As filed with the Securities and Exchange Commission on October 5, 2004
Registration No. 333-112595
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
POST-EFFECTIVE AMENDMENT NO. 2 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAGNITUDE INFORMATION SYSTEMS, INC.
(Name of small business issuer in its charter)
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Delaware 7372 75-2228828
(State or other jurisdiction of (Primary Standard I.R.S.Employer
Incorporation or organization) Industrial Classification Identification No.)
Code Number)
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401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Address and telephone number of principal executive offices
and place of business)
Steven D. Rudnik Joseph J. Tomasek, Esq.
401 State Route 24, 75-77 North Bridge Street
Chester, New Jersey 07930 Somerville, New Jersey 08876
(908) 879-2722 (908) 429-0030
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462 (b) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462 (c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ____________. If this form is a post-effective amendment filed
pursuant to Rule 462 (d) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,ACTING
PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE.ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus
Magnitude Information Systems, Inc.
23,116,037 Shares of Common Stock
1,424,000 Shares of Common Stock
Underlying Common Stock Purchase Warrants
1,500,000 Shares of Common Stock
Underlying Stock Option Grants
This prospectus covers a total of 26,040,037 common shares registered
on behalf of selling shareholders for resale. Some of these common shares have
been issued already or may be issued under our warrants, stock options and
convertible preferred stock owned by selling shareholders. We have also filed
two additional registration statements on behalf of other selling shareholders
to sell 62,795,481 common shares, registration statement no. 333-118522 and to
sell 29,183,218 common shares, registration statement no.333-73992,
respectively. All of the 26,040,037 common shares covered in this prospectus may
be sold from time to time by the named selling shareholders. We are not selling
any of these common shares and will not receive any of the proceeds from their
sale.We will receive the proceeds from any cash exercises of any of the warrants
and stock options by the selling shareholders. Our common shares are quoted on
the Electronic Bulletin Board, Over-The-Counter Market under the symbol "MAGY".
On August 17, 2004, the average of the high and low prices paid for our common
stock was $0.10. See "Selling Shareholders" and "Use of Proceeds".
You may contact us at our principal executive offices located at 401
State Route 24, Chester, New Jersey 07930 or by phone at (908)879-2722.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
This Investment Involves Certain High Risks. See "Risk
Factors" Beginning on Page 6.
The date of this prospectus is October 5, 2004
Neither the Securities And Exchange Commission nor any state Securities
Commission has approved or disapproved of these Securities or passed
upon the adequacy or accuracy of this prospectus. Any representation to
the contrary is a criminal offense.
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Prospectus Summary
This Summary Is Qualified In Its Entirety By The More Detailed Information
Appearing Elsewhere In This Prospectus
The Company
We are a corporation that was organized under the laws of the State of
Delaware (the "Company" or "Magnitude") on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, we changed our name to Whitestone
Industries, Inc. On July 14,1997,the Company changed its name to Proformix
Systems, Inc., and on November 18, 1998, the Company changed its name to
Magnitude Information Systems, Inc.
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name "ErgoManagerTM" which are designed to
help individual computer users and businesses increase productivity and reduce
the risk of potentially preventable repetitive stress injury (RSI). These
software modules can be applied individually or together in a comprehensive
ergonomic and early intervention program that seeks to modify a user's behavior
by monitoring computer usage patterns over time and warning the user when to
break a dangerous trend in repetitive usage of an input device, such as a
keyboard or mouse. The product was developed to train people working on
computers, monitor computer-use related activities and evaluate a user's risk
exposure and propensity towards injury or loss of effectiveness in connection
with his/her day-to-day work. Moreover, the software enables a company to not
only address the issue of health risks involving employees and to minimize
resulting potential liabilities, but delivers a powerful tool to increase
overall productivity.
Background
On June 24, 1997, the Company entered into an acquisition agreement
whereby it acquired substantially all of the outstanding stock of Proformix,
Inc., a Delaware corporation and manufacturer of ergonomic keyboarding systems.
Proformix, Inc. in November 1998 changed its name to Magnitude, Inc. and is
hereafter referred to as Magnitude, Inc. The business combination took the form
of a reverse acquisition. The Company and Magnitude, Inc. remain as two separate
legal entities whereby Magnitude, Inc. operates as a subsidiary of Magnitude
Information Systems, Inc.. The operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software developing
firm, and on April 30, 1998, into an Asset Purchase Agreement with Vanity
Software Publishing Co., a Canadian developer of specialized software, whereby
the Company, in return for payments in form of cash and equity, acquired the
rights to certain software products and related assets, with such software
products subsequently forming the basis for the further development during the
year of the Company's proprietary ErgoManagerTM software product.
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The Offering
Securities offered 26,040,037 shares of common stock, $.0001 par value,
including 1,424,000 shares of common stock issuable
upon the exercise of Warrants, and; 1,500,000 shares
of common stock issuable upon the exercise of stock
options. See "Selling Shareholders" at page 16.
Selling Shareholders The selling shareholders are identified in this
prospectus at page 16 together with the maximum
amount of our common shares that each may sell either
outright or upon conversion or exercise of rights
under their respective preferred stock, warrants,
stock options and the convertible note or subsequent
to consummation of the subscription agreement. See
"Selling Shareholders" at page 16.
Plan of Distribution Up to 26,040,037 shares of common stock may be
offered and sold by the selling shareholders through
agents or brokers, acting as principal, agent in
transactions, which may involve block transactions,
on the Electronic Bulletin Board, over-the-counter
market or on other exchanges on which the shares are
then listed, pursuant to the rules of the applicable
exchanges or in the over-the-counter market, or
otherwise, at market prices prevailing at the time of
sale, at negotiated prices or at fixed prices;
through brokers or agents in private sales at
negotiated prices; or by any other legally available
means.
Offering Price At prevailing market prices on the Electronic
Bulletin Board or on other exchanges on which the
shares are then listed or at negotiated prices.
Use of Proceeds We will not obtain any funds from the sale of the
common stock sold by the selling shareholders. We
will receive up to $679,000 in proceeds from the cash
exercise of the warrants and stock options currently
outstanding and included in this prospectus. However,
due to current market conditions as well as the fact
that the exercise prices of most of these warrants
and options have been higher than the current market
price of our stock, it is unlikely that we will
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realize the receipt of any proceeds from the exercise
of these warrants and options. If the market price
for our common stock increases to permit the exercise
of these warrants and options, we intend to use any
such cash proceeds received for general corporate
purposes, which may include repaying indebtedness,
making additions to our working capital, funding
future acquisitions or for further developing our
products and hiring additional personnel.
Securities Outstanding We are authorized to issue up to an aggregate
200,000,000 shares of common stock and 3,000,000
shares of preferred stock of which 110,381,323 common
shares and 286,857 preferred shares were issued and
outstanding at August 17, 2004. Two developments may
increase our outstanding number of common shares:
first, if the selling shareholders exercise all of
their rights to convert and/or exercise all of their
warrants and sock options, an additional 2,924,000
common shares, representing part of the shares being
registered, will be outstanding, and; secondly, we
have filed two additional registration statements,
registering an additional 91,978,699 common shares
for earlier and more recent investors and, as with
the selling shareholders in this prospectus, if all
of them exercise and/or convert their stock options,
warrants, convertible preferred stock and convertible
notes into common shares, we will have 156,126,304
outstanding common shares. We have in reserve an
additional 2,713,143 authorized preferred shares that
we may issue in one or more series with such rights,
preferences and privileges as may be determined by
our Board of Directors.
Risk Factors An investment in our common shares is highly
speculative and any purchasers will suffer
substantial dilution per common share compared to the
purchase price. We have suffered losses for the
second quarter of 2004 of $563,993, for the six
months ended June 30, 2004 of $1,266,506 and losses
for the fiscal year ended December 31, 2003 of $
2,337,881 and losses of $2,763,104 during 2002. We
will need additional funding. No person should invest
in our common shares who cannot afford to risk the
loss of his or her entire investment. See "Risk
Factors" at page 6.
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RISK FACTORS
You should carefully consider the risks described below when evaluating your
ownership of the Magnitude common stock. The risks and uncertainties described
below are not the only ones Magnitude faces. Additional risks and uncertainties
we are presently not aware of or that we currently consider immaterial may also
impair Magnitude's business operations.
If any of the following risks actually occurs, our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline significantly.
We Continue to Suffer Financial Losses in our Business.
We have a history of losses and if we do not achieve profitability we may not be
able to continue our business in the future. We have incurred substantial
operating losses since our inception, which has resulted in an accumulated
deficit of approximately $ 23,705,641 as of December 31, 2003 of which
approximately $7 million are attributable to its discontinued hardware product
line. For the fiscal years ended December 31, 2003 and 2002, we incurred losses
of $ 2,337,881 and $2,763,104, respectively, and losses of $1,266,506 for the
six months ended June 30, 2004. 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.
Our Auditors Have Rendered An Opinion Raising Doubts as to Whether We Can
Continue Operations.
Our auditors have expressed their opinion that our financial condition as shown
in our financial statements for our fiscal year that ended on December 31, 2003,
raises substantial doubts whether or not we will be able to continue in business
as an operating company. See "Financial Statements".
We Need Additional Financing.
We could be required to cut back or stop operations if we are unable to raise or
obtain needed funding. Our ability to continue operations will depend on our
positive cash flow, if any, from future operations or our ability to raise
additional funds through equity or debt financing. At present, we have not
received firm commitments for private financings in amounts sufficient to cover
the working capital necessary to continue to finance our operations and execute
our business plan. Although we anticipate that future revenues and new capital
from private and institutional investors with whom we are currently in
negotiations will be sufficient to fund our current operations and capital
requirements for the current fiscal year, we cannot give you any assurance that
these negotiations will result in definite agreements that will provide such
needed capital. We could be required to cut back or stop operations if we are
unable to raise or obtain funds when needed.
We Do Not Have A Proven Software Sales Record
We do not have a proven software sales record and have made only limited sales
of our software products. Our total revenues for software sales and licenses and
support services for the years ended December 31, 2003 and 2002 were
approximately $ 162,335 and $369,443, respectively. For the fiscal year ended
December 31, 2003, we have revenues of only $ 162,335, and for the six months
ended June 30, 2004 we had revenues of only $64,874. As a result of our lack of
proven sales success and lack of evidence that the business or consumer
marketplaces have accepted our software products, you and other investors may
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not have enough or sufficient financial and operational information about us
that is necessary in order to properly evaluate the risks of making any
investment in our stock.
We Are Not Certain That Customers Will Buy Our Products.
Our revenues depend on sales of our specialized software products and
we are uncertain whether there will be broad market acceptance of these
products. Our revenue growth for the foreseeable future is largely dependent
upon increased sales of our ErgoManagerTM suite of software products. Since the
introduction of our ErgoManagerTM software products in November, 1998 and
through December 31, 2003, revenue from our software products has been
approximately $1,962,000 (prior to this time, we had sales of approximately
$63,000 based upon a predecessor version of the ErgoManagerTM software}.
For the fiscal year ended December 31, 2003, we had revenues from the
sales of software product licenses and support services of $162,335. Our future
financial performance will depend upon the successful introduction and customer
acceptance of our ErgoManagerTM software products as well as the development of
new and enhanced versions of this product as well as other related software
products that may be developed in the future. Revenue from products such as
ErgoManagerTM depend on a number of factors, including the influence of market
competition, technological changes in the ergonomic workplace market, our
ability to design, develop and introduce enhancements on a timely basis and our
ability to successfully establish and maintain distribution channels. If we fail
to achieve broad market acceptance of our ErgoManagerTM products, it would have
a material adverse effect on our business, operating results and financial
condition.
We Do Not Have An Established Sales Distribution Network.
We do not have an established sales distribution network through which
to sell our software products. Our 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 Could Lose Your Entire Investment.
Our common stock offered in this prospectus 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.
If We Were To Lose The Services of Our President Our Business Would Suffer
We are substantially dependent upon the continued services of Steven D.
Rudnik, our President and Chief Executive Officer. The loss of the services of
Mr. Rudnik through incapacity or otherwise would have a material adverse effect
upon our business and prospects. To the extent that his services become
unavailable, we will be required to retain other qualified personnel, and there
can be no assurance that we will be able to recruit and hire qualified persons
upon acceptable terms. We do, however, maintain key person life insurance on the
life of Mr. Rudnik in the amount of $1 Million.
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In addition to Mr. Rudnik, if we were to lose the services of one or
more of our key employees, such as Joerg Klaube, our Chief Financial Officer,
our business, operating results, financial condition or business prospects could
be materially adversely affected. We have several programs in place to retain
key personnel, including granting of stock options that vest annually over four
or five years. All of these outstanding options are at exercise prices above the
current market price of our common stock.
Penny Stock Regulations
The Securities Enforcement Penny Stock Act of 1990 requires specific disclosure
to be made available in connection with trades in the stock of companies defined
as "penny stocks". The Commission has adopted regulations that generally define
a penny stock to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. Such exceptions include any
equity security listed on NASDAQ and any equity security issued by an issuer
that has (I) net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three years; (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years; or (iii) average annual revenue of at least $6,000,000, if such issuer
has been in continuous operation for less than three years. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risk associated therewith as well as the written consent of the
purchaser of such security prior to engaging in a penny stock transaction. The
regulations on penny stocks may limit the ability of the purchasers of our
securities to sell their securities in the secondary marketplace. Our common
stock is currently considered a penny stock.
There is Intense Competition in the Industry
The market for ergonomic application software is expected to become intensely
competitive. Although we are not aware of any ergonomic software that competes
with our ErgoManagerTM software products currently, competitors will certainly
enter this marketplace. Although we believe our success will be due in part to
our early entry into the computer workplace market, we expect other software
product manufacturers to develop and sell similar products.
Intense competition could lead to increased price competition in the market,
forcing us to reduce prices. As a result, our gross margins may decline and we
may lose our first-to-market advantage which, in turn, could have a material
adverse effect on our business, financial condition and results of operations.
In addition, we may be unable to compete successfully with any new competitors
which are better financed, have larger technical staffs and operational
resources. There can be no assurances, therefore, that our software products
will be able to successfully compete in the marketplace.
We have 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:
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o knowledge, ability and experience of our employees;
o frequent software product enhancements; and
o timeliness and quality of support services.
Patent, trade secret and copyright protections may be inadequate, and our
competitors may independently develop ergonomic software products that are
substantially equivalent or superior to our software products. We do not believe
that our software products, our trademarks or other proprietary rights infringe
on the property rights of any third parties. However, third parties may assert
infringement claims against us and our products. These assertions could require
us to enter into royalty arrangements or could result in costly litigation.
Magnitude May Experience Product Liability Claims
Although our license agreements contain provisions designed to limit our
exposure to potential product liability claims, these provisions could be
invalidated by unfavorable judicial decisions or by federal, state or local laws
or ordinances. Although we have not experienced any product liability claims to
date, use of our software in mission critical applications may create a risk
that a third party may pursue a claim against us. Although we carry product
liability insurance, if a product liability claim against us was successful, the
resulting damages or injunctive relief could have a material adverse affect on
our business, financial condition and results of operations.
Our Stock Price is Volatile and There is a Risk of Litigation
The trading price of our common stock has in the past and may in the future be
subject to wide fluctuations. For example, during the first quarter of fiscal
year 2004, the average high sales price for our common stock traded in the
public market was $.134 per share while the average low sales price during the
same period was $0.126 per share. Similarly, $0.094 was the average high and
$0.088 the average low trading prices of our stock during the second quarter of
2002 in contrast to the $0.62 per share high average and $0.27 per share low
average trading prices witnessed during the second quarter of 2002.
Further, the stock market has experienced in recent months and may continue in
the future to experience extreme price and volume fluctuations that particularly
affect the market prices of equity securities of high technology companies that
often are not related to or are disproportionate to the operating performance of
such companies. These broad market fluctuations, as well as general economic,
political and market conditions have, and may continue to have, a material
adverse effect on the trading price of our common stock. Fluctuations in the
price of our common stock may expose us to the risk of securities class action
lawsuits. We cannot assure you that there will not be lawsuits in the future or
that future lawsuits will not have a material adverse effect on our business,
financial condition and results of operations.
Rapid Technological Change; Dependence on New Products
The market for software is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company must respond rapidly to developments related to
operating systems and applicable programming languages. Such developments will
require the Company to continue to make substantial product development
investments. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in product development or introduction, could result in a loss of
competitiveness or revenue.
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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 cost-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.
Any Further Stock Issuances Could Depress Our Share Trading Price
Of the 26,040,037 common shares offered in this prospectus, 23,116,037 common
shares have already been issued to the selling shareholders. If the selling
shareholders were to fully exercise their rights under their warrants and stock
options to purchase the remaining 2,924,000 common shares offered in this
prospectus and then sell them, the market price of our common stock could be
materially adversely affected. As of August 17, 2004, the substantial majority
of the warrants had exercise prices above the current market price of our common
stock. In addition, we have filed two additional registration statements,
registering a total of 91,978,699 common shares for new and existing investors.
60,503,109 of these shares have already been issued to the existing and new
investors with the balance of 23,903,364 shares underlying stock options,
warrants, convertible preferred stock and a convertible note. If the new
investors were to fully exercise their rights under their warrants and stock
options to convert them into common shares and then sell them, such sales could
have a materially adverse effect upon the market price of our common stock.
Market Overhang
As of August 17, 2004, we had 110,381,323 common shares outstanding. As of
August 17, 2004, we had 11,944,308 outstanding stock options, 25,430,502
outstanding common stock purchase warrants, 286,857 preferred shares convertible
into 11,123,898 common shares and a convertible promissory note convertible into
998,900 common shares. If all the outstanding stock options, common stock
purchase warrants, preferred shares and the convertible note were exercised
and/or converted by their holders an additional 48,498,708 common shares would
be outstanding; this would represent an approximate 44% increase in our
outstanding common shares. The vast majority of these outstanding options and
warrants are exercisable at prices currently above the public trading prices of
our common stock. However, in the event that even a portion of these outstanding
options and warrants were to be exercised, or portions of the preferred shares
and/or the convertible promissory note converted, the resulting dilution could
depress the public trading price of our common shares. In addition, we are
registering 29,183,218 shares for sale by the Selling Shareholders in this
prospectus and an aggregate 89,085,518 shares for new and existing investors in
our two additional registration statements; if a significant portion of these
shares were sold by the Selling Shareholders in this prospectus and the
investors further to our two additional registration statements in the public
marketplace, such sales could also have a severe and adverse material affect on
the public trading price of our common shares. Any increase in the amount of
saleable shares increases significantly the possibility of large amounts of our
shares offered for sale and, if sold, dramatically increases the selling price
pressure for our shares which could result in a further depressed sales and
market price for our stock.
The Market Price At Which The Selling Shareholders Resell Their Stock Offered In
This Prospectus May Bear No Relationship To Our Value
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The prices at which Selling Shareholders resell our common shares will be
determined by the then prevailing market prices of our common shares offered and
sold on the Electronic Bulletin Board, over-the-counter market or on any other
then applicable exchange where our Common Shares are traded, or may be at
negotiated prices which, in all likelihood, will bare no relationship to our
assets, book value, net worth or other economic or recognized measure of value.
All of the exercise and conversion prices and rates of the Company's outstanding
warrants, stock options, convertible preferred stock, convertible promissory
notes and convertible note were arbitrarily determined by us and, as well, bare
no relationship to our assets, book value, net worth, or any other economic or
recognized measure of value. These exercise prices or conversion rates should
not be regarded as any indication of current or future market price for our
common shares.
FORWARD LOOKING STATEMENTS
When used in this Prospectus, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "projected,"
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to economic conditions, changes in laws or
regulations, the Company's history of operating losses, demand for its software
products and services, newly developed technologies and software, regulatory
matters, protection of technology, lack of industry standards, the ability to
obtain contracts and licensing sales, the effects of competition and the ability
of the Company to obtain additional financing. Such factors, which are discussed
in "Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the notes to consolidated
financial statements, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
any opinions or statements expressed with undue reliance on any such
forward-looking statements, which speak only as of the date made. See "Risk
Factors," "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our Securities and
Exchange Commission filings are available to the public over the Internet at the
Securities and Exchange Commission's web site at http://www.sec.gov. You may
also read and copy any document we file at the Securities and Exchange
Commission's public reference room located at 450 Fifth Street, N.W.,
Washington, DC 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms and their
copy charges.
This prospectus is part of a Form SB-2 registration statement that we filed with
the SEC. This prospectus provides you with a general description of the
securities that may be offered for sale, but does not contain all of the
information that is in the registration statement. To see more detail, you
should read the entire registration statement and the exhibits filed with the
registration statement. Copies of the registration statement and the exhibits
are on file at the offices of the Commission and may be obtained upon payment of
the fees prescribed by the Commission, or examined without charge at the public
reference facilities of the Commission described above.
You should rely only on the information incorporated by reference or provided in
this prospectus or any prospectus supplement. We have not authorized anyone to
provide you with different information.
Neither Magnitude nor any selling shareholder is making an offer of the
securities covered by this prospectus in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
prospectus supplement or in any other document incorporated by reference in this
prospectus is accurate as of any date other than the date on the front of those
documents.
Upon request, we will provide without charge a copy of our Annual, Quarterly and
Current Reports we have filed electronically with the Commission as well as a
copy of any and all of the information that has been or may be incorporated by
reference in this prospectus. Requests for such copies should be directed to
Magnitude Information Systems, Inc., 401 State Route 24, Chester, New Jersey
07930 (telephone: 908-879-2722).
12
USE OF PROCEEDS
The selling shareholders will receive all of the net proceeds from the resale of
any of the Company's common shares offered in this prospectus. We will not
receive any of the proceeds from any sale of the shares by the selling
shareholders. We will receive up to $679,000 in proceeds from the cash exercise
of the warrants currently outstanding and included in this
prospectus and we intend to use any such cash proceeds received for general
corporate purposes, which may include repaying indebtedness, making additions to
our working capital, funding future acquisitions or for further developing our
products and hiring additional personnel. However, due to current market
conditions and the fact that the exercise prices for most of these warrants and
options are higher than the current market price for our common stock, it is
unlikely that we will receive any funds from the exercise of these instruments.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our 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 our common stock:
Low/Bid High/Ask
2002
First Quarter $ 0.29 $ 0.08
Second Quarter $ 0.29 $ 0.12
Third Quarter $ 0.23 $ 0.09
Fourth Quarter $ 0.17 $ 0.09
2003
First Quarter $ 0.15 $ 0.08
Second Quarter $ 0.13 $ 0.06
Third Quarter $ 0.13 $ 0.06
Fourth Quarter $ 0.15 $ 0.07
2004 First Quarter $ 0.20 $ 0.09
Second Quarter $ 0.20 $ 0.10
As of August 17, 2004, there were approximately 395 shareholders of record for
our common stock. The number of record holders does not include shareholders
whose securities are held in street name.
