As filed with the Securities and Exchange Commission on December 22, 2000
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
401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Name, address and telephone number of agent for service)
With Copies To:
Joseph J. Tomasek, Esq.
75-77 North Bridge Street
Somerville, New Jersey 08876
(908) 429-0030
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. [ ]
Calculation Of Registration Fee
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PROPOSED PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE
TO BE TO BE PRICE PER OFFERING AMOUNT OF
REGISTERED(1) REGISTERED SHARE PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------
Up to
Common Stock 2, 386,364 shares(1) (2) $1,001,451 $303.47
$.0001 par value per share
Up to
Common Stock 1,193,181 shares(3) (3) $ 500,726(1) $151.74
$.0001 par value per share
Up to
Total 3,579,545 shares(1) $1,502,177(1) $455.21
- -------------------------------------------------------------------------------
(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 October 24, 2000 as
reported on the Electronic Bulletin Board Over-The-Counter Market
maintained by The National Association Of Securities Dealers, Inc.
2) The price per common share to be paid by Torneaux Fund Ltd.
will vary based on a formula described in the common stock purchase
agreement we signed with Torneaux and is described elsewhere in this
registration statement.
(3) The remainder of the shares to be registered are issuable upon the
exercise of warrants to purchase common stock. The warrants are
issuable to Torneaux from time to time when Magnitude exercises
its right to sell shares of common stock to Torneaux pursuant to a
draw down. The exercise price of the warrants will be equal to 115%
of the price per share paid by Torneaux upon a draw down.
----------------------
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
Prospectus
Magnitude Information Systems, Inc.
2,045,448 Common Shares
o The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
o This prospectus relates to the resale by the selling stockholder, Torneaux
Fund Ltd.. of up to 3,579,545 shares of our common stock. The selling
stockholder may sell common stock from time to time in the principal market
in which our stock is traded at the prevailing market price or in
negotiated transactions.
o We will not receive any proceeds from the sale of the shares by the selling
stockholder. However, we will receive the sale price of any common stock
that we sell to Torneaux under the common stock purchase agreement
described in this prospectus or upon the exercise for cash of the warrants
issuable to Torneaux when exercised. We will pay the costs of registering
the shares under this prospectus, including legal fees.
o Our common stock is traded in the over-the-counter market and quoted on the
OTC Bulletin Board under the symbol "MAGY". On October 24, 2000 the average
of the high and low price of our common stock was $.71 per share as
reported on the OTC Bulletin Board.
o Investing in the common stock involves a high degree of risk. You should
invest in the common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning at page 8 of this prospectus.
The date of this prospectus is __________, 2000
3
Please read this prospectus carefully. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with different information. You should not assume that the
information provided by the prospectus is accurate as of any date other than the
date on the front of this prospectus.
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
Table Of Contents
Page
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Forward Looking Statements..............................................4
Prospectus Summary .....................................................5
Summary Consolidated Financial Data ....................................7
Risk Factors ...........................................................8
The Offering...........................................................15
Use of Proceeds .......................................................16
Price Range of Common Stock ...........................................16
Dividend Policy .......................................................16
Management's Discussion and Analysis of Financial Condition and
results of Operations ..............................................17
Business ..............................................................25
Management ............................................................31
Certain Transactions ..................................................36
Principal Stockholders ................................................37
Selling Stockholder ...................................................39
Plan of Distribution ..................................................45
Description of Capital Stock ..........................................46
Legal Matters .........................................................48
Additional Information ................................................49
Index to Financial Statements .........................................50
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."
4
Prospectus Summary
This summary highlights information that we present more fully in the
rest of this prospectus. You should read the entire prospectus carefully.
Magnitude Information Systems, Inc.
All references to "Magnitude Information Systems, Inc.", "Magnitude" or
the "Company" , refers to us or we throughout this prospectus. Our 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 injuries, referred to as "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.
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., a publicly traded Canadian designer,
manufacturer and distributor of office furniture, pursuant to which it 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.
5
The Offering Summary
Total shares of common stock
outstanding as of September 30,
2000............................ 16,193,314
Shares of common stock being
offered forresale by the selling
stockholder..................... Up to 2,045,448 shares, assuming the sale of
all of the shares registered in connection
with the common stock purchase agreement and
exercise of all warrants by the selling
stockholder.
Offering Price.................. Market price or negotiated prices at the time
of resale.
Use of Proceeds................. We will not receive any of the proceeds of the
shares offered by the selling stockholder. Any
proceeds we receive from our sales of common
stock to Torneaux Fund Ltd. and the exercise
of warrants working capital and other general
corporate purposes.
OTC Bulletin Board
Symbol.......................... MAGY
6
Summary Consolidated Financial Data
This summary of consolidated financial data has been derived from our
annual and interim consolidated financial statements included elsewhere in this
prospectus. You should read this information in conjunction with those financial
statements, and notes thereto, along with the section entitled "Management's
Discussion and Analysis of Financial Condition."
Nine months
Year Ended December 31, ended September 30
-------------------------------- -----------------
Consolidated Statement of Operations 1998 1999 2000
Data: ----------- --------- -----------------
(Unaudited)
Revenue $2,926,455 $ 263,553 $ 601,790
Loss from operations 2,588,762 (2,642,989) (2,345,154)
Net Loss (2,530,909) (2,391,948) (2,481,177)
Loss per Share
Basic (0.58) (0.28) (0.17)
Diluted (0.58) (0.28) (0.17)
Working Capital (deficiency) (2,145,611) (3,541,257) 638,071
Total Assets 2,098,207 2,220,223 3,052,034
Stockholders' Equity (impairment) (2,061,872) (2,280,945) 1,522,127
Consolidated Balance Sheet Data: As of September 30, 2000
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(Unaudited)
Cash and cash equivalents................................ $ 680,866
Working Capital (deficiency)............................. 638,071
Total Assets............................................. 3,052,035
Total Liabilities........................................ 1,529,908
Stockholders' Equity..................................... 1,522,127
7
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.
We Continue to Suffer Losses and We Are Not Profitable.
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 $11,298,013 as of December 31, 1999 of
which approximately $7 million are attributable to its discontinued hardware
product line. For the fiscal years ended December 31, 1999 and 1998, we incurred
losses of $2,391,948 and $2,530,909, respectively. For the nine month period
ended, September 30, 2000, we had additional losses of $2,481,177. 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.
We Will Need Additional Financing.
We could be required to cut back or stop operations if we are unable to
raise or obtain needed funding. Our ability to continue operations will depend
on our positive cash flow, if any, from future operations or our ability to
raise additional funds through equity or debt financing. In February, 2000 we
received a firm commitment for private financing of $3.0 million of equity in
order to obtain the working capital necessary to continue to finance our
operations and execute our business plan. Although we anticipate that future
revenues and our current cash balance will be sufficient to fund our current
operations and capital requirements for the current fiscal year, we cannot give
you any assurance that we will not need additional funds before such time. On
December 18, 2000, we signed a new common stock purchase agreement with Torneaux
Fund Ltd., a Bahamian Island based company, replacing a previously signed
similar agreement on October 6, 2000, that may permit us to sell between
$1.2 million and $4.2 million worth of our common shares, at our option and at
discounts ranging from 9.5% to 12% of the average market price of our common
shares, depending upon our successful registration of additional Company
common shares under federal securities laws and depending upon the
prevailing market price of our common stock. Other than this possibility to
sell additional equity and obtain funds, we have no current arrangements for
additional financing and we may not be able to obtain additional financing on
commercially reasonable terms, if at all. We could be required to cut back or
stop operations if we are unable to raise or obtain funds when needed.
8
Our Business is New and We Have Had Limited Sales of Our Products.
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, 1999 and 1998 were
approximately $260,703 and $72,486, respectively. For the six month period ended
June 30, 2000 we have revenues of only $601,790.
Our Software Products Are Untested in the Marketplace.
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 ErgoManagerTMsuite of software products. Since the
introduction of our ErgoManagerTM software products in November, 1998 and
through December 31, 1999 revenue from our software products has been
approximately $270,000 (prior to this time, we had sales of approximately
$63,000 based upon a predecessor version of the ErgoManagerTM software}. For the
nine month period ended September 30, 2000, we had revenues from the sales of
software product licenses of $601,790. Our future financial performance will
depend upon the successful introduction and customer acceptance of our
ErgoManagerTM software products as well as the development of new and
enhanced versions of this product as well as other related software products
that may be developed in the future. Revenue from products such as
ErgoManagerTM depend on a number of factors, including the influence of market
competition, technological changes in the ergonomic workplace market, our
ability to design, develop and introduce enhancements on a timely basis and
our ability to successfully establish and maintain distribution channels.
If we fail to achieve broad market acceptance of our ErgoManagerTM products,
it would have a material adverse effect on our business, operating results
and financial condition.
We Do Not Have A Sales Distribution Network or Strategic Sales Partners.
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.
You May Lose Your Entire Investment in Our Stock.
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.
9
Our Business Depends Upon the Continued Efforts of a Select Few People.
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.
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.
Our Stock is a "Penny Stock" and is Subject to Strict Offering 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 aswell 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.
10
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:
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.
We 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.
11
We Have Not Paid any Dividends and Are Not Likely to Pay Any Dividends On Our
Common Stock in the future
We have not declared or paid any dividends on our common stock, and do
not anticipate paying any dividends for the foreseeable future. In addition, the
holders of shares of our preferred stock are entitled to receive, out of any
legally available funds, cumulative dividends equal to varying percentages,
depending upon which of three series of preferred shares outstanding, of the
liquidation preferences of these shares. All dividends must be paid on our
preferred stock before any may be declared or paid on the common stock.
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.
Future Sales of our Common Stock Pursuant to This Prospectus by Torneaux and the
Exercise of Outstanding Options and Warrants May Adversely Affect our Stock
Price and Your Percentage of Ownership.
Sales of a substantial number of shares of our common stock in the
public market could cause a reduction in the market price of our common stock.
Through this offering, Torneaux Fund, Ltd. may be reselling up to 2,045,448
shares of our common stock. In addition, as of September 30, 2000, there were
outstanding preferred shares and other convertible instruments, warrants and
options convertible or exercisable to purchase an aggregate of 17,929,276 shares
of our common stock. Some of the options and warrants have exercise prices below
the current trading price of our common stock. As a result of this offering and
future issuances of our common stock pursuant to the convertible securities and
instruments, options or warrants, a substantial number of shares of our common
stock will become available for resale which could have a material and adverse
effect on the market price of our common stock. Further, this may have a
detrimental impact on the terms under which we may be able to obtain financing
through a sale of our common stock in the future by hindering our ability to
raise capital at a higher market price due to the dilutive effect to new
investors. For these reasons, any evaluation of the favorability of market
conditions for subsequent stock offering must take into account any outstanding
common shares, convertible securities and instruments, warrants and options.
12
Torneaux May Sell Large Quantities of Our Shares in The Public Market in Order
to Reduce the Number of Our Common Shares It Owns.
Our common stock purchase agreement with Torneaux limits the number of
our common shares Torneaux may own at any time during the term of the agreement
to 9.9% of our outstanding common shares. We had 16,193,314 common shares
outstanding as of September 30, 2000. If Torneaux's 9.9% stock ownership
limitation was applied to this amount of outstanding shares, Torneaux could buy
up to 1,779,287 shares under the terms of our agreement. If Torneaux owned this
or any other amount of our common shares representing its maximum 9.9% ownership
amount, we would not be able to issue a drawdown request and obtain a draw under
the terms of our agreement. However, Torneaux will have the right to resell any
amounts of our shares it previously purchased under our agreement in order to
reduce its ownership percentage of our outstanding common shares to below its
9.9% ownership limitation. These resales by Torneaux may occur after each of the
12 drawdowns we may request and obtain under the terms of our agreement and may
occur even more frequently. Such resales by Torneaux, may substantially increase
the amount of our common shares in the public market and could lead to material
and substantial decreases in the public market price of our common shares.
We Will Sell Our Common Shares to Torneaux at a Discount to the Market Price, at
Prices Lower Than Available to Public Investors and, In Many Cases, at Prices
Lower Than What Our Shareholders Paid For Our Common Shares.
Torneaux will be able to purchase our common shares at discounts
between 12% and 9.5% of the public market price of our shares. This will permit
Torneaux to purchase our shares at prices substantially below what public
investors will pay for our shares on the open market and may represent prices
substantially lower than what our shareholders paid for our common shares.
Accordingly, Torneaux will be able to buy our common shares at substantial
discounts and resell them pursuant to this prospectus at the then current market
price. This purchase price discount provides Torneaux with substantial economic
reasons to purchase our shares at the discount and immediately resell them into
the public market. Such resales by Torneaux could substantially depress the
market price of our shares and substantially increase the number of our common
shares in the public market, resulting in material dilution to shareholders of
their ownership percentage in our shares. See, "Common Stock Purchase Agreement"
below.
If the Public Trading Price of Our Common Shares Stays Below $1.00, We Will Not
Be Able To Request A Draw From Torneaux.
We can only obtain a draw on our equity line under our agreement with
Torneaux if the public trading price of our common shares is sustained at a
price of $1.00 or higher during the 20-day trading period following any drawdown
request we make. On December 19, 2000, the average high and low bid asked price
for our common shares was $0.7344. If this market price was to remain below
$1.00 throughout the term of our agreement with Torneaux, being less than the
minimum $1.00 market or threshold price required in order to obtain a draw, we
would not be able to obtain any draw from our equity line under our agreement
with Torneaux. Even if the market price for our common shares rises above $1.00
for substantial periods, permitting us to draw and obtain funds from Torneaux,
any substantial resale of our common shares by Torneaux under this prospectus
could, in turn, cause a substantial decrease in the public trading price. See,
"Common Stock Purchase Agreement" below.
13
The Software Business Constantly Changes and We May not Be Able to Respond
Quickly to These Changes.
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.
14
The Offering
Common Stock Purchase Agreement
We are registering 2,045,448 shares of our common stock in connection
with our common stock purchase agreement with Torneaux Fund Ltd. On December 18,
2000, we entered into a common stock purchase agreement and related agreements
with Torneaux , a private equity fund organized under the laws of the Bahamas.
Subject to the fulfillment of certain conditions, the agreements provide us with
a facility through which we may sell shares of our common stock, at our option,
to Torneaux periodically over a 15 month period. Our ability to request a draw
down under the common stock purchase agreement is subject to the continued
effectiveness of a resale registration statement filed with the Securities and
Exchange Commission to cover the shares to be issued. The amount of common stock
to be sold at each draw down will not be less than $100,000 nor more than
$350,000. We have agreed to sell our shares to Torneaux at a price equal to the
then current market price of our common stock during the draw down period, less
a discount of between 9.5% and 12% specifically determined based upon a formula
related to the then current market price of the stock, but which purchase price
may not be less than $1.00. Accordingly, Torneaux is obligated to purchase our
common shares at our election if the average daily current market price is at
least $1.00. The number of shares that we may sell to Torneaux varies depending
on certain factors, including the then current ownership interest of our common
stock by Torneaux. We have also agreed to issue to Torneaux warrants to purchase
from 30% to 50% of the number of shares of common stock being purchased at the
time of each draw down. Torneaux will either resell its shares of our common
stock in the open market, resell its shares of our common stock to other
investors in negotiated transactions or hold shares of our common stock in its
portfolio. All decisions concerning the resale of our shares purchased by
Torneaux under this agreement are made by a director of Torneaux, Karen Zyp.
This prospectus covers the resale by Torneaux of common stock purchased by
Torneaux and issuable upon exercise of the related warrants either in the open
market or to other investors. See "Common Stock Purchase Agreement" below, and
"Risk Factors" above.
Pending Stock Distribution and Registration Statement
We currently have a pending distribution of our common shares taking place
pursuant to an effective registration statement previously filed with the
Securities and Exchange Commission. On August 24, 2000, our registration
statement, filed on behalf of selling securityholders to offer 19,482,086 of our
common shares for resale to the public, was declared effective by the Securities
and Exchange Commission. Many of these shares underlie stock options, stock
warrants and convertible securities we previously sold to the selling
securityholders. We will not receive any of the proceeds from the sales of our
common shares by the selling securityholders but will receive those payments
representing the exercise prices of the stock options and stock warrants.
15
Use Of Proceeds
We will not receive any proceeds from the resale of shares of common stock by
Torneaux, the selling stockholder. Torneaux will receive all of the net
proceeds from the resale of any of our common shares offered in this
Prospectus. However, we will receive the sale price of any common stock we sell
to Torneaux under the common stock purchase agreement described in this
prospectus and upon the exercise of warrants issuable to Torneaux when it pays
the exercise price in cash. We expect to use the proceeds of any such sales for
general working capital purposes.
