGNITUDE INFORMATION SYSTEMS, INC.
BY:
DEFINITIONS
Affiliate: An Affiliate of any person (for purposes hereof a "person"
includes a partnership, corporation or other legal entity such
as a trust or estate) is a person which controls, is
controlled by or is under common control with such person. For
purposes of this definition:
(i) a person should be presumed to control a Member if the
person beneficially owns 10% or more of the outstanding voting
securities of a Member which is a corporation, or beneficially
owns a partnership interest in 10% or more of the outstanding
voting securities of a person which is a corporation, or
beneficially own a partnership interest in 10% or more of the
distributable profits or losses of a person which is a
partnership; and
(ii) a Member should be presumed to control a person if the
Member and Persons Associated with the Member beneficially own
10% or more of the outstanding voting securities of a person
which is a corporation, or beneficially own a partnership
interest in 10% or more of the distributable profits or losses
of a person which is a partnership; and
(iii) a person should be presumed to be under common control
with a Member if:
(1) the same person controls both the Member and such
person by beneficially owning 10% or more of the
outstanding voting securities of the Member and other
such person which is a corporation, or by
beneficially owning a partnership interest in 10% or
more of the distributable profits or losses of the
Member and other such person which is a partnership;
or
(2) a person having the power to direct or cause the
direction of the management or policies of the Member
also has the power to direct or cause the direction
of the management or policies of the other entity in
question.
Associate: An Associate is
(i) any corporation or organization of which you are
an officer, director or partner, or of which you are
directly or indirectly the beneficial owner of 10% or
more of any class of equity securities.
(ii) any trust or other estate in which you have a
substantial beneficial interest or as to which you
serve as trustee or in a similar fiduciary capacity;
and
(iii) any relative or spouse of yours, or any
relative of such spouse who has the same home as you.
Member: A Member is any broker or dealer admitted to
membership in the NASD.
Person A "Person Associated with a Member" is every sole
proprietor, partner,
Associated officer, director or branch manager of any Member,
or any natural person
with a occupying a similar status or performing similar
functions, or any person
Member: engaged in the investment banking or securities
business who is directly or indirectly
controlling or controlled by such Member (for
example, any employee), whether or not any such
person is registered or exempt from registration with
the NASD.
Exhibit 5.1
November 21, 2001
Joseph J. Tomasek
Attorney At Law
75-77 North Bridge Street
Somerville, New Jersey 08876
Magnitude Information Systems, Inc.
50 Tannery Road, Unit 8
Branchburg, New Jersey 08876
Ladies and Gentlemen::
I have acted as counsel for Magnitude Information Systems, Inc., a
Delaware corporation ("Magnitude"), in connection with the preparation of a
Registration Statement on Form SB-2 (the "Registration Statement") to be filed
by Magnitude with the Securities and Exchange Commission (the "Commission')
pursuant to the Securities Act of 1933 (the "Act"). The Registration Statement
relates to up to 11,693,288 shares (the "Shares") of common stock, par value
$.0001 per share (the "Common Stock").
I have examined such corporate records, certificates and other
documents as I have considered necessary or appropriate for the purposes of this
opinion. In such examination, I have assumed the genuineness of all signatures
and the authenticity of all documents submitted to me as copies. In examining
agreements executed by parties other than Magnitude, I have assumed that such
parties had the power, corporate or other, to enter into and perform all
obligations thereunder and also have assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such parties
of such documents, and the validity and binding effect thereof. As to any facts
material to the oopinion expressed herein which I have not independently
verified or established, I have relied upon statements and representations of
officers and representatives of Magnitude and others.
Based on such examination, I am of the opinion that the Shares have
been duly authorized for issuance and are validly issued, fully paid and
non-assessable.
I hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and to the reference to me and this opinion in the
prospectus that forms a part of the Registration Statement.
Very truly yours,
/s/ Joseph J. Tomasek
------------------------
Joseph J. Tomasek, Esq.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Magnitude Information Systems, Inc. and Subsidiaries
As independent public accountants, we hereby consent to the inclusion in the
Form SB-2 Registration Statement of Magnitude Information Systems, Inc. and
Subsidiaries, filed with the Commission on or about November 20, 2001, of (1)
our report dated February 28, 2001 on the consolidated financial statements of
Magnitude Information Systems, Inc. and Subsidiaries for the fiscal years ended
December 31, 2000 and 1999 and (2) our report dated March 24, 2000 on the
consolidated financial statements of Magnitude Information Systems, Inc. and
Subsidiaries for the fiscal years ended December 31, 1999 and 1998, and to all
references to our Firm included in this Registration Statement.
/s/Rosenberg Rich Baker Berman & Company
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
November 20, 2001