The Company has not declared or paid, nor has it any present intention to pay,
cash dividends on its Common stock. The Company is obliged to pay cash dividends
on its outstanding convertible preferred stock and, under certain circumstances,
on its outstanding cumulative preferred stock. See "DESCRIPTION OF CAPITAL
STOCK" - "The Series A Stock", "The Series B Stock", "The Series C Stock", "The
Series D Stock" and "The Series E Stock" , below.
13
SELLING SECURITYHOLDERS
All of the common stock offered is either already issued or is issuable upon the
exercise of Company warrants or stock options, or issuable by Magnitude to the
selling securityholders. Magnitude may from time to time supplement or amend
this prospectus, as required, to provide other information with respect to the
selling securityholders.
The following table sets forth certain information regarding ownership of
Magnitude's common stock by the selling securityholders as of August 17, 2004,
including their names, and the number of shares of common stock owned by them
and offered pursuant to this prospectus. The selling securityholders listed in
the table do not necessarily intend to sell any of their shares. Magnitude filed
the registration statement, which includes this prospectus, due to the
registration rights granted to the selling securityholders, not because they had
expressed an intent to immediately sell their shares.
Name of
Selling Beneficial Holdings Common Shares Transaction % of Class
Securityholder Before the Offering Offered Hereby Note No. after Offering
- ----------------------------------------------------------------------------------------------------------
Acosta, Elbert R. II 2,880,000 1,550,000 1 **
AKB Privatbank Zurich AG 2,555,500 2,000,000 1 **
Angelastri, Ivano 2,012,500 300,000 4 2.1%
Angelastri, Nicola 100,000 100,000 1 **
Angelastri, Anastasia 100,000 100,000 1 **
B+T Marketing GmbH 500,000 500,000 1 **
Bagnolo, Marcella 50,000 50,000 1 **
Bilenk, William 5,000 5,000 1 **
Blackburn, Theodore 100,000 100,000 1 **
Citrus Land & Development Corp. 1,166,777 386,666 1 **
Cohen, Alan R 45,000 45,000 5 **
DeWolf, Keith G 1,070,000 250,000 1 **
Easterling Family Properties LLC 100,000 100,000 1 **
Friedenberg, Douglas 416,666 416,666 1 **
Gilmour, William J 100,000 100,000 10 **
Gray, Steven L 3,538,604 904,000 1,2,4 3.4%
Grolimund, Georges 150,000 150,000 1 **
Guarneri, Antonio 150,000 150,000 1 **
Hofer, Patrick 25,000 25,000 1 **
Holian, John W. Jr 150,000 20,000 1 **
Hunter, Tracy S 833,334 833,334 1 **
INSA Stiftung 500,000 500,000 3 **
Jackson-Hewitt Investment Svc. Inc. 2,410,000 1,485,000 1,5,9 1.2%
Klaube, Joerg H 1,660,417 800,000 4 1.0%
Marot, Richard N 416,666 416,666 1 **
Merrill, Bryan G 610,000 50,000 1 **
Mette, Tim 91,000 50,000 1 **
Morton, James W.& Karen E 1,158,000 1,033,000 1,5 **
Muehlemann, Juerg 50,000 50,000 1 **
Mueller, Klaus 400,000 300,000 1 **
Newton, Tim & Mary 250,000 250,000 1 **
Oriente, David & Jennifer 200,000 200,000 1 **
Premium Strategy Partners AG 570,000 570,000 5 **
Rabish, Mark A 667,000 667,000 1 **
14
Real Resources Inc. 166,666 166,666 1 **
Reimann, Karen M 166,667 166,667 1 **
Reimann, Robert 166,667 166,667 1 **
Rieger, Roland 10,000 10,000 1 **
Rudnik, Steven D 7,924,595 1,300,000 4,8 7.9%
S & I Consulting 165,500 100,000 1 **
Schuerch, Ulrich 3,010,000 3,000,000 3,5 **
Scott, Matthew J 629,872 629,872 1 **
Shoemaker, John & Audrey 1,936,667 1,736,667 1 **
Siegfried, Ulrich 100,000 100,000 1 **
Stenz, Hermann 100,000 100,000 1 **
Studer, Marlies E 175,000 150,000 1 **
Studer, Peter 100,000 50,000 1 **
Szalbirak, Martin & Dana 10,000 10,000 1 **
T+T Vermoegensverwaltungs AG 1,000,000 500,000 1 **
Tannert, Michael H 250,000 250,000 1 **
The Research Works Inc. 800,000 800,000 6 **
Tomasek, Joseph J 1,062,500 300,000 4 **
V-Finance 673,333 673,333 7 **
Vitelli, Stefan 100,000 100,000 1 **
Wunderlich, Stanley 172,833 172,833 1 **
Zaroff, Murray 1,100,000 1,100,000 5 **
---------- ----------
44,881,764 26,040,037
** less than 1 percent
Description of selling securityholders and certain transactions:
1) Private Placements Pursuant to Section 4(2)
The Company is registering a total 14,152,704 shares on behalf of (a) 35 private
foreign and U.S. investors pursuant to private placement subscriptions entered
into between the Company and such investors, and (b) 5 individuals and their 4
assignees who converted an aggregate $132,170 of debt into 1,510,833 Company
shares. In the case of U.S. investors, subscriptions and investments were
received during the periods (i) August 16, 2002 to August 22, 2002, prior to the
termination of the Company's 2002 private placement on August 27, 2002, and (ii)
February 21, 2003 to December 19, 2003, the period the Company's 2003 private
placement commenced through December 19,2003. In the case of the Company's
foreign investors, subscriptions and investments were received during the period
November 8, 2002 through November 11, 2003, all of which shares were issued
outright to these investors. The above mentioned common shares include 180,000
shares that have been issued to one of the investors who also serves as a
director of the Company. The Company received an aggregate $1,137,112 from these
investment transactions. A copy of the subscription agreement utilized in these
transactions is attached as Exhibit 4.30.
Acosta, Elbert R. II 1,550,000
AKB Privatbank Zurich AG 2,000,000
Angelastri, Nicola 100,000
Angelastri, Anastasia 100,000
B+T Marketing GmbH 500,000
Bagnolo, Marcella 50,000
Bilenk, William 5,000
Blackburn, Theodore 100,000
Citrus Land & Development Corp. 386,666
DeWolf, Keith G 250,000
15
Easterling Family Properties LLC 100,000
Friedenberg, Douglas 416,666
Gray, Steven L 180,000
Grolimund, Georges 150,000
Guarneri, Antonio 150,000
Hofer, Patrick 25,000
Holian, John W. Jr 20,000
Hunter, Tracy S 833,334
Jackson-Hewitt Investment Svc. Inc. 310,000
Marot, Richard N 416,666
Merrill, Bryan G 50,000
Mette, Tim 50,000
Morton, James W.& Karen E 533,000
Muehlemann, Juerg 50,000
Mueller, Klaus 300,000
Newton, Tim & Mary 250,000
Oriente, David & Jennifer 200,000
Rabish, Mark A 667,000
Real Resources Inc. 166,666
Reimann, Karen M 166,667
Reimann, Robert 166,667
Rieger, Roland 10,000
S & I Consulting 100,000
Scott, Matthew J 629,872
Shoemaker, John & Audrey 1,736,667
Siegfried, Ulrich 100,000
Stenz, Hermann 100,000
Studer, Marlies E 150,000
Studer, Peter 50,000
Szalbirak, Martin & Dana 10,000
T+T Vermoegensverwaltungs AG 500,000
Tannert, Michael H 250,000
Vitelli, Stefan 100,000
Wunderlich, Stanley 172,833
The following persons have voting and investment control over the Company shares
held by the entities named above as selling stockholders: Hans-Rudi Strasser for
AKB Privatbank Zurich AG; Nadja Baertschi for B+T Marketing GmbH; James Morton
for Citrus Land & Development Corp who also, in his individual capacity, has
beneficial ownership of 1,158,000 shares with his spouse, giving him an
aggregate 2,324,777 Company shares over which he has investment and voting
control; Gary Easterling for Easterling Family Properties LLC;Daniel Prewitt for
Jackson-Hewitt Investment Svc. Inc.; James Morton for Real Resources Inc.;
Josiane Keller for S&I Consulting, and; Michael Tauss for T+T
Vermoegensverwaltungs AG.
(2) Shares Underlying Warrants
An outside director purchased, in a private transaction, stock purchase warrants
for 424,000 shares from an unrelated party, for nominal consideration. These
warrants are all exercisable at $1 per share and expire during 2005. The Company
agreed to include the shares underlying these warrants in this registration
statement.
Gray, Steven L 424,000
(3) Shares Underlying Warrants
16
The Company is registering 1,000,000 shares underlying stock purchase warrants,
issued to two foreign finders in recognition of their services in promoting the
Company to accredited private investors in Europe. Such warrants are exercisable
at $0.15 per share and expire in 2006.
INSA Stiftung 500,000
Schuerch, Ulrich 500,000
INSA Stiftung, a Swiss entity controlled by Hans-Rudi Strasser, who has voting
and investment control over our shares as well as those owned of record by AKB
Privatbank Zurich AG, giving him voting and investment control over an aggregate
3,055,500 Company shares, and Ulrich Schuerch served as the Company's European
placement agents in connection with our private placement to accredited European
investors, identified in Transactional Note (1) above, and received the shares
we are registering as payment for these services performed.
(4) Shares Issued Pursuant to Stock Awards
The Company is registering 2,000,000 shares issued to five officers and
directors of the Company, for services rendered during 2003.
Angelastri, Ivano 300,000
Gray, Steven L 300,000
Klaube, Joerg H 800,000
Rudnik, Steven D 300,000
Tomasek, Joseph J 300,000
(5) Shares Issued for Services
The Company is registering 3,890,000 shares issued outright and 1,500,000 shares
underlying non-statutory stock options, issued to six consultants pursuant to
consulting agreements involving business consulting and investor relations
services with unrelated parties. The stock options are exercisable at $0.07 per
share and expire in September 2006. Copies of the consulting agreements are
attached as Exhibits 10.12 through 10.17.
Cohen, Alan R 45,000
Jackson-Hewitt Investment Svces.Inc 675,000
Morton, James W 500,000
Premium Strategy Partners AG 570,000
Schuerch, Ulrich 2,500,000
Zaroff, Murray 1,100,000
Alan R. Cohen received 45,000 shares of Company stock for his agreement to
introduce software sales and licensing prospects to the Company. Jackson-Hewitt
Investment Services, Inc., received 675,000 shares for the its agreement to
utilize its network of clients to identify potential sales and licensing
prospects for the Company products; Daniel Prewitt has investment and voting
control over our shares issued to this entity. James W. Morton received a
retainer payment of 500,000 Company shares pursuant to the terms of his
consulting agreement for his marketing assistance during the one-year term and
for his investor relations services for strategic shareholders located in the
Southeast region of the United States (see Note 1 above). Premium Strategy
Partners AG, a Swiss entity whose principals, Messrs. Otto Koller, Dieter
Luescher and Ulrich Schuerch, have equal voting and investment control over our
shares, received shares as payment for promotional activities undertaken in
Europe to publicize Company products in the media and translate our literature
into the German language, to communicate with Company shareholders in Europe and
to identify institutional/accredited investors in Europe over the course of the
one-year term of the contract. We are registering an aggregate 2,500,000 shares
for Ulrich Scheurch. Mr. Scheurch has been the Company's principal
representative in
17
the European markets for several years, and the Company and Mr. Scheurch entered
into a formal, two-year contract for his dedicated services: continue developing
potential licensing partners, arrange for research reports from European
software/ergonomic industry analysts and maintain surveillance over the European
ergonomic markets as they develop, targeting sector companies for presentations
and strategic distribution alliance/partnerships. The Company hired Mr. Murray
Zaroff to serve as one of the Company's independent sales/marketing
representatives for our software products.
(6) Shares Issued for Services
The Company is registering 800,000 shares issued to a financial consultant
pursuant to a consulting agreement, a copy of which is attached hereto as
Exhibit 10.18.
The Research Works Inc. 800,000
The Company paid 800,000 shares to The Research Works, Inc. of Sea Girt, New
Jersey, to prepare a research report on the Company, its products and the
marketplace and then publish it on its website and distribute the report to
individual and institutional investors. Bill Ritger has voting and investment
control over our shares issued to The Research Works, Inc.
(7) Shares Issued for Services
The Company is registering 673,333 shares issued to a registered broker /dealer
as part of his agreed-upon remuneration for finder's services, pursuant to a
consulting agreement, a copy of which is attached hereto as Exhibit 10.11.
Specifically, we agreed to pay vFinance for serving as the Company's private
placement agent one share of our common stock for each 10 shares purchased by
private placement investors.
vFinance Investments, Inc. 673,333
Richard Galterio has voting and investment control over our shares issued to
vFinance Investments, Inc.
(8) Shares Issued in Lieu of Cash Compensation to Officer
The Company is registering 1,000,000 shares on behalf of the current President
and Chief Executive Officer of the Company, such shares having been issued in
lieu of cash compensation for most of the year 2003.
Rudnik, Steven D 1,000,000
(9) Shares Underlying Warrant
The Company is registering 500,000 shares issued pursuant to the exercise of a
stock purchase warrant. These shares have previously been registered with a
registration statement on Form SB-2 originally declared effective in August 2000
and subsequently amended, on behalf Stuart Zimmerman Revocable Trust, who
exercised the warrant and assigned the shares to the named Selling
Securityholder.
Jackson-Hewitt Investment Svces. Inc. 500,000
As stated in Transactional Note (5) above, Daniel Prewitt has voting and
investment control over our shares issued to Jackson-Hewitt Investment Svces.
Inc.
(10) Shares Issued to a Former Employee as Part of his Remuneration.
18
The Company is registering 100,000 shares issued pursuant to an agreement with
an employee, as part of his remuneration package.
Gilmour, William J. 100,000
19
SHARES ELIGIBLE FOR FUTURE SALE
This prospectus covers 26,040,037 common shares. As of August 17, 2004, there
are 110,381,323 common shares issued and outstanding of which 34,000,000 are
freely tradable.
Upon the effectiveness of this registration statement, (a) an additional
23,116,037 common shares already issued and (b) 2,924,000 common shares
underlying stock options and warrants which, if exercised, will result in those
shares also being freely tradable.
Apart from this prospectus and registration statement, we have filed two
additional registration statements on Form SB-2, registering a total of
91,978,699 shares of our common stock on behalf of previous and existing
investors. Upon the effectiveness of these two additional registration
statements, (a) a further 48,157,718 common shares already issued and (b)
42,820,981 common shares underlying stock options, warrants, convertible
preferred stock and convertible notes which if exercised will also become freely
tradable.
In addition to our three registration statements referenced above, the 4,107,568
remaining shares of common stock presently outstanding that are restricted
and/or affiliate securities and not included in our three prospectuses as well
as 118,298 common shares underlying the issued and outstanding senior
convertible preferred stock, 350,000 common shares underlying outstanding
warrants, and 4,594,442 common shares underlying outstanding stock options,
which, if converted or exercised, as the case may be, may not presently, but may
in the future be sold into any public market that may exist for the common stock
pursuant to Rule 144 promulgated pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). Sales of substantial amounts of this common
stock in the public market could adversely affect the market price of the common
stock.
In general, under Rule 144 as currently in effect, a person (or group of persons
whose shares are aggregated), including affiliates of the Company, can sell
within any nine month period, an amount of restricted securities that does not
exceed the greater of 1% of the total number of outstanding shares of the same
class, or the reported average weekly trading volume during the four calendar
weeks preceding the sale; provided at least one year has elapsed since the
restricted securities being sold were acquired from the Company or any affiliate
of the Company, and provided further that certain other conditions are also
satisfied. If at least two years have elapsed since the restricted securities
were acquired from the Company or an affiliate of the Company, a person who has
not been an affiliate of the Company for at least three months can sell
restricted shares under Rule 144 without regard to any limitations on the
amount. Future sales by current shareholders could depress the market price of
the Common Stock in the public market.
20
PLAN OF DISTRIBUTION
This Prospectus and the registration statement in which it is included relates
to the offer and sale of up to an aggregate 26,040,037 common shares by the
Selling Shareholders. As used in this prospectus, "Selling Shareholders"
includes donees, pledgees, transferees or other successors-in-interest selling
shares received after the date of this prospectus from a Selling Shareholder as
a gift, pledge, partnership distribution or other non-sale related transfer. The
Selling Shareholders may sell some or all of their shares at any time and in any
of the following ways. They may sell their shares:
o To underwriters who buy the shares for their own account and resell them
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale.
Any public offering price and any discount or concessions allowed or
reallowed or paid to dealers may be changed from time to time;
o Through brokers, acting as principal or agent, in transactions, which may
involve block transactions, on the Electronic Bulletin Board,
over-the-counter market or on other exchanges on which the shares are then
listed, in special offerings, exchange distributions pursuant to the rules
of the applicable exchanges or in the over-the-counter market, or
otherwise, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, at negotiated prices or at fixed
prices;
o Directly or through brokers or agents in private sales at
negotiated prices; or
o By any other legally available means.
The Selling Shareholder Finance, is a registered broker-dealer in the U.S. and
is deemed an "underwriter" of the Company Common Shares offered and sold by it
in this Prospectus. Selling Shareholders may pay part of the proceeds from the
sale of shares in commissions and other compensation to underwriters, dealers,
brokers or agents who participate in the sales.
Certain states may require shares to be sold only through registered or licensed
brokers or dealers. In addition, certain states may require the shares to be
registered or qualified for sale unless an exemption from registration or
qualification is available and complied with.
Magnitude has agreed to contribute to payments the Selling Shareholders may be
required to make under the Securities Act.
LEGAL PROCEEDINGS
The Company is not a party in any legal proceedings.
21
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
The names and ages of all directors and executive officers of the Company are as
follows:
Name Positions Term Served (Expires)
- ---- --------- ------------
Steven D. Rudnik Director (Chairman Feb. 11, 2000 (2004)
of the Board)
President, Chief Executive Jan. 8, 1999 (March 2, 2004)
Officer
Mark Chroscielewski Sr. Vice President Jan.2, 2003
Business Development
Joerg H. Klaube Sr. Vice President, Secretary, Jul. 31, 1997 (April 15, 2004)
Chief Financial Officer
Steven W. Jagels Sr. Vice President Feb. 18, 1998
Steven L. Gray Director May 18, 2000 (2004)
Ivano Angelastri Director May 18, 2000 (2004)
Joseph J. Tomasek Director Feb. 11, 1999 (2004)
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 44 - Chairman and Chief Executive Officer,
President. Mr. Rudnik personally developed many of the copyrighted
software products offered by Magnitude Information Systems. Mr. Rudnik
co-founded Rolina Corporation in 1996. Prior to 1996, Mr. Rudnik had
executive level positions in software product development and software
company operations. In 1983, Mr. Rudnik joined Randall-Helms
International, Inc. Over the next 13 years, he conceived and developed
four independent families of stock market modeling software products aimed
at the worldwide "large cap" institutional investor market. These product
families generated over US$ 25 million in sales from more than 400 clients
in 23 countries. Mr. Rudnik was Executive Vice President and Partner at
Randall-Helms when it was sold in 1995.
Mark Chroscielewski, Age 46 - Senior Vice President Business Development.
Since joining the Company in January 2003 Mark Chroscielewski manages our
strategic alliances and develops new marketing strategies to present our
products to both the productivity and ergonomic segments of the corporate
marketplace. Prior to joining our Company, Mr. Chroscielewski was the
principal of a consulting firm, specializing in the development of
proprietary data mining software, modeled for corporate customers seeking
an enterprise-wide application for their customer relations management
programs. This software was utilized by Columbia/HCA, the largest
healthcare enterprise in the world, to support its healthcare claims
protocol. Mark's experience includes the co-founding, in 1988,
22
of a multi-national software marketing enterprise, CrossZ International.
As Chairman and Chief Executive Officer, Mr. Chroscielewski grew this
company to 80 plus employees, established international operations, sold
product to many fortune 100 companies including American Express, Philip
Morris and MCI while raising approximately $37 million in equity capital
to fund its business and growth. After participating in its initial public
offering in 1997, CrossZ Software was sold to an Italian consortium,
Intelitec in 2002, and is now now called CrossZ Solutions SA
Joerg H. Klaube , Age 62 - Chief Financial Officer. Joined Magnitude, Inc. in
December 1994. From 1993 to 1994 he was Vice President Administration for Comar
Technologies Inc., a computer retail firm, and from 1983 to 1993 Chief Financial
Officer for Unitronix Corporation, a publicly traded software design and
computer marketing firm. Prior to that, Mr.Klaube was employed for 16 years with
Siemens Corp., the US subsidiary of Siemens AG, where he served most recently as
Director of Business Administration for its Telecommunications Division. He
graduated from the Banking School in Berlin, Germany, and holds an MBA degree
from Rutgers University.
Steven W. Jagels, Age 44 - Senior Vice President Information Systems. Mr. Jagels
joined Magnitude in February 1998. Mr. Jagels has 20 years of software
development experience in such diverse disciplines as clinical laboratory
analysis, stock market modeling, artificial intelligence, and retail business
applications. Mr. Jagels also has experience in the software industry, including
software management, project development, systems analysis, and training. Prior
to his software career, Mr. Jagels had five years experience in biomedical
engineering and management.
Steven L. Gray, age 55 years, Mr. Gray was elected a director on May 18, 2000.
For the past 3-1/2 years, Mr. Gray has served as the President and is a
shareholder of a private Florida corporation engaged in the retail distribution
of nutritional products. This corporation has a customer base in nine countries.
Prior to that time, Mr. Gray ran his own real estate development company,
specializing in the design and construction of multi-family housing.
Ivano Angelastri, Age 41 - Director. Mr. Angelastri was elected to serve on the
Board on May 18, 2000. He is a resident of Zurich, Switzerland. Mr. Angelastri
has been active in portfolio management services for many years. Since January
24, 2001 he is the Managing Director of T&T Vermoegensverwaltungs AG, Zurich
whose main business is portfolio management. Prior to his current position, Mr.
Angelastri served as Managing Director of Megan Services where he also performed
financial advisory and portfolio management services.
Joseph J. Tomasek , Age 57 - 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.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive capacities
for the fiscal years ended December 31, 2002, December 31, 2001, and December
31, 2000, for the chief executive officer and for each executive officer whose
aggregate cash remuneration exceeded $100,000, for all executive officers as a
group, and for certain other most highly compensated employees:
23
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
Other Restricted Securities All
- --------------------------- Annual Stock Underlying Other
Name and Year Salary ($) Bonus ($) Compensation($) Awards ($) Options ($) Compens.($)
Principal Position ---- ---------- --------- --------------- ---------- ----------- -----------
------------------ (1) (2) (3) (4) (5)
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
Steven D. Rudnik 2003 133,333(6) - 15,262 27,000 - 3,250
Chief Executive Officer, 2002 133,333(7) - 12,560 42,000 - 3,250
President 2001 130,171 - 10,800 - - 3,250
-
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
Joerg H. Klaube 2003 125,000 - 11,404 67,000 - 1,710
Sr. Vice President, 2002 125,000 - 9,087 42,000 - 1,710
CFO 2001 122,375 - 9,000 - - 1,710
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
Mark Chroscielewski 2003 125,000 - 6,000 - - 8,400
Sr. Vice President 2002 - - - - - -
Business Development 2001 - - - - - -
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
Steven W. Jagels 2003 108,333 - 11,083 - - 1,940
Sr. Vice President 2002 108,333 - 9,000 - - -
Information Systems 2001 100,000 - 9,000 - - -
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
All executive officers
As a group ( 4 persons) 2003 491,666 - 43,749 94,000 15,300
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
- ----------
(1) The value of other non-cash compensation, except for the items listed
under (2), (3), (4) and (5), that was extended to or paid for individuals
named above did not exceed 10% of the aggregate cash compensation paid to
such individual, or to all executive officers as a group.