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
1998
First Quarter ..................... $ 5 7/8 $4 3/8
Second Quarter ................... 5 7/8 3 3/4
Third Quarter ..................... 4 3/4 1 1/4
Fourth Quarter ................... 2 5/8 3/4
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................. 1.43 0.71
As of June 30, 2000, there were approximately 238 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.
Dividend Policy
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" and "The Series C
Stock", below.
16
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Nine Months Ended September 30, 2000, Compared to Nine Months Ended
September 30, 1999
Results of Operations:
The first three quarters in 2000 showed a substantial relative increase
in revenues over the corresponding quarters in 1999. These increases are the
result of several conversions from pilot projects to enterprise-wide
installation by several larger customers, the first such occurrences in the
Company's history. Although in absolute terms, revenues have not yet grown to a
level that will cover ongoing expenses management considers the sales results
for the period significant insofar as they appear to validate the Company's
marketing strategy of lowering entry barriers by closely cooperating with larger
potential clients in introducing the proprietary ErgoManager(TM) software
through pilot projects at selected worksites, thereby creating the necessary
credibility and awareness of the product's unique potential in the areas of
productivity enhancement and risk reduction with respect to repetitive stress
injuries, in the office environment. Even though relatively time consuming,
pilot projects involving smaller numbers of employees provide a potential client
with an opportunity to test the software's utility and reliability, systems and
network friendliness, and staff acceptance without incurring the perceived risk
associated with an immediate enterprise-wide installation of a new product.
During the last two quarters, four companies and government agencies
have converted from pilot programs to full deployment of the ErgoManager(TM)
software, three of which, the insurance company 21st Century Insurance Co., the
California State Controller's Office, and the State Compensation Insurance Fund
are located in the State of California which in 1998 pioneered legislation that
requires businesses to monitor and manage employees who work on computers in
order to mitigate health risks and which was followed by proposals for similar
legislation, in the states of North Carolina and Washington and by the U.S.
Federal OSHA, the latter expected to be enacted before the end of the year.
Although market acceptance of the Company's products, in management's opinion
does not depend on the passing of such legislation, compliance motivation with
respect to actual or proposed law constitutes an important element in the
Company's marketing strategy.
Revenues for the nine months ended September 30, 2000, amounted to
$601,790 compared to $162,430 for the same period in 1999; all such revenues
generated by the Company's wholly owned subsidiary Magnitude, Inc. from the
licensing of the Company's proprietary ErgoManager(TM) software. Gross profits
amounted to $475,396 for a 79% gross margin. Gross profits are burdened with a
fixed charge for amortization of software investments. Software assets
underlying the Company's products are being amortized on a straight line over 10
years, resulting in a level charge of approximately $13,000 per month to
cost-of-goods-sold. Since variable product costs are low, the gross margin is
expected to further increase as revenues grow. After deducting selling expenses
and general and administrative expenses totaling $2,820,550 the Company realized
an operating loss of $2,345,154, compared to an operating loss of $1,966,175 for
the first six months in 1999. Non-operating expenses totaled $136,023 and
include $148,934 net interest expense and $14,060 in miscellaneous income from
royalty payments in connection with the 1998 divestiture of the former
keyboarding systems product line. The net result for the period was a loss of
$2,481,177 or $0.17 per share, compared to a loss of $2,124,599 or $0.26 per
share for the same period last year.
17
The nine months' net result was strongly affected by the continuing
expansion of marketing and sales operations resulting in a sharp increase of
selling expenses, which almost doubled from the level a year ago. The Company is
undertaking pioneering efforts in educating future customers and the business
community at large about the merits of a pro-active stance in dealing with the
growing level of health risks and potential liabilities associated with
repetitive stress injuries in the computer workplace environment. Management
believes that these efforts are justified by the potential rewards accruing from
this "First to Market" approach which should lead to a strong competitive
advantage and a sizable market share during the years to come. The Company will
continue to invest in a comprehensive marketing campaign with the goal of
accelerating the education of potential clients and promoting the name and
products of the Company. This process is showing first results in form of larger
orders, however, overall is a time consuming approach. While management is
confident of the ultimate success of its strategy it is not in a position to
predict with any degree of certainty when revenues will grow to a level
sufficient to finance operations.
As part of its overall marketing plan, the Company negotiated several
joint venture-, joint marketing-, and distribution agreements with, among
others, AON Ergonomic Services (a division of insurance industry leader AON
Corporation), The Speech Centre Training Group (U.K.) , CapitalReps
(organization specializing in sales of computer products to the federal
government). 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. In order to take advantage of the wide reach of the Internet,
the Company just completed a distribution agreement with a key e-commerce
marketer - Big Planet Inc., whereby Big Planet will offer the Company's products
directly to Internet users and through its vast network of independent
distributors.
During the second quarter, agreements were negotiated with Automated
Systems, Inc. (ASI), the well known high level systems integrator headquartered
in Chicago, and Protegrity Services, Inc., one of the largest privately held
workers' compensation service companies in the United States, serving over
18,000 business customers in 17 states. These partnerships are expected to
facilitate the Company's access to key prospects and accelerate market entry and
acceptance for the Company's software products.
Liquidity and Capital Resources:
As already reported for the prior fiscal year, the Company during 2000
continued attracting new equity investments through private placements with
accredited investors and agreed with certain other investors to convert larger
amounts of debt into equity. These transactions significantly changed the
balance sheet of the Company and improved the Company's financial profile so
that, at September 30, 2000 and in spite of the loss from operations,
stockholders' equity increased to $1,522,127 compared to a deficit in excess of
$2.2 Million at the end of the previous fiscal year. During the same time, the
working capital deficit of $3,541,257 at December 31, 1999, was transformed into
a positive $638,071 at the end of the third quarter.
In February, the Company had obtained a firm commitment from a previous
investor to act as placement agent for a capital raising effort to obtain new
equity capital of $3 Million through private placement subscriptions by
accredited investors. By September 30, 2000, the Company had received the entire
amount under this program, and, in addition, $200,000 pursuant to equity
investments from other private investors. Furthermore, the Company received
equity capital of $500,000 from private placement subscriptions by accredited
investors under a new program designed to attract an aggregate total of
approximately $2 Million in equity funding through the remainder of this year
and the first quarter in 2001. Aside from attracting new capital in the form of
equity investments, the Company between January 1, 2000 and September 30, 2000
has converted an aggregate of $2,790,045 short-term debt into equity in form of
common stock and convertible preferred stock and restructured a $374,890
short-term liability into a long-term convertible obligation. These financing
transactions more than offset the negative cash flow from operations of
approximately $2,773,000 during the first nine months of the year. The Company
has no bank debt.
18
To further augment available financial resources, the Company on July
18, 2000, entered into a Common Stock Purchase Agreement with Torneaux Ltd., an
investment fund headquartered in the Commonwealth of The Bahamas (the "Fund"),
which provides for an Equity Draw Down facility which may be utilized by the
Company at its option and whereby the Fund during a period of 14 months if and
when called upon by the Company will purchase newly to be issued and registered
common stock of the Company at discounts ranging from 9.5% to 12% of average
market prices, up to an aggregate total amount of between $1.2 Million and $4.2
Million, depending upon certain market price and other criteria. Owing to the
current market price of the Company's common stock, the terms of the agreement
preclude utilization of the facility at this time, however, management believes
that funds from the above described capital transactions will provide for
adequate liquidity and financial resources, sufficient to cover present and
anticipated future operations during the current and well into the next fiscal
year.
Fiscal Year Ended December 31, 1999, Compared to Fiscal Year Ended December
31, 1998
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1999 and 1998 is derived from the audited financial statements of the Company
and should be read in conjunction with the financial statements and notes
thereto.
SELECTED FINANCIAL DATA
Balance Sheet December 31,
1999 1998
----------------- ----------------------
Total assets ............................. $ 2,220,223 $ 2,098,207
Current liabilities ...................... 4,465,413 2,718,240
Long-term debt ........................... 35,755 1,441,839
Working capital (deficit) ................ (3,541,257) (2,145,611)
Shareholders' Equity (deficit) ........... $ (2,280,945) $ (2,061,872)
Statement of Operations For The Year Ended December 31,
1999 1998
------------------ ---------------------
Hardware revenues ........................ $ 2,850 $ 2,853,969
Software revenues ........................ 260,703 72,486
Total revenues ........................... $ 263,553 $ 2,926,455
Operating loss ........................... (2,642,989) (2,588,762)
Loss before extraordinary items .......... (2,882,322) (3,130,621)
Net loss ................................. (2,391,948) (2,530,909)
Net loss per common share ................ $ (0.28) $ (0.58)
Number of shares used in computing
per share data ........................... 8,486,443 4,324,292
Summary:
Fiscal Year 1999 was a pivotal year of transition - the Company focused
its efforts and resources on several key areas which management considers
crucial with respect to the strategic positioning of Magnitude for future
growth: (i) the further expansion and completion of its core software product,
the ErgoManager(TM) software system, (ii) the development of strategic
partnerships with several potential resellers and influencers, (iii) the
introduction of key prospective clients to the ErgoManager(TM) product, (iv) the
urgently required restructuring of the Company's balance sheet and addition of a
substantial amount of new equity capital to finance ongoing and future
development and marketing efforts, and (v) the conceptualization and initial
design of new software products related to Internet and e-Commerce usage - two
important growth markets. Management believes that it has succeeded in making
significant progress in all five areas.
19
The ErgoManager(TM) System:
During the year, Version 3.05 was released and Version 4.0, to be
released during the year 2000, was nearing completion. Numerous important
feature enhancements and a new report writer module were finalized. The system
as a whole has been extensively field tested during several dozen pilot programs
at prospective customers' sites, and several customers have substantially
expanded their usage of the software.
Key Prospective Clients:
At this time the Company focuses on introducing its ergonomic software
products to the market. The most promising clients are medium size to large
companies or organizations that (a) employ a large staff in the data entry or
general computer related work environment, (b) 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 (c) are prepared to make the necessary investments in a
remedial and preventive solution such as offered by the ErgoManager(TM) System.
During the second half of 1999, the Company succeeded in gaining acceptance for
larger pilot programs, and in some cases the actual deployment of the software
across entire departments, at several large corporate clients, among them
well-known Fortune 500 companies.
Recapitalization and Debt Restructuring:
As explained in more detail below, starting with the latter part of
1999, management is making efforts to retain investor's confidence in the
Company's future with the goal of obtaining new equity capital and reducing the
Company's debt burden. These efforts are showing results in form of a
significant relative improvement of the balance sheet of the Company.
New Products:
Several new product initiatives started in 1999 and are expected to
link the Company's future to the Internet and e-Commerce marketplace. Among
these are ErgoPal, eFuel(TM), and SmartErgonomics.com. Expected new equity
capital will fund initial development efforts, however, management plans to
attract additional funding dedicated specifically towards development and
marketing efforts in these new areas.
Results of Operations for the Year Ended December 31, 1999:
For the year ended December 31, 1999, the Company had gross revenues of
$263,553 . While modest, this figure represents a significant increase in
software-derived revenues (prior year $72,486), all of which was generated by
the Company's wholly owned subsidiary Magnitude, Inc. These revenues are
primarily composed of smaller orders for initial pilot projects. Conversion to
enterprise-wide contracts is expected for several of these pilots. The sales
cycle for larger projects involving software related products is relatively
long, and the Company does not expect to realize significant new revenues before
the second quarter of fiscal year 2000.
Gross profits amounted to $92,732 for a 35% gross margin. Gross profits
are burdened with a fixed charge for amortization of software investments.
Software assets underlying the Company's products are being amortized on a
straight line over 10 years, resulting in a level charge of approximately
$12,000 per month to cost-of-goods-sold. Owing to the fact that variable
cost-of-goods-sold expenses are in the vicinity of only 5%, the gross margin
20
will sharply increase when revenues grow. After deducting selling expenses and
general and administrative expenses of $2,735,721 the Company realized an
operating loss of $2,642,989 (compared to an operating loss of $2,588,762 in
1998). Non-operating expenses totaled $239,333 and include $293,553 net interest
expense and non-operating income of approximately $133,520 for royalties from
the 1998 sale of the Company's hardware product line. A large extraordinary gain
of $490,374 from the sale of net loss carry-forward tax credits pursuant to the
new New Jersey Emerging Technology and Biotechnology Financial Assistance Act
more than offset the interest expense, and the year concluded with a net loss of
$2,391,948 or $0.28 per share, compared to a loss of $2,530,909 or $0.58 per
share ($3,130,621 or $0.72 per share before an extraordinary gain from the sale
of the Company's hardware product line) for the previous year.
The fiscal year's results must be interpreted from the viewpoint of a
young company that pioneers new products for emerging markets. These markets are
now evolving and management believes that its "First to Market" approach will
lead to a strong competitive advantage and a sizable market share during the
months and years to come.
To some extent, a severe capital shortage during the first nine months
of the fiscal year affected the extent and pace at which the new software
products could be introduced to the market. The working capital shortage in
particular prohibited a more comprehensive marketing campaign which would have
accelerated the education of potential clients. Education is of critical
importance. This task will become easier for the Company as the general public
becomes aware of the risks associated with poor posture and work habits in the
computer work-place environment, and as the burden of informing the public is
taken up by certain State and Federal agencies. In addition, as described below,
the Company during the first quarter in 2000 has secured new capital investments
that will provide for the funding of a comprehensive marketing plan.
Liquidity and Capital Resources:
At December 31, 1999, the working capital deficit amounted to
$3,541,257 as compared to a deficit of $2,227,516 at December 31, 1998. Current
liabilities included approximately $3.7 Million short-term debt, the majority
maturing during the second and third quarter of 2000. During the year and as a
consequence of the absence of revenues, operations consumed $1,955,000 cash
flow, financed primarily by the issuance of convertible debt with maturities
averaging 14 months, and short-term loans, and to the extent of $525,000 by
direct equity investments, all of these under private placement arrangements
with accredited investors. The Company has no bank debt.
Beginning in the fourth quarter of 1999, management has taken
accelerated measures to redress the balance sheet and put the Company on a more
solid financial footing. At the end of the year, negotiations are underway with
several interested parties which when completed will result in new net equity
investments in the form of cash under private placement arrangements totaling
more than $2.5 Million. Parallel to attracting new capital in the form of equity
investments, the Company seeks to convert significant amounts of short-term
convertible debt maturing during 2000 into equity or long-term debt.
Fiscal Year Ended December 31, 1998, Compared to Fiscal Year Ended December 31,
1997
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1998 and 1997 is derived from the audited financial statements of the Company
and should be read in conjunction with the financial statements and notes
thereto.
21
On July 2, 1997, the Company, then known as Whitestone Industries Inc.,
after divesting itself of substantially all operations, assets, and liabilities,
extended an offer to all holders of the common stock of Magnitude, Inc. f/k/a
Proformix, Inc. to exchange their shares into newly to be issued common stock of
the Company. The business combination which took the form of a reverse
acquisition has been accounted for as a Purchase. Subsequent to the exchange,
the Company and Magnitude, Inc. remain as two separate legal entities whereby
Magnitude, Inc. operates as a subsidiary of Magnitude Information Systems, Inc.,
however, the operations of the newly combined entity are comprised solely of the
operations of Magnitude, Inc. Therefore, the discussion ensuing below only
pertains to the operations of Magnitude, Inc. for the prior fiscal year until
the date of the acquisition of Magnitude, Inc. through the Company, and to the
operations of the Company thereafter. The past results of operations for
Whitestone Industries, Inc. are summarized as Discontinued Operations. All
intercompany accounts and transactions have been eliminated in consolidation.
22
Selected Financial Data
Balance Sheet December 31,
1998 1997
----------------- --------------------
Total assets ........................... $ 2,138,453 $ 1,152,250
Current liabilities .................... 2,813,308 3,429,825
Long-term debt ......................... 1,316,839 1,719,435
Working capital (deficit) .............. (2,227,516) (2,806,682)
Shareholders' Equity (deficit) ......... $ (1,991,694) $ (3,997,010)
Statement of Operations For The Year Ended December 31,
1998 1997
------------------ --------------------
Hardware revenues ...................... $ 2,853,969 $ 3,125,009
Software revenues ...................... 72,486 -
Total revenues ......................... $ 2,926,455 $ 3,125,009
Operating loss ......................... (2,588,762) (1,128,170)
Loss before extraordinary items ........ (3,113,157) (1,507,745)
Net loss ............................... (2,530,909) (1,507,745)
Net loss per common share .............. $ (0.58) $ (0.76)
Number of shares used in computing
per share data ......................... 4,324,292 2,094,724
Results of Operations for the Year Ended December 31, 1998:
For the year ended December 31, 1998, the Company had gross revenues of
$2,926,455 (previous year $3,125,009), all of which was generated by its
subsidiary Magnitude, Inc., primarily through its keyboarding systems business.