(2) Consists of automobile expenses allowances and paid vacation pay-out.
(3) During 2003, the Board of Directors approved stock awards of 300,000
restricted shares to Rudnik and of 800,000 restricted shares to Klaube.
During 2002, the Board of Directors approved stock awards of 300,000
restricted shares each to Rudnik and Klaube. These shares are listed in
the table above at the market price for unrestricted stock quoted at the
time of the award. The number and value of the aggregate restricted stock
holdings at the end of fiscal year 2003 (using market prices of
unrestricted stock at the end of the fiscal year) are as follows:
S.Rudnik: 2,777,778 shares - $388,889; J.Klaube: 1,100,000 shares -
$154,000. The valuation of stock awards and end-of-year holdings is in
conformity with guidelines set forth for SEC Regulation S-B Item 402
(b)(2)(iv). All such shares are fully vested. The Company does not
currently foresee to pay dividends on any of these shares.
(4) .See table for "Stock Options" below.
(5) Consists of premiums for personal life insurance.
(6) During 2003, the Board of Directors approved the issuance of 1,000,000
restricted shares in lieu of $100,000 cash salary; the stated salary
figure includes such shares, valued at the nominal $100,000 which they
replaced.
(7) During 2002, the Board of Directors approved the issuance of 1,100,000
restricted shares in lieu of $110,000 cash salary; the stated salary
figure includes such shares, valued at the nominal $110,000 which they
replaced.
Stock Options :
The following table sets forth stock options granted during 2003 pursuant to the
Company's 1997 Stock Option Plan and 2000 Stock Incentive Plan, to executive
officers, certain other employees with highest remuneration, directors, and
beneficial owners of more than 10 percent of any class of equity securities of
the Company:
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted and Directors in FY Price ($/Sh.) Date .
There were no stock options granted to employees and directors during 2003.
24
The following table sets forth aggregated stock option and warrant exercises
during 2003 by executive officers, certain other employees with highest
remuneration, directors, and beneficial owners of more than 10 percent of any
class of equity securities of the Company:
- ------------------------------------------------------------------------------
Shares #of Shares Underlying Value of Unexercised
Acquired Value Unexercised In-the-Money Options
Name on Exercise (#) Realized ($)Options/Warrants & Warrants at Y/E ($)
There were no stock options or warrants exercised by employee-executives or
directors during 2003.
1997 Stock Option Plan:
The Company's 1997 Stock Option Plan, as filed with Information Statement
pursuant to Section 14(c) with the Commission on July 1, 1997, and with
Registration Statement on Form S-8 with the Commission on September 8, 1997, is
hereby incorporated by reference.
2000 Stock Incentive Plan:
The Company's 2000 Stock Incentive Plan, as filed with the Commission as an
exhibit to the quarterly report on Form 10-QSB for the period ended March 31,
2000, is hereby incorporated by reference.
Compensation of Directors:
The Company currently pays no outside directors' fees. Outside directors are
awarded stock options for 40,000 shares each upon commencement of their office.
In addition, the three incumbent outside directors have been granted, in 2003,
restricted stock awards for services rendered, as follows: I. Angelastri 300,000
common shares; S. Gray 688,500 common shares and 4,166.67 preferred shares
convertible into 416,667 common shares, J. Tomasek 300,000 common shares and
5,805 preferred shares convertible into 580,500 common shares. The above
preferred shares were accompanied by warrants for the purchase of 208,333 and
290,250 common shares, respectively, such warrants being exercisable during
three years at the price of $0.15 per share.
During 2003, one outside director of the Company who also serves as the
Company's general and securities counsel, was paid an aggregate $132,000 for
legal services. One other outside director was paid $14,900 for services
performed.
One outside director of the Company who also serves as the Company's general and
securities counsel, was paid an aggregate $132,000 for 2003 and $108,600 for
2002 for legal services rendered to the Company. One other outside director was
paid $14,900 for services performed.
Employment Agreements
In April 2002, the Company entered into an employment agreement with Steven D.
Rudnik, its current President and Chief Executive Officer, to serve as President
and Chief Executive Officer of the Company for a period of five years, replacing
an earlier employment agreement dated February 1998, as amended. Base salary
under the agreement is $133,333 per year with predetermined increases effective
upon the Company achieving certain revenue goals. The agreement also calls for
the grant of certain stock awards and incentive and non-statutory stock options
and eligibility for the Company's benefit programs. The Company will also
provide reimbursement of ordinary and necessary business expenses and a monthly
car allowance. The agreement provides for severance compensation to be
determined pursuant to a formula established therein, payable to the officer if
the employment agreement is terminated or is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months after
termination of employment.
25
In April 2002, the Company entered into an employment agreement with Joerg H.
Klaube, its current Senior Vice President and Chief Financial Officer, to serve
in that capacity for a period of five years, replacing an earlier employment
agreement dated April 1996, as amended. Base salary under the agreement is
$125,000 per year with predetermined increases effective upon the Company
achieving certain revenue goals. The agreement also calls for the grant of
certain stock awards and incentive and non-statutory stock options and
eligibility for the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses and a monthly car
allowance. The agreement provides for severance compensation to be determined
pursuant to a formula established therein, payable to the officer if the
employment agreement is terminated or is not renewed by the Company. A non-
competition/non-solicitation restriction applies for 24 months after termination
of employment.
In April 2002, the Company entered into an employment agreement with Steven W.
Jagels, its current Senior Vice President Information Technology, to serve in
that capacity for a period of five years. Base salary under the agreement is
$108,333 per year with predetermined increases effective upon the Company
achieving certain revenue goals. The agreement also calls for the grant of
certain stock awards and incentive and non-statutory stock options and
eligibility for the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses and a monthly car
allowance. The agreement provides for severance compensation to be determined
pursuant to a formula established therein, payable to the officer if the
employment agreement is terminated or is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months after
termination of employment.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of August 17, 2004, the record and
beneficial ownership of common stock of the Company by each executive officer
and director, all executive officers and directors as a group, and each person
known to the Company to own beneficially, or of record, five percent or more of
the outstanding shares of the Company:
Title Name and Address of Amount and Nature of Percent
of Class )* Beneficial Owner Beneficial Ownership (1) of Class
- ----------- ---------------- ------------------------ --------
Common Ivano Angelastri 2,362,500 (2) 2.13 %
Mark Chroscielewski - -
Steven L. Gray 4,296,704 (3) 3.86 %
Steven W. Jagels 622,083 (4) 0.56 %
Joerg H. Klaube 1,660,417 (5) 1.50 %
Steven D. Rudnik 9,425,695 (6) 8.17 %
Joseph J. Tomasek 1,933,250 (7) 1.74 %
Martin, Christoph 9,400,000 (8) 8.18 %
Address of all persons above: c/o the Company.
All Directors and Executive Officers 20,300,649 17.10 %
as a Group (6 persons)
* The Company also has issued and outstanding as of August 17, 2004, 286,857
shares of its Senior Convertible Preferred Stock, with concentrations in excess
of 10% for one or more of the holders of such stock, however, none of such
shares bear any voting rights.
26
- ----------
(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 August 17, 2004. For purposes of
computing the percentage of outstanding shares of Common stock held by
each person or group of persons named above, any security which such
person or persons has or have the right to acquire within such date is
deemed to be outstanding but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnote to this table and pursuant to applicable
community property laws, the Company believes based on information
supplied by such persons, that the persons named in this table have sole
voting and investment power with respect to all shares of Common stock
which they beneficially own.
(2) Includes options to acquire 512,500 shares and warrants for 125,000
shares.
(3) Includes options to acquire 400,275 shares and warrants for 632,333
shares.
(4) Represents options to acquire 602,083 shares.
(5) Includes options to acquire 560,417 shares.
(6) Includes options to acquire 4,147,917 shares and warrants for 833,333.
(7) Includes options to acquire 262,500 shares and warrants for 290,250.
(8) Includes warrants for 4,550,000 shares.
27
DESCRIPTION OF CAPITAL STOCK
Magnitude is currently authorized by its Certificate of Incorporation to issue
an aggregate 203,000,000 shares of capital stock, including 200,000,000 shares
of common stock, $.0001 par value per share of which 110,381,323 were issued and
outstanding as of August 17, 2004 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 August 17, 2004, 300,000 shares have been designated as Series A Senior
Convertible Preferred Stock (the "Series A Stock"), $0.001 par value per share
of which 29,300 were issued and outstanding as of August 17, 2004; 350,000
shares have been designated as Series B Senior Convertible Preferred Stock (the
"Series B Stock"), par value $0.001 per share, of which no shares were
outstanding as of August 17, 2004, 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 August 17, 2004; 500,000
shares have been designated as Series D Senior Convertible Preferred Stock (the
"Series D Stock"), $.001par value per share of which 63,890 were issued and
outstanding as of August 17, 2004 and; 500,000 shares have been designated as
Series E Senior Convertible Preferred Stock (the "Series E Stock"), $.001 par
value per share of which 93,667 were issued and outstanding as of August 17,
2004.
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 authorized 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 August
17, 2004 23, 2004 (the "Series A Stock"); (2) up to 350,000 shares of Preferred
Stock designated as Series B Senior Convertible Preferred Stock (the "Series B
Stock') of which no shares were outstanding as of August 17, 2004, (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 August 17, 2004; (4) up to 500,000 shares of Preferred Stock designated as
Series D Senior Convertible Preferred Stock (the "Series D Stock") of which
63,890 shares were outstanding as of August 17, 2004, and; (5) up to 500,000
shares of Preferred Stock designated as Series E Senior Convertible Preferred
Stock (the "Series E Stock") of which 93,667 shares were outstanding as of
August 17, 2004.
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
28
liquidation, dissolution or winding up of the affairs of Magnitude and after
payment of its debts and liabilities, the holders are entitled to be paid out of
the remaining assets a liquidation price of $5.00 per share of Series A Stock,
on an equal basis with the holders of any Series B Stock and Series C Stock.
Magnitude has the right to redeem or buy back part or all of the Series A Stock
three years after their issuance by paying to the holders the liquidation price
($5.00 per share), any accumulated but unpaid dividends and a payment (a "call
premium") equal to 15% of the liquidation price. Holders of the Series A Stock
can convert their shares into Magnitude Common stock at a conversion rate equal
to 150% of the "market price" of Magnitude's Common Stock at the time of
conversion. "Market price" is based upon the average bid and asked prices for
Magnitude's Common Stock as quoted by the then stock exchange during the 20
consecutive trading day period immediately preceding the conversion.
The Series B Stock
The Series B Stock has no voting rights and their holders do not have a right to
cast a vote on shareholder matters. The holders of Series B Stock are entitled
to receive semi-annual cumulative dividends before any dividends are declared
and paid upon the Common Stock, but on a par with the holders of any Series A
Stock and Series C Stock, calculated against their liquidation price of $9.00
per share at the rate of 7% annually. In the event of a liquidation, dissolution
or winding up of the affairs of Magnitude and after payment of its debts and
liabilities, the holders are entitled to be paid out of the remaining assets a
liquidation price of $9.00 per share of Series B Stock, on an equal basis with
the holders of any Series A Stock and Series C Stock. Magnitude has the right to
redeem or buy back part or all of the Series B Stock three years after their
issuance by paying to the holders the liquidation price ($9.00 per share), any
accumulated but 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.
The Series D Stock
The Series D Stock has no voting rights and their holders do not have a right to
cast a vote on shareholder matters. The holders of Series D Stock are entitled
to receive semi-annually cumulative dividends before any dividends are declared
and paid upon the Common Stock, but on par with the holders of any Series A
Stock, Series B Stock and Series C Stock calculated against their respective
stated value per share at the rate of 7% semi-annually. In the event of a
liquidation, dissolution or winding up of the affairs of Magnitude and after
payment of its debts and liabilities, the holders are entitled to be paid out of
the remaining assets a liquidation price equal to their stated value for the
Series D Stock, on an equal basis with the holders of any Series A Stock, Series
B Stock and Series C Stock. Magnitude has the right to redeem or buy back
29
part or all of the Series D Stock three years after their issuance by paying to
the holders the stated value thereof, any accumulated but unpaid dividends and a
payment (a "call premium") equal to 10% of the stated value. Holders of the
Series D Stock can convert their shares into Magnitude Common stock on the basis
of 10 shares of Common stock for one share of Series D Stock at any time.
Series E Stock
The Series E Stock has no voting rights and their holders do not have a right to
cast a vote on shareholder matters. The holders of Series E Stock are entitled
to receive cumulative dividends before any dividends are declared and paid upon
the Common Stock and any other Magnitude Preferred Stock, calculated against its
stated value per share at the rate of 6% annually. In the event of a
liquidation, dissolution or winding up of the affairs of Magnitude and after
payment of its debts and liabilities, the holders are entitled to be paid out of
the remaining assets a liquidation price equal to their stated value for the
Series E Stock, on an equal basis with the holders of any Series A Stock, Series
B Stock, Series C Stock and Series D Stock. Each outstanding share of Series E
Stock shall automatically convert into shares of Magnitude Common Stock on the
basis of one hundred (100) shares of Common Stock for one share of Series E
Senior Preferred six months after the date of their issuance.
Cumulative Preferred Stock
The Company has designated 2,500 shares as "Cumulative Preferred Stock", of
which as of December 31, 2003, one share is issued and outstanding. The
Cumulative Preferred Stock is non-voting. Each share shall be entitled to
receive out of the surplus or net profits of the Company, cumulative dividends
thereon at the rate of $9,000 per year, payable quarterly, semi-annually, or
annually, as and when declared by the Board of Directors. The Cumulative
Preferred Stock shall, with respect to dividend rights, rights on liquidation,
winding up and dissolution and rights upon redemption, rank prior to all classes
and series of Common stock.
BUSINESS
Background
On June 24, 1997, the Company entered into an acquisition agreement whereby it
acquired substantially all of the outstanding stock of Proformix, Inc., a
Delaware corporation and manufacturer of ergonomic keyboarding systems.
Proformix, Inc. in November 1998 changed its name to Magnitude, Inc. and is
hereafter referred to as Magnitude, Inc. The business combination took the form
of a reverse acquisition. The Company and Magnitude, Inc. remain as two separate
legal entities whereby Magnitude, Inc. operates as a subsidiary of Magnitude
Information Systems, Inc.. The operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of Merger
with Rolina Corporation, a privately held New Jersey software developing firm,
and on April 30, 1998, into an Asset Purchase Agreement with Vanity Software
Publishing Co., a Canadian developer of specialized software, whereby the
Company, in return for payments in form of cash and equity, acquired the rights
to certain software products and related assets, with such software products
subsequently forming the basis for the further development during the year of
the Company's proprietary ErgoManagerTM software product.
As of August 17, 2004, there were outstanding 110,381,323 common shares, 1
Cumulative Preferred Share, 29,300 shares of Series A Stock, no shares of Series
B Stock, 100,000 shares of Series C Stock, 63,890 shares of Series D Stock and
93,667 shares of Series E Stock.
30
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 (RSI) is a classification of diseases caused by the
excessive use of joints. It is a sub-classification of Cumulative Trauma
Disorders (CTDs). One common form of RSI is Carpal Tunnel Syndrome (CTS) which
can be caused by excessive typing, among other activities, and can be aggravated
by deficient - in the ergonomic sense - equipment and inappropriate work habits.
The carpal tunnel is a channel in the wrist where tendons and the median nerve
connect the arm to the hand. Through excessive use, the tendons become swollen
and pinch the nerve. RSI accounts for a large portion of work-related illnesses,
and the incidence of RSI is expected to grow as the number of people operating
keyboards increases. The impact of RSI is measured not only in the pain and
suffering of its victims, but also in time lost from work and medical costs.
The Company's proprietary software products are designed to help businesses deal
with potentially preventable repetitive stress injuries, by real-time monitoring
of keyboarding activities, pro-active dialog with at-risk employees, and
strategic profiling and management of computer use throughout an organization.
During 1996, the issues of repetitive stress injuries and the potential of
liability to employers from the effects of carpal tunnel syndrome and other
RSI's on employees were forcibly brought to the forefront of corporate
consciousness through widely publicized suits involving a major computer maker.
31
The US Bureau of Labor Statistics reported that already in 1995, there were
approximately 70,000 cases of carpal tunnel syndrome and associated tendonitis,
and that 25% of all injuries that result in lost work time are due to repetitive
stress problems. They currently cost employers an estimated $20 billion a year
in workers' compensation claims. The federal government estimates an additional
$80 billion is lost in related costs such as absenteeism and reduced
productivity. Increased awareness of the health risks and associated costs led
the State of California to pass OSHA Title 8 which directs qualifying employers
to establish and implement a program designed to minimize RSI's. Such program
shall include work-site evaluation, control of exposures which have caused
RSI's, and training of employees. The Company's proprietary software products
deliver a comprehensive compliance tool. In a similar pursuit, the Clinton
Administration, in January 2000, proposed that on a federal level, preventive
guidelines be established, and the Occupational Safety and Health Administration
plans to issue pertinent regulations this year. The RSI issues in the United
States are mirrored in the rest of the developed world. The Company believes
that the growing recognition of these trends will give rise to a rapidly
expanding market for the Company's products.
The Industry
The Company operates in only one business segment: the development, marketing,
and licensing of risk aversion and productivity enhancement software products
for the computerized workplace environment. More specifically, the Company
licenses highly sophisticated and proprietary software that provides computer
based training, work pacing and monitoring tools, as well as a computer
workstation assessment tool.
Potential customers for the Company's products are businesses of all sizes, as
well as organizations and government departments and agencies that employ many
staff in computer-related functions. The software industry in general is
comprised of a remarkable variety of providers, ranging from small boutique-type
designers to large international corporations. The industry is characterized by
great dynamics, patterns of rapid growth and well-known success stories, but
also by a high degree of volatility and risk. As such, the Company with its
recent transition from the more stable environment of a supplier of ergonomic
(hardware) accessories, to a software house addressing a specialized market, has
entered new territory. Nevertheless, its chances for success, in management's
opinion, are greatly enhanced by the timeliness of the introduction of its
product into an increasingly receptive market, as described above.
The Company operates primarily in the United States of America, however, has
introduced a Portuguese language version of its software products for the
Brazilian market, and is preparing other language versions. The Company has not
yet derived any material revenues from the licensing or sale of its software
products, either domestically or in foreign markets.
Products, Patents, Trademarks
The Company's current primary product is a suite of seven proprietary software
modules marketed under the name ErgoManager(TM) which are designed to help
individual computer users and businesses deal with potentially preventable
repetitive stress injury (RSI). The seven software modules can be applied
individually or together in a comprehensive ergonomic and early intervention
program that seeks to modify a user's behavior by monitoring computer usage
patterns over time and warning the user when to break a dangerous trend in
repetitive usage of an input device, such as a keyboard or mouse. The product
was developed to train people working on computers, monitor computer-use related
activities and evaluate a user's risk exposure and propensity towards injury or
loss of effectiveness in connection with his/her day-to-day work. Moreover, the
package enables a company to not only address the issue of health risks
involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
32
The system is highly customizable for management, staff and employees. All
components operate on any PC or workstation running the Microsoft Windows
operating system. The ErgoManager(TM) suite employs the International RULA
(Rapid Upper Limb Assessment) standard for compliance with California OSHA
Title.
The seven modules are described as follows:
ErgoSure : A postural risk-assessment tool that records how an employee is
working; it determines injury potential and suggests improvements. It also can
be used to evaluate workstation alternatives prior to purchase.
ErgoSentry(TM) : Employing patent-pending algorithms that measure rest against
work in real time, the non intrusive program informs users when to break from
high-risk trends (thresholds definable by the user or corporate safety officer)
when keyboarding or using a mouse. ErgoSentry also includes an "ErgoPak" video
or slides that depict correct workstation setup, posture and repetitive
stress-reducing exercises. Surveyor(TM) : An electronic surveyor used by
management to gather macro-information about employee populations and to gain a
clear understanding of equipment usage, discomfort and comfort patterns,
workstation configurations and employee habits. The ErgoSentry trademark has
been registered with the United States Patent and Trademark Office on September
12, 2000 providing legal protection for a ten year period through September 12,
2010.
UserNotes(TM) : An easy, effective means for employees to report workplace
discomfort so staff can address certain issues earlier, at lower cost and with
greater likelihood of success. UserNotes encourages a proactive approach.
Guardian : Captures the frequency of mouse clicks and activation of individual
keys, over time. It also can be used in a review process to assess attributes
such as ease-of-use among competing applications. Guardian also is a good
training tool. By measuring before-and-after results, Guardian can be used to
determine the type of training program needed, measure each program's
effectiveness and highlight needed improvements.
ErgoQuiz: An electronic testing system and awareness-building tool that measures
employees' understanding of ergonomic principles.
ErgoManager(TM) Analyzer: A comprehensive report writer and analysis tool for
manipulating, interpreting and evaluating the data collected in the ErgoSentry
module - on the workstation-, department-, and company level.
In addition to the trademarks shown above which are owned by the Company,
Magnitude has applied for other product designators to be afforded trademark
protection, and has filed US Patent Application for certain design principles
underlying several of its proprietary software products, including a patent
application for its newest product, a new class of usage tracking and data
collection software that is directed towards e-commerce and a wide range of
other Internet related applications. There can be no assurance, however, that
such patents will be granted or, if granted, that a third party will not design
products which perform the same or similar functions as the Company's products,
using technology other than that covered by the Company's patents.
Patents and New Products
ErgoSentry - Patent Allowed:
A patent was issued to the Company on May 16, 2000 by the United States Patent
and Trademark Office. The patent covers various innovations including a proven
approach that helps computer users manage their activity to improve productivity
and reduce the risk of repetitive motion injuries. Entitled
33
"Computer Activity Monitoring Station", this patent provides protection under
United States law through January 7, 2017.
ErgoPal Introduced, Patent Pending:
New patent-pending ErgoPal software -- a work pacing tool that helps users
mitigate health risks and improve their productivity by gently alerting them to
increases in stress and fatigue which are occurring before they realize it.