A portion of $72,486 during 1998 was attributable to the licensing of the
Company's proprietary software. There were no software revenues in 1997.
Gross profits amounted to $1,336,015 for a 46% gross margin ($1,673,805
respectively 54% in 1997). After deducting selling expenses of $1,363,564 and
general and administrative expenses of $2,561,213, the Company realized an
operating loss of $2,588,762 (compared to an operating loss of $1,128,170 in
1997). Non-operating expenses aside from an item of $686,584 extraordinary
income from the sale of the hardware business to Office Specialty and related
royalty income (see Item 1 "Business") totaled $628,731 and include $342,010 net
interest expense and charges of approximately $255,000 which account for the
write-off of assets which were obsoleted with the sale of the hardware business
and for the dissolution of previously capitalized deferred financing charges,
the latter as the result of the early repayment of bank loans in connection with
the Office Specialty transaction. The year concluded with a net loss of
$2,530,909 or $0.58 per share, compared to a loss of $1,507,745 or $0.76 per
share for the previous year.
23
The fiscal year's results were primarily determined by a combination of
slightly lower revenues, a decrease in the overall gross profit margin, and
significant increases in general and administrative expenses. Sales of keyboard
platforms and accessories continued at a strong pace throughout the first two
quarters, however, were affected during the third quarter by a worsening
shortage of working capital which brought about disruptions in the supply of
materials and caused a curtailment of marketing activities. During the fourth
quarter and in anticipation of the impending sale of the hardware product line,
management dedicated most of the available resources towards the software
business. Effective with the sale of the hardware business in November 1998 no
further revenues were being generated from this product line, aside from
royalties which amounted to $53,543 for the months of November and December and
which are included in Non-operating Income. In the aftermath of the Office
Specialty transaction, the Company's revenue base is being supplied solely by
the licensing of the Company's proprietary software. The software business
accounted for only $72,486 during 1998, however, is expected to grow
significantly during 1999.
Cost-of-goods sold include approximately $95,000 amortization of
software assets. These assets which the Company acquired earlier in 1998
pursuant to the asset purchase agreements with Rolina Corporation and Vanity
Software Publishing Inc. and which formed the basis for the further development,
during the year, of the Company's proprietary Proformix EMS Software System, are
being amortized on a straight line, 10-year, basis. Such software amortization
and higher agency fees in connection with some hardware sales accounted for the
decrease in the overall gross profit margin which otherwise would have tracked
the prior year's result.
During the year, the Company invested considerable resources in the
further development and enhancement of its acquired software products, and the
formation of new infrastructure for the new business sector. The Company hired
product development and customer support staff and, starting with the fall of
1998, put in place a new sales organization dedicated to the software business.
Related incremental expenditures, not including the outlays for the primary
software assets acquired from Rolina and Vanity Software, totaled more than
$800,000 , most of which are reflected in the financial statements as additional
operating expenses. These expenditures which management categorizes as a
front-end investment in the future of the Company, caused general and
administrative expenses in total to increase by 63% over the level of the
preceding year. However, the Company is in the process of divesting itself of
unneeded infrastructure previously associated with the hardware business, and a
cost savings trend is expected to take hold during the upcoming fiscal year.
The Software Business:
In expectation that - on a going forward basis - the software business
will account for most if not all of future revenues, management is giving
special attention to the fact that this business distinguishes itself from the
Company's traditional hardware business in certain important criteria:
(a) Target Clientele: even more so than with the keyboarding products, the
Company expects its client mix to gravitate towards larger companies and
organizations. A likely consequence, initially, will be a concentration of sales
into a smaller number of larger projects and increased volatility in its revenue
stream.
(b) Sales Cycles: Software that has the potential of affecting a
company's operations especially with respect to utilization of human resources
is subjected to a possibly larger degree of test, scrutiny, and committee
decision making than most other software products. Management therefore expects
longer sales cycles which during the transition period until a break-even sales
volume is achieved, will put additional strain on the Company's liquidity and
financial resources.
24
(c) Cost Structures: The software business to a significant
degree is less capital intensive than the Company's traditional hardware
business. Also, its overall cost structure is less sensitive to changes in
volume. While this translates into improved predictability of future
expenditures, it also burdens the Company with a certain level of quasi fixed
expenses during the period when it is only beginning to realize cash flow from
revenues. However, after passing the break-even point the Company will be the
beneficiary of significant cash flows from any further revenue increases.
In view of the above and of its limited financial resources the
Company, at least during the upcoming quarters, will need to continue relying on
outside financing to augment working capital until a sufficiently large revenue
base has evolved. Management is working to secure such financing and fully
expects to be able to successfully complete the transition to a specialized
software house, with the goal of becoming the premier supplier of productivity
enhancement software for the computer workplace, concentrating on areas such as
worksite evaluation, employee training and work pacing.
Liquidity and Capital Resources:
At December 31, 1998, the working capital deficit amounted to
$2,227,516 as compared with a deficit of $2,806,682 at December 31, 1997. The
relative increase in working capital was a direct consequence of financing
activities and other transactions more closely described below, which more than
offset the total of investments in the new software business and the losses
incurred .
Such activities fall into four areas: (1) the divestiture of the
hardware business pursuant to the Asset Purchase Agreement with 1320236 Ontario
Inc. in November 1998 (see Item 1 "Business") which generated approximately $1.3
million cash for the Company; (2) the conversion of certain current and past-due
Company debt totaling approximately $340,000 into common equity at the rate of
$1 per share; (3) the raising of new capital through placement of the Company's
Common Shares with domestic investors under private placement arrangements, and
with foreign investors under exemptions pursuant to Regulation S promulgated
under the Securities Act of 1933, as amended, by way of which the Company
received an aggregate $2,787,000 net in new equity capital against issuance of a
total of 1,525,866 shares, consisting of $2,512,000 cash and $275,000
representing the conversion of subscription prepayments received prior to
December 31, 1997; and (4) loans extended by a director and shareholder of the
Company (see Item 12 "Certain Relationships").
Cash received from the 1320236 Ontario Inc. transaction was used to
retire outstanding bank debt in the amount of approximately $800,000 owed to the
Company's principal lender Carnegie Bank, who held a security interest in the
sold assets, and to pay down certain trade liabilities in the aggregate amount
of approximately $500,000. Cash received from the financing transactions
mentioned under (3) and (4) above was primarily used to partially finance the
software purchases pursuant to the Rolina Corporation and Vanity Software
Publishing Co. acquisitions, and to offset losses from operations. The equity
issues as per (3) took place during the first and second quarter of 1998 and
have been discussed in more detail in the Company's last report on Form 10-KSB
and the quarterly 10-QSB reports filed during 1998, all of which are
incorporated herein by reference.
The Company currently has only very limited financial resources, and
needs to augment working capital through outside financing. Management's efforts
in this direction center around securing additional funding from a variety of
sources including debt instruments and a liquidation of unused NOL's for which
recent New Jersey tax legislation created a market. Until such can be completed
which is expected to occur towards the beginning of the second quarter, certain
members of the Company's management have agreed to provide for needed bridge
funding.
24
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.
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 $.01, of which at December 31, 1999, 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 200,000 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; and 120,000 shares as
Series C Senior Convertible Preferred Stock, par value $0.001.
As of June 30, 2000, there were outstanding 15,479,163 Common Shares, 1
Cumulative Preferred Share, 29,300 shares of Series A Stock, 222,228 shares of
Series B Stock and 100,000 shares of Series C Stock.
25
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
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 or "RSI" is a classification of diseases caused
by the excessive use of joints. It is a sub-classification of Cumulative Trauma
Disorders or "CTDs". One common form of RSI is Carpal Tunnel Syndrome or "CTS"
which can be caused by excessive typing, among other activities, and can be
aggravated by deficient - in the ergonomic sense - equipment and inappropriate
work habits. The carpal tunnel is a channel in the wrist where tendons and the
median nerve connect the arm to the hand. Through excessive use, the tendons
become swollen and pinch the nerve. RSI accounts for a large portion of
work-related illnesses, and the incidence of RSI is expected to grow as the
number of people operating keyboards increases. The impact of RSI is
measured not only in the pain and suffering of its victims, but also in time
lost from work and medical costs.
The Company's proprietary software products are designed to help
businesses deal with potentially preventable repetitive stress injuries, by
real-time monitoring of keyboarding activities, pro-active dialog with at-risk
employees, and strategic profiling and management of computer use throughout an
organization.
During 1996, the issues of repetitive stress injuries and the potential
of liability to employers from the effects of carpal tunnel syndrome and other
RSI's on employees were forcibly brought to the forefront of corporate
consciousness through widely publicized suits involving a major computer maker.
The US Bureau of Labor Statistics reported that already in 1995, there were
approximately 70,000 cases of carpal tunnel syndrome and associated tendonitis,
and that 25% of all injuries that result in lost work time are due to repetitive
stress problems. They currently cost employers an estimated $20 billion a year
in workers' compensation claims. The federal government estimates an additional
$80 billion is lost in related costs such as absenteeism and reduced
productivity. Increased awareness of the health risks and associated costs led
the State of California to pass OSHA Title 8 which directs qualifying employers
to establish and implement a program designed to minimize RSI's. Such program
shall include work-site evaluation, control of exposures which have caused
RSI's, and training of employees. The Company's proprietary software products
deliver a comprehensive compliance tool. In a similar pursuit, the Clinton
Administration, in January 2000, proposed that on a federal level, preventive
guidelines be established, and the Occupational Safety and Health Administration
plans to issue pertinent regulations this year. The RSI issues in the United
States are mirrored in the rest of the developed world. The Company believes
that the growing recognition of these trends will give rise to a rapidly
expanding market for the Company's products.
26
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
8. The seven modules are described as follows:
ErgoSure : A postural risk-assessment tool that records how an employee is
working; it determines injury potential and suggests improvements. It also can
be used to evaluate workstation alternatives prior to purchase.
ErgoSentry(TM) : Employing patent-pending algorithms that measure rest against
work in real time, the non intrusive program informs users when to break from
high-risk trends (thresholds definable by the user or corporate safety officer)
when keyboarding or using a mouse. ErgoSentry also includes an "ErgoPak" video
or slides that depict correct workstation setup, posture and repetitive
stress-reducing exercises.
27
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
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.
28
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
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.
29
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.
Competition
The market addressed by the Company's software products is presently
served by a number of smaller software companies, none of which occupies a
dominant position. These competitors, however, typically only target task
complexes that are addressed by individual component parts of the Company's
products, such as the ErgoSentry(TM) module, without offering a comparable
breadth of function and integration in such areas as work-site evaluation,
employee training and work pacing.
The Company is not aware of any products that directly compete with its
integrated software product suite that is marketed by the Company under the
trade name ErgoManager(TM). While the Company believes that it currently has a
strategic competitive advantage in ergonomic software, especially with regard to
its patent-pending algorithms, there can be no assurance that competitors will
not attempt to copy the Company's products or develop and successfully license
similar products, to the Company's detriment.
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.
30
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 Jan. 8, 1999 (2001)
of the Board)
President, Chief Executive Feb. 2, 1998 (March 2, 2003)
Officer
Joerg H. Klaube Director, President and July 31, 1997 (April 15, 2002)
Chief Financial Officer
John C. Duncan Director May 17, 1999 (2001)
Executive Vice President July 1, 1999 (July 1, 2004)
Steven L. Gray Director May 18, 2000 (2001)
Ivano Angelastri Director May 18, 2000 (2001)
Joseph J. Tomasek Director Dec. 23, 1999 (2001)
There are no family relationships among the Company's Officers and
Directors.
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 40 - 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. Subsequently, pursuant to Mr. Rudnik's initiative, the Board
of Directors appointed John Duncan President and Chief Operating Officer in
October, 2000. 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.
John C. Duncan, age 42 - President, Chief Operating Officer and Director.
Until January 1999, Mr. Duncan was the Director of the Department of Industrial
Relations (DIR) of the State of California. In that capacity, he was the
principal advisor to Governor Pete Wilson on labor and employment issues and
served in his cabinet. In October, 2000, the Board of Directors appointed Mr.
Duncan President and Chief Operating officer of the Company. Mr. Duncan was
instrumental in California becoming the first state to enact ergonomic
regulations to help protect workers from repetitive stress injuries. As Director
of the California DIR, Mr. Duncan supervised the Cal/OSHA program and eleven
other divisions of the State government, including the Labor Commissioner's
Office and the Division of Workers Compensation. He was responsible for the
supervision of 3,000 State employees and an annual budget of $220 Million.
31
Joerg H. Klaube, age 58 - 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 51 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 37 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 53 - 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.
32
Executive Compensation
The following table summarizes the cash compensation paid or accrued
and executive capacities during the past three fiscal years for the Company's
Chief Executive Officer and for each executive officer whose aggregate cash
remuneration exceeded $100,000.
Restricted Securities
Stock Underlying
Name Year Salary (1) Awards Options (2)(3)
- ---- ------ ---------- ------ -------
Steven D. Rudnik 1999 $ 44,144 150,000 200,000
President and CEO 1998 $ 106,923 750,000
Joerg H. Klaube 1999 $ 100,025 0 50,000
Vice President, CFO 1998 $ 97,095 0 31,162
1997 $ 80,008 0 68,838
Michael G. Martin 1999 $ 46,382 150,000 0
Chairman, Director 1998 $ 139,527 150,000 1,285,000
President and CEO 1997 $ 108,347 60,000 0
Jerry Swon 1998 $ 0 150,000 900,000
President and CEO
Director
John C. Duncan 1999 $ 88,500 0 540,000
Executive Vice President
Director
John M. Perry 1997 $ 80,008 75,000 40,000
Executive Vice President
- --------------------
(1) The value of other non-cash compensation, except for the items listed under
(2) and (4), 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) During 1999, the Board of Directors approved a reduction in the exercise
price of options previously granted to S.Rudnik, from $5.25 per share
(95,235 shares) and $4.0385 per share (154,765 shares) to $1.00 per share.
(4) The Board of Directors of the Company awarded several stock grants as
additional compensation for services during 1999, as follows:
Beneficiary Position No. of Shares*
- ----------- -------- ---------------
Michael G. Martin Chairman 150,000
Steven D. Rudnik President, CEO 150,000
Jerry Swon Director 150,000
Bruce L. Deichl Director 100,000
All such shares, with the exception of the shares granted to Steven D. Rudnik,
were registered under the Securities Act on Form S-8. The shares for Mr. Rudnik
have not yet been issued. The Company has recognized a liability in its books of
$66,667 for future issuance of such shares. * the closing price for the
Company's common stock at the time of the grants was approximately $0.70 per
share.
33
Stock Options :
The following table sets forth stock options granted during 1999
pursuant to the Company's 1997 Stock Option Plan, to executive officers,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
- ---------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
- ---------------------------------------------------------------------------
J. Duncan 100,000 8.7% 1.00 7/1/04
J. Klaube 50,000 4.4% 1.00 12/22/04
The following table sets forth stock options granted during 1999
outside of the Company's 1997 Stock Option 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 in Fiscal Year Price ($/Sh.) Date
- ----------------------------------------------------------------------------
S. Rudnik )* 200,000 17.5% 1.00 11/19/08
J. Duncan 400,000 38.4% 1.00 4/23/06
S. Kroll 40,000 n/a 1.00 5/4/06
)* does not include options for 125,000 shares issued pursuant to an
anti-dilution clause in the Agreement and Plan of Merger for the acquisition of
Rolina Corporation dated February 2, 1998.
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, reserved 1,000,000 Common Shares for issuance of which 894,000 Common
Shares are underlying outstanding stock option grants and 106,000 Common Shares
remain available for future stock awards.
Compensation of Directors:
The Company currently pays no outside directors' fees. Outside
directors are awarded stock options for 40,000 shares each.
34
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.