Business Strategy
The most important prospective customers for the Company's products are medium
and large companies, organizations, and governmental departments and agencies
that have a relatively large staff working in computer-related functions. These
entities not only are more cognizant of the health risks and negative effect on
productivity associated with many of the traditional tools of the computerized
workplace and therefore tend to be more receptive to new remedial solutions and
alternatives based on the science of Ergonomics, but also have a significant
exposure in terms of legal liabilities if they fail to act addressing these
potential risks. On an on-going basis, the increasing costs of worker's
compensation insurance creates a growing incentive to deal with the underlying
causes.
With its new proprietary ergonomic software the Company offers a comprehensive
and effective tool for corporate clients to address the three major issues
involved: (a) employee wellness, (b) cost containment and productivity
enhancement, and (c) potential legal liabilities. While certain portions of the
ErgoManager(TM) software suite have been previously marketed as individual
modules, the release to the market, in November 1998, of an overall integrated
solution in form of the ErgoManager(TM) system constituted a novel approach.
Since that time, the product has been installed by a growing number of corporate
and institutional clients. For example, during fiscal year 2000 we acquired 43
new customers and in 2001, 36 new customers. Typically, in view of the new-ness
of product and market, such client initially purchases a license for a "pilot
version" of the software, functionally complete but limited to a smaller number
of users. After undergoing a process of familiarization and evaluation the
client is expected to upgrade to the intended ultimate number of users which, by
definition, should encompass all personnel exposed to the above described risks.
Many tests and evaluations by third parties have confirmed to the Company's
satisfaction that its product is mature, stable, and effective. It is with a
high degree of confidence, therefore, that the Company expects many of the
ongoing trial installations to lead to larger enterprise orders and, thereby, to
the 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.
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
The Company has invested considerable resources in the further development of
the overall ErgoEnterprise (TM) system and related product documentation and
marketing collateral materials. In late summer 1997, the first official version
of ErgoEnterprise (TM), Version 1.78, was released, followed by yearly upgrades
since then. The Company is currently shipping Version 5.5 which was released in
February, 2004.
The Company has expensed all expenditures related to the above efforts. Such
expenses totaled approximately $228,000 for the year ended December 31, 2003 and
$183,000 for the year ended December 31, 2002.
34
Major University Study
Alan Hedge, Phd,, Professor of Ergonomics at Cornell University, in
collaboration with Scott J. Evans, Manager of Facilities and ESH at Lockheed
Martin Enterprise Information Systems, authored a Cornell University study
testing the effects of using "ErgoManager", the Company's ergonomic management
system ("EMS"), an ergonomic work pacing software, on 56 Lockheed Martin
computer software programmers at that company's Orlando, Florida facility (the
"Study"). Professor Hedge serves as the Chairman of the Company's Ergonomics
Advisory Board and is a shareholder of the Company. In accordance with the
policy of Cornell University, neither the results of the Study nor the fact of
its publication, constitutes an endorsement by Cornell University of the
Company's ErgoManager or EMS software products used in the Study.
The performance of the 56 studied-test participants was passively monitored
using the EMS software for four weeks to establish a baseline, without
activating the ErgoManager's icons at rest break capabilities. Following this
initial four-week period, the full capabilities of ErgoManager were activated
for all participants and their work performance was monitored for a further
four-week period. Full activation permitted the EMS software to coach users to
take periodic microbreaks throughout the workday depending upon their work rate.
The results of the Study displayed a significant 59% improvement in work
accuracy following the activation of ErgoManager and the EMS software. The Study
further disclosed that there was no difference in total keystrokes or in mouse
use during either the initial four-week baseline period or the following
four-week ErgoManager activation period, confirming previous research showing
that alerting keyboard users to take more short rest and break periods did not
impair their overall keystroke and mouse use but did improve their work
accuracy. The Study proposed that further studies of this type of ergonomic
workflow software could prove useful and beneficial in evaluating the effects of
microbreaks on participants who are experiencing musculoskeletal problems and in
quantifying the erformance benefits of this software for a larger number of
workers over a longer period.
Economic analysis showed that in this Study the performance benefits alone that
accrued from using ErgoManager's ergonomic work pacing software would operate to
provide a return on investment in less than one-week. This Study is available to
the public on the Cornell University Website at
:http://ergo.human.cornell.edu/CUEHnews.html,and then clicking on the Study,
entitled "Ergonomic Management Software and Work Performance".
Competition
Competitive pressures come from other ergonomic software products. Current
competitors of the Company, their product names and locations are as follows:
Company Product Name Location
- ------- ------------ --------
Great Attitudes, Inc. Compustretch Canada
ErgoWare ErgoWare RSI Manager San Diego, CA
Alen Jevsenak fit@work 3D Germany
Peak Technology Ltd. Kairos New Zealand
DITR Marketing, Inc. Mouse Tool California, USA
35
The key to ErgoManager winning the business appears to be finding someone at the
prospective client who understands ergonomic issues and can appreciate why
ErgoManager is a superior product.
The Company has ascertained, based on customer comments, that the Company's
market share lead gives it the opportunity to be first to dominate this market
niche. However, this market is in its infancy and there are no real competitors
- - higher or lower in cost compared to Magnitude - executing substantial
marketing communications. Magnitude is left to finance and develop the market on
its own.
The relatively small size of the existing marketplace, Magnitude, and its
competitors provides a window of opportunity for companies with substantial
resources to quickly enter and dominate the market, should they determine or
suspect rapid growth. While such a move could lessen Magnitude's opportunity to
be the overall market leader, it would greatly benefit the Company by drawing
attention to and building the market.
From a marketing and sales perspective, Magnitude and its products do not
currently have significant competition. There are several first and
second-generation keystroke counters and egg timers but they do not provide the
end user and the employer with the requisite compliance and usability that
ErgoManager brings to the table. First-generation, or "egg timer" methodology
focuses on counting time and then offering a typing break based upon a time
threshold. Second-generation, or "odometer" methodology employs the counting of
keystrokes and then offering a typing break based upon a total number of
keystrokes threshold. Third-generation technology, which we utilize in our
software, compares typing keystroke input over time to establish a correlation
of typing work and rest for individual users, which once established proceeds to
offer interrupting typing breaks based upon a user's typing patterns when typing
work and rest patterns deviate from the previously established norms. In all
comparisons, ErgoManager provides more features and better performance than
competitive products. The differences between ErgoManager and competing products
are substantial.
At this time, there is no significant competitor offering a product suite of
features comparable to ErgoManager. A number of competing products offer
rudimentary reporting capabilities. Magnitude's ErgoSentry is the only Third
Generation Workpacing software available today.
Seasonality and Dependency
The industry segment in which the Company does business is not seasonal. The
Company's software related revenues until now have consisted primarily of
smaller orders for pilot projects and field tests. The Company's future success
is dependent upon its ability to follow up on such initial orders with
enterprise-wide contracts where corporate clients introduce the Company's
software products across the entire spectrum of computer workplaces throughout
their company or certain divisions. There can be no assurance that the Company
will succeed in doing so, or if it does succeed, that its business will generate
enough revenues during the coming periods, in a timely manner and sufficient in
scope, to finance and support the Company's planned future growth as expected by
management.
EMPLOYEES
As of December 31, 2003, the Company employed 11 persons, of whom six were
primarily engaged in research and development and software support activities,
three were primarily engaged in sales and marketing, and three in general
administrative and clerical functions. The Company has no collective bargaining
agreements with its employees.
36
PROPERTIES
On March 15, 2000, the Company entered a five year lease for approximately 6,000
square feet of office space at 401 State Route 24, Chester, New Jersey. This
lease agreement calls for monthly rental payments of $6,500 with nominal
increases after years No. 2, 3, and 4.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934
Except for historical information, the Company's reports to the Securities and
Exchange Commission on Form 10-KSB and Form 10-QSB and periodic press releases,
as well as other public documents and statements, contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
by the statements. These risks and uncertainties include general economic and
business conditions, development and market acceptance of the Company's
products, and other risks and uncertainties identified in the Company's reports
to the Securities and Exchange Commission, periodic press releases, or other
public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking statements.
The Company undertakes no obligation to republish or revise forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrences of unanticipated events.
Results of Operations for the Quarter Ended June 30, 2004
Our efforts during the quarter, to close some of the larger sales contracts for
a company-wide deployment of our software products at several large potential
clients, that we have been working on for some time now, have not met with
success as of the date of this report. We are continuing these efforts and are
still optimistic about ultimate success, however, cannot predict when this might
occur. We also continued with a program of co-marketing the Company's products
together with selected partners in the insurance and risk management industry.
The quarter ended June 30, 2004, showed revenues of $20,294, compared to $33,107
achieved in the second quarter of 2003. Revenues for the six months ended June
30, 2004, totaled $64,874, close to the $68,559 recorded in 2003 for the same
period.
Gross profits for the quarter amounted to negative $18,772, as a result of a
fixed charge for amortization of certain proprietary software assets. Such
software assets underlie the Company's products and 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. Our expense and cost structure was
essentially unchanged from prior periods, and, after deducting selling - and
general and administrative expenses of $527,342 which decreased by 13% over the
$607,875 recorded in 2003, the Company realized an operating loss of $546,097,
compared to an operating loss of $613,748 in 2003. Non-operating expenses
consisted of $3,406 net interest expense and a charge of $14,489 for a valuation
allowance on certain inventories. The period result was a net loss of $563,993,
with a total loss for the first six months of $1,266,506, compared to losses of
$638,360 and $ 1,322,776 respectively, for the same periods in 2003. After
accounting for dividend accruals on outstanding preferred stock which totaled
$56,873, and an accounting charge to capital for amortization of discount for
warrants issued in connection with the placement of certain convertible stock
which amounted to $779,026, the net loss for the quarter applicable to common
shareholders was $1,399,892 or $0.02 per share, compared to a loss of $667,177
or $0.01 per share for the same quarter in the previous year.
Results of Operations for the Year Ended December 31, 2003
The results for the fiscal year 2003 were affected by a continued severe
shortage of cash which necessitated a retrenchment in the pursuit of more
ambitious marketing plans. Previously planned sales and marketing projects were
partially compromised by the need to dedicate available management resources
towards securing new working capital in order to finance ongoing operations and
preserve the infrastructure and basis for growing the business in the future.
Only towards the end of the year was the Company in a position to accumulate
modest financial resources that would permit management to concentrate on
formulating and developing a more effective marketing strategy. Management is
cautiously optimistic that it has succeeded in identifying promising areas of
growth and a winning marketing approach that will reverse past year's sales
decline and result in significant revenue increases in the new fiscal year. An
entirely new marketing strategy has been developed that leverages the database
characteristics of our software products for the purpose of providing clients
with a unique management tool for control of operations and increase in
productivity. These efforts go hand-in-hand with a renewed program of
co-marketing the Company's products together with selected partners in the
insurance and risk management industry. Following these strategies, the Company
has entered into negotiations for company-wide deployment of its software
products with several well known large corporate clients; such discussions have
in some cases already resulted in pilot installations on divisional levels.
For the year ended December 31, 2003, the Company had revenues of $162,335,
considerably less than the $369,443 achieved in 2002. This decline was a
consequence of the above described detrimental factors. Revenues consisted of
$130,812 licensing fees for the Company's software products and $31,523 for
maintenance and support services.
Gross profits amounted to $6,388. Gross profits are burdened with a fixed charge
for amortization of certain proprietary software assets. Such software assets
underlie the Company's products and 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. Owing to the fact that variable cost-of-goods-sold expenses
are less than 5%, the gross margins will increase with larger revenues, as the
portion of fixed expenses decreases relatively. After deducting selling -,
research -, and general and administrative expenses of $2,455,809 which
decreased by 20% from the $3,055,563 recorded in 2002, the
38
Company realized an operating loss of $2,449,421 compared to an operating loss
of $2,847,990 in 2002. Non-operating income and expenses included $94,823 net
interest expense, $779 charges for losses on assets, and $3,745 in non-recurring
income consisting of extraordinary gains from the dissolution of certain prior
year accruals. The Company also realized a credit of approximately $209,000 from
the sale of net loss carry-forward tax credits pursuant to New Jersey Emerging
Technology and Biotechnology Financial Assistance Act. The year concluded with a
net loss of $2,337,881. After accounting for dividend accruals on outstanding
preferred stock which totaled $126,293, the net loss applicable to common
shareholders was $2,464,174 or $0.04 per share, compared to a loss of $2,763,104
or $0.06 per share for the previous year.
The decrease in operating expenses is primarily the result of lesser
expenditures for sales staff expenses and certain marketing programs and of
efforts to curtail general and administrative expenses across the board.
Management is committed to review the merit of all activities with respect to
cost/benefit relations on an on-going basis and exercise due diligence in
day-to-day operations with the goal of further reducing all non-critical
expenditures.
Liquidity and Capital Resources for the Quarter Ended June 30, 2004
The cash reserves that were built up during the first quarter, augmented by
limited subsequent new equity placements, were sufficient to finance the
Company's operations during the second quarter. Such new equity placement
transactions resulted in the receipt of approximately $280,000 cash. The
issuances of new common and convertible preferred stock during the first six
months of the year, and anticipated issuance of further shares thereafter
necessitated an increase in the authorized number of common shares, for which
the Company obtained shareholder approval in June (see "Submission of Matters to
a Vote of Securities' Holders").
At June 30, 2004, the deficit in working capital amounted to $899,434, compared
to $619,182 at March 31, 2004. The cash flow from operations during the first
six months totaled approximately negative $966,000 and was financed by new
equity which was obtained through the placement of common and convertible
preferred stock with accredited private investors. Details of such transactions
can be found in the "Changes in Securities" section in this report and in the
Company's report on Form 10-QSB for the period ended March 31, 2004. In February
2004, the Company had filed a new registration statement on Form SB-2 and an
amendment to a previously filed registration statement on Form SB-2, both of
which covered common shares directly issued as well as common shares underlying
the previously issued convertible preferred stock and warrants, in connection
with these and prior financing transactions. These registrations were declared
effective by the Securities and Exchange Commission as of June 30, 2004.
At the time of this submission, the Company had no bank debt. At June 30, 2004
our short-term liabilities, aside from trade payables and accruals, included
certain notes aggregating $233,419 of which $99,890 was owed to the chairman and
chief executive officer of the Company in form of a demand note (see "Long Term
Debt"). Also included are 472,920 in accrued dividends, the majority of which on
outstanding series A, C, and D preferred stock which in view of the absence of
surplus funds management does not plan to liquidate in the immediate future.
Current cash reserves and net cash flow from operations expected during the near
future are inadequate when measured against present and anticipated future
needs. In order to remedy the resulting liquidity constraints and address any
"going-concern" issues, management is continuing discussions with several
financing sources with the goal of obtaining commitments for further investments
in form of debt or equity capital, to be funded during the upcoming quarter.
There can be no assurance, however, that these negotiations will lead to the
desired outcome.
Liquidity and Capital Resources for the Year Ended December 31, 2003
As explained in more detail below, during 2003 management had to invest much
time to find new equity capital for financing the Company's ongoing operations.
Such efforts were successful in attracting approximately $1.7 million in new
equity funding in the form of cash, as well as converting approximately $466,000
debt into equity.
At December 31, 2003, the deficit in working capital amounted to $274,617 as
compared to $964,689 at December 31, 2002. Stockholders' equity showed an
impairment of $377,851 at the end of the year, compared to an impairment of
$336,918 at the beginning of the year. The negative cash flow from operations
totaled approximately $1.8 million and was substantially financed by new equity
which was obtained through private placements. The new equity placements were
consummated by issuance of common stock and convertible preferred stock to
accredited private investors in the United States and overseas. Details of such
transactions can be found in the "Changes and Issuance of Securities" sections
in the Company's reports on Form 10-QSB during the year, as well as in the
pertinent section of this report. In February 2004, the Company had filed a new
registration statement on Form SB-2 and an amendment to a previously filed
registration statement on Form SB-2, both of which covered common shares
directly issued as well as common shares underlying the previously issued
convertible preferred stock and warrants, in connection with these and prior
financing transactions. These filings are currently under review by the
Securities and Exchange Commission. During the first three months of 2004 and up
to the time of this submission, more recent equity financing transactions have
generated approximately $890,000 cash in the aggregate which was utilized to
finance operations during that period.
At the time of this submission, the Company had no bank debt. At December 31,
2003 its short-term liabilities, aside from trade payables and accruals,
consisted of certain notes and loans aggregating approximately $416,000 of which
approximately $239,000 was owed to the chairman and chief executive officer of
the Company in form of demand notes (see "Related Party Transactions"). All of
the long-term debt of approximately $100,000 was likewise owed to the chairman
and chief executive officer and evidences by a promissory note maturing in
January 2005.
Current cash reserves and net cash flow from operations expected during the near
future are inadequate when measured against present and anticipated future
needs. In order to remedy the resulting liquidity constraints and address any
"going-concern" issues, management is currently negotiating with several
financing sources with the goal of obtaining commitments for further investments
in form of debt or equity capital, to be funded during the upcoming quarter.
There can be no assurance, however, that these negotiations will lead to the
desired outcome.
39
Outlook
In the absence of sufficient capital funding management could not maintain any
meaningful marketing programs. Giving much wider exposure to the general public
of the nature and risks associated with repetitive stress injuries, and the
important role that the Company and its software products can play in this
environment by providing costs effective remedial solutions for these problems,
is an expensive but necessary undertaking. Until larger financial resources can
be made available all sales and marketing efforts must therefore be limited to
one-on-one direct sales efforts with a limited number of prospects. In doing so,
management will try to capitalize on certain visible success stories with well
known larger companies that have purchased and successfully utilized the
Company's products. This is a slow process that is expected to yield substantial
cash flows only
40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 31, 2000, the Company and its President and Chief Executive Officer
agreed to convert a current liability payable to him in the amount of $374,890
into a Company obligation, of which $100,000 was subsequently classified as due
on demand, which was repaid in April 2002, with the remaining balance of
$274,890 maturing July 1, 2002. On February 19, 2002, the maturity of the term
portion of $274,890 was extended to July 2003, and the board of directors of the
Company approved a change in the conversion option towards a rate of $0.10 per
share. In January 2004, $175,000 was repaid and the maturity of the remaining
open balance of $99,890 was extended to January, 2005.
In January 2002, the Company and its President and Chief Executive Officer
agreed to issue 1,100,000 restricted shares of common stock bearing piggy-back
registration rights, in lieu of $110,000 cash remuneration representing salary
payments due to that individual for the time February through December 2002.
In January and February 2002, an outside director of the Company purchased
common stock and exercised certain warrants for a total of 726,111 shares, at
the price of $0.10 per share.
In February 2002, the Company and its President and Chief Executive Officer
agreed to convert most of his base salary for the remainder of the year 2002
into restricted common stock in lieu of cash at the rate of $0.10 per share, for
a total amount of $110,000.
During the first quarter in 2002, three outside directors of the Company were
awarded stock grants for an aggregate 700,000 restricted common shares, for
services rendered.
During the quarter ended September 30,2002, the Company issued common stock
grants of 1,500,000 to certain of its officers and directors.
During the second quarter in 2002, an affiliate of an outside director of the
Company received 25,000 newly issued restricted common shares, for services
rendered.
In June 2002, an officer of the Company offered, and the Company accepted, the
conversion of $15,000 liabilities into 150,000 shares of common stock.
During the third quarter in 2002, the directors and certain officers of the
Company were awarded stock grants for an aggregate 1,500,000 restricted common
shares, for services rendered.
In July 2002, an outside director of the Company and an affiliate exercised
certain warrants for a total of 400,000 shares, at the price of $0.10 per share.
In August 2002, an outside director of the Company converted cash advances in
the aggregate amount of $45,000, extended to the Company during June and July
2002, into 450,000 restricted common shares.
During the third quarter in 2002, an outside director exercised options for the
purchase of 262,500 shares, at the price of $0.10 per share.
During 2003 and 2002, one outside director of the Company who also serves as the
Company's general and securities counsel, was paid an aggregate $132,000 and
$108,600, respectively, for legal services.
In January 2003, the Company and its President and Chief Executive Officer
agreed to issue 1,000,000 restricted shares of common stock bearing piggy-back
registration rights, in lieu of $100,000 cash remuneration representing a
portion of salary payments due to be paid during 2003.
41
During the first quarter in 2003, an outside director of the Company was awarded
a stock grant for 200,000 restricted common shares, for services rendered. The
same director converted $20,500 in accrued expenses incurred on behalf of the
Company, into 205,000 restricted shares.
During the first quarter in 2003, the Company's President and Chief Executive
Officer and an outside director of the Company extended cash advances to the
Company, totaling $92,500, repayable on demand and carrying interest at the rate
of 10% per annum.
During the second quarter in 2003, an outside director of the Company was
awarded a stock grant for 163,500 restricted common shares, for services
rendered.
During the second quarter in 2003, the Company's President and Chief Executive
Officer and an outside director of the Company extended cash advances to the
Company, totaling $151,500, repayable on demand and carrying interest at the
rate of 10% per annum.
In a meeting of the board of directors of the Company on May 29, 2003, in
consideration of the Company's President's role in augmenting available working
capital through salary conversion and direct cash loans, the board approved a
reduction in the exercise price of stock options for a total 4,147,917 shares
issued to him, from prices ranging from $0.50 to $1.00, to $0.10 per share.
In January 2004, the Company and its President and Chief Executive Officer
agreed to convert most of his base salary for the remainder of the year
2004 into 16,667 shares of convertible preferred stock, convertible into
1,666,667 restricted common shares, and 833,333 warrants, exercisable
during three years at the price of $0.15 per share, in lieu of $100,000
cash. The Company also repaid $239,088 notes payable due to this officer.
During the first quarter in 2004, an outside director of the Company was
awarded a stock grant for 150,000 restricted common shares, for services
rendered. The same director exercised an option for 250,000 restricted
common shares at the price of $0.01 per share which option was acquired by
him in a private transaction with an unrelated party.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the aggregate
amount of $39,947 and $39,399 for professional services rendered for their audit
of our annual financial statements and their reviews of the financial statements
included in our Forms 10-QSB for the year ended December 31, 2003 and December
31, 2002, respectively.
AUDIT-RELATED FEES
Rosenberg did not bill us for, nor perform professional services rendered for
assurance and related services that were reasonably related to the performance
of audit or review of the Company's financial statements for the fiscal years
ended December 31, 2003 and December 31, 2002.
TAX FEES
Rosenberg billed us in the aggregate amount of $3,073 and $11,640 for
professional services rendered for tax related services for the fiscal years
ended December 31, 2003 and December 31, 2002, respectively.
ALL OTHER FEES
The aggregate fees billed by Rosenberg for services rendered to the Company
during the last two fiscal years, other than as reported above, were $4,775 and
$2,720, respectively.
TRANSFER AGENT
The transfer agent for the Company is Securities Transfer Corporation, located
at 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
42
ANNUAL REPORT
The Company intends to continue its practice of furnishing annual reports to its
shareholders containing financial statements audited by independent certified
public accountants.