In July 1999, the Company entered into an employment agreement with
John C. Duncan, its current Executive Vice President, to serve as
Executive Vice President for a period of five years. Base salary under
the agreement is $120,000 per year with annual increases and other
incentives and bonuses determined by the Chief Executive Officer of
the Company. The agreement also calls for the grant of a stock option
for 100,000 shares of the common stock of the Company, and further
stock options whose vesting is tied to the achievement of certain
sales goals established in the agreement, and provides for eligibility
for the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses. The
agreement provides for severance compensation to be determined
pursuant to a formula established therein 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
35
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.
36
Security Ownership Of Certain Beneficial Owners and Management
The following table sets forth, as of June 30, 2000, the record and
beneficial ownership of Common stock of the Company by each officer and
director, all 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 2, 302,778 (2) 13.0 1%
Stock John C. Duncan, Exec. VP, Director 510,000 (3) 3.19%
Joerg H. Klaube, CFO, 100,100 (4) **
Peter J. Buscetto, (Former Director) 56,667 (5) **
Paul Chernis, (Former Director) 30,000 (3) **
Seymour Kroll, (Former Director) 394,792 (6) 2.50%
Howard G. Siegel, VP 1,035,166 (7) 6.47%
Joseph J. Tomasek, Director 50,000 (3) **
Ivano Angelastri Director 1,050,000(11) 6.51%
Steven Gray, Director 537,000(12) 3.42%
Address of all persons above: c/o the Company.
All Directors and Officers 3,774,411 21.78 %
as a Group (8 persons)
Michael G. Martin 1,750,000 (8) 10.16 %
12 Tillman Ct., Bridgewater, NJ
Schuerch Asset Management 1,578,500 (9) 9.51%
Tellstrasse 21,
St.Gallen, Switzerland
Viviana Partners, L.P. 1,260,000 (10) 7.84 %
1 Sansome Str., San Francisco, CA
Liechtensteinische 916,820 (13) 5.68%
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 March 28, 2000. 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 deferred compensation of 150,000 shares, options to acquire
1,325,000 shares and conversion rights for appr.750,000 shares..
(3) Represents options to acquire the same number of shares.
(4) Includes options to acquire 100,000 shares.
(5) Includes 22,222 shares held by an affiliate and options to acquire 20,000
shares.
(6) Includes options to acquire 129,866 shares and conversion rights for
approx. 194,926 shares.
(7) Includes warrants for 424,000 shares and 104,166
shares issuable for past services..
(8) Includes options for 750,000 shares and
preferred stock convertible into 1,000,000 shares.
(9) Includes options and warrants for 1,023,900 shares.
(10)Includes warrants for 600,000 shares.
(11)Includes stock options to acquire 250,000 and warrants to purchase 400,000.
(12)Includes warrants to purchase 240,000 Common Shares.
(13)Includes 277,880 shares underlying convertible preferred stock and 388,940
underlying warrants.
37
Employees
As of June 30, 2000, the Company employed 18 persons, of whom six were
primarily engaged in research and development and software support activities,
seven 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.
38
COMMON STOCK PURCHASE AGREEMENT
Overview
We signed a common stock purchase agreement with Torneaux Fund Ltd. a
Bahamian Islands corporation on December 18, 2000 , for the future issuance and
purchase of share of our common stock. The stock purchase agreement establishes
what is sometimes called an equity line of credit or an equity drawdown
facility.
In general, the drawdown facility operates like this: the investor,
Torneaux, has committed to provide up to $4.2 million to purchase shares of our
common stock over a 15 month period, in return for common stock we issue to
Torneaux. Once every 20 trading days, we may request a draw of up to $350,000 of
that money, subject to a maximum of 12 draws. The maximum drawdown amount we
actually can specify in each drawdown request depends upon a common stock
purchase price we identify and which is called the "threshold price" in our
agreement with Torneaux. By specifying a stock price or threshold price, in our
draw down request, we set the minimum for the market price of our common stock
for each day during the upcoming 20-day trading or drawdown period. The average
daily trading price of our common stock must equal or be greater than the stock
purchase or threshold price we set in our drawdown notice for each day during
the 20-day trading or drawdown period in order for each day to qualify. The
formulas for determining the actual drawdown amounts, the number of shares we
issue to Torneaux and the price per share paid by Torneaux are described in
detail beginning on page __. Each draw down must be for at least $100,000. We
may make up to a maximum of 12 draws; however, the aggregate total of all draws
cannot exceed $4.2 million and no single draw can exceed $350,000. We are under
no obligation to request a draw for any period.
The per share dollar amount Torneaux pays for our common stock for each
drawdown includes a discount of between 9.5% and 11% to the average daily market
price of our common stock during the 20-day period after our drawdown request.
At the closing of each drawdown, we will issue a warrant to Torneaux
to purchase between 30% and 50% of the number of shares purchased by Torneaux in
each drawdown. The amount of shares covered in each warrant depends upon the
market or threshold price we identified in our drawdown request. If we set the
market or threshold price at $1.00 then we will deliver to Torneaux a warrant at
the drawdown closing to purchase 50% of the number of our shares then purchased
by Torneaux; if we set the market or threshold price between $1.00 and $2.00, we
will deliver to Torneaux a warrant at the drawdown closing to purchase 40% of
the number of our shares then purchased by Torneaux, and; if we set the market
or threshold price at $2.00 or higher, we will deliver to Torneaux a warrant at
the drawdown closing to purchase 30% of the number of our shares then purchased
by Torneaux. For any warrant delivered to Torneaux, the warrant exercise price
will equal 115% of the price paid by Torneaux for our shares at the closings of
each drawdown and may be exercised during a three year period. The common stock
issuable upon exercise of those warrants is included in the registration
statement of which this prospectus is a part.
The facility is based on a "use-it-or-lose-it" principle. We are under
no obligation to request a draw for any period. However, if we do not request a
draw for a given period, we may never to be able to draw those funds again. We
may make up to a maximum of twelve (12) draws; however, the aggregate total of
all draws cannot exceed $4.2 million and no single draw can exceed $350,000. In
lieu of providing Torneaux with a minimum aggregate drawdown commitment, we have
agreed to make a payment of $24,000 to Torneaux in the event we have not made
drawdown requests in a minimum aggregate amount of $500,000 under our agreement.
39
Based on a review of our trading volume and stock price history and the
number of drawdowns we estimate making, we are registering 1,363,632 shares of
common stock for possible issuance under the stock purchase agreement and
681,816 shares underlying the warrants potentially issuable to Torneaux.
The Drawdown Procedure and the Stock Purchases
We may request a drawdown by faxing a drawdown notice to Torneaux,
stating the amount of the drawdown we wish to exercise and the minimum threshold
price at which we are willing to sell the shares. The next 20 trading days
immediately following the drawdown notice are used to determine the actual
amount of money Torneaux will provide and the number of shares we will issue in
return. The 22nd trading day is the drawdown exercise date when the amount of
the draw and the number of shares to be issued are calculated and delivered
based on the formulas below.
Amount of the Draw
The amount of the draw down is the amount we have requested in our
notice to Torneaux, which can range from $100,000 to $350,000, depending upon
the market or threshold price we also set in our notice. If we set our market or
threshold price at $1.00, we can only request a draw down of $100,000. If we set
our market or threshold price at 3.50 or higher, we can request a draw down of
the maximum $350,000. However, the draw down amount we request is subject to
reduction. If the volume-weighted average daily price for any given trading day
is below the market or threshold price set by us in the drawdown notice for any
day of the 20 trading days immediately following the date we give notice, then
the drawdown amount that Torneaux is obligated to pay us is correspondingly
reduced by 1/20 for each day that is below our market or threshold price. Thus,
if the daily price for a day is below the threshold price we will not issue any
shares and Torneaux will not purchase any shares for that day.
Number of Shares
To determine the number of shares of common stock we must issue in
connection with a drawdown, take 1/20 of the draw down amount and for each of
the 20 trading days immediately following the date we give notice of the
drawdown, divide it by 88% (if we have set a market or threshold price of $1.00)
or divide it by 90.5% (if we have set a market or threshold price of $3.50) of
the volume-weighted average daily trading price of our common stock on such
date. The 88% to 90.5% percentage range accounts for Torneaux's discount. The
88% discount applies to a market or threshold price of $1.00. For each $0.50
increase in the market or threshold price we set above $1.00, the discount
percentage to Torneaux decreases by .50 percent and our draw amount increases by
$50,000. If we set a market or threshold price of $3.50 then Torneaux's discount
is reduced to 90.5% and our draw amount is increased above the minimum $100,000
by two hundred fifty percent, or $250,000, to $350,000. The sum of these 20
daily calculations produces the number of common shares we will issue, unless
the volume-weighted average daily price for any given trading day is below the
market or threshold price we set, in which case that day is not part of the sum.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the drawdown amount
and the number of shares we would issue to Torneaux in connection with that
drawdown based on hypothetical assumptions.
40
Sample draw down amount calculation.
We provide a draw down notice to Torneaux that we wish to draw down
$350,000 which is the maximum amount for any draw. The average of the
volume-weighted average daily prices of our common stock for the 20 trading days
following our notice is $3.50. The maximum amount we can draw down under the
formula is capped at $350,000, the amount which we can draw.
Suppose that our notice specifies a market or threshold price of $3.50,
below which we will not sell any shares to Torneaux during this draw down
period. If the volume-weighted average daily price of our common shares for each
of the next 20 trading days following the draw down notice is at least $3.50, we
will be able to draw the maximum $350,000 amount. If on the other hand the
volume-weighted average daily price of our common shares is below $3.50 on two
of those 20 days, for example, the $350,000 would be reduced by 1/20 for each of
those days and our draw down amount would be 18/20 of $350,000, or $315,000.
Sample Calculation of Number of Shares
Assume that the drawdown amount for the drawdown period is $350,000 and
assume that the volume-weighted average daily price for our common shares is as
set forth in the table below. Suppose that our notice specifies a threshold
amount of $3.50. The number of shares to be issued based on any trading day
during the drawdown period is calculated from the formula:
(1/20 of the drawdown amount) divided by (90.5% of the volume weighted
average daily price).
For example, for the first trading day in the example in the table
below, the calculation is as follows: (1/20 of $350,000) divided by (90.5% of
$4.00 per share) or 4,834 shares. Perform this calculation for each of the 20
measuring days, excluding any days on which the volume-weighted average daily
price is below the $3.50 threshold amount, and add the results to determine the
number of shares to be issued, which in this example is 88,415.
Volume-Weighted Number of Shares of Common
Average Daily 1/22 of Requested Draw Stock to be Issued for the
Trading Day Stock Price* Down Amount Trading Day
---------- ----------------------------- ---------------------- ---------------------------
1 $4.00 $ 17,500.00 4,834
2 4.25 17,500.00 4,546
3 4.00 17,500.00 4,834
4 3.75 17,500.00 5,162
5 3.50 17,500.00 5.521
6 3.75 17,500.00 5,162
7 3.50 17,500.00 5,521
8 3.25 ** **
9 3.375 ** **
10 3.50 17,500.00 5,521
11 3.75 17,500.00 5,162
12 4.00 17,500.00 4,834
13 3.75 17,500.00 5,162
14 4.00 17,500.00 4,834
15 4.25 17,500.00 4,546
16 4.125 17,500.00 4,692
17 4.25 17,500.00 4,546
18 4.50 17,500.00 4,300
19 4.25 17,500.00 4,546
20 4.125 17,500.00 4,692
---------------------- ---------------------------
Total $ 315,000.00 88,415
41
- ---------------------
o The share prices are illustrative only and should not be interpreted as a
forecast of share prices or the expected or historical volatility of the
share prices of our common stock.
** Excluded because the volume-weighted average daily price is below the
market or threshold specified in our hypothetical draw down notice.
We would receive $315,000.00 requested in our drawdown notice. Upon the
delivery of the requisite 88,415 shares to Torneaux, it will pay the amount of
the draw by wire transfer to our bank account. Only one drawdown can occur
during this 20-day draw down period.
Necessary Conditions Before Torneaux is Obliged to Purchase our Shares.
The following conditions must be satisfied before Torneaux is
obligated to purchase the common shares that we wish to sell from time to time:
o A registration statement for the shares we will be issuing must be
declared effective by the Securities and Exchange Commission and
must remain effective and available as of the draw down settlement
date for making resales of the common shares purchased by
Torneaux;
o There can be no material adverse change in our business,
operations, properties, prospects or financial condition;
o We must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets to
another company, unless the acquiring company has agreed to honor
the common stock purchase agreement;
o No statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the stock purchase agreement;
o No litigation or proceeding adverse to us, Torneaux or their
affiliates, can be pending, nor any investigation by any
governmental authority threatened against us or them seeking to
restrain, prevent or change the transactions contemplated by the
stock purchase agreement or seeking damages in connection with
such transactions; and
o Trading in our common shares must not have been suspended by the
Securities and Exchange Commission or the over-the-counter,
bulletin board market.
42
On each drawdown settlement date for the sale of common shares, we must
deliver an opinion from our counsel about these matters.
The common stock purchase agreement does not permit us to draw down
funds if the issuance of shares of common stock to Torneaux pursuant to the
drawdown would result in Torneaux owning more than 9.9% of our outstanding
common stock on the drawdown closing
date.
Restrictions on Future Financings
The common stock purchase agreement limits our ability to raise money
by selling our securities for cash at a discount greater than 25% to the market
price until the agreement has terminated, the period of 15 months following the
date the Securities and Exchange Commission declares the registration statement
of which this prospectus is a part, effective. If we sell our securities to
another party at a discount greater than 25% to the market price of our common
shares, the common stock purchase agreement will terminate immediately.
There are exceptions to this limitation for our outstanding stock
options, warrants and convertible securities as well as stock options that we
may issue in the future under our existing stock plan. During the 15 month
period during which we may request draw downs, we can issue and sell our
securities to anyone we choose as long as the purchase prices at which we sell
our securities do not contain a more than 25% discount to the then market price
of our common stock and as long as we sell and place our securities during
periods when any drawdown 20-day period has not been noticed by us or is in
effect.
If we choose to sell our securities to another party during a 20-day
drawdown period then in effect at a purchase price that does not exceed the 25%
discount level, Torneaux has the option to:
o pay for the shares it purchases during the applicable 20-day drawdown
period at the same price we sold shares to the other party: or
o pay for the shares it purchases during the applicable 20-day drawdown
period at the purchase price determined in accordance with the formulas set
forth in the agreement; or
o elect not to purchase any of our shares during the applicable 20-day
drawdown period.
Costs of Closing the Transaction
We are paying all of the costs associated with the preparation and
filing of this registration statement with the Securities and Exchange
Commission and its qualification under the blue sky laws of selected states. We
have also agreed to pay for Torneaux's legal cost up to a maximum amount of
$50,000.
Termination of the Stock Purchase Agreement
Torneaux may terminate the equity draw down facility under the stock
purchase agreement if any of the following events occur:
o We suffer a material adverse change in our business, operations,
properties, or financial condition;
o There occurs any stop order or suspension of the effectiveness
of the registration statement of which this prospectus is a
part for an aggregate of 5 trading days for any reason other deferrals
or suspension during a blackout period as a result of corporate
developments requiring the registration statement be amended to
disclose any such corporate development;
o The registration statement of which this prospectus forms a part
is not declared effective by the Securities and Exchange
Commission on or before April 22, 2001;
o Our officers and directors cease to own or control at least 2%
of our outstanding common stock on a fully diluted basis.
Indemnification of Torneaux
Torneaux is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Torneaux to us for inclusion in the
registration statement and prospectus.
44
Selling Stockholder
The following table sets forth certain information regarding the
beneficial ownership of shares of common stock by Torneaux Fund Ltd.
("Torneaux"), the selling stockholder, as of September 30, 2000, and the number
of shares of common stock covered by this prospectus. The number of shares in
the table represents an estimate of the number of shares of common stock to be
offered by Torneaux, including shares that may be acquired upon the exercise of
warrants or other rights to acquire shares.
The shares being offered by Torneaux consist of shares of common stock
that it may purchase from us pursuant to the common stock purchase agreement,
including upon exercise of warrants issued pursuant to that agreement. For
additional information about the stock purchase agreement, please see the
"Common Stock Purchase Agreement" subsection of "THE OFFERING" section of this
prospectus. The address of Torneaux Fund Ltd. is: Montague Sterling Street,
East Bay Street, P. O. Box SS-6238, Nassau, Bahamas.
Number of Number of Common
Common Shares Number of Shares Beneficially
Beneficially Owned Common Shares Owned Following
Name of Stockholder Prior to the Offering Offered Hereby(1) The Offering(1)
- ---------------------- ---------------------- ----------------- -----------------------------
# of Shares % of Class # of Shares # of Shares % of Class
------------ ----------- ----------------- -------------- -----------
Torneaux -0- -0- 2,045,448(2) -0-(3) -0-
* Less than 1% of the outstanding common stock.
(1) Assumes the sale of the shares of common stock which have been offered
pursuant to the prospectus.
(2) Includes the resale of up to 1,363,632 shares of common stock which we
have the right to cause Torneaux to purchase pursuant to the common stock
purchase agreement and the resale of up to 681,816 shares that may be
acquired upon the exercise of warrants. Under the common stock purchase
agreement we are required to issue warrants to purchase from
30% to 50% of the number of shares we sell to Torneaux.
(3) Assumes the resale of shares to be acquired by Torneaux pursuant to the
common stock purchase agreement or upon the exercise of warrants.
Torneaux
Torneaux Fund Ltd. is engaged in the business of investing in publicly
traded equity securities for its own account. Torneaux's principal offices are
located at Montague Sterling Street, East Bay Street, Nassau, Bahamas.
Investment decisions for Torneaux are made by its board of directors. Torneaux
does not currently own any of our securities as of the date of this prospectus.
Other than its obligation to purchase common shares under the common stock
purchase agreement, it has no other commitments or arrangements to purchase or
sell any of our securities. There are no business relationships between Torneaux
and us other than the common stock purchase agreement.
45
Plan of Distribution
We have been advised by Torneaux Fund Ltd. that it may sell the common
stock from time to time in transactions on the OTC Bulletin Board, or any
exchange where the common stock is then listed, in negotiated transactions, or
otherwise, or by a combination of these methods, at fixed prices which may be
changed, at market prices at the time of sale, at prices related to market
prices or at negotiated prices. Tourneaux Fund Ltd. may effect these
transactions by selling the common stock to or through broker-dealers, who may
receive compensation in the form of discounts, concessions or commissions from
Torneaux Ltd. or the purchasers of common stock to or through broker-dealers,
who may receive compensation in the form of discounts, concessions or
commissions from Tourneaux Fund Ltd. or the purchasers of common stock for whom
the broker-dealer may act as an agent or to whom it may sell the common stock as
a principal, or both. The compensation to a particular broker-dealer may be in
excess of customarycommissions.
Torneaux Fund Ltd. is an "underwriter" within the meaning of the
Securities Act in connection with the sale of the common stock offered hereby.
Assuming that we are in compliance with the conditions of the common stock
purchase agreement, Tourneaux Fund Ltd. must accept draw downs of shares from
us, subject to maximum aggregate dollar amounts, during the 15 month term of the
agreement. Broker-dealers who act in connection with the sale of the common
stock may also be deemed to be underwriters. Profits on any resale of the common
stock as a principal by such broker-dealers may be deemed to be underwriting
discounts and commissions under the Securities Act. Any broker-dealer
participating in such transactions as agent may receive commissions from
Tourneaux Fund Ltd. and, if they act as agent for the purchaser of our common
stock, from such purchaser. Broker-dealers may agree with Tourneaux Fund Ltd. to
sell a specified number of shares of our common stock at a stipulated price per
share, and, to the extent such a broker-dealer is unable to do so acting as
agent for Tourneaux Fund Ltd., to purchase as principal any unsold common stock
at the price required to fulfill the broker-dealer commitment to Torneaux Ltd.
Broker-dealers who acquire common stock as principal may thereafter resell the
common stock from time to time in transactions (which may involve crosses and
block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common stock
commissions computed as described above.
The common stock offered hereby is being registered pursuant to our
contractual obligations, and we have agreed to pay the costs of registering the
shares hereunder. We have also agreed to pay Torneaux Fund Ltd.'s fees, expenses
and disbursements of counsel for Torneaux Ltd. for the preparation of the
agreement up to a maximum of $50,000, and all reasonable fees incurred in
connection with any amendment, modification or waiver, to or enforcement of the
agreement.
The price at which the common shares will be issued by us to Torneaux
Fund Ltd. will fluctuate. The price will be between 88% and 90.5% of the daily
volume weighted average closing price over an 20-day trading period on the OTC
Bulletin Board for each draw down period. We cannot obligate Torneaux to
purchase any of our common shares at less than $1.00 per share, before applying
the agreed upon discount ranging between 9.5% and 12%. Please see the "Common
Stock Purchase Agreement"above.
46
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 16,193,314 shares
were issued and outstanding as of September 30, 2000 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 September 30, 2000; 300,000 shares have been
designated as Series A Senior Convertible Preferred Stock (the "Series A
Stock"), $0.001 par value per share of which 29,300 were issued and oustanding
as of September 30, 2000; 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 222,228 shares were outstanding as of September 30, 2000, and; 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 September 30, 2000.
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 September 30, 2000 (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 222,228 shares were outstanding
as of September 30, 2000, and; (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 September 30, 2000.
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.
47
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.
Cumulative Preferred Stock
The Company has designated 2,500 shares as "Cumulative Preferred
Stock", of which as of June 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.
Legal Matters
The Company is not a party in any legal proceedings.
48
Where You Can Find More Information
We file annual, quarterly and special reports 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 Torneaux Fund Ltd., the selling stockholder, 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.
---------------
49
Magnitude Information Systems, Inc.
Index to Financial Statements
Magnitude Information Systems, Inc. and Subsidiaries
Audited Consolidated Financial Statements as of December 31, 1999 and
for the years ended December 31, 1999 and 1998.
Audited Consolidated Financial Statements as of December 31, 1998 and
for the years ended December 31, 1998 and 1997.
Unaudited Consolidated Financial Statements for the nine month perioid
ended September 30, 2000.
50
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Index to the Consolidated Financial Statements
December 31, 1998
Page
Independent Auditors' Report.............................. 86
Financial Statements
Consolidated Balance Sheet................................ 88
Consolidated Statements of Operations..................... 89
Consolidated Statement of Stockholders Equity (Deficit)... 90-91
Consolidated Statements of Cash Flows..................... 92-93
Notes to the Consolidated Financial Statements............ 94-107
51
Letterhead of
Rosenberg Rich Baker Berman & Company
380 Foothill Road
Bridgewater, New Jersey 08807
Independent Auditors' Report
To the Board of Directors and Stockholders of Magnitude Information Systems,
Inc. and Subsidiaries (formerly Proformix Systems, Inc and Subsidiaries)
We have audited the accompanying consolidated balance sheet of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 1998 and 1997. 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, 1998 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, as of December 31, 1998, the Company has
a negative working capital position and has experienced net losses and negative
cash flows from operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in the notes to the financial statements. The
consolidated financial statements do not include ant adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts or
classifications of liabilities that might be necessary should the Company be
unable to continue in operation.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 7, 1999
52
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Balance Sheet
December 31, 1998
Assets
Current Assets
Cash $ 9,403
Accounts receivable net of allowance for doubtful accounts of $109,421 109,249
Inventories 26,789
Miscellaneous receivables 54,743
Prepaid expenses 385,608
--------------
Total Current Assets 585,792
Property, plant and equipment 148,283
Investment in Input Technologies - at cost 60,000
Software, net of accumulated amortization of $116,123 1,339,267
Other assets 5,111
==============
Total Assets 2,138,453
==============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 1,673,742
Dividends payable 9,000
Loans payable 369,730
Current maturities of notes payable 550,000
Current maturities of long-term debt 195,010
Current maturities of capitalized lease obligations 15,826
--------------
Total Current Liabilities 2,813,308
Notes payable, less current portion 1,025,000
Long term debt, less current portion 262,000
Obligations under capital leases, excluding current maturities 29,839
--------------
Total Liabilities 4,130,147
--------------
-
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; 6,431,113 shares issued 643
and outstanding
Contributed capital 81,000
Additional paid in capital 6,832,728
Accumulated deficit (8,906,065)
--------------
Total Stockholders' Equity (Deficit) (1,991,694)
--------------
Total Liabilities and Stockholders' Equity (Deficit) 2,138,453
==============
See notes to the consolidated financial statements.
53
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Operations
Year Ended December 31,
----------------------------------
1998 1997
--------------- --------------
Net Sales $ 2,926,455 $ 3,125,009
Cost of goods sold 1,590,440 1,451,204
--------------- --------------
Gross Profit 1,336,015 1,673,805
Selling, general and administrative expenses 3,924,777 2,801,975
--------------- --------------
(Loss) From Operations (2,588,762) (1,128,170)
--------------- --------------
Other Income (Expense)
Miscellaneous income 86,872 90,977
Interest income 1,384 -
Lawsuit settlement (10,000) -
Miscellaneous expense (172,385) -
Interest expense (343,394) (338,038)
Loss on disposition of assets (104,336) (132,514)
--------------- --------------
Total Other (Expense) (541,859) (379,575)
--------------- --------------
(Loss) From Continuing Operations Before Provision for Income Taxes (3,130,621) (1,507,745)
Provision for Income Taxes - -
--------------- --------------
(Loss) From Continuing Operations (3,130,621) (1,507,745)
Discontinued Operations
Gain on disposal of hardware line of business (net of $0 income tax effect) 599,712 -
=============== ==============
Net (Loss) $ (2,530,909) $ (1,507,745)
=============== ==============
Net (Loss) Per Common Share:
(Loss) From Continuing Operations $ (.72) $ (.76)
Discontinued Operations .14 -
--------------- --------------
Net (Loss) $ (.58) $ (.76)
=============== ==============
Weighted Average of Common Shares Outstanding 4,324,292 2,094,724
=============== ==============
See notes to the consolidated financialstatements.
54
Magnitude Information Systems, Inc. and Subsidiaries (formerly Proformix
Systems, Inc. and Subsidiaries) Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1997
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
Shares Amount Shares Amount Shares Amount
-------- ------ ------ ------ ------ ------
Balances, January 1, 1997 - $ - 10 $ - 3,417,655 $ 3,418
Dividends on cumulative preferred shares - - - - - -
Dividends on cumulative preferred shares waived - - - - - -
Issuances of common stock for services performed - - - - 1,210,000 1,210
Issuances of common stock pursuant to stock - - - - 701,343 702
option exercise per consulting agreement
Issuance of common stock for conversion of - - - - 281,539 282
accrued interest on private placement notes
Issuance of common stock pursuant to - - - - 2,900,000 2,900
cons.agreement
Subtotal - Magnitude, Inc. - - 10 - 8,510,537 8,512
Exchange of Magnitude, Inc. preferred stock for - - (10) - - -
preferred stock of the Company
Recapitalization pursuant to reverse acquisition: - - - - - -
Exchange of Magnitude, Inc. common shares 3.4676 - - - - (8,266,757) (8,267)
to 1 common share of the Company
Magnitude, Inc. common shares not tendered and
accounted for as a minority interest - - - - (243,780) (245)
Subtotal - Magnitude, Inc. - - - - - -
Opening common and preferred stock of the Company - - 35,036 - 43,064 4
prior to the exchange with Magnitude, Inc.
Cancelation of the Company's preferred stock - - (35,036) - - -
Issuance of common stock to Royal Capital, Inc. - - - - 313,600 32
Fractional shares canceled - - - - (18) -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - - - - 2,384,000 238
Exchange of the Company's preferred stock for - - 10 - - -
preferred stock of Magnitude, Inc.
Subtotal - the Company - - 10 - 2,740,646 274
Issuance of common stock to President pursuant to grant - - - - 60,000 6
Issuance of common stock to domestic private - - - - 28,611 3
individuals pursuant to an exemption under Rule 506
Issuance of common stock to foreign - - - - 69,250 7
investors pursuant to Reg. S.
Net loss, year ended December 31, 1997 - - - - - -
Balances, December 31, 1997 - $ - 10 $ - 2,898,507 $ 290
======== ========== ========= ========= ============ =========
See notes to the consolidated financial statements.
55A
Magnitude Information Systems, Inc. and Subsidiaries (formerly Proformix
Systems, Inc. and Subsidiaries) Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1997
Total
Additional Stockholders'
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
--------- ----------- --------- -----------
Balances, January 1, 1997 162,000 $ 1,361,108 $ (4,957,411) $ (3,430,885)
Dividends on cumulative preferred shares - - (9,000) (9,000)
Dividends on cumulative preferred shares waived 81,000 - (81,000) -
Issuances of common stock for services performed - 44,790 - 46,000
Issuances of common stock pursuant to stock - 216,636 - 217,338
option exercise per consulting agreement
Issuance of common stock for conversion of - 281,250 - 281,532
accrued interest on private placement notes
Issuance of common stock pursuant to - (2,900) - -
cons.agreement
Subtotal - Magnitude, Inc. 243,000 1,900,884 (5,047,411) (2,895,015)
Exchange of Magnitude, Inc. preferred stock for - - - -
preferred stock of the Company
Recapitalization pursuant to reverse acquisition: - - - -
Exchange of Magnitude, Inc. common shares 3.4676 - 8,267 - -
to 1 common share of the Company
Magnitude, Inc. common shares not tendered and
accounted for as a minority interest - 245 - -
Subtotal - Magnitude, Inc. 243,000 1,909,396 (5,047,411) (2,895,015)
Opening common and preferred stock of the Company - (4) - -
prior to the exchange with Magnitude, Inc.
Cancelation of the Company's preferred stock - - - -
Issuance of common stock to Royal Capital, Inc. - (32) - -
Fractional shares canceled - - - -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - (238) - -
Exchange of the Company's preferred stock for - - - -
preferred stock of Magnitude, Inc.
Subtotal - the Company
Issuance of common stock to President pursuant to grant 243,000 1,909,396 (5,047,411) (2,895,015)
Issuance of common stock to domestic private - (6) - -
individuals pursuant to an exemption under Rule 506 - 128,747 - 128,747
Issuance of common stock to foreign - 276,993 - 277,000
investors pursuant to Reg. S.
Net loss, year ended December 31, 1997 - - (1,507,745) (1,507,745)
Balances, December 31, 1997 $ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
========= ============ ============ ==============
See notes to the consolidated financial statements.
55B
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1998 and 1997
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 - - - - 79,722 8
individuals pursuant to an exemption under Rule 506
Issuances of common stock to foreign investors - - - - 1,453,644 145
pursuant to Reg. S.
Exchange of the Company's common stock, one common - - - - 22,061 2
share for 3.4676 common shares of Magnitude, Inc.
Issuance of common stock for conversion of accrued - - - - 10,411 1
interest on private placement notes
Issuance of common stock in exchange for prepaid - - - - 150,000 15
advertising
Issuance of common stock pursuant to Rolina - - - - 155,556 16
Corporation merger
Issuance of common stock pursuant to Vanity Software - - - - 224,000 22
Publishing Corporation acquisition
Issuance of common stock granted for services performed - - - - 1,080,177 108
Issuance of common stock for conversion of loan and - - - - 342,000 34
accrued interest
Issuance of common stock pursuant to sales incentive - - - - 5,035 1
awards
Issuance of common stock in exchange for product rights - - - - 10,000 1
- - - - - -
Net loss, year ended December 31, 1998
- $ - 10 $ - 6,431,113 $ 643
Balances, December 31, 1998
========= ========= ======= ========= ========== ========
See notes to the consolidated financialstatements.
56A
Magnitude Information Systems, Inc. and Subsidiaries (formerly Proformix
Systems, Inc. and Subsidiaries) Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1997
Total
Additional Stockholders'
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
--------- ----------- --------- -----------
$ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
Balances, January 1, 1998
Accrued Dividends on cumulative preferred shares - - 18,000 18,000
reversed
Dividends on cumulative preferred shares waiver (162,000) - 162,000 -
reversed
Issuances of common stock to domestic private - 199,992 - 200,000
individuals pursuant to an exemption under Rule 506
Issuances of common stock to foreign investors - 2,586,855 - 2,587,000
pursuant to Reg. S.
Exchange of the Company's common stock, one common - (2) - -
share for 3.4676 common shares of Magnitude, Inc.
Issuance of common stock for conversion of accrued - 36,101 - 36,102
interest on private placement notes
Issuance of common stock in exchange for prepaid - 374,985 - 375,000
advertising
Issuance of common stock pursuant to Rolina - 388,874 - 388,890
Corporation merger
Issuance of common stock pursuant to Vanity Software - 559,978 - 560,000
Publishing Corporation acquisition
Issuance of common stock granted for services performed - 29,892 - 30,000
Issuance of common stock for conversion of loan and - 341,199 - 341,233
accrued interest
Issuance of common stock pursuant to sales incentive - (1) - -
awards
Issuance of common stock in exchange for product rights - (1) - -
- - (2,530,909) (2,530,909)
Net loss, year ended December 31, 1998
$ 81,000 $ 6,832,728 $ (8,906,065) $ (1,991,694)
Balances, December 31, 1998
============= ============ ============== ==============
See notes to the consolidated financialstatements.