43
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
-----
Page
Number
------
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- June 30, 2004 38
Consolidated Statements of Operations
- Three and six months ended June 30, 2004 and 2003 39
Consolidated Statements of Cash Flows
- Six months ended June 30, 2004 and 2003 40
Notes to Consolidated Financial Statements 41- 47
PART I - Item 1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS June 30, 2004
-------------
Current Assets
Cash .......................................................................... $ 9,927
Accounts receivable, net of allowance for
doubtful accounts of $212 .................................................. 1,408
Miscellaneous receivables ..................................................... 1,800
Inventories ................................................................... 12,428
Prepaid expenses .............................................................. 206,199
-------------
Total Current Assets ....................................................... 231,762
Property and equipment, net of accumulated
depreciation of $139,954 ................................................... 13,434
Software, net of accumulated amortization of $963,298 ......................... 543,992
Other assets .................................................................. 38,548
-------------
TOTAL ASSETS ....................................................................... 827,736
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (IMPAIRMENT)
LIABILITIES
Accounts payable and accrued expenses ......................................... 362,945
Deferred revenue .............................................................. 31,607
Dividends payable ............................................................. 472,920
Loans and notes payable ....................................................... 100,000
Current maturities of long-term debt .......................................... 133,419
Current maturities of capitalized lease obligations ........................... 2,805
-------------
Total Current Liabilities .................................................. 1,103,696
Capitalized lease obligations, less current portion ........................... 3,234
-------------
TOTAL LIABILITIES .................................................................. 1,106,930
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,
500,000 shares have been designated Series E Convertible Preferred Stock,
of which a combined total 521,582 shares are issued and outstanding ........... 522
Common Stock, $0.0001 par value, 100,000,000 shares authorized,
83,292,141 shares are issued and outstanding .................................. 8,329
Additional paid-in capital .................................................... 26,293,818
Accumulated deficit ........................................................... (26,581,863)
-------------
TOTAL STOCKHOLDERS' EQUITY ......................................................... (279,194)
TOTAL LIABILITIES AND EQUITY ....................................................... $ 827,736
=============
See notes to consolidated financial statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Total Revenues .............................. $ 20,294 $ 33,107 $ 64,874 $ 68,559
Cost of Goods Sold .................... 39,066 38,980 78,021 77,967
------------ ------------ ------------ ------------
Gross Profit ................................ (18,772) (5,873) (13,147) (9,408)
Selling expenses ...................... 111,412 139,049 229,649 293,645
Stock-based compensation .............. 85,978 61,210 236,033 207,216
General & administrative expenses ..... 329,935 407,616 763,985 781,312
------------ ------------ ------------ ------------
Operating (Loss) ............................ (546,097) (613,748) (1,242,814) (1,291,581)
Misc. non-operating expenses .......... (14,489) -- (14,489) --
Interest expense, net ................. (3,407) (24,612) (9,203) (31,195)
------------ ------------ ------------ ------------
Non-Operating (Expense) ..................... (17,896) (24,612) (23,692) (31,195)
------------ ------------ ------------ ------------
Net (Loss) before taxes ..................... (563,993) (638,360) (1,266,506) (1,322,776)
Provision for income taxes ............ 0 0 0 0
Net (Loss) .................................. $ (563,993) $ (638,360) $ (1,266,506) $ (1,322,776)
============ ============ ============ ============
Dividends accrued on preferred stock ........ 56,873 28,817 114,253 57,634
Amortized discount on convertible
preferred stock ....................... 779,026 -- 1,495,462 --
Net (Loss) applicable to common shareholders $ (1,399,892) $ (667,177) $ (2,876,221) $ (1,380,410)
============ ============ ============ ============
Loss per Common Share ....................... $ (0.02) $ (0.01) $ (0.04) $ (0.02)
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding ............. 81,805,474 65,661,771 79,971,031 63,232,175
============ ============ ============ ============
See notes to consolidated financial statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2004 2003
----------- -----------
Cash Flows from Operating Activities
Net (loss) ............................... $(1,266,506) $(1,322,776)
Adjustments to net (loss)
Depreciation and amortization ......... 82,982 93,456
Securities issued for expenses and debt 314,300 182,937
Decreases (increases) in Assets
Accounts receivable ................... 34,432 3,875
Miscellaneous receivables ............. -- 1,458
Inventories ........................... 14,489 30
Prepaid expenses ...................... (129,101) (87,057)
Other assets .......................... 10,577 --
Increases (decreases) in Liabilities
Deferred revenues ..................... 38,925 (3,198)
Change in prepayments ................. -- (14,075)
Accounts payable and accrued expenses . (66,069) 208,236
----------- -----------
Net Cash (Used) by Operating Activities ....... (965,971) (937,114)
Cash Flows from Investing Activities
Purchases of equipment and fixtures ...... (3,443) (1,885)
----------- -----------
Net Cash (Used) by Investing Activities ....... (3,443) (1,885)
Cash Flows from Financing Activities
Proceeds from loans and notes payable .... -- 316,763
Repayment of loans and notes ............. (282,851) (16,706)
Payment of dividends ..................... (900) --
Issuance of common and preferred stock ... 1,165,114 655,148
----------- -----------
Net Cash Provided by Financing Activities ..... 881,363 955,205
Net Increase (Decrease) in Cash ............... (88,051) 16,206
Cash at Beginning of Period ................... 97,978 9,976
----------- -----------
Cash at End of Period ......................... $ 9,927 $ 26,182
=========== ===========
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On November 18, 1998, the Company changed its name to
Magnitude Information Systems, Inc.
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name 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.
On June 24, 1997, the Company extended a stock exchange offer to the
shareholders of Magnitude, Inc., a Delaware corporation and manufacturer
of ergonomic keyboarding systems. At the time of this submission, holders
of 99.4% of Magnitude, Inc. common stock have tendered their shares. The
remaining Magnitude, Inc. shareholders hold a minority interest which is
valued at $0. The Company and Magnitude, Inc. remain as two separate legal
entities whereby Magnitude, Inc. operates as a subsidiary of Magnitude
Information Systems, Inc. The operations of the combined entity are
currently comprised solely of the operations of Magnitude, Inc.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required for annual financial statements.
These financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's annual report on Form 10-KSB for the year ended December 31,
2003 and its quarterly report on Form 10-QSB for the period ended March
31, 2004.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's
financial position as of June 30, 2004, the results of operations for the
three months and six months ended June 30, 2004 and 2003, and the cash
flows for the three months ended June 30, 2004 and 2003, have been
included.
48
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Principles of Consolidation
The consolidated financial statements include the accounts of Magnitude
Information Systems, Inc. and its subsidiary Magnitude, Inc. All
significant inter-company balances and transactions have been eliminated.
Inventories
Inventory consists of finished goods that are stated at the lower of cost
(determined by the first-in, first out method) or market.
Depreciation and Amortization
Property 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 capitalized at the fair value of stock
exchanged/granted upon acquisition and are amortized on the straight-line
method on a product-by-product basis over the estimated economic life of
the products which has been determined to be 10 years.
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. The Company determined
the fair market value of the warrants/options issued under the
Black-Scholes Pricing Model. 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 to be accounted for based on the fair value of the services
rendered or the fair value of the equity instruments issued, whichever is
more reliably measurable. As permitted by the statement, the Company has
elected to continue to follow the requirements of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees' for
employees under the intrinsic value method. The adoption of SFAS No. 123
does not have a material impact on the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected to
be settled in the Company's income tax return. Certain items of revenue
and expense are reported for Federal income tax purposes in different
periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. The Company has incurred net operating
losses for financial-reporting and tax-reporting purposes. Accordingly,
for Federal and state income tax purposes, the benefit for income taxes
has been offset entirely by a valuation allowance against the related
federal and state deferred tax asset for the year ended December 31, 2003.
49
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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
The Company's revenue recognition policy for software sales is in
accordance with Accounting Statement of Position 97-2. Revenue is
recognized at the time of licensing provided that the resulting receivable
position is deemed probable of collection and is fixed or determinable.
Revenue from software maintenance contracts is recognized ratably as
earned. Where a sales contract includes multiple elements, revenues are
allocated to the various elements based on Company-specific objective
evidence of fair value, regardless of any separate prices for each element
that may be stated within the contract.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
GOING CONCERN
The ability of the Company to continue its operations is dependent on
increasing sales and obtaining additional capital and financing. In their
report for the fiscal year ended December 31, 2003, our auditors had
expressed an opinion that, as a result of the losses incurred, there was
substantial doubt regarding our ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that
might be necessary if the Company were unable to continue as a going
concern. During the last two years and the first quarter in 2004 the
Company has relied on the private placement of its common and preferred
stock to fund its operations. Management's plans are to continue seeking
additional working capital through equity and debt placements with private
and institutional investors.
50
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in a financial institution which are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. and overseas. The Company performs ongoing
credit evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
PREPAID EXPENSES
The major positions in Prepaid Expenses at the end of the quarter included
$50,000 representing the value of the unamortized portion of part of the
Company's chief executive officer's base salary for the remainder of the
current year which was prepaid in January 2004 in the form of convertible
preferred stock and warrants, in lieu of cash (see "Related Party
Transactions"). Also included were approximately $85,000 representing the
value of restricted stock and options issued to certain consultants for
services to be rendered in the near future, and approximately $41,000
prepaid rent and insurance costs.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2004:
Equipment $ 81,157
Furniture and fixtures 72,230
--------------
153,387
Less accumulated depreciation 139,434
--------------
Total $ 13,434
==============
Depreciation expense charged to operations was $5,021 in the first six months of
2004 and $15,497 in the first six months of 2003.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at June 30,
2004:
Accounts payable $ 183,328
Accrued interest 55,572
Accrued commissions 12,678
Accrued salaries, bonuses, vacations 49,334
Accrued professional fees 50,563
Miscellaneous accruals 11,470
-------------
Total $ 362,945
=============
51
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
DEFERRED REVENUES
Deferred revenues at March 31, 2004, consist of prepaid software maintenance and
support charges which are amortized ratably over the remaining duration of the
underlying maintenance agreements.
LOANS AND NOTES PAYABLE
At June 30, 2004, Magnitude, Inc. and the Company had borrowings under short
term loan agreements with the following terms and conditions:
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 March 31, 2004 and no demand for payment has been made. $ 75,000
At December 31, 1999 the Company had $1,475,000 of notes outstanding related to
a June 1995 private placement offering. During 2000 the holders of $1,450,000
worth of notes agreed to accept partial repayment of approximately 30% of the
note balances and converted the remaining balances into common shares or
convertible preferred shares. The total amount of non-converted notes
outstanding at March 31, 2004 is $25,000. Attempts to locate the holder of this
note, to settle this liability, have been unsuccessful. 25,000
---------
Total $ 100,000
=========
52
LONG TERM DEBT
Long-term debt as of June 30, 2004, is comprised of the following:
Pursuant to the February 2, 1998, Agreement and Plan of Merger with
Rolina Corporation, the Company had issued 155,556 shares (the "Shares")
of its common stock to the principal of Rolina Corporation who currently
serves as the Company's Chief Executive Officer and Board Chairman, and
had issued a Put Option for such Shares at a price of $2.41 per share in
accordance with the provisions contained therein, with notice for
exercise eligible to be given at any time after February 1, 2000, and
before 5:00 p.m. on the 90th day thereafter. This liability was
converted into a Company obligation for $274,890 maturing March 31, 2002
and a demand loan for $100,000 both carrying interest at the rate of 7%
per year, subsequently increased to 10%, payable monthly. The demand
portion of this note was repaid in April 2002 and the due date for
$274,890 of the remaining balance was extended to July 1, 2003. During
the first quarter of 2004, $175,000 was repaid and the maturity of the
unpaid balance was changed to January 1, 2005. The obligation includes
an option to the holder for conversion of the outstanding principal into
shares of the Company's convertible preferred stock and warrants at the
rate of $0.06 per common share equivalent. $ 99,890
Discounted present value of a non-interest bearing $70,000 settlement
with a former investor of Magnitude, Inc. to be paid in monthly
payments commencing July 1, 1997. The imputed interest rate used to
discount the note is 8% per annum. This obligation is in default. 33,529
---------
Total 133,419
Less current maturities 133,419
---------
Long-term debt, net of current maturities $ 0
=========
##
INCOME TAXES
At December 31, 2003, the Company had net operating loss carry-forwards
approximating $22,043,000 for federal income tax purposes which expire between
the years 2007 and 2023 and are subject to certain annual limitations. At
December 31, 2003, the Company has available approximately $4,905,000 of net
operating losses to carry-forward and which may be used to reduce future state
taxable income which expire December 31, 2010.
The Company's total deferred tax asset and valuation allowance
at December 31, 2003 are as follows:
Total deferred tax asset, non-current $7,274,000
Less valuation allowance (7,274,000)
----------
Net deferred tax asset $ -
==========
COMMITMENTS AND CONTINGENCIES
Lease Agreement
On March 15, 2000, the Company entered into a lease agreement for office space
which is utilized for the Company's principal offices. Such lease commenced
April 15, 2000 and expires on March 31, 2005 and requires monthly payments of
$6,500 from April 15, 2000 through March 31, 2002; of $6,695 thereafter through
March 31, 2003; of $6,896 thereafter through March 31, 2004; and of $7,103
thereafter through March 31, 2005. In August 2002 the Company rented additional
office space at this location commencing September 1, 2002. The add-on rental
requires monthly payments of $1,955 throughout the remainder of the original
lease term.
53
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
COMMITMENTS AND CONTINGENCIES, continued
Under the lease agreement, the Company is required to make future minimum
lease payments as follows in addition to a pro-rata share of certain
operating expenses:
Year Ending December 31,
------------------------
2004 84,615
2005 21,309
----------
Total 105,924
==========
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 January 2004, the Company and its President and Chief Executive Officer
agreed to convert most of his base salary for the remainder of the year 2004
into 16,667 shares of convertible preferred stock, convertible into 1,666,667
restricted common shares, and 833,333 warrants, exercisable during three years
at the price of $0.15 per share, in lieu of $100,000 cash. The Company also
repaid $239,088 notes payable due to this officer.
During the first quarter in 2004, an outside director of the Company was awarded
a stock grant for 150,000 restricted common shares, for services rendered. The
same director exercised an option for 250,000 restricted common shares at the
price of $0.01 per share which option was acquired by him in a private
transaction with an unrelated party.
54
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
Page
Independent Auditors' Report.................................... 1
Financial Statements
Consolidated Balance Sheet................................. 2
Consolidated Statements of Operations...................... 3
Consolidated Statement of Stockholders Equity (Deficit).... 4-5
Consolidated Statements of Cash Flows...................... 6-7
Notes to the Consolidated Financial Statements............. 8-27
55
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
Page
Independent Auditors' Report.................................... 1
Financial Statements
Consolidated Balance Sheet................................. 2
Consolidated Statements of Operations...................... 3
Consolidated Statement of Stockholders Equity (Deficit).... 4-5
Consolidated Statements of Cash Flows...................... 6-7
Notes to the Consolidated Financial Statements............. 8-27
56
[letterhead of Rosenberg Rich Baker Berman & Company
380 Foothill Road, Bridgewater, New Jersey]
Independent Auditors' Report
To the Board of Directors and Stockholders of
Magnitude Information Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 2003 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 2003 and 2002. 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 auditing standards generally accepted
in the United States of America. 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 provide 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, 2003 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the notes to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 5, 2004,
1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
Assets
Current Assets
Cash $ 97,978
Accounts receivable, net of allowance for doubtful accounts of $212 35,840
Inventory 26,917
Miscellaneous receivables 1,800
Prepaid expenses 69,622
------------
Total Current Assets 232,157
Property and equipment, net of accumulated depreciation of $134,932 15,013
Software, net of accumulated amortization of $885,338 621,952
Deposits 23,783
Prepaid expenses, less current portion 32,818
------------
Total Assets 925,723
============
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable and accrued expenses 400,200
Deferred revenues 16,641
Deferred rental obligation 4,856
Dividends payable 359,568
Loans payable 75,000
Notes payable 132,851
Current maturities of long-term debt 208,419
Current maturities of capitalized lease obligations 2,805
------------
Total Current Liabilities 1,200,340
Capitalized lease obligations, less current portion 3,234
Long term debt, less current portion 100,000
------------
Total Liabilities 1,303,574
Commitments and Contingencies --
Stockholders' Equity (Impairment)
Preferred Stock, $.001 par value, non-voting, 3,000,000 shares authorized; 351,023
shares issued and outstanding 351
Common stock, $.0001 par value, 100,000,000 shares authorized; 77,213,808 shares issued
and outstanding 7,721
Discounts on preferred stock (630,896)
Additional paid in capital 23,950,614
Accumulated (deficit) (23,705,641)
------------
Total Stockholders' Equity (Impairment) (377,851)
------------
Total Liabilities and Stockholders' Equity (Impairment) $ 925,723
============
See notes to the consolidated financial statements.
2
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------
2003 2002
------------ ------------
Net Sales
Hardware Products $ -- $ --
Software 162,335 369,443
------------ ------------
Total Net Sales 162,335 369,443
------------ ------------
Cost of Good Sold
Hardware Products -- 603
Software 155,947 161,267
------------ ------------
Total Cost of Goods Sold 155,947 161,870
------------ ------------
Gross Profit 6,388 207,573
------------ ------------
Research and development costs 12,892 64,847
Stock-based compensation 466,399 454,896
Selling, general and administrative expenses 1,976,518 2,535,820
------------ ------------
(2,449,421) (2,847,990)
Loss From Operations
------------ ------------
Other Income (Expense)
Miscellaneous income 3,745 75,719
Interest income -- 2,820
Interest expense (94,823) (48,946)
Loss on disposition of assets (779) (27,740)
------------ ------------
Total Other Income (Expense) (91,857) 1,853
------------ ------------
(2,541,278) (2,846,137)
Loss Before Provision for Income Taxes
Benefit from Income Taxes 203,397 203,464
------------ ------------
Net Loss $ (2,337,881) $ (2,642,673)
Dividends on Preferred Shares $ (126,293) $ (120,431)
------------ ------------
$ (2,464,174) $ (2,763,104)
Net Loss Applicable to Common Shareholders
============ ============
Net Loss Per Common Share (0.04) (0.06)
============ ============
Weighted Average of Common Shares Outstanding 66,962,744 44,509,412
============ ============
See notes to the consolidated financial statements.
3
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003 AND 2002
Convertible Cumulative
Preferred Convertible Preferred Shares Common Stock
---------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balances, January 1, 2002 214,857 $ 215 1 $ -- 25,,711,403 $ 2,571
Conversion of convertible
preferred stock into common
stock (18,889) (19) -- -- 188,890 19
Issuance of common stock for
accrued dividends -- -- -- -- 353,854 36
Issuance of common stock for
stock awards -- -- -- -- 2,200,000 220
Issuance of options for
outside services -- -- -- -- --
Issuance of common stock
pursuant to exercise of options -- -- -- -- 262,500 26
Issuance of common stock
pursuant to exercise of
warrants -- -- -- -- 4,432,308
Issuance of common stock
pursuant to private equity
placements -- -- -- -- 19,651,500 1,965
Issuance of common stock
granted for private placement
finders' fees -- -- -- -- 226,000 23
Issuance of common stock
pursuant to conversion of
accounts payable -- -- -- -- 525,738 53
Issuance of common stock for
services performed -- -- -- -- 1,532,183 153
Isuance of common stock for
compensation -- -- -- -- 1,311,441 131
Net loss, year ended December
31, 2002 -- -- -- -- -- --
Dividends on convertible
preferred stock -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2002 195,968 $ 196 1 $ -- 56,395,817 $ 5,640
============ ============ ============ ============ ============ ============
Total
Stock Additional Stockholders'
Subscriptions Paid in Accumulate Equity
Receivable Capital Deficit (Deficit)
------------ ------------ ------------ ------------
Balances, January 1, 2002 $ -- 18,033,948 $(18,478,363) $ (441,629)
Conversion of convertible
preferred stock into common
stock -- -- -- --
Issuance of common stock for
accrued dividends -- 35,350 -- 35,386
Issuance of common stock for
stock awards -- 136,600 -- 136,600
Issuance of options for
outside services -- 56,771 -- 56,771
Issuance of common stock
pursuant to exercise of options -- 25,974 -- 26,000
Issuance of common stock
pursuant to exercise of
warrants 443 438,565 -- 439,008
Issuance of common stock
pursuant to private equity
placements (3,297) 1,857,065 -- 1,855,733
Issuance of common stock
granted for private placement
finders' fees -- 6,027 -- 6,050
Issuance of common stock
pursuant to conversion of
accounts payable -- 52,521 -- 52,574
Issuance of common stock for
services performed -- 133,255 -- 133,408
Isuance of common stock for
compensation -- 126,154 -- 126,285
Net loss, year ended December
31, 2002 -- -- (2,642,673) (2,642,673)
Dividends on convertible
preferred stock -- -- (120,431) (120,431)
------------ ------------ ------------ ------------
Balances, December 31, 2002 $ (3,297) $ 20,902,010 $(21,241,467) $ (336,918)
============ ============ ============ ============
See notes to the consolidated financial statements.