56B
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------
1998 1997
----------------- -----------------
Cash Flows From Operating Activities
Net Income (Loss) $ (2,530,909) $ (1,507,745)
Adjustments to Reconcile Net (Loss) to Net Cash (Used) by Operating
Activities
Depreciation and amortization 266,589 268,155
Loss on disposition of assets 112,112 132,514
Bad debt provision 94,287 370
Forgiveness of debt (32,893) 90,977
Inventory variance 132,890 -
Return reserve provision 30,000 -
Decreases (Increases) in Assets
Accounts receivable 50,956 144,674
Miscellaneous receivables (54,743) -
Inventories (317,650) 11,139
Prepaid expenses 36,996 11,337
Other assets 414 (1,127)
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses 403,405 170,117
Trade acceptance payable (44,860) 44,860
Advances payable - 275,000
----------------- -----------------
Net Cash (Used) by Operating Activities (1,853,406) (359,729)
----------------- -----------------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (569,857) (56,372)
Sales of property and equipment 716,926 -
----------------- -----------------
Net Cash Provided (Used) by Investing Activities 147,069 (56,372)
----------------- -----------------
Cash Flows From Financing Activities
Repayment of notes payable (25,000) -
Proceeds from long-term debt 342,000 -
Repayment of long-term debt (750,577) (148,950)
Repayment of capital lease obligations (7,229) (7,660)
Repayment of officer loans payable (85,000) (30,000)
Proceeds from loans payable - 25,000
Repayment of loans payable (275,000) (25,000)
Proceeds from issuance of common stock 2,512,000 605,750
----------------- -----------------
Net Cash Provided by Financing Activities 1,711,194 419,140
----------------- -----------------
Net increase in Cash 4,857 3,039
Cash at beginning of period 4,546 1,507
----------------- -----------------
Cash at end of period $ 9,403 $ 4,546
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 245,916 $ 142,875
================= =================
Taxes Paid $ 4,320 $ 425
================= =================
See notes to the consolidated financial statements.
57
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
Year Ended December 31,
----------------------------------
1998 1997
------------ ----------------
Schedule of non-cash financing activities
Inconnection 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 $ -
============ ================
Inconnection 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 $ -
============
================
Inconnection with the issuance of common stock, 281,539 Magnitude,
Inc. shareswere issued as consideration for accrued interest on
$1,175,000 of private placement notes
$ $ 281,539
============ ================
Promissory note issued in connection with retirement of other
promissory notesand the repayment of a past due subordinated
debenture
$ $ 316,849
============ ================
In connection with the issuance of common stock, 75,000 Magnitude,
Inc. shares were issued as consideration for past services
$ $ 46,000
================
============
In connection with a stock option exercise, 34,676 Magnitude, Inc. shares
were issued in connection with a reduction in accrued expenses
$ $ 17,338
============ ================
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 ssued
$ 388,890 $
============ ================
Inconnection with the Vanity Software Publishing Corporation
acquisition, 224,000 common shares were issued
$ 560,000 $
============ ================
Inconnection with the issuance of common stock, 72,677 shares were
issued as consideration for past services
$ 30,000 $
============ ================
Inconnection with the retirement of a $316,849 promissory note and
accrued interest thereon, 342,000 common shares were issued
$ 341,233 $
============ ================
See notes to the consolidated financial statements.
58
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On 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 16, 1997, Royal Capital, Inc. ("Royal"), a New Jersey
Corporation, entered into an agreement with the Company, then known as
Whitestone Industries, Inc., and its then president, whereby Royal (i)
acquired 100,000 shares of the Company's preferred stock held by the
President and (ii) acquired the voting proxy of 1,120,000 (pre-split)
shares of common stock. The consideration paid to the President was
$100,000. Thus, Royal obtained a voting majority of the Company's
capital stock.
On June 24, 1997, the Company, Royal, and Proformix, Inc., a company
incorporated in the State of Delaware in October 1991, entered into an
acquisition agreement as a consequence of which the Company on July 2,
1997, submitted a stock exchange offer to the shareholders of
Proformix, Inc. Proformix, Inc. in November, 1998 changed its name to
Magnitude, Inc. and is hereafter referred to as Magnitude, Inc. In
order to enter into the aforesaid agreement, the Company's then Board
of Directors authorized a 137: 1 reverse split of its outstanding
shares of common stock, and spun off the shares of its wholly owned
subsidiary Golden Bear Entertainment Corporation to its then current
shareholders in the form of a stock dividend. This distribution
effectively eliminated all assets and liabilities from the books of the
Company prior to the acquisition of Magnitude, Inc.
The exchange offer to the Magnitude, Inc. shareholders gave them the
choice to exchange their shares of the common stock in Magnitude, Inc.
into newly to be issued common stock of Whitestone at the rate of
3.4676 shares of Magnitude, Inc. common stock to 1 share of Whitestone
common stock, and to holders of Magnitude Cumulative Preferred Stock,
to exchange their shares into newly to be issued Cumulative Preferred
Stock of Whitestone at the rate of 1 to 1. The exchange transaction
resulted in the former Magnitude, Inc. shareholders owning
approximately 90% of the combined entity. Holders of approximately 98%
of Magnitude, Inc. common stock have agreed to the stock exchange and
tendered their common shares in exchange for Whitestone common shares.
The remaining 2% of Magnitude, Inc. stockholders hold a minority
interest which is valued at $0.
For accounting purposes, the acquisition has been treated as an
acquisition of Whitestone by Magnitude, Inc. and a recapitalization of
Magnitude, Inc. The historical financial statements prior to July 2,
1997 are those of Magnitude, Inc. Proforma information is not presented
since the combination is considered a recapitalization. Subsequent to
the exchange, 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.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software
developing firm, and on April 30, 1998, into an Asset Purchase
Agreement with Vanity Software Publishing Co., a Canadian developer of
specialized software, whereby the Company, in return for payments in
form of cash and equity, acquired the rights to certain software
products and related assets, with such software products subsequently
forming the basis for the further development, during the year, of the
Company's proprietary Proformix EMS Software System.
59
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
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 Proformix hardware products. The Company
will continue to market its proprietary software under the Proformix
label. The Agreement with OS also provided for the retirement of the
Company's then existing bank debt, out of the proceeds of the
transaction.
Until November 18, 1998, when the Company sold its hardware product
line comprised of Magnitude, Inc.'sergonomic 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 "Proformix EMS (Ergonomic Management System)
software system. With the sale of the hardware product line, the
Company's business is now focused exclusively on the further
development and marketing of these software products. As such, the
Company currently must be considered an enterprise in transition,
because it has not yet realized material revenues from licensing its
software.
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.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in
the consolidated financial statements, the Company has negative working
capital of $2,227,516 as of December 31, 1998. Additionally, the
Company generated net losses from operations of $3,130,621 and
$1,507,745 along with negative cash flows from operations of $1,853,406
and $359,729 for the years ended December 31, 1998 and 1997,
respectively. A large portion of accounts payable and accrued expenses
are either overdue or otherwise beyond original terms. The Company has
negotiated extended payment terms with key suppliers, and entered into
several pay-out agreements with other creditors.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
adjustments relating to the recoverability of assets and classification
of liabilities that might be necessary should the Company be unable to
continue in operation.
The Company's plans to overcome these difficulties, include raising
funding through debt, new equity capital or a combination of both.
Management has provided for bridge funding of which approximately
$500,000 has been subsequently received.
60
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Principles of Consolidation
The consolidated financial statements include the accounts of
Magnitude Information Systems, Inc. and its subsidiaries,
Magnitude, Inc. and Corporate Ergonomic Solutions, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories
Inventory consists of finished goods which are stated at the lower of
cost (determined by the first-in, first out method) or market. The sale
of the Company's hardware product line resulted in a loss on disposal
of inventory of $74,736.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Certain molds were
being depreciated using the units of production method based upon an
estimated useful life of 1,000,000 units. During 1997, the company
changed the estimated useful life of these molds to 300,000 units. The
effect of this change in estimate increased the Company's net loss for
1997 by $169,073. As part of the OS Asset Purchase Agreement, molds
with a remaining net book value of $312,258 and equipment with a
remaining net book value of $6,110 were sold. Depreciation on remaining
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.
Hardware
System design costs and software acquisition costs are amortized on a
straight-line basis over an estimated useful life of 10 years. As part
of the OS Asset Purchase Agreement, hardware system design costs with a
remaining net book value of $57,920 were sold. Deferred finance charges
are amortized using the straight line method over a period of 4-5
years. Remaining charges of $19,495 after retirement of the Company's
then existing bank debt as part of the OS Asset Purchase Agreement were
written off.
Securities Issued for Services
The Company accounts for stock options issued for services by reference
to the fair market value of the Company's stock on the date of stock
issuance or option grant. Compensation expense is recorded for the fair
market value of the stock issued, or in the case of options, for the
difference between the stock's fair market value on the date of grant
and the option exercise price.
Securities Issued for Services, Continued
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation". The statement generally suggests, but does not require,
employee stock-based compensation transactions be accounted for based
on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable.
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", which does not require
compensation to be recorded if the consideration to be received is at
least equal to the fair value at the measurement date. The adoption of
SFAS No. 123 does not have a material impact on the financial
statements.
Investment
Investment in Input Technologies LLC is accounted for under the cost
method.
61
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and
tax-reporting purposes. Accordingly, the benefit for income taxes has
been offset entirely by a valuation allowance against the related
deferred tax asset for the year ended December 31, 1998.
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.
62
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
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 on going 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, 1998:
Finished goods $ 26,789
---------------
$ 26,789
===============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1998:
Equipment $ 195,903
Furniture and fixtures 66,093
Leasehold improvements 45,770
----------------
307,766
Less accumulated depreciation 159,483
----------------
$ 148,283
================
Depreciation expense charged to operations was $107,928 and $237,189 in
1998 and 1997, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1998:
Accounts payable $ 782,863
Accrued interest 283,722
Accrued commissions 97,532
Accrued returns 30,000
Accrued legal settlement 20,000
Accrued professional fees 130,000
Deferred royalties 91,531
Accrued payroll 188,014
Miscellaneous accruals 70,080
---------------
$ 1,693,742
===============
63
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
LOANS PAYABLE
Magnitude, Inc. had borrowings under short term loan agreements with the
following terms and conditions at December 31, 1998:
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. $ 90,000
On December 4, 1996, Magnitude, Inc. repurchased 500,000 shares
of its common stock andretired 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, 1998 and no demand for payment has been made through
April 7, 1999 75,000
On December 31, 1998, the Company's board chairman issued a
short-term loan to the Company 80,000
Pursuant to a promissory note dated January 22, 1996, an officer of
the Company advanced the sum of $64,730 which is due upon demand and
accruing interest at the rate of 12% per annum.
24,730
Pursuant to the Rolina Corporation Agreement & Plan of Merger dated
February 2, 1998 the Company was to deliver to Steven D. Rudnik
$ 100,000 eight months from the closing date. Such amount is
overdue and as a result Mr. Rudnik has a lien on certain software
products. 100,000
---------------
Total $ 369,730
===============
NOTES PAYABLE
Private Placement Offering
During February through June 1995, an underwriter acting as placement
agent offered on behalf of Magnitude, Inc. in a private placement
offering a minimum of five (5) and a maximum of twenty (20) units. The
first 5 units were offered on a "best efforts all or none" basis and
the remaining 15 units on a "best efforts" basis. Each unit consisted
of a $100,000, 12% promissory note and 10,000 shares of Magnitude,
Inc.'s common stock. The promissory notes were originally due on the
earlier of 12 months from their issuance or the completion of a public
or private financing of either debt or equity securities of Magnitude,
Inc. whereby, if such financing was for less than the principal amount
of said notes, then the principal amount of said notes were to be
repaid on a pro-rata basis. These notes were subsequently extended for
an additional 6 months, and further by an additional 9 months. In May
1997 a restructuring agreement caused the reclassification of
$1,175,000 of these notes to long-term debt. These notes were extended
and modified to (i) mature by April 30, 2000, (ii) change from 12% to
8%, (iii) convert all interest accrued until April 30, 1997 into shares
of common stock of Magnitude, Inc. and (iv) paying future interest in
cash an a quarterly basis. Two such notes, however, totaling $200,000
were extended and modified to (1) mature in dates ranging from January
1, 1999 through April 30, 2000, (ii) change from 12% to 8%, (iii)
converted all interest accrued until April 30, 1997 into shares of
common stock, (iv) paying future interest in cash on a quarterly basis,
(v) reverts to 12% for failure to make interest payment when due, with
observance of a two-week cure period, (vi) balance becomes due and
payable immediately for failure to make principal payments when due,
with observance of a two-week cure period, and (vii) balance
convertible into common stock of Magnitude Inc. One of those notes for
$150,000 also grants 10,000 common stock purchase warrants with a
exercise price of $5.00 expiring April 30,2000. The remaining $450,000
of non-restructured notes are included in current liabilities and are
in default as of December 31, 1998.
64
The 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 notes outstanding at December 31, 1998 was $1,575,000,
of which $550,000 is current.
65
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt as of December 31, 1998 is comprised of the following:
Note to the board chairman, principal due January 15, 2000 accruing interest at a rate of 10%
per annum. This note is secured by all of Magnitude Inc.'s assets and property $ 262,000
Note to the board chairman of the Company issued in place of accrued royalties, principal due
April 14, 1998 accruing interest at a rate of 5% per annum. This note is overdue and no
demand for payment has been made through April 7, 1999 111,007
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
Discounted present value of a non-interest bearing $176,000 settlement with former counsel of
Magnitude, Inc. to be paid in 24 monthly payments commencing September 1, 1997. The imputed
interest rate used to discount the note is 8% per annum. 50,474
--------------
Total 457,010
Less current maturities 195,010
--------------
Long-term debt, net of current maturities $ 262,000
==============
66
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Financial Statements
LONG-TERM DEBT, Continued
Total maturities of long-term debt are as follows:
Year Ending December 31,
1999 $ 195,010
2000 262,000
---------------
$ 457,010
===============
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under non-cancelable capital lease
agreements expiring between January 19, 2001 and October 27, 2002. The
capital lease obligations have been recorded at the present value of
future minimum lease payments, discounted at interest rates of 7.00% to
8.643%. The capitalized cost of equipment at December 31, 1998 amounted
to $32,590 net of accumulated depreciation of $17,014.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1998:
Year Ending December 31,
1999 $ 19,307
2000 16,456
2001 9,798
2002 6,316
---------------
Total minimum capital lease payments 51,877
Less amounts representing interest 6,212
---------------
Present value of net minimum capital lease payments 45,665
Less current maturities of capital lease obligations 15,826
---------------
Obligations under capital leases, excluding current maturities $ 29,839
===============
67
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
INCOME TAXES
At December 31, 1998, The Company has net operating loss carry forwards
approximating $8,900,000 which expire between the years 2008 and 2013 and
are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at
December 31, 1998 are as follows:
Total deferred tax asset $ 3,560,000
Less valuation allowance 3,560,000
----------------
Net deferred tax asset $ -
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 which may not exceed 3% of the employee's total
compensation for the plan year. Contributions to the plan were $16,095
and $17,800 for the years ended December 31, 1998 and 1997, 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.
68
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
STOCK OPTION PLANS (cont.)
Qualified and Non-Qualified
Shares Under Option December 31,
----------------------------------
1998 1997
--------------- ---------------
Outstanding, beginning of year 586,144 -
Granted during the year 501,162 596,144
Exercised during the year at $1.73 per share - (10,000)
Forfeited during the year (105,838) -
=============== ===============
Outstanding, end of year (at prices ranging from $1.00 to $4.50 per share) 981,468 586,144
=============== ===============
Eligible, end of year for exercise (at prices ranging from $1.00 to
$4.50 per share) 292,597 283,144
=============== ===============
At December 31, 1998 and 1997, the weighted average exercise price and
weighted average remaining contractual life is $2.56 and $3.36 per share
and 5 years 4 months and 6 years 4 months, respectively.
At December 31, 1998, there were 157,118 shares reserved for future grants.