4
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003 AND 2002
Discount on
Convertible Cumulative Preferred
Preferred Shares Preferred Shares Stock
---------------------------- --------------------------- ---------------
Shares Amount Shares Amount Amount
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2003 195,968 $ 196 1 $ -- $ --
Issuance of convertible 130,834 131 -- -- (598,289)
preferred stock pursuant to
private equity placements
Issuance of convertible
preferred stock for services
performed and accr. interest 7,405 7 -- -- --
Issuance of preferred stock
pursuant to conversion of debt 19,593 20 -- -- (48,663)
Repurchase of preferred stock (2,778) (3) -- -- --
Receipt of stock subscription
receivable -- -- -- --
Issuance of common stock
pursuant to conversion of debt -- -- -- -- --
Issuance of common stock
pursuant to exercise of options -- -- -- --
Issuance of common stock
pursuant to exercise of warrants -- -- -- -- --
Issuance of common stock
pursuant to private equity
placements -- -- -- -- --
Issuance of common stock
granted for private placement
finders' fees -- -- -- -- --
Issuance of common stock
pursuant to conversion of
accounts payable -- -- -- -- --
Issuance of common stock for
services performed -- -- -- -- --
Issuance of common stock for
compensation -- -- -- -- --
Issuance of common stock for
stock awards -- -- -- -- --
Issuance of common stock for
services performed -- -- -- -- --
Issuance of warrants for
services performed -- -- -- -- --
Net loss, year ended December
31, 2003 -- -- -- -- --
Dividends on convertible
preferred stock -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Amortization of discount on
preferred stock -- -- -- -- 16,056
------------ ------------ ------------ ------------ ------------
Balances, December 31, 2003 351,022 $ 351 1 $ -- $ (630,896)
============ ============ ============ ============ ============
Stock Additional Total
Subscriptions Paid in Accumulated Stockholders'
Common Stock Receivable Capital Deficit Equity (Deficit)
--------------------------- ------------- ----------- ------------ ------------
Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balances, January 1, 2003 56,395,817 $ 5,640 $ (3,297) $ 20,902,010 $(21,241,467) $ (336,918)
Issuance of convertible -- -- -- 1,357,560 -- 759,402
preferred stock pursuant to
private equity placements
Issuance of convertible
preferred stock for services
performed and accr. interest -- -- -- 44,225 -- 44,232
Issuance of preferred stock
pursuant to conversion of debt -- -- -- 166,203 -- 117,560
Repurchase of preferred stock -- -- -- (24,997) -- (25,000)
Receipt of stock subscription
receivable -- -- 3,297 -- -- 3,297
Issuance of common stock
pursuant to conversion of debt 220,000 22 -- 21,978 -- 22,000
Issuance of common stock
pursuant to exercise of options 81,000 8 -- 8,092 -- 8,100
Issuance of common stock
pursuant to exercise of warrants 3,552,752 355 -- 319,792 -- 320,147
Issuance of common stock
pursuant to private equity
placements 9,122,171 912 -- 646,480 -- 647,392
Issuance of common stock
granted for private placement
finders' fees 30,000 3 -- (3) -- --
Issuance of common stock
pursuant to conversion of
accounts payable 5620,533 62 -- 41,055 -- 41,117
Issuance of common stock for
services performed 3,828,035 383 -- 158,873 -- 159,256
Issuance of common stock for
compensation 1,000,000 100 -- 99,900 -- 100,000
Issuance of common stock for
stock awards 2,363,500 236 -- 105,554 -- 105,790
Issuance of common stock for
services performed -- -- -- 48,543 -- 48,543
Issuance of warrants for
services performed -- -- -- 55,349 -- 55,349
Net loss, year ended December
31, 2003 -- -- -- -- (2,337,881) (2,337,881)
Dividends on convertible
preferred stock -- -- -- -- (110,237) (110,237)
------------ ------------ ------------ ------------ ------------ ------------
Amortization of discount on
preferred stock -- -- -- -- (16,056) --
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2003 77,213,808 $ 7,721 $ -- $ 23,950,614 $(23,705,641) $ (377,851)
============ ============ ============ ============ ============ ============
See notes to the consolidated financial statements
5
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------
2003 2002
----------- -----------
Cash Flows From Operating Activities
Net Loss $(2,337,881) $(2,642,673)
Adjustments to Reconcile Net Loss to Net Cash Used by Operations
Depreciation and amortization 178,447 205,373
Common stock/options issued for various expenses 466,399 454,896
Loss on disposition of assets 779 2,741
Bad debt provision 30,905 20,029
Forgiveness of debt 3,745 75,719
Decreases (Increases) in Assets
Accounts receivable (20,952) 233,578
Miscellaneous receivables 1,929 4,471
Inventories 30 (26,947)
Prepaid expenses (3,052) 31,155
Other assets -- (1,955)
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses (147,402) (209,446)
Deferred revenue 1,396 (220,675)
Deferred rental obligation (1,339) 1,050
Deposits payable (14,075) 14,075
----------- -----------
Net Cash Used by Operating Activities (1,841,071) (2,058,609)
----------- -----------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (3,695) (13,195)
Collections of loans -- 14,469
----------- -----------
Net Cash (Used) Provided by Investing Activities (3,695) 1,274
----------- -----------
Cash Flows From Financing Activities
Repayment of note payable -- (100,000)
Repayment of capital lease obligations (2,981) (7,956)
Proceeds from loans payable 183,323 25,000
Repayment of loans payable (44,793) (142,500)
Proceeds from officer loans 83,881 --
Proceeds from issuance of common and preferred stock 1,713,338 2,277,538
----------- -----------
Net Cash Provided by Financing Activities 1,932,768 2,052,082
----------- -----------
Net increase (decrease) in Cash 88,002 (5,253)
Cash at beginning of period 9,976 15,229
----------- -----------
Cash at end of period $ 97,978 $ 9,976
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 36,564 $ 35,418
=========== ===========
Taxes Paid $ 2,800 $ 1,080
=========== ===========
See notes to the consolidated financial statements.
6
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
2003 2002
---------------- ----------------
Schedule of non-cash investing and financing activities
In connection with consideration for consulting services, stock options for 1,935,000
common shares were issued $ 48,543
===============
In connection with consideration for consulting and professional services, stock
warrants for 1,570,250 common shares were issued $ 55,349
===============
In connection with the retirement of a short-term loan, 220,000 common shartes were
issued $ 22,000
===============
In connection with the retirement of accounts payable, 30,235 common shares were issued $ 2,116
===============
In connection with consideration of current services, 7,781,833 common shares were
issued $ 404,047
===============
In connection with consideration of current services and accrued interest, 7,405
preferred shares were issued $ 44,232
===============
In connection with the retirement of a short-term loan, 19,593 preferred shares were
issued $ 117,560
===============
In connection with the purchase of equipment, a capitalized lease obligation resulted $ 8,509
===============
In connection with consideration for current goods/services, 5,026,124 common shares $ 398,125
were issued
================
In connection with consideration for past services, 526,849 common shares were issued $ 52,685
================
In exchange for accrued dividends on preferred stock, 353,854 common shares were issued $ 35,385
================
In connection with the retirement of accrued dividends on preferred stock, notes and
accounts payable, 463,890 common shares were issued $ 46,389
================
In connection with consideration of current services, stock options for 1,079,500
shares were issued $ 56,771
================
In exchange for prepaid rent, 78,000 common shares were issued $ 4,218
================
See notes to the consolidated financial statements.
7
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company") was incorporated as a
Delaware corporation on April 19, 1988 under the name Fortunistics Inc. On
November 18, 1998, the Company changed its name to Magnitude Information
Systems, Inc.
The Company and Magnitude, Inc. are two separate legal entities whereby
Magnitude, Inc. operates as a subsidiary of the Company. However, the operations
of the combined entity are currently comprised solely of the operations of
Magnitude, Inc. The 1% of Magnitude, Inc. not owned by the Company constitutes a
minority interest which is valued at $0.
On January 15, 2000, the Company acquired all of the issued and outstanding
capital stock of Cornell Ergonomics, Inc. (Cornell) and Internet Ergonomics
Technologies Corp. (IET), privately held Delaware Corporations, whose only
property was comprised of certain proprietary ergonomic software modules, in
exchange for the Company's common stock. These modules were subsequently
transferred to the Company. The Company is currently in the process of
dissolving both Cornell and IET.
The Company's primary product is an integrated suite of proprietary software
modules marketed under the name ErgoManagerTM which are designed to help
individual computer users and businesses increase productivity and reduce the
risk of potentially preventable repetitive stress injury (RSI). These software
modules can be applied individually or together in a comprehensive ergonomic and
early intervention program that seeks to modify a user's behavior by monitoring
computer usage patterns over time and warning the user when to break a dangerous
trend in repetitive usage of an input device, such as a keyboard or mouse. The
product was developed to train people working on computers, monitor computer-use
related activities and evaluate a user's risk exposure and propensity towards
injury or loss of effectiveness in connection with his/her day-to-day work.
Moreover, the software enables a company to not only address the issue of health
risks involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
Principles of Consolidation
The consolidated financial statements include the
accounts of Magnitude Information Systems, Inc. and its subsidiary, Magnitude,
Inc. All significant intercompany balances and transactions have been
eliminated.
Depreciation
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is computed on the
straight line method over the estimated useful lives of such assets between 5-10
years. Maintenance and repairs are charged to operations as incurred. Repairs
and maintenance which do not extend the useful lives of the related assets are
expensed as incurred.
8
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Inventory
Inventory is stated at the lower of cost (first in, first out) or market
value and consists primarily of packaged software.
Amortization
Software assets are capitalized at the fair value of stock
exchanged/granted upon acquisition and are amortized on the straight line
method on a product-by-product basis over the estimated economic life of
the products which has been determined to be 10 years.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense was $31,546 and $6,065 for the years ended December 31, 2003 and
2002, respectively.
Evaluation of Long Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In
evaluating the fair value and future benefits of long-lived assets, their
carrying value would be reduced by the excess, if any, of the long-lived
asset over management's estimate of the anticipated undiscounted future
net cash flows of the related long-lived asset.
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. The Company determined
the fair market value of the warrants/options issued under the
Black-Scholes Pricing Model and applied a 50% discount due to the trading
nature of the Company's stock. A similar discount was utilized in valuing
stock issued. 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 to be accounted for based
on the fair value of the services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted by
the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected to
be settled in the Company's income tax return. Certain items of revenue
and expense are reported for Federal income tax purposes in different
periods than for financial reporting purposes, thereby resulting in
deferred income taxes. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. The Company has incurred net operating
losses for financial-reporting and tax-reporting purposes. Accordingly,
for Federal and state income tax purposes, the benefit for income taxes
has been offset entirely by a valuation allowance against the related
federal and state deferred tax asset for the year ended December 31, 2003.
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.
9
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Revenue Recognition
The Company's revenue recognition policy for software sales is in
accordance with Accounting Statement of Position 97-2. Revenue is
recognized at the time of licensing provided that the resulting receivable
is deemed probable of collection and is fixed or determinable. Revenue
from software maintenance contracts is recognized ratably as earned. When
a sales contract includes multiple elements, revenues are allocated to the
various elements based on Company - specific objective evidence of fair
value, regardless of any separate prices for each element that may be
stated within the contract.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
net losses of $2,337,881 and $2,642,673 during the years ended December
31, 2003 and 2002, respectively. The ability of the Company to continue as
a going concern is dependent on increasing sales and obtaining additional
capital and financing. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a going concern. Management's plans are to continue discussions with
several potential investors to obtain additional capital in order to
alleviate the situation.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions
which are insured by the Federal Deposit Insurance Corporation up to
$100,000. Balances in these accounts may, at times, exceed the federally
insured limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. The Company performs ongoing credit
evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
PREPAID EXPENSES
Prepaid expenses are recorded in connection with common stock/options
issued to consultants for future services and are amortized over the
period of the agreement, ranging from one to two years.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2003:
Equipment $ 77,715
Furniture and fixtures 72,230
---------------
149,945
Less accumulated depreciation 134,932
---------------
$ 15,013
===============
Depreciation expense charged to operations was $22,529 and $49,454 in 2003 and
2002, respectively.
10
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, 2003:
Accounts payable $ 191,627
Accrued interest 53,398
Accrued consulting fees 32,745
Accrued commissions 10,118
Accrued professional fees 40,000
Accrued taxes 371
Accrued payroll 59,941
Miscellaneous accruals 12,000
-----------------
$ 400,200
=================
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan
agreements with the following terms and conditions at December 31, 2003:
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, 2003 and no demand for payment has been made. $ 75,000
-----------------
Total $ 75,000
================
NOTES PAYABLE
At December 31, 1999 the Company had $1,475,000 of notes outstanding
related to a June 1995 private placement offering. During 2000 the holders
of $1,450,000 worth of notes agreed to accept partial repayment of
approximately 30% of the note balances and converted the remaining
balances into common shares or convertible preferred shares. The total
amount of nonconverted notes outstanding at December 31, 2002 is $25,000.
Attempts to locate the holder of this note, $ 25,000 to settle this
liability, have been unsuccessful.
Cash advances by an officer of the company, payable on demand, carrying
interest at 10% per annum 64,088
Note dated June 2, 2003, due December 2, 2003, issued to a relative of a
director and carrying interest at the rate of 10% per annum. This note was
overdue at December 31, 2003, and was subsequently repaid in full in
January 2004. 43,763
-----------------
Total $ 132,851
=================
11
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT
Long-term debt as of December 31, 2003 is comprised of the following:
Pursuant to the February 2, 1998, Agreement and Plan of Merger with Rolina
Corporation,
the Company had issued 155,556 shares (the "Shares") of its common stock
to the principal of Rolina Corporation who currently serves as the
Company's Chief Executive Officer and Board Chairman, and had issued a Put
Option for such Shares at a price of $2.41 per share in accordance with
the provisions contained therein, with notice for exercise eligible to be
given at any time after February 1, 2000, and before 5:00 p.m. on the 90th
day thereafter. This liability was converted into a Company obligation for
$274,890 maturing March 31, 2002 and a demand loan for $100,000 both
carrying interest at the rate of 7% per year, subsequently increased to
10%, payable monthly. The demand portion of this note was repaid in April
2002 and the due date for $274,890 of the remaining balance was extended
to July 1, 2003. Subsequently, the maturity of the unpaid balance was
changed to a portion of $174,890 payable on demand, and a portion of
$100,000 due and payable on January 2, 2005. The obligation includes an
option to the holder for conversion of the outstanding principal into
shares of the Company's common stock at the rate of $0.10 per share.
Subsequently, in January 2004, the entire demand portion of $174,890 was
repaid. $ 274,890
Discounted present value of a non-interest bearing $70,000 settlement with
a former investor of Magnitude, Inc. to be paid in 24 equal monthly
payments commencing July 1, 1997. The imputed interest rate used to
discount the note is 8% per annum. This obligation is in default. 33,529
-----------------
308,419
Total
Less current maturities 208,419
-----------------
Long-term debt, net of current maturities $ 100,000
=================
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under a non-cancelable capital lease
agreement expiring in January 2006. The capital lease obligation has been
recorded at the present value of future minimum lease payments, discounted
at an interest rate of 6.00%. The capitalized cost of equipment at
December 31, 2003 amounted to $5,909 net of accumulated depreciation of
$2,600.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 2003:
Year Ending December 31, 2003
Total minimum capital lease payments $ 6,441
Less amounts representing interest 402
----------------
Present value of net minimum capital lease payments 6,039
Less current maturities of capital lease obligations 2,805
----------------
Obligations under capital leases, excluding current maturities $ 3,234
================
12
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED REVENUES
Deferred revenues at December 31, 2003, amounted to $16,641 related to
prepaid software maintenance and support charges which are amortized
ratably over the duration of the underlying maintenance agreements.
PREFERRED STOCK
Preferred stock is non-voting, $.001 par value per share with 3,000,000
shares authorized. Cumulative Preferred Stock has 2,500 shares designated
of which 1 share is issued and outstanding. The total Cumulative Preferred
Stock at December 31, 2003 is $0 with a liquidation price of $100,000. As
of December 31, 2003, there was $9,000 of cumulative preferred dividends
in arrears representing $9,000 per cumulative preferred share.
Series A of the Senior Convertible Preferred Stock series which was issued
in 2000 has 300,000 shares designated, 29,300 shares issued and
outstanding. The total outstanding Series A Senior Convertible Preferred
Stock at December 31, 2002 is $29 with a liquidation price of $146,500.
The following is a description of the Series A convertible preferred
stock:
(1) The holders of said shares of Series A Senior Preferred shall be
entitled to receive cumulative dividends at the rate of seven
percent (7%) per annum during the first annual period after
issuance, increasing by increments of one half of one percent for
every year thereafter until the rate reaches ten percent (10%) per
annum at which time it will remain at 10% payable semi-annually when
declared by the Board of Directors, before any dividend shall be
declared, set apart for, or paid upon the Common Stock of the
Company. The Dividend Rate shall accrue on the Liquidation Price of
each share of the Series A Senior Preferred. The dividends on the
Series A Senior Preferred, payable in cash, shall be cumulative, so
that if the Company fails in any fiscal year to pay such dividends
on all the issued and outstanding Series A Senior Preferred, such
deficiency in the dividends shall be fully paid, but without
interest, before any dividends shall be paid on or set apart for the
Cumulative Preferred Stock or the Common Stock.
(2) The Series A Senior Preferred shall with respect to dividend rights
and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with
the Series B and C Senior Convertible Preferred Stock.
(3) In the event of any liquidation, of the Company, whether voluntary
or otherwise, after payment or provision for payment of the debts
and other liabilities of the Company, the holders of the Series A
Senior Preferred shall be entitled to receive, out of the remaining
net assets of the Company, the amount of Five ($5.00) dollars for
each share of Series A Senior Preferred (the "Liquidation Price")
held of record by such holder, payable in cash or in shares of
stock, securities or other consideration, the value of which stock,
securities or other consideration shall be fixed by the Board of
Directors, plus the amount of all dividends in arrears on each such
share up to the date fixed for distribution, provided, however, that
such remaining net assets are sufficient to cover all the before
mentioned payments and also like payments to holders of Series B and
C Senior Preferred, before any distribution shall be made to the
holders of Common Stock or Cumulative Preferred Stock of the
Company. In case such remaining net assets are insufficient to cover
all such payments to holders of Series A, B and C Senior Preferred,
the holders of these series shall receive payments on a pro rata
basis.
13
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series A Senior Preferred issued and outstanding at any time,
with the Board of Directors of the Company in its sole discretion
deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a
minimum of three (3) years at the time of notice of redemption to
the holders of such shares, by paying to the holders thereof the
Liquidation Price for each share of Series A Senior Preferred held
by such holder plus a "call premium" of 15% of the Liquidation
Price, together with the amount of any accrued and unpaid dividends
as may have accumulated thereon at the time of redemption (the
"Redemption Price").
(5) Each share of Series A Senior Preferred shall be convertible at any
time prior to the Redemption Date, at the holder's option, into such
number (the "Conversion Ratio") of shares of the Common Stock of the
Company as arrived at by dividing the Liquidation Price by one
hundred fifty (150) percent of the market price of the Common Stock
of the Corporation ("Market Price") on the earlier of the dates such
share of Series A Senior Preferred is subscribed for or issued (the
"Effective Date").
As of December 31, 2003 there were $32,474 Series A Senior
Convertible Preferred share dividends accrued and unpaid
representing $1.11 per share.
Series B of the Senior Convertible Preferred Stock series which was issued
in 2000 has 350,000 shares designated, no shares issued and outstanding.
The total outstanding Series B Senior Convertible Preferred Stock at
December 31, 2003 is $0. The following is a description of the Series B
Senior Convertible Stock:
(1) The holders of said shares of Series B Senior Preferred shall be
entitled to receive cumulative dividends thereon at the rate of
seven percent (7%) per annum, payable semi-annually when declared by
the Board of Directors, before any dividend shall be declared, set
apart for, or paid upon the Common Stock of the Company. The
Dividend Rate shall accrue on the Liquidation Price of each share of
the Series B Senior Preferred. The dividends on the Series B Senior
Preferred, payable in cash, shall be cumulative, so that if the
Company fails in any fiscal year to pay such dividends on all the
issued and outstanding Series B Senior Preferred, such deficiency in
the dividends shall be fully paid, but without interest, before any
dividends shall be paid on or set apart for the Cumulative Preferred
Stock or the Common Stock.
(2) The Series B Senior Preferred shall, with respect to dividend rights
and liquidation rights, rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with
the Series A and C Senior Convertible Preferred Stock.
(3) In the event of any liquidation of the Company, whether voluntary or
otherwise, after payment or providing for payment of the debts and
other liabilities of the Company, the holders of the Series B Senior
Preferred shall be entitled to receive, out of the remaining net
assets of the Company, the amount of nine ($9.00) dollars for each
share of Series B Senior Preferred (the "Liquidation Price") held of
record by such holder, payable in cash or in shares of stock,
securities or other consideration, the value of which stock,
securities or other consideration shall be fixed by the Board of
Directors, plus the amount of all dividends in arrears on each such
share up to the date fixed for distribution, provided however, that
such remaining net assets are sufficient to cover all the before
mentioned payments and also like payments to holders of Series A and
C Senior Preferred, before any distribution shall be made to the
holders of Common Stock or Cumulative Preferred Stock of the
Company. In case such remaining net assets are insufficient to cover
all such payments to holders of Series A, B and C Senior Preferred,
the holders of these series shall receive payments on a pro rata
basis.
14
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series B Senior Preferred issued and outstanding at any time,
with the Board of Directors of the Company in its sole discretion
deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a
minimum of three (3) years at the time of notice of redemption of
the holders of such shares, by paying to the holders thereof the
Liquidation Price for each share of Series B Senior Preferred held
by such holder plus a "call premium" of 10% of the Liquidation
Price, together with the amount of any accrued and unpaid dividends
as may have accumulated thereon at the time of redemption (the
"Redemption Price").
(5) Each share of Series B Senior Preferred shall be convertible at any
time prior to the Redemption Date, at the holder's option, into
shares of Common Stock of the Company on the basis of ten (10)
shares of Common Stock for 1 share of Series B Senior Preferred.
As of December 31, 2002 there were no Series B Senior Convertible
Preferred share dividends accrued and unpaid.
Series C of the Senior Convertible Preferred Stock series which was issued
in 2000 has 120,000 shares designated, 100,000 shares issued and
outstanding. The total outstanding Series C Senior Convertible Preferred
Stock at December 31, 2002 is $100 with a liquidation price of $900,000.
The following is a description of the Series C Senior Convertible Stock:
(1) The holders of said shares of Series C Senior Preferred shall be
entitled to receive cumulative dividends thereon at the rate of
seven percent (7%) per annum, payable monthly, before any dividend
shall be declared, set apart for, or paid upon the Common Stock of
the Company. The Dividend Rate shall accrue on the Liquidation Price
(as hereinafter defined) of each share of the Series C Senior
Preferred. The dividends on the Series C Senior Preferred, payable
in cash, shall be cumulative, so that if the Company fails in any
fiscal year to pay such dividends on all the issued and outstanding
Series C Senior Preferred, such deficiency in the dividends shall be
fully paid, but without interest, before any dividends shall be paid
on or set apart for the Cumulative Preferred Stock or the Common
Stock.
(2) The Series C Senior Preferred shall with respect to dividend rights
and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with
the Series A and B Senior Convertible Preferred Stock.
(3) In the event of any liquidation of the Company, whether voluntary or
otherwise, after payment or provision for payment of the debts and
other liabilities of the Company, the holders of the Series C Senior
Preferred shall be entitled to receive, out of the remaining net
assets of the Company, the amount of nine ($9.00) dollars for each
share of Series C Senior Preferred (the "Liquidation Price") held of
record by such holder, payable in cash or in shares of stock,
securities or other consideration, the value of which stock,
securities or other consideration shall be fixed by the Board of
Directors, plus the amount of all dividends in arrears on each such
share up to the date fixed for distribution, provided, however, that
such remaining net assets are sufficient to cover all the before
mentioned payments and also like payments to holders of Series A and
B Senior Preferred, before any distribution shall be made to the
holders of Common Stock or Cumulative Preferred Stock of the
Company. In case such remaining net assets are insufficient to cover
all such payments to holders of Series A, B and C Senior Preferred,
the holders of these series shall receive payments on a pro rata
basis.
15
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series C Senior Preferred issued and outstanding at any time,
with the Board of Directors of the Company in its sole discretion
deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a
minimum of three (3) years at the time of notice of redemption to
the holders of such shares, by paying to the holders thereof the
Liquidation Price for each share of Series C Senior Preferred held
by such holder plus a "call premium" of 10% of the Liquidation Price
together with the amount of any accrued and unpaid dividends as may
have accumulated thereon at the time of redemption (the "Redemption
Price").
(5) Each share of Series C Senior Preferred shall be convertible at any
time prior to the Redemption Date, at the holder's option, into
shares of Common Stock of the Company on the basis of ten (10)
shares of Common Stock for 1 share of Series C Senior Preferred.
As of December 31, 2003 there were $189,000 Series C Senior Convertible
Preferred share dividends accrued and unpaid representing $1.89 per share.
Series D of the Senior Convertible Preferred Stock series which was issued
in 2000 has 500,000 shares designated, 63,890 shares issued and
outstanding. The total outstanding Series D Senior Convertible Preferred
Stock at December 31, 2003 is $64 with a liquidation price of $575,010.
The following is a description of the Series D Senior Convertible Stock:
(1) The holders of said shares of Series D Senior Preferred shall be
entitled to receive cumulative dividends thereon at the rate of
seven percent (7%) per annum, payable semi-annually when declared by
the Board of Directors before any dividend shall be declared, set
apart for, or paid upon the Common Stock of the Company. The
Dividend Rate shall accrue on the Stated Value (the "Stated Value"),
which Stated Value shall be noted on the certificate issued to the
holder, of each share of the Series D Senior Preferred. The
dividends on the Series D Senior Preferred, payable in cash, shall
be cumulative, so that if the Company fails in any fiscal year to
pay such dividends on all the issued and outstanding Series D Senior
Preferred, such deficiency in the dividends shall be fully paid, but
without interest, before any dividends shall be paid on or set apart
for the Cumulative Preferred Stock or the Common Stock.
(2) The Series D Senior Preferred shall with respect to dividend rights
and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with
the Series A, B and C Senior Convertible Preferred Stock.
(3) In the event of any liquidation of the Company, whether voluntary or
otherwise, after payment or provision for payment of the debts and
other liabilities of the Company, the holders of the Series D Senior
Preferred shall be entitled to receive, out of the remaining net
assets of the Company, an amount equal to the Stated Value of each
share of Series D Senior Preferred held of record by such holder,
payable in cash or in shares of stock, securities or other
consideration, the value of which stock, securities or other
consideration shall be fixed by the Board of Directors, plus the
amount of all dividends in arrears on each such share up to the date
fixed for distribution, provided, however, that such remaining net
assets are sufficient to cover all the before mentioned payments and
also like payments to holders of Series A, B and C Senior Preferred,
before any distribution shall be made to the holders of Common Stock
or Cumulative Preferred Stock of the Company. In case such remaining
net assets are insufficient to cover all such payments to holders of
Series A, B, C and D Senior Preferred, the holders of these series
shall receive payments on a pro rata basis.
16
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series D Senior Preferred issued and outstanding at anytime,
with the Board of Directors of the Company in its sole discretion
deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been outstanding for a minimum of
three (3) years at the time of notice of redemption to the holders
of such shares, by paying to the holders thereof the Stated Value
for each share of Series D Senior Preferred held by such holder plus
a "call premium" of 10% of the Stated Value, together with the
amount of any accrued and unpaid dividends as may have accumulated
thereon at the time of redemption (the "Redemption Price").
(5) Each share of Series D Senior Preferred shall be convertible at any
time prior to the Redemption Date, at the holder's option, into
shares of Common Stock of the corporation on the basis of ten(10)
shares of Common Stock for 1 share of Series D Senior Preferred.
As of December 31, 2003 there were $129,094 Series D Senior Convertible
Preferred share dividends accrued and unpaid representing $2.02 per share.
Series E of the Senior Convertible Preferred Stock series which was issued
in 2003 has 500,000 shares designated, 157,832 shares issued and
outstanding. The total outstanding Series E Senior Convertible Preferred
Stock at December 31, 2003 is $158 with a liquidation price of $946,992.
The following is a description of the Series E convertible preferred
stock:
(1) The holders of said shares of Series E Senior Preferred shall be
entitled to receive cumulative dividends at the rate of six percent
(6%) per annum, payable at the time said shares are converted into
shares of common stock of the Company and when declared by the board
of Directors, before any dividend shall be declared, set apart for,
or paid upon the Common Stock and any other Preferred Stock of the
Company. The Dividend Rate shall accrue on the Stated Value, which
Stated Value shall be noted on the certificate issued to the holder
of each share of the Series E Senior Preferred. The dividends on the
Series E Senior Preferred, payable in cash, shall be cumulative, so
that if the company fails in any fiscal year to pay such dividends
on all the issued and outstanding Series E Senior Preferred, such
deficiency in the dividends shall be fully paid, but without
interest, before any dividends shall be paid on or set apart for any
other class of Preferred Stock or the Common Stock.
(2) The Series E Senior Preferred shall with respect to dividend rights
rank prior to all classes and series of Common Stock, Cumulative
Preferred Stock , and the Series A, B, C, and D Senior Convertible
Preferred Stock and, with respect to liquidation rights rank prior
to all classes and series of Common Stock, the Cumulative Preferred
Stock, and be on a par with the Series A, B, C and D Senior
Convertible Preferred Stock.
(3) In the event of any liquidation, dissolution, or winding up of the
affairs of the Company, whether voluntary or otherwise, after
payment or provision for payment of the debts and other liabilities
of the Company, the holders of the Series E Senior Preferred shall
be entitled to receive, out of the remaining net assets of the
Company, an amount equal to the Stated Value of each share of Series
E Senior Preferred held of record by such holder, payable in cash or
in shares of stock, securities or other consideration, the value of
which stock, securities or other consideration shall be fixed by the
Board of Directors, plus the amount of all dividends in arrears on
each such share up to the date fixed for distribution, provided,
however, that such remaining net assets are sufficient to cover all
the before mentioned payments and also like payments to holders of
Series A, B, C and D Senior Preferred, before any distribution shall
be made to (1)
17
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
the holders of Common Stock or Cumulative Preferred Stock of the
Company. In case such remaining net assets are insufficient to cover
all such payments to holders of Series A, B, C, D and E Senior
Preferred, the holders of these series shall receive payments on a
pro rata basis.
(4) The holders of said shares of Series E Senior Preferred shall not be
entitled to any voting rights.
(5) Shares of Series E Senior Preferred which have been issued and
reacquired in any manner, including shares purchased or converted
into Common Stock exchanged or redeemed, shall be canceled on the
books of the Company and shall not be considered outstanding for any
purpose.
(6) During such time as there exist unpaid cumulative dividends due on
the Series E Senior Preferred, no reclassification of the shares of
the Company or capital reorganization of the Company in any manner
provided by law shall be valid unless(a) the holders of a majority
of all the Series E Senior Preferred approve, and (b) provision is
made for the payment of the aggregate unpaid cumulative dividends
then in arrears.
(7) Each share of Series E Senior Preferred shall automatically convert,
on the date six months after the date of issuance (the "Conversion
Date") which Conversion Date shall be noted on the certificate
issued to the holder of each share of the Series E Senior Preferred,
into shares of Common Stock of the Company on the basis of one
hundred (100) shares of Common Stock for 1 share of Series E Senior
Preferred. The holder of any shares of Series E Senior Preferred
shall surrender, as soon as practicable on or after the Conversion
Date, at the principal office of the Company or at such other office
or agency maintained by the Company for that purpose, the
certificate or certificates representing the shares of Series E
Senior Preferred due for conversion. As promptly as practicable, and
in any event within ten business days after surrender of such
certificates, the Company shall deliver or cause to be delivered
certificates representing the number of validly issued, fully paid
and non-assessable shares of Common Stock of the Company to which
such holder of Series E Senior Preferred so converted shall be
entitled. Such conversion shall be deemed to have been made at the
close of business on the Conversion Date, so that the rights of the
holders of the Series E Senior Preferred shall thereafter cease
except for the right to receive Common Stock of the Company in
accordance herewith, and such converting holder of Series E Senior
Preferred shall be treated for all purposes as having become the
record holder of such Common Stock of the Company at such time.
(8) In the event that, prior to the conversion of the Series E Senior
Preferred Stock by the holder thereof into Common Stock of the
company, there shall occur any change in the outstanding shares of
Common Stock of the Company by reason of the declaration of stock
dividends, or through a re-capitalization resulting from stock
splits or combinations, without the receipt by the Company of fair
consideration therefore in the form of cash, services or property,
the conversion ratio of the Series E Senior Preferred Stock into
Common Stock of the Company shall be adjusted such that any holder
of Series E Senior Preferred Stock converting such stock into Common
Stock subsequent to such change in the outstanding shares of Common
Stock of the Company be entitled to receive, upon such conversion, a
number of shares of Common Stock of the Company representing the
same percentage of common shares outstanding as presented by the
shares that he would have received had he converted his Series E
Senior Preferred Stock to Common Stock prior to such change in the
outstanding shares of Common Stock of the Company.
As of December 31, 2003 there were $0 Series E Senior Convertible
Preferred share dividends accrued and unpaid representing $0 per
share.
18
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
At the time each Convertible Preferred Stock Series was issued, the
respective conversion features were in excess of the then market value of
the Company's common stock.
INCOME TAXES
The income tax provision (benefit) is comprised of the following:
Year Ended December 31,
------------------------------------
2003 2002
---------------- ----------------
State current provision (benefit) $ (203,397) $ (203,464)
State deferred provision (benefit) - -
---------------- ----------------
$ (203,397) $ (203,464)
================ ================
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 2003
and 2002, the Company entered into an agreement under which it retained a
third party broker to identify a buyer for its NOL Carryover. The total
tax benefit of this transaction was $209,084 in 2003 and $210,598 in 2002.
The Company's total deferred tax asset and valuation allowance are as
follows:
December 31,
-----------------------------------
2003 2002
--------------- ---------------
Total deferred tax asset, noncurrent $ 7,274,000 $ 6,700,000
Less valuation allowance (7,274,000) (6,700,000)
--------------- ---------------
Net deferred tax asset, noncurrent $ - $ -
=============== ===============
The differences between income tax benefits in the financial statements
and the tax benefit computed at the combined state and U.S. Federal
statutory rate of 40% are as follows:
Year Ended December 31,
-----------------------------------
2003 2002
--------------- ---------------
Tax benefit 40% 40%
Valuation allowance 40% 40%
--------------- ---------------
Effective tax rate - -
=============== ===============
At December 31, 2003, the Company has available approximately $22,043,000
of net operating losses to carryforward and which may be used to reduce
future federal taxable income and expire between December 31, 2007 and
2023.
At December 31, 2003, the Company has available approximately $4,905,000
of net operating losses to carryforward and which may be used to reduce
future state taxable income which expire December 31, 2010.
19
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 $16,175 and $14,715 for the years ended December 31, 2003 and 2002,
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.
In May 2000 the Company adopted its 2000 Stock Incentive Plan ("the 2000
Plan"). The 2000 Plan provides that certain options granted thereunder are
intended to qualify as "incentive stock options" (ISO) within the meaning
of Section 422A of the United States Internal Revenue Code of 1986, while
nonqualified options may also be granted under the Plan. The initial Plan
provides for the grant of options for up to 5,000,000 shares. The purchase
price per share of common stock deliverable upon exercise of each ISO
shall not be less than 100% of the fair market value of the common stock
on the date such option is granted. If an ISO is issued to an individual
who owns, at the time of grant, more than 10% of the total combined voting
power of all classes of the Company's common stock, the exercise price of
such option shall be at least 110% of the fair market value of the common
stock on the date of the grant, and the term of the option shall not
exceed five years from the date of grant. The purchase price of shares
subject to non-qualified stock options shall be determined by a
compensation committee established by the Board of Directors.
20
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLANS - (Continued)
Qualified and Non-Qualified
Shares Under Option Pursuant to
the 1997 Plan
December 31,
---------------------------------
2003 2002
---- ----
Outstanding, beginning of year 607,000 857,000
Granted during the year - -
Expired during the year - (50,000)
Forfeited during the year - (200,000)
-------------- ---------------
Outstanding, end of year (at prices ranging from $1.00 to $2.00
per share) 607,000 607,000
-------------- ---------------
Eligible, end of year for exercise (at prices ranging from $1.00 to
$2.00 per share) 607,000 607,000
============== ===============
At December 31, 2003 and 2002, the weighted average exercise price and
weighted average remaining contractual life is $1.06 and $1.06 per share
and 1 years 11 months and 2 years 11 months, respectively.
At December 31, 2003, there were 393,000 shares reserved for future option
grants.
Qualified and Non-Qualified
Shares Under Option Pursuant to
the 2000 Plan
December 31,
---------------------------------
2003 2002
---- ----
Outstanding, beginning of year 3,053,942 2,701,109
Granted during the year 5,000 785,500
Exercised during the year (50,000) (303,500)
Forfeited during the year - (79,167)
Expired during the year (190,000) (50,000)
-------------- --------------
Outstanding, end of year (at prices ranging from $0.10 to $1.33) 2,818,942 3,053,942
-------------- --------------
Eligible, end of year for exercise (at prices ranging from $0.10 to $1.33) 2,818,942 3,043,942
============== ==============
At December 31, 2003 and 2002 the weighted average exercise price and
weighted average remaining contractual life is $0.60 and $0.76 per share
and 2 years 4 months and 3 years 2 months, respectively.
At December 31, 2003, there were 2,181,058 shares reserved for future
option grants.
If the Company had used the fair value based method of accounting for its
employee stock option plan, as prescribed by Statement of Financial
Accounting Standards No. 123, compensation cost in net loss for the years
ended December 31, 2003 and 2002 would have increased by $0 and $37,772,
respectively, resulting in net loss of $2,297,365 and $2,680,445 net of
tax, respectively, and loss per share of $0.03 and $.06, respectively. The
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected dividend, 0%; risk-free interest rate, 5%; expected
volatility, 115%; and expected life (in years) of 4.4.
21
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLANS - (Continued)
The Company also issues options outside of the Stock Incentive Plans which
are comprised as follows:
December 31,
-------------------------------
2003 2002
---- ----
Outstanding, beginning of year 7,174,866 6,214,866
Granted during the year 2,180,000 1,750,000
Exercised during the year - (40,000)
Forfeited during the year (250,000) (750,000)
Expired during the year (50,000) -
-------------- --------------
Outstanding, end of year (at prices ranging from $.10 to $1.00) 9,054,866 7,174,866
-------------- --------------
Eligible, end of year (at prices ranging from $.10 to $1.00) 9,054,866 7,174,866
============== ==============
At December 31, 2003 and 2002 the weighted average exercise price and
weighted average remaining contractual life is $0.34 and $0.41 per share,
and 4 years 7 months and 6 years 6 months, respectively.
WARRANTS
The Company granted common stock purchase warrants between May 1, 1998 and
December 31, 2003 which are comprised as follows:.
December 31,
-------------------------------
2003 2002
---- ----
Outstanding, beginning of year 7,398,164 11,980,472
Granted during the year 9,241,599 -
Exercised during the year (3,552,752) (4,432,308)
Forfeited during the year (27,780) -
Expired during the year (1,086,213) (150,000)
-------------- --------------
Outstanding, end of year (at prices ranging from $.15 to $1.50) 11,973,018 7,398,164
============== ==============
Callable, end of year (at $2.00) 100,000 824,000
============== ==============
At December 31, 2003 and 2002, the weighted average exercise price and weighted
average remaining contractual life is $0.32 and $0.94 per share and 2 years 8
months and 1 year, respectively.
COMMITMENTS AND CONTINGENCIES
Lease Agreement
On March 15, 2000, the Company entered into a lease agreement for office
space which is utilized for the Company's principal offices. Such lease
commenced April 15, 2000 and expires on March 31, 2005 and requires
monthly payments of $6,500 from April 15, 2000 through March 31, 2002; of
$6,695 thereafter through March 31, 2003; of $6,896 thereafter through
March 31, 2004; and of $7,103 thereafter through March 31, 2005. In August
2002 the Company subleased additional office space at this location
commencing September 1, 2002 and expiring December 31, 2003. The sublease
requires monthly payments of $1,955 throughout the sublease term.
Consequently, this space has been leased directly from the landlord on a
month-to-month basis at the same monthly rental rate.
22
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES (continued)
Under the lease agreement, the Company is required to make future minimum
lease payments as follows in addition to a pro-rata share of certain
operating expenses:
Year Ending December 31,
2004 $ 84,615
2005 21,309
---------------
Total $ 105,924
===============
Included in general and administrative expenses is rent expense which
amounted to $110,784 and $97,098 for the years ended December 31, 2003 and
2002, respectively.
Employment Agreements
The Company has entered into employment agreements with certain key
personnel which provide for a base salary, yearly bonuses in common stock
and/or options of the Company and other benefits. Termination of the
agreements may be made by either party with advance notice.
RELATED PARTY TRANSACTIONS
In February 2002, the company and its President and Chief Executive
Officer agreed to convert most of his base salary for the remainder of the
year 2002 into 1,100,000 restricted common shares in lieu of cash at the
rate of $0.10 per share, for a total amount of $110,000.
During the first quarter of 2002, three outside directors of the Company
were awarded stock grants for an aggregate 700,000 restricted common
shares, for services rendered.
In January and February 2002, an outside director of the Company purchased
common stock and exercised certain warrants for a total of 726,111 shares,
at the price of $0.10 per share.
During the second quarter of 2002, an affiliate of an outside director of
the Company received 25,000 newly issued restricted common shares, for
services rendered.
In June 2002, an officer of the Company offered, and the Company accepted,
the conversion of $15,000 liabilities into 150,000 shares of common stock.
During the third quarter of 2002, the directors and certain officers of
the Company were awarded stock grants for an aggregate 1,500,000
restricted common shares, for services rendered.
In July 2002, an outside director of the Company and an affiliate
exercised certain warrants for a total of 400,000 shares, at the price of
$0.10 per share.
In August 2002, an outside director of the Company converted cash advances
in the aggregate amount of $45,000, extended to the Company during June
and July 2002, into 450,000 restricted common shares.
During the third quarter of 2002, an outside director exercised options
for the purchase of 262,500 shares, at the price of $0.10 per share.
In January 2003, the Company and its President and Chief Executive Officer
agreed to convert most of his base salary for the remainder of the year
2003 into 1,000,000 restricted common shares in lieu of cash at the rate
of $0.10 per share, for a total amount of $100,000.
23
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RELATED PARTY TRANSACTIONS (continued)
During the first quarter of 2003, an outside director of the Company was
awarded a stock grant for 200,000 restricted common shares, for services
rendered. The same director converted $20,500 in accrued expenses incurred
on behalf of the Company, into 205,000 restricted shares.
During the first and second quarters of 2003, the Company's President and
Chief Executive Officer and an outside director of the Company extended
cash advances to the Company, totaling $244,000, repayable on demand and
carrying interest at the rate of 10% per annum.
During the second quarter of 2003, an outside director of the Company was
awarded a stock grant for 163,500 restricted common shares, for services
rendered.
In a meeting of the board of directors of the Company on May 29, 2003, in
consideration of the Company's President's role in augmenting available
working capital through salary conversion and direct cash loans, the board
approved a reduction in the exercise price of stock options for a total
4,147,917 shares issued to him, from prices ranging from $0.50 to $1.00,
to $0.10 per share.
During the fourth quarter in 2003, the Company granted restricted stock
awards totaling 2,025,000 common shares to five officers and directors of
the Company. In addition, two outside directors were granted restricted
stock awards for services rendered, of 9,971.67 preferred shares
convertible into 997,167 common shares and warrants for the purchase of
498,583 shares, exercisable during three years at the price of $0.15 per
share.
During 2003 and 2002, one outside director of the Company who also serves
as the Company's general and securities counsel, was paid an aggregate
$132,000 and $145,893, respectively, for legal services. One other outside
director was paid $14,900 for services performed during 2003.
MAJOR CUSTOMERS
The Company had one major customer for the year ended December 31, 2003,
which comprised 25% of total sales, and one major customer for the year
ended December 31, 2002 which comprised 63% of total sales. The Company's
revenue profile consists of a larger number of small transactions
interspersed with a few large contracts which, if they were not to
materialize, would significantly alter period revenues. This
unpredictability and volatility represents a risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable, accrued expenses, notes
payable, long-term debt and capitalized lease obligations:
The carrying amount approximates fair value because of the short term
maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
24
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that statement,
SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.
This statement amends SFAS No. 13, Accounting for Leases, to eliminate
inconsistencies between the required accounting for sales-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sales-leaseback
transactions. Also, this statement amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Provisions of SFAS
No. 145 related to the rescissions of SFAS No. 4 were effective for the
Company on November 1, 2002 and provisions affecting SFAS No. 13 were
effective for transactions occurring after May 15, 2002. The adoption of
SFAS No. 145 did not have a significant impact on the Company's results of
operations or financial position.
In June 2003, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement covers
restructuring type activities beginning with plans initiated after
December 31, 2002. Activities covered by this standard that are entered
into after that date will be recorded in accordance with provisions of
SFAS No. 146. The adoption of SFAS No. 146 did not have a significant
impact on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which provides alternative methods
of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation as prescribed in SFAS
123, Accounting for Stock-Based Compensation. Additionally, SFAS No. 148
required more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The provisions
of this Statement are effective for fiscal years ending after December 15,
2002. The adoption of this statement is not expected to have a significant
impact on the Company's results of operations of financial position.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", which
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, except for certain
hedging relationships designated after June 30, 2003. Most provisions of
this Statement should be applied prospectively. The adoption of this
statement is not expected to have a significant impact on the Company's
results of operations or financial position.
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities, if applicable. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The adoption
of this statement is not expected to have a significant impact on the
Company's results of operations or financial position.
25
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS (continued)
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a
company, at the time it issues a guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantees
and elaborates on existing disclosure requirements related to guarantees
and warranties. The recognition requirements are effective for guarantees
issued or modified after December 31, 2002 for initial recognition and
initial measurement provisions. The adoption of FIN 45 did not have a
significant impact on the Company's results of operations or financial
position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after
June 15, 2003. The adoption of FIN 46 did not have a significant impact on
the Company' results of operations or financial position.
SUBSEQUENT EVENTS
During January 2004 the Company issued convertible preferred stock to
accredited private investors pursuant to private placement subscriptions,
which resulted in the Company receiving approximately $890,000 in cash.
The preferred stock is convertible into approximately 15.6 million common
shares which the Company will include in a registration statement to be
filed during the second quarter 2004.
26
26,040,037 Shares
Magnitude Information Systems, Inc.
Common stock
------------------
PROSPECTUS
------------------
August __, 2004
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING
STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
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Prospectus Summary 3
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Risk Factors 6
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Where You Can Find More Information 12
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Use of Proceeds 13
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Market for Company's Common Equity & Dividend Policy 13
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Selling Shareholders 14
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Shares Eligible for Future Sale 20
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Plan of Distribution 21
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Legal Proceedings 21
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Management 22
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Principal Shareholders 26
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Description of Capital Stock 28
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Business 30
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Management's Discussion and Analysis 38
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Certain Transactions 41
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Financial Statements 44
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57
UNTIL ________________, 2004 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
58
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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Magnitude will pay all expenses incident to the offering and sale to the public
of the shares being registered other than any commissions and discounts of
underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except the
Securities and Exchange Commission ("SEC") registration fee.