WARRANTS
The Company issued common stock purchase warrants as follows:
------------------------------------------------------------------------------------------------------------
Exercise Price
No. of Per Exercise Term
----------------------------------------------
Date of Grant Shares Share
Start Expiration Voting Rights
--------------------------------------------------------------------------------------------------------------------------------
May 1, 1997 10,000 $ 5.00 May 1, 1997 April 30, 2000 Upon Issue
--------------------------------------------------------------------------------------------------------------------------------
August 14, 1997 55,929 4.09 August 14, 1997 August 14, 1999 Upon Issue
--------------------------------------------------------------------------------------------------------------------------------
May 1, 1998 224,000 5.00 May 1, 1998 April 30, 2003 Upon Issue
--------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998, there were 289,929 shares eligible for exercise at
prices ranging from $4.09 to $5.00 per share.
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commences December 16, 1998
and expires on December 31, 2001 and requires monthly payments of $3,700
from December 16, 1998 to October 31, 1999 and $3,250 from November 1,
1999 to December 31,1999. Ergonomics leases office space pursuant to a
lease agreement dated November 1, 1997. Such lease expired November 1,
1998. It is currently leased on a month-to-month basis and requires
monthly payments of $600. Under such lease agreements, 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,
---------------------------------
1999 $ 43,500
2000 39,000
2001 39,000
--------------
Total $ 121,500
==============
Included in general and administrative expenses is rent expense
which amounted to $103,580 and $96,544 for the years ended
December 31, 1998 and 1997, respectively.
69
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Two lawsuits were instituted against Magnitude, Inc. by a stockholder
of Magnitude, Inc.
One suit asserts that the stockholder had a consulting agreement
with Magnitude, Inc. pursuant to which Magnitude, Inc. had
agreed to pay $125,000 a year for five years and that Magnitude,
Inc. has defaulted in performance of its obligations.
The stockholder has also initiated suit along with other
shareholder members of his family alleging damages because
Magnitude, Inc. acted inconsistent with the best interest of its
stockholders. Other miscellaneous claims were asserted in that
suit.
It is Magnitude, Inc.'s position that both of these suits are
without merit, however, a verbal settlement had been reached with
the plaintiffs in both cases pursuant to which all claims would be
dismissed upon Magnitude, Inc. making six monthly payments totaling
$20,000 commencing November 1, 1998. This potential liability has
been recorded by Magnitude, Inc. No payments have yet been made by
Magnitude, Inc. since it has not received from the plaintiff's
attorneys the necessary settlement documents. The settlement may
also be contingent upon approval by a bankruptcy court since the
stockholder has filed a petition of reorganization.
An additional suit was bought against Magnitude, Inc. by a claimant
for legal fees. The suit was settled upon the agreement by the
Company (guaranteed by an officer of the Company) to pay a total of
$176,000 consisting of an initial payment of $20,000 and the
balance in equal monthly installments of $6,500 each over a period
of 24 months, commencing September 1, 1997. In addition, the
Company and the officer agreed that in the event any payment was in
default, they each would consent to judgement for the total legal
fees demanded of $238,564 less any payments made to that point.
The Company was not in default as of December 31, 1998.
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.
70
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Employment Agreements
In July of 1997 the Company entered into an employment agreement with
Magnitude, Inc.'s President, to serve as the Company's President and
Chief Executive Officer for a period of five years. Base salary under
the agreement is $108,000 per annum with annual increases determined by
the Board of Directors. The agreement also calls a first year bonus of
140,000 shares of the Company's stock, and 200,000 shares in any year
thereafter in which the Company's after tax net profits exceed
$1,000,000 for each of its first three full fiscal years during the
employment term beginning with calendar year 1998. The agreement was
amended to replace the stock bonuses with nonqualified options to
purchase up to 750,000 shares at a purchase price of $1 and up to
535,000 shares at a price of $.50. Eligibility for benefit programs,
with the exception of any key employee stock option plan, and a fully
paid medical/hospitalization policy is provided under the agreement.
The Company will also provide reimbursement of ordinary and necessary
business expenses and a monthly car allowance. A
noncompetition/nonsolicitation restriction applies for 36 months after
termination of employment. The agreement provides for severance
compensation equal to three months of base salary if employment is
terminated by the Company for cause.
The Vice President and Chief Financial Officer of Magnitude, Inc.
entered into an employment agreement on April 15, 1996. The agreement
is for a term of three years expiring April 14, 1999. Pursuant to the
terms of the agreement, the officer is to receive an annual salary of
$100,000 subject to annual review by the Board of Directors with the
first such review at September 1, 1996, and an annual bonus as
determined by the Board. Pursuant to the agreement, Magnitude, Inc.
would pay the premiums on a $400,000 life insurance policy for the
benefit of individuals designated by the officer. The agreement
restricts the officer from competing with Magnitude, Inc. for a period
of two years after the termination of his employment under certain
circumstances. The agreement provides for severance compensation to be
determined pursuant to a formula established therein to be paid to the
officer if his employment with Magnitude, Inc. 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 any successor to Magnitude, Inc. after a change of
control or other reorganization of Magnitude, Inc. fails to assume the
agreement.
Consulting Agreements
On May 12, 1997, the Company's subsidiary Magnitude, Inc. entered into
a financial and marketing consulting agreement with Royal Capital, Inc.
("Royal"), whereby Royal would act as a consultant to the company. In
consideration of such services, Royal was granted, in addition to other
consideration, options to purchase 692,122 common shares of the Company
or any succeeding or acquiring entity at exercise prices ranging from
$1.04 to $5.62 per share of the Company. Through December 31, 1998,
options to acquire 192,256 shares of the Company were exercised at a
price of $1.04 per share. Through April 7, 1999, an aggregate of
approximately $2,787,000 in additional equity has been raised pursuant
to Royal's efforts.
On May 12, 1997, the Company's subsidiary Magnitude, Inc. entered into
an agreement with a management consultant. In consideration of such
services, whereby, in addition to other consideration, the consultant
was awarded options equal to 43,258 shares of the Company of which
33,258 remain unexercised at December 31, 1998.
71
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS
During July 1997 one of the Company's board members advanced the
Company $100,000 as evidenced by two 8% promissory notes which were
subsequently agreed to be converted to common shares pursuant to the
filing of an Offering Memorandum offering shares pursuant to an
exemption provided by Rule 504 of Regulation D promulgated under the
Securities Act of 1933, as amended. The Company, however, decided not
to consummate such offering, and instead pursued an offering under Rule
506 of Regulation D promulgated under the Securities Act of 1933 under
which the notes were converted to 22,222 common shares and warrants in
May 1998. During November and December 1997, one investor advanced the
Company $175,000 which was to be used for the purchase of common stock
pursuant to the filing of a Private Placement offering shares to
qualified investors pursuant to an exemption provided by Regulation S
promulgated under the Securities Act of 1933, as amended. On January
26, 1998, 87,500 shares of common stock were issued to this investor.
In November 1998, a director and principal shareholder extended a
working capital loan of $262,000 to the Company, secured by the assets
of the Company, against issuance of a promissory note bearing interest
at the rate of 10% per annum.
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, the director and
principal shareholder extended working capital loans aggregating
$395,560 to the Company, of which a portion of $351,060 was covered by
a promissory note bearing interest at the rate of 10% p.a. 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.
72
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the 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, Steven D. Rudnik was appointed President and CEO of
the Company, taking over the position previously occupied by Jerry
Swon.
73
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 1999
Page
Independent Auditors' Report....................................... 69
Financial Statements
Consolidated Balance Sheet.................................... 70
Consolidated Statements of Operations......................... 71
Consolidated Statement of Stockholders Equity (Deficit)....... 72-73
Consolidated Statements of Cash Flows......................... 74-75
Notes to the Consolidated Financial Statements................ 76-85
74
[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
Bridgewater, New Jersey
March 24, 2000
75
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.
76
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.
77
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
78A
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
78B
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
79A
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
79B
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.
80
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.
81
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.
82
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.
83
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.
84
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
===============
85
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.
86
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 $ - $ -
-----------------------------------------================ -------------
87
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.
88
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.
89
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.
90
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 $1,990,900 pursuant to a
firm commitment equity financing transaction under which shares of
common stock and a new series of convertible preferred shares with
detachable common stock purchase warrants will be issued.
91
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 2000 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 13
PART II - OTHER INFORMATION 14 - 15
SIGNATURES 16
FINANCIAL DATA SCHEDULE 17
OTHER EXHIBITS 18
92
PART I - Item 1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 2000
ASSETS
Current Assets
Cash .....................................................................$ 680,866
Accounts receivable, net of allowance for
doubtful accounts of 6,646 ............................................. 461,401
Inventories ............................................................... 8,670
Deferred tax asset......................................................... 201,470
Prepaid expenses .......................................................... 427,677
-------------
Total Current Assets ................................................... 1,780,084
Property, plant and equipment, net of accumulated
depreciation of $176,978 ............................................... 118,054
Software, net of accumulated amortization of
$378,602 .............................................................. 1,128,688
Other assets .............................................................. 25,209
-------------
TOTAL ASSETS ................................................................... 3,052,035
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses ..................................... 779,414
Deferred revenue........................................................... 27,196
Dividends payable ......................................................... 89,973
Prepayments received ...................................................... 0
Loans and notes payable ................................................... 238,492
Current maturities long-term debt ....................................... 0
Current maturities lease obligations .................................... 6,938
-------------
Total Current Liabilities .............................................. 1,142,013
Long-term debt, less current portion ................................... 374,890
Lease obligations, less current portion ................................ 13,005
-------------
TOTAL LIABILITIES .............................................................. 1,529,908
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized:
2,500 shares have been designated Cumulative Preferred Stock,
of which 1 share is issued and outstanding ................................ 0
300,000 shares have been designated Series A Convertible Preferred Stock,
350,000 shares have been designated Series B Convertible Preferred Stock,
120,000 shares have been designated Series C Convertible Preferred Stock,
500,000 shares have been designated Series D Convertible Preferred Stock,
of which a combined total 490,448 shares are issued and outstanding 490
Common Stock, $0.0001 par value, 100,000,000 shares authorized,
16,193,314 shares are issued and outstanding............................... 1,619
Contributed capital ....................................................... 81,000
Additional paid-in capital ................................................ 15,341,180
Accumulated deficit ....................................................... (13,902,162)
------------
TOTAL STOCKHOLDERS' EQUITY............................... 1,522,127
TOTAL LIABILITIES AND EQUITY .................................... $ 3,052,035
=============
See notes to consolidated financial statements
93
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Total Revenues....................................$ 253,787 $ 52,250 $ 601,790 $ 162,430
Cost of Goods Sold .......................... 41,740 41,257 126,394 127,696
------------- ------------ ------------- ----------------
Gross Profit ..................................... 212,047 10,993 475,396 34,734
Selling expenses ............................ 441,140 210,383 1,046,219 567,217
General & administrative expenses ........... 641,478 499,253 1,774,331 1,433,692
------------- ------------ ------------- --------------
Operating Income (Loss) .......................... (870,571) (698,643) (2,345,154) (1,966,175)
Miscellaneous income ........................ 12 10,469 14,060 98,065
Interest expense, net........................ (16,091) (77,385) (148,934) (187,383)
Miscellaneous expenses ...................... (0) (49,417) (1,149) (69,106)
------------- ------------ ------------ ------------
Non-Operating Income (Expense) ................... (16,079) (116,333) (136,023) (158,424)
------------- ------------- ------------- ------------
Net Loss .........................................$ (886,650) $ (814,976) $(2,481,177) $ (2,124,599)
========== ============ =========== =============
Loss per Common Share ............................$ (0.06) $ (0.09) $ (0.17) $ (0.26)
========== =========== ============ ============
Weighted Average Number of
Common Shares Outstanding ................... 15,745,597 8,824,380 14,599,500 8,164,100
See notes to consolidated financial statements
94
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2000 1999
Cash Flows from Operating Activities
Net income (loss) ........................... $(2,481,178) $ (2,124,599)
Adjustments to net income (loss)
Depreciation and amortization ............ 149,074 139,694
Stock and debt issued for expenses........ 251,667 0
Loss on disposition of certain assets .... 1,122 8,993
Dividend payments......................... (42,000) 0
Decreases (increases) in Assets
Accounts receivable ...................... (401,277) 68,281
Miscellaneous receivables................. 15,227 0
Inventories .............................. 215 17,827
Prepaid expenses ......................... (38,795) (121,527)
Other assets ............................. (22,750) 1,852
Increases (decreases) in Liabilities
Prepayments received...................... 0 0
Deferred revenue.......................... 27,193
Accounts payable and accrued expenses .... (231,682) (711,686)
-------------- -------------
Net Cash Provided (Used) by Operating Activities (2,773,181) (2,721,165)
Cash Flows from Investing Activities
Purchases of equipment and fixtures ......... (52,182) (2,606)
Disposition of equipment and other assets ... 3,358 60,000
-------------- ------------
Net Cash Provided (Used) by Investing Activities (48,824) 57,394
Cash Flows from Financing Activities
Proceeds from notes payable ................. 250,000 1,247,235
Repayment of loans and notes ................ (484,534) (293,200)
Repayment of long-term debt ................. (0) (52,000)
Accrual of contingent liability.............. 0 374,890
Issuance of preferred stock.................. 2,937,836 0
Issuance of common stock ........... ........ 550,000 1,380,031
----------- -----------
Net Cash Provided (Used) by Financing Activities 3,253,302 2,656,956
Net Increase (Decrease) in Cash .................. 431,297 (6,815)
Cash at Beginning of Period ...................... 249,569 9,403
----------- ----------
Cash at End of Period ............................ $ 680,866 $ 2,588
================= ===========
See notes to consolidated financial statements
95
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
DESCRIPTION OF BUSINESS
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to
Whitestone Industries, Inc. On July 14, 1997, the Company changed its
name to Proformix Systems, Inc., and on November 18, 1998, the Company
changed its name to Magnitude Information Systems, Inc.
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name ErgoManager(TM) which are
designed to help individual computer users and businesses increase
productivity and reduce the risk of potentially preventable repetitive
stress injury (RSI). These software modules can be applied individually
or together in a comprehensive ergonomic and early intervention program
that seeks to modify a user's behavior by monitoring computer usage
patterns over time and warning the user when to break a dangerous trend
in repetitive usage of an input device, such as a keyboard or mouse.
The product was developed to train people working on computers, monitor
computer-use related activities and evaluate a user's risk exposure and
propensity towards injury or loss of effectiveness in connection with
his/her day-to-day work. Moreover, the software enables a company to
not only address the issue of health risks involving employees and to
minimize resulting potential liabilities, but delivers a powerful tool
to increase overall productivity.
BACKGROUND
On June 24, 1997, the Company, extended a stock exchange offer to the
shareholders of Proformix, Inc., a Delaware corporation and
manufacturer of ergonomic keyboarding systems. Proformix, Inc. in
November 1998 changed its name to Magnitude, Inc. and is now referred
to as Magnitude, Inc. At the time of this submission, holders of
99.1% of Magnitude, Inc. common stock have tendered their shares.
The business combination which took the form of a reverse acquisition
has been accounted for as a purchase. As a result, the Company and
Magnitude, Inc. remain as two separate legal entities whereby
Magnitude, Inc. operates as a subsidiary of Magnitude Information
Systems, Inc.. The operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software
developing firm, and on April 30, 1998, into an Asset Purchase
Agreement with Vanity Software Publishing Co., a Canadian developer of
specialized software, whereby the Company, in return for payments in
form of cash and equity, acquired the rights to certain software
products and related assets, with such software products subsequently
forming the basis for the further development, during the year, of the
Company's proprietary ErgoManager(TM) software system.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several
related agreements with 1320236 Ontario Inc. ("OS"), a publicly traded
Canadian designer, manufacturer and distributor of office furniture
based in Holland Landing, Ontario, Canada, pursuant to which OS
acquired Magnitude, Inc.'s hardware product line comprised of the
Company's ergonomic keyboard platform products and accessories, all
related inventory and production tooling and warehousing assets, and
all intellectual property rights including the Proformix name, against
a cash consideration and certain royalty payments on OS' sales of the
Proformix hardware products.
96
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Magnitude Inc.'s wholly owned subsidiary, Corporate Ergonomic
Solutions, Inc. (Ergonomics) was incorporated in the State of New
Jersey during October 1992. Ergonomics, which commenced operations in
September 1997, was formed primarily to market hardware products. Its
operations during the last two years have not been significant.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Magnitude Information Systems, Inc. and its subsidiaries,
Magnitude, Inc. and Corporate Ergonomic Solutions, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories
Inventory consists of finished goods which are stated at the lower of
cost (determined by the first-in, first out method) or market.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is
computed on the straight line method over the estimated useful lives of
such assets between 3-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets are amortized on the straight
line method over 10 years.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-based Compensation". The
statement generally suggests, but does not require, employee
stock-based compensation transactions be accounted for based on the
fair value of the services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted
by the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and
tax-reporting purposes. Accordingly, for Federal income tax purposes,
the benefit for income taxes has been offset entirely by a valuation
allowance against the related federal deferred tax asset for the year
ended December 31, 1999. For state income tax purposes, a partial
valuation allowance has been offset against the related state deferred
tax asset for the year ended December 31, 1999.
97
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share" is computed by
dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from the licensing of proprietary software products is
recognized at the time of licensing provided that the resulting
receivable is deemed probable of collection. Revenue from software
maintenance contracts is recognized ratably as earned.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
DEFERRED TAX ASSET
During 1999, the Company had filed an application with the New Jersey
Economic Development Authority who administers the current New Jersey
Tax Certification program pursuant to the New Jersey Emerging
Technology and Biotechnology Financial Assistance Act to qualify for
and be the beneficiary of this program which will permit a participant
to liquidate its State NOL tax benefits against cash considerations.
The Company has been accepted under this program and has been issued
tax transfer certificates which will, upon liquidation, result in a
cash benefit in the amount stated.
PREPAID EXPENSES
Prepaid expenses include a position of $375,000 resulting from an
agreement in February 1998 with BNN Business News Network Inc., a
nationwide media advertising and radio network company, whereby the
Company purchased advertising time to be utilized on stations
associated with Business News Network Inc., usable over a period of
three years, since then extended, and aggregating $900,000 in retail
value, against issuance of 150,000 new and restricted common shares.
The services purchased were capitalized at the then fair market value
of the stock issued, for a total of $375,000. The resulting asset will
be amortized as utilized, over the time frame of the next two years. As
per the date of this report, no portion of this asset has been
utilized. Management believes that the Company will derive economic
benefits commensurate with the value of this asset. If management were
to determine that it may not be able to economically utilize the entire
amount during the time allotted, it will effect an accelerated
amortization or write-down of this asset position.
98
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at September 30,
2000:
Equipment $ 179,287
Furniture and fixtures 69,976
Leasehold improvements 45,770
--------------
295,033
Less accumulated depreciation 176,979
--------------
Total $ 118,054
==============
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at September
30, 2000:
Accounts payable $ 359,442
Accrued interest 66,921
Accrued commissions 30,176
Accrued salaries and professional fees (payable in cash) 59,997
Accrued salaries and professional fees (payable in equity) 173,711
Miscellaneous accruals 89,167
=============
Total $ 779,414
=============
LOANS AND NOTES PAYABLE
At September 30, 2000, Magnitude, Inc. and the Company had borrowings
under short term loan agreements with the following terms and conditions:
Note issued by Magnitude, Inc. originally maturing December 4, 1998
and accruing interest at $ 75,000
5% per year. This note is overdue at September 30, 2000; no demand
for payment has been made through today's date.
Note issued by Magnitude, Inc. originally maturing June 1996 and
accruing interest at 12% per year. This note is overdue at September
30, 2000; no demand for payment has been made through today's date. 25,000
Discounted present value of a non-interest bearing $70,000 settlement
with a former investor of Magnitude, Inc. to be paid in monthly
payments commencing July 1, 1997. The imputed interest rate used 33,529
to discount the note is 8% per annum. Balance of promissory note
issued to a former member of the board of directors of the Company 54,963
carrying interest at 12% p.a., maturing July 2000, convertible at
the holder's option into shares of the common stock of the Company at
the rate of $0.50 per share. Cash advance by an officer of the
Company, carrying interest at the rate of 7% p.a. 50,000
Total $ 238,492
==============
99
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
LONG-TERM DEBT
Pursuant to the February 2, 1998, Agreement and Plan of Merger with
Rolina Corporation (see "Background") the Company had issued 155,556
shares (the "Shares") of its common stock to the principal of Rolina $ 374,890
Corporation who currently serves as the Company's President and
Chief Executive Officer, and had issued a Put Option for such Shares
at a price of $2.41 per share in accordance with the provisions
contained therein, with notice for exercise eligible to be given
at any time after February 1, 2000, and before 5:00 p.m. on the
90th day thereafter. This current liability was converted into a
Company obligation maturing March 31, 2002, and carrying interest at
the rate of 7% per year payable monthly. The obligation includes an
option to the holder for conversion of the outstanding principal into
shares of the Company's common stock at the rate of $0.50 per share.
INCOME TAXES
At December 31, 1999, the Company had net operating loss carry
forwards approximating which expire between the years 2008 $ 11,300,000
and 2013 and are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December 31,
1999 are as follows:
Total deferred tax asset $ 4,240,000
Less valuation allowance 4,240,000
Net deferred tax asset $ -
===============
COMMITMENTS AND CONTINGENCIES
Lease Agreements
Magnitude, Inc. currently leases office space which contained its former
administrative offices pursuant to a lease agreement dated December 9,
1998. Such lease commences December 16, 1998 and expires on December 31,
2001 and requires monthly payments of $3,700 from December 16, 1998 to
October 31, 1999 and $3,250 from November 1, 1999 to December 31, 2001.
This space has been sublet, generating $3,250 per month in offsetting
revenues.
On March 15, 2000, the Company entered into a lease agreement for office
space which is utilized for the Company's principal offices. Such lease
commenced April 15, 2000 and expires on March 31, 2005 and requires monthly
payments of $6,500 from April 15, 2000 through March 31, 2002; of $6,695
thereafter through March 31, 2003; of $6,896 thereafter through March 31,
2004; and of $7,103 thereafter through March 31, 2005.
100
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
RELATED PARTY TRANSACTIONS
On March 31, 2000, the Company and its President and Chief Executive
Officer agreed to convert a current liability payable to him in the amount
of $374,890 into a Company obligation maturing March 31, 2002, which among
others provides for a right to the holder to convert such obligation into
common stock of the Company (see "Long-term debt").
In September 2000, an officer of the Company extended a cash advance of
$50,000 to the Company, accruing interest at the rate of 7% per year.
This advance was repaid in October 2000.
SUBSEQUENT EVENTS
On October 11, 2000, the board of directors of the Company confirmed the
promotion of John C. Duncan, Executive Vice President, to the position of
President and Chief Operating Officer of the Company. Steven D. Rudnik
retains the title and position of Chief Executive Officer and Chairman of
the Board.
On October 11, 2000, the board of directors of the Company adopted a
resolution by which the By-Laws of the Company are amended in Article I,
Section 7, Subsection C, through insertion of the sentence "A special
meeting of stockholders of the Company may be called by stockholders
holding a majority of the issued and outstanding common shares of the
Company".
101
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.
102
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.
SEC registration fee $ 455.21
Legal fees and expenses 70,000.00
Accounting fees and expenses 0
Printing and Engraving Costs 2,000.00
Transfer Agent Fees 5,000.00
Fees for Qualification of Offering
Under State Blue Sky Laws ----------
Miscellaneous expenses 1,000.00
Total $78,455.21
Item 26. Recent Sales of Unregistered Securities
Fiscal Year 2000
During fiscal year 2000 and through the six month period ended June 30,
2000, the Company placed the following unregistered securities with accredited
or institutional investors:
(i) 109,926 shares of Common Stock pursuant to the
conversion of $54,963 in convertible promissory
notes, issued in reliance upon exemptions provided
under Section 4(2) of the Securities Act;
(ii) 12,000 shares of Common Stock for services rendered;
(iii) 11,535 shares of Common Stock in exchange against 40,000 common
shares of Magnitude, Inc., pursuant to the Company's stock
exchange offer of July 1997;
(iv) 617,616 shares of Common Stock and warrants for the purchase of
100,000 shares at a price of $1 per share, in exchange
against the cancellation of a $460,000 liability in form of a past-due
promissory note and accrued interest thereon;
(v) Warrants for the purchase of 36,000 shares of Common Stock at $1 per
share, for services rendered;
(vi) 83,364 shares of Series B Senior Convertible
Preferred Stock accompanied by warrants for the
purchase of 416,820 shares at a price of $0.90 per
share, to a foreign investor pursuant to private
placement subscriptions under Section 4 (2) of the
Securities Act, which resulted in the receipt by the
Company of $750,276 in cash, whereby such shares,
among other things, have the following rights and
privileges: (i) 7% annual preferential dividend,
payable semi-annually, (ii) conversion at the
holders' option into shares of Common Stock at a
conversion rate of 10 common shares for 1 preferred
share;
103
(vii) 55,556 shares of Series D Senior Convertible Preferred Stock
accompanied by warrants for the purchase of 555,560 shares at a price of $0.50
per share, to two investors pursuant to private placement subscriptions under
Section 4 (2) of the Securities Act, which resulted in the receipt by the
Company of $500,000 in cash, whereby such shares, among other things, have the
following rights and privileges: (i) 7% annual preferential dividend, payable
semi-annually, (ii) conversion at the holders' option into shares of Common
Stock at a conversion rate of 10 common shares for 1 preferred share.
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;
104
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;
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.
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;
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;
105
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.
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;
106
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.
Fiscal Year 1997
During fiscal year 1997, the Company placed the following unregistered
securities with accredited and institutional investors:
Pursuant to an Offering Memorandum dated August 14, 1997, the Company
issued a total of 28,611 shares of Common Stock at a purchase price of $4.50,
and 28,611 warrants for the purchase of Common Stock exercisable at $4.50 per
share, thereby raising $128,750 in gross proceeds. The aforesaid offering of
securities was exempt pursuant to Regulation D of the Securities Act of 1933, as
amended ("Securities Act"), and Rule 506 promulgated thereunder.
26,387 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;
465,500 shares of Common Stock issued to foreign entities, thereby
raising $862,000 in gross proceeds, pursuant to Regulation S of the Securities
Act;
In July 1997, the Company issued 173,600 unregistered shares of its
Common Stock to designees of a management consulting firm against a grant of
313,597 shares to this firm for services rendered, pursuant to a resolution of
the Company's Board of Directors of June 16, 1997.
Between July and September 1997, the Company issued an aggregate of
1,143,562 unregistered shares of its Common Stock to holders of common stock of
Proformix, Inc. pursuant to a stock exchange offer extended by the Company on
July 2, 1997.
Between July and October 1997, the Company issued 345,000 unregistered
shares of its Common Stock to designees of a management consulting firm against
a grant of 836,313 shares to this firm pursuant to a consulting agreement of May
8, 1997, and in September 1997 the Company issued 179,600 unregistered shares of
its Common Stock to designees of this consulting firm against an equity
investment of $200,000 made by it in May, 1997.
In September 1997 the Company issued 1,869 unregistered shares of
its Common Stock to a consultant for services rendered.
107
Item 27. Exhibits Index
The following Exhibits are filed or incorporated by reference into this
Registration Statement:
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, previously filed as Exhibit to the Company's
report on Form 10-KSB for the year ended December 31, 1998 and
incorporated herein by reference.
3(i) Articles of Incorporation and Amendments thereto, incorporated
herein by reference to Exhibits of previous filings with the
Commission.
3(ii) Bylaws of the Company, incorporated herein by reference to
Exhibits of previous filings with the Commission.
4.1* Term Sheet
4.2* Form of Subscription Agreement
4.3* Form of Common Stock Purchase Warrant
4.4* Form of Convertible Promissory Note
4.5* Form of Subscription Agreement
4.6* Form of Convertible Grid Promissory Note
4.7* Form of Common Stock Purchase Warrant
4.8* Form of Convertible Promissory Note
4.9* Form of Common Stock Purchase Warrant
4.10* Loan Agreement with S.Kroll
4.11* Form of Convertible Promissory Note
4.12* Form of Subscription Agreement
4.13* Form of Subscription Agreement
4.14* Form of Subscription Agreement
4.15* Form of Subscription Agreement 4.16* Form of Subscription Agreement
4.17* Form of Common Stock Purchase Warrant
4.18* Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000,and amended on March 20, 2000,
designating a new class of Series B Senior Convertible Preferred Stock.
4.19* Form of Common Stock Purchase Warrant
4.20+ Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series C Senior Convertible
Preferred Stock
4.21* Agreement with S.Rudnik, re: convertible debt 4.22* Consulting
agreement with G.Shemano
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.
108
4.25 Common Stock Purchase Agreement,dated December 18, 2000, by and
between the Company and Torneaux Fund Ltd., which is incorporated by
reference herein from our Form 8K/A filed with the Securities and
Exchange Commission on December 19, 2000.
4.26 Form of Warrant issuable under the Common Stock Purchase Agreement
filed as Exhibit 4.25.
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.
23.1 Independent Auditors' Consent
27 Financial Data Schedule
- -------
+Documents incorporated by reference to Magnitude's Annual Report filed on Form
10-KSB for the fiscal year ended December 31, 1999 with the Securities and
Exchange Commission on March 30, 2000.
*Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 and Amendments thereto, Commission File No. 333-34512, and
incorporated herein by reference.
109
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.
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.
110
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.
111
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, certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form SB-2 and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Chester,
State of New Jersey, on December 21, 2000.
MAGNITUDE INFORMATION SYSTEMS, INC.
By:/s/ Steven D. Rudnik
-----------------------
Steven D. Rudnik,Chairman 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 December 21, 2000
Steven D. Rudnik Chief Executive Officer
(Principal Financial Officer)
/s/ Joerg H Klaube Chief Financial Officer December 21, 2000
Joerg H. Klaube (Principal Financial Officer)
/a/ John C. Duncan President and Chief
John C. Duncan Operating Officer,Director December 21, 2000
/s/ Steven L. Gray Director December 21, 2000
Steven L. Gray
/s/ Ivano Angelastri Director December 21, 2000
Ivano Angelastri
/s/ Joseph J. Tomasek Director December 21, 2000
Joseph J. Tomasek
112
Exhibit 5.1
Joseph J. Tomasek, Esq.
75-77 North Bridge Street
Somerville, New Jersey 08876
December 21, 2000
Board of Directors
Magnitude Information Systems, Inc.
401 State Route 24
Chester, New Jersey 07930
Re: Common Stock of Magnitude Information Systems, Inc.
Gentlemen:
We act as counwel to Magnitude Information Systems, Inc. (the
"Company"), a Delaware corporation, in connection with the registration under
the Securities Act of 1933, as amended (the "Securities Act"), of 2,045,448
shares of the Company's Common Stock (the "Shares"), including shares underlying
warrants, which may be resold by Torneaux Fund Ltd., the selling stocholder, all
as further described in a registration statement on Form SB-2 filed under the
Securities Act (the "Registration Statement").
For the purpose of rendering this opinion, we examined originals or
photostatic copies of such documents as we deemed to be relevant. In conducting
our examination, we assumed, without investigation, the genuineness of all
signatures, the correctness of all certificates, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies, and the accuracy and completeness
of all records made available to us by the Company. In addition, in rendering
this opinion, we assumed that the Shares will be offered in the manner and on
the terms identified or referred to in the prospectus, including all amendments
thereto.
Our opinion is limited solely to matters set forth herein. We are
admitted to practice in the State of New Jersey and we express no opinion as to
the laws of any other jurisdiction other than the laws of the State of Delaware
and the laws of the United States.
Based upon and submect to the foregoing, after giving due regard to
such issues of law as we deemed relevant, and assuming that (i) the Registration
Statement becomes and remains effective, and the prospectus which is part
thereof (the "Prospectus"), and the Prospectus delivery procedures with respect
thereto, fulfill all of the requirements of the Securities Act, throughout all
periods relevant to the opinion, and (ii) all offers and sales of the Shares
have been and will be made in compliance with the securities laws of the states,
having jurisdiction thereof, we are of the opinion that the Shares offered by
the Selling Stockholder has been, and the Shares to be issued upon the exercise
of warrants for adequate consideration will be, validly issued, fully paid, and
nonassessable.
We hereby consent in writing to the use of our opinion as an exhibit to
the Registration Statement and any amendment thereto.
Very truly yours,
/s/ Joseph J. Tomasek,
Joseph J. Tomasek, Esq.
Rosenberg Rich Baker Berman & Company
380 Foothill Road
Bridgewater, NJ 08807
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
Prospectus forming a part of Form SB-2 Registration Statement of Magnitude
Information Systems, Inc. and Subsidiaries to be filed with the Commission on or
about December 22, 2000 of (1) our report dated April 7, 1999 on the
Consolidated Financial Statements of Magnitude Information Systems, Inc. and
Subsidiaries for the fiscal years ended December 31, 1998 and 1997 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
December 21, 2000