Legal fees and expenses 30,000.00
Accounting fees and expenses 5,000.00
Printing expenses 2,500.00
Miscellaneous expenses 5,000.00
---------------------------------------------------------------
Total $ 42,500.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
FISCAL YEAR 2004
During the quarter ended June 30, 2004, the Company issued the following
unregistered securities:
(i) 2,875,000 shares of common stock, accompanied by warrants for the
purchase of 2,875,000 common shares at the price of $0.15 per share,
to six accredited foreign investors pursuant to private placement
subscriptions, issued in reliance upon exemptions provided under
Section 4(2), Rule 506 of Regulation D and Regulation S of the
Securities Act, altogether resulting in the receipt by the Company
of approximately $284,000 in cash.
(ii) 285,000 shares of common stock to a consultant for investor
relations and general business consulting services.
(iii) 150,000 shares of common stock in lieu of cash, for rent expenses.
(iv) 500,000 shares of common stock pursuant to the conversion of 5,000
shares of Series E Senior Convertible Preferred Stock, in accordance
with the designation for the latter.
61
During the quarter ended March 31, 2004, the Company issued the following
unregistered securities:
(i) 1,145,000 shares of common stock and 1,900 shares of Series E Convertible
Preferred Stock convertible into 190,000 common shares, accompanied by
warrants for the purchase of 95,000 common shares at the price of $0.15
per share, to three consultants for investor relations and general
business consulting services.
(ii) 673,333 shares of common stock to a financial services firm for finder's
fees in connection with the private placement of convertible preferred
stock.
(iii) 50,000 shares of common stock in lieu of cash, for rent expenses.
(iv) 150,000 shares of common stock to an outside director of the Company for
services rendered. The same director was issued 250,000 shares pursuant to
his exercise of an option at the price of $0.01 per share which option was
acquired by him in a private transaction with an unrelated party.
(v) 156,993 shares of Series E Convertible Preferred Stock convertible into
15,699,333 common shares, accompanied by warrants for the purchase of
7,849,667 common shares at the price of $0.15 per share, to thirty-nine
accredited investors pursuant to private placement subscriptions, issued
in reliance upon exemptions provided under Section 4(2), Rule 506 of
Regulation D and Regulation S of the Securities Act, altogether resulting
in the receipt by the Company of approximately $880,000 in cash.
(vi) 16,667 shares of Series E Convertible Preferred Stock convertible into
1,666,667 common shares, accompanied by warrants for the purchase of
833,333 common shares, exercisable during three years at the price of
$0.15 per share, to the Company's chief executive officer in lieu of
$100,000 salary.
FISCAL YEAR 2003
During the quarter ended December 31, 2003, the Company issued the following
unregistered securities:
(i) 1,350,000 shares of common stock to eight accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S of
the Securities Act, altogether resulting in the receipt by the Company of
approximately $73,000 in cash;
(ii) 947,500 shares of common stock to three consultants for marketing and
investor relations services rendered;
(iii) 172,833 shares of common stock issued to a creditor in return for
cancellation of $10,370 debt;
(iv) 2,000,000 shares of common stock to certain directors and officers of the
Company, for services rendered;
(v) 130,834 shares of Series E Senior Convertible Preferred Stock, convertible
into 13,083,400 shares of common stock, and stock purchase warrants for
the purchase of 6,691,600 shares of common stock, exercisable during three
years at $0.15 per share, to 18 accredited investors and three assignees
pursuant to private placement subscriptions, issued in reliance upon
exemptions provided under Section 4(2), Rule 506 of Regulation D and
Regulation S of the Securities Act, altogether resulting in the receipt by
the Company of approximately $741,000 in cash;
(vi) 19,593 shares of Series E Senior Convertible Preferred Stock,
convertible into 1,959,300 shares of common stock, and stock purchase
warrants for the purchase of 979,650 shares of common stock,
exercisable during three years at $0.15 per share, to four creditors,
one of who is a director of the Company, in return for cancellation of
$117,600 debt;
(vii) 7,405 shares of Series E Senior Convertible Preferred Stock,
convertible into 740,500 shares of common stock, and stock purchase
warrants for the purchase of 370,250 shares of common stock,
exercisable during three years at $0.15 per share, to two individuals,
one of who is a director of the Company, for services rendered.
(i) 1,900,000 shares of common stock to 7 accredited investors During the
quarter ended September 30, 2003, the Company issued the following
unregistered securities:
(i) 4,296,870 shares of common stock to nine accredited investors pursuant
to private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S
of the Securities Act, altogether resulting in the receipt by the
Company of approximately $258,000 in cash;
(ii) 1,642,500 shares of common stock and options for the purchase of
1,535,000 shares, for marketing consulting and investor relations
services;
During the quarter ended June 30, 2003, the Company issued the following
unregistered securities:
(i) 1,900,000 shares of common stock to 7 accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S
of the Securities Act, and 1,115,500 shares of common stock pursuant to
the exercise of stock purchase warrants previously issued, altogether
resulting in the receipt by the Company of approximately $250,000 in
cash;
62
(ii) 500,000 shares of common stock for marketing consulting and investor
relations services performed;
(iii) 163,500 shares of common stock pursuant to a stock grant to an outside
director of the Company.
During the quarter ended June 30, 2003, the Company issued the following
unregistered securities:
(i) 1,900,000 shares of common stock to 7 accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S
of the Securities Act, and 1,115,500 shares of common stock pursuant to
the exercise of stock purchase warrants previously issued, altogether
resulting in the receipt by the Company of approximately $250,000 in
cash;
(ii) 500,000 shares of common stock for marketing consulting and investor
relations services performed;
(iii) 163,500 shares of common stock pursuant to a stock grant to an outside
director of the Company.
During the quarter ended March 31, 2003, the Company issued the following
unregistered securities:
(i) 2,063,000 shares of common stock to 14 accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S
of the Securities Act, and 2,437,252 shares of common stock pursuant to
the exercise of stock purchase warrants previously issued, altogether
resulting in the receipt by the Company of approximately $408,000 in
cash;
(ii) 81,000 shares of common stock to five employees pursuant to their
exercise of stock options at a price of $0.10 per share;
(iii) 1,000,000 shares of common stock to the Company's chief executive
officer in lieu of $100,000 cash salary (see "Related Party
Transactions");
(iv) 743,035 shares of common stock for marketing consulting and investor
relations services performed;
(v) 200,000 shares of common stock pursuant to a stock grant to an outside
director of the Company;
63
(vi) 205,000 shares of common stock to an outside director of the Company in
exchange for cancellation of payables for an aggregate $20,500 in
expenses.
FISCAL YEAR 2002
During the fourth quarter of 2002 the Company had issued the following
unregistered securities:
(i) 2,125,000 shares of common stock to seven foreign accredited investors
pursuant to private placement subscriptions under Section 4(2), Rule
506 of Regulation D and Regulation S of the Securities Act, which
resulted in the receipt by the Company of $191,250 in cash;
(ii) 262,500 shares of common stock and 463,890 shares of common stock
pursuant to the exercise of stock options and warrants, respectively,
at the price of $0.10 per share which resulted in the receipt by the
Company of $26,250 in cash and the cancellation of $46,389 in current
liabilities;
(iii) 90,000 shares of common stock to two consultants for services rendered.
(iv) 16,441 shares of common stock issued to an employee for sales
commissions.
(v) During the quarter, the issuance of 81,000 shares previously recorded
in connection with the exercise of stock options, was reversed
In addition, during the fourth quarter of 2002, the board of directors of
the Company approved resolutions affecting previously issued or to be issued
securities, as follows:
(i) During a meeting on October 8, 2002, the board approved a downward
adjustment of the exercise price of stock options for 262,500 shares,
previously issued to an outside director, to $0.10 per share,
conditioned upon the exercise of such restated options;
(ii) During a meeting on December 23, 2002, the board approved the placement
of common stock with accredited private foreign investors pursuant to
private placement subscriptions under Section 4(2), Rule 506 of
Regulation D and Regulation S of the Securities Act, at a price of
$0.10 per share for an aggregate of up to $3,000,000 in proceeds.
During the quarter ended September 30, 2002, the Company issued the
following unregistered securities:
(i) 2,290,000 shares of common stock to 5 accredited investors including an
outside director of the Company pursuant to private placement
subscriptions, issued in reliance upon exemptions provided under
Section 4(2) S of the Securities Act, and 1,500,067 shares of common
stock pursuant to the exercise of stock purchase warrants previously
issued, altogether resulting in the receipt by the Company of
approximately $379,000 in cash;
64
(ii) 30,000 shares of common stock to two employees pursuant to the terms of
their employment agreements;
(iii) 138,890 shares of common stock pursuant to the conversion of 13,889
shares of the Company's Series D Convertible Preferred Stock;
(iv) 367,000 shares of common stock for marketing consulting and investor
relations services performed;
(v) 1,500,000 shares of common stock pursuant to stock grants to certain
directors and officers of the Company;
(vi) 353,854 shares of common stock pursuant to the conversion of accrued
dividends on shares of convertible preferred stock, at the rate of
$0.10 per share.
During the quarter ended June 30, 2002, the Company issued the following
unregistered securities:
(i) 8,245,000 shares of common stock to 38 accredited U.S. investors and
certain non-U.S. investors pursuant to private placement subscriptions,
issued in reliance upon exemptions provided under Section 4(2) and, in
the case of the non-U.S. investors, provided by Regulation S of the
Securities Act, and 1,789,240 shares of common stock pursuant to the
exercise of stock purchase warrants previously issued, which resulted
in the receipt by the Company of approximately $960,000 in cash. All of
the accredited investors had a pre-existing relationship with the
Company and no general solicitation or advertisement was utilized to
solicit any of the accredited investors. Each of the accredited
investors (a) executed and delivered to the Company a subscription
agreement which included the investor's representations that such
investor qualified as an accredited investor, had the financial
experience and resources to appreciate the risk of such investment and
(b) had the time to ask questions and make inquiries to the Company
before their investment funds were accepted. Of the 38 accredited
investors, 1 is a current Company officer, 15 were pre-existing
shareholders and 8 were non-U.S. residents. All of the Company's
securities placed with these investors bore the appropriate restrictive
legend, designating such securities as restricted securities;
(ii) 165,500 shares of common stock to three foreign individuals as finder's
fee in connection with certain of the private placement subscription
mentioned under (i) above which subscriptions were entered into by
private foreign investors;
(iii) 341,814 shares of common stock pursuant to the conversion of certain
payables into equity, at a rate of $0.10 per share;
(iv) 377,139 shares of common stock for investor relations services
performed;
65
(v) 250,000 shares pursuant to a stock grant to a business consultant for
the Company;
(vi) 20,000 shares pursuant to the exercise of options at a price of $0.10
per share.
During the quarter ended March 31, 2002, the Company issued the following
unregistered securities:
(i) 7,052,000 shares of common stock to 21 U.S. accredited investors and
non-U.S. investors pursuant to private placement subscriptions, issued
in reliance upon exemptions provided under Section 4(2) and, in the
case of the non-U.S. investors, Regulation S of the Securities Act; and
679,111 shares of common stock pursuant to the exercise of stock
purchase warrants previously issued, which resulted in the receipt by
the Company of approximately $753,000 in cash. All of the accredited
investors had a pre-existing relationship with the Company and no
general solicitation or advertisement was utilized to solicit any of
the accredited investors. Each of the accredited investors (a) executed
and delivered to the Company a subscription agreement which included
the investor's representations that such investor qualified as an
accredited investor, had the financial experience and resources to
appreciate the risk of such investment and (b) had the time to ask
questions and make inquiries to the Company before their investment
funds were accepted. Of the 22 accredited investors, 3 are current
Company officers and directors, 8 were pre-existing shareholders and 4
were non-U.S. residents. All of the Company's securities placed with
these investors bore the appropriate restrictive legend, designating
such securities as restricted securities;
(ii) 50,000 shares of common stock pursuant to the conversion of 5,000
shares of the Company's Series D Convertible Preferred Stock;
(iii) 720,718 shares of common stock pursuant to the conversion of certain
payables into equity, at a rate of $0.10 per share;
(iv) 1,250 shares of common stock for services performed;
(v) 700,000 shares as stock grants and 1,165,000 shares in lieu of
compensation (see "Related Party Transactions").
FISCAL YEAR 2001
During the fourth quarter of 2001 the Company had issued the following
unregistered securities:
(i) 220,000 shares of common stock accompanied by warrants for the purchase
of 110,000 shares of common stock at a price of $0.50 per share, to
three accredited investors pursuant to private placement subscriptions
under Section 4(2) of the Securities Act, which resulted in the receipt
by the Company of $49,500 in cash. All of the accredited investors had
a pre-existing relationship with the Company and no
66
general solicitation or advertisement was utilized to solicit any of
the accredited investors. Each of the accredited investors (a) executed
and delivered to the Company a subscription agreement which included
the investor's representations that such investor qualified as an
accredited investor, had the financial experience and resources to
appreciate the risk of such investment and (b) had the time to ask
questions and make inquiries to the Company before their investment
funds were accepted. All of the Company's securities placed with these
investors bore the appropriate restrictive legend, designating such
securities as restricted securities;;
(ii) Warrants for the purchase of 600,000 shares of common stock at various
prices averaging $1.13 per share to a consultant and his assignees for
services rendered.
In addition, during the fourth quarter of 2001 and the first quarter of
2002 through March 26, 2002, the board of directors of the Company approved
resolutions affecting previously issued or to be issued securities, as follows:
(i) During a meeting on October 16, 2001, the board approved a downward
adjustment of the exercise price of previously issued warrants for the
purchase of common stock, to $0.25 per share, for an aggregate of up to
$500,000 in proceeds from the exercise of such restated warrants;
(ii) During a meeting on December 26, 2001, the board approved a downward
adjustment of the exercise price of warrants for the purchase of common
stock previously issued to accredited private investors, to $0.10 per
share, for an aggregate of up to $1,000,000 in proceeds from the
exercise of such restated warrants;
(iii) During a meeting on January 3, 2002, the board approved the placement
of common stock with accredited private investors pursuant to private
placement subscriptions under Section 4(2) and Rule 506 of Regulation D
of the Securities Act, at a price of $0.10 per share for an aggregate
of up to $1,000,000 in proceeds.
During the Third Quarter ended September 30, 2001, the Company issued the
following unregistered securities:
(i) 1,124,030 shares of common stock accompanied by warrants for the
purchase of 1,118,700 shares of common stock exercisable at $0.60 per
share, to four accredited investors pursuant to private placement
subscriptions, issued in reliance upon exemptions provided under
Section 4(2) of the Securities Act, which resulted in the receipt by
the Company of approximately $423,000 in cash. All of the accredited
investors had a pre-existing relationship with the Company and no
general solicitation or advertisement was utilized to solicit any of
the accredited investors. Each of the accredited investors (a) executed
and delivered to the Company a subscription agreement which included
the investor's representations that such investor qualified as an
accredited investor, had the financial experience and resources to
appreciate the risk of such investment and (b) had the time to ask
questions and make inquiries to the Company before their investment
funds were accepted. All of the Company's securities placed with these
investors bore the appropriate restrictive legend, designating such
securities as restricted securities;
67
(ii) 79,403 shares of common stock to three creditors of the Company,
pursuant to the conversion of $31,800 in miscellaneous payables. The
Company negotiated these debt conversions with its corporate creditors
with whom the Company had business relationships.
(iii) 1,000,000 shares of common stock pursuant to the exercise of certain
options and warrants by two individuals, one of whom is a director of
the Company (see "Related Party Transactions" above); resulting in the
receipt by the Company of $250,000 in cash;
(iv) 3,750 shares of common stock for services performed.
During the Second Quarter Ended June 30, 2001, the Company issued the following
unregistered securities:
(i) 932,200 shares of common stock accompanied by warrants for the purchase
of 932,200 shares of common stock exercisable at prices of $0.60 and
$0.90 per share, to ten accredited investors pursuant to private
placement subscriptions, issued in reliance upon exemptions provided
under Section 4(2) of the Securities Act, which resulted in the receipt
by the Company of approximately $380,000 in cash. All of the accredited
investors had a pre-existing relationship with the Company and no
general solicitation or advertisement was utilized to solicit any of
the accredited investors. Each of the accredited investors (a) executed
and delivered to the Company a subscription agreement which included
the investor's representations that such investor qualified as an
accredited investor, had the financial experience and resources to
appreciate the risk of such investment and (b) had the time to ask
questions and make inquiries to the Company before their investment
funds were accepted. All of the Company's securities placed with these
investors bore the appropriate restrictive legend, designating such
securities as restricted securities;
(ii) 2,033,920 shares of common stock pursuant to the conversion of 203,392
shares of Senior Convertible Preferred Stock, Series B and D, of the
Company;
(iii) 92,666 shares of common stock pursuant to the conversion into equity of
accrued dividends on certain Convertible Preferred Stock and interest
accrued on notes payable;
(iv) 250,000 shares of common stock pursuant to the cash-less exercise of
certain warrants;
(v) 3,750 shares of common stock for services performed.
68
During the three month period ended March 31, 2001, the Company placed the
following unregistered securities with accredited or institutional investors:
(i) 70,000 shares of Common stock pursuant to the conversion of $35,000 in
convertible promissory notes, issued in reliance upon exemptions
provided under Section 4(2) of the Securities Act;
(x) 27,788 shares of Series B Senior Convertible Preferred Stock to a
foreign investor pursuant to private placement subscriptions under
Section 4 (2) and Regulation S of the Securities Act, which resulted in
the receipt by the Company of $250,092 in cash, whereby such shares,
among other things, have the following rights and privileges:
(i) 7% annual preferential dividend, payable semi-annually,
(ii) conversion at the holders' option into shares of Common stock at a
conversion rate of 10 common shares for 1 preferred share. The
preferred shares are callable by the Company under certain terms and
conditions. The Company placed these investments with accredited
investors with whom the Company had established a business relationship
and without the use of any general solicitation or advertisement.
260,000 shares of Common stock pursuant to the conversion of an aggregate
$130,000 in convertible promissory notes, issued in reliance upon exemptions
provided under Section 4(2) of the Securities Act;
3,407 shares of Common stock to one outside consultants and suppliers for
services rendered;
118,000 shares of Common stock to the principals of two privately held
companies, Internet Ergonomic Technologies, Inc. and Cornell Ergonomics, Inc.,
purchased by the Company in January 2000, which companies owned certain software
assets which have been made part of and integrated into the Company's
proprietary 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;
69
2,120,000 shares of Common stock pursuant to the conversion of an
aggregate $1,060,000 in convertible promissory notes, issued in reliance upon
exemptions provided under Section 4(2) of the Securities Act;
(xi) 160,000 shares of Common stock to seven private investors who had
previously subscribed for certain convertible debt, such shares issued
pursuant to the terms of the pertinent subscription agreement, and in
reliance upon exemptions provided under Section 4(2) of the Securities
Act. The Company placed these investments with accredited investors
with whom the Company had established a business relationship and
without the use of any general solicitation or advertisement.
(xii) 400,000 shares of Common stock to two individual investors pursuant to
private placement subscriptions under Section 4 (2) of the Securities
Act, which resulted in the receipt by the Company of $200,000 in cash.
The Company placed these investments with accredited investors with
whom the Company had established a business relationship and without
the use of any general solicitation or advertisement.
(xiii) 500,000 shares of Common stock to three individual foreign investors
pursuant to private placement subscriptions under Section 4 (2) of the
Securities Act, which resulted in the receipt by the Company of
$250,000 in cash. The Company placed these investments with accredited
investors with whom the Company had established a business relationship
and without the use of any general solicitation or advertisement.
(xiv) 194,440 shares of Series B Senior Convertible Preferred Stock to five
individual foreign investors pursuant to private placement
subscriptions under Section 4 (2) of the Securities Act, which resulted
in the receipt by the Company of $1,750,000 in cash, whereby such
shares, among other things, have the following rights and privileges:
(i) 7% annual preferential dividend, payable semi-annually, (ii)
conversion at the holders' option into shares of Common stock at a
conversion rate equivalent to $0.90 per share, and (iii) callable by
the Company under certain terms and conditions. The Company placed
these investments with accredited investors with whom the Company had
established a business relationship and without the use of any general
solicitation or advertisement.
100,000 shares of Series C Senior Convertible Preferred Stock to the
former chairman of the Company pursuant to the terms of a Resignation Agreement
entered into between the Company and this individual, whereby such shares, among
other things, have the following rights and privileges: (i) 7% annual
preferential dividend, payable monthly, (ii) conversion at the holders' option
into 1,000,000 shares of Common, and (iii) callable by the Company under certain
terms and conditions.
109,926 shares of Common stock pursuant to the conversion of $54,963 in
convertible promissory notes, issued in reliance upon exemptions provided under
Section 4(2) of the Securities Act;
12,000 shares of Common stock for services rendered;
11,535 shares of Common stock in exchange against 40,000 common shares of
Magnitude, Inc., pursuant to the Company's stock exchange offer of July 1997;
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617,616 shares of Common stock and warrants for the purchase of 100,000
shares at a price of $1 per share, in exchange against the cancellation of a
$460,000 liability in form of a past-due promissory note and accrued interest
thereon;
Warrants for the purchase of 36,000 shares of Common stock at $1 per
share, for services rendered;
(xv) 83,364 shares of Series B Senior Convertible Preferred Stock
accompanied by warrants for the purchase of 416,820 shares at a price
of $0.90 per share, to a foreign investor pursuant to private placement
subscriptions under Section 4 (2) of the Securities Act, which resulted
in the receipt by the Company of $750,276 in cash, whereby such shares,
among other things, have the following rights and privileges: (i) 7%
annual preferential dividend, payable semi-annually, (ii) conversion at
the holders' option into shares of Common Stock at a conversion rate of
10 common shares for 1 preferred share. The Company placed these
investments with accredited investors with whom the Company had
established a business relationship and without the use of any general
solicitation.
(xvi) 55,556 shares of Series D Senior Convertible Preferred Stock
accompanied by warrants for the purchase of 555,560 shares at a price
of $0.50 per share, to two investors pursuant to private placement
subscriptions under Section 4 (2) of the Securities Act, which resulted
in the receipt by the Company of $500,000 in cash, whereby such shares,
among other things, have the following rights and privileges: (i) 7%
annual preferential dividend, payable semi-annually, (ii) conversion at
the holders' option into shares of Common stock at a conversion rate of
10 common shares for 1 preferred share. The Company placed these
investments with accredited investors with whom the Company had
established a business relationship and without the use of any general
solicitation or advertisement.
ITEM 27. EXHIBITS INDEX
SEC No. Document
- ------- --------
2.2+ Agreement and Plan of Merger with Rolina Corporation and Steven D.
Rudnik, and Employment Agreement with Steven D. Rudnik, both of the
date February 2 , 1998, as filed as Exhibit to the Company's report
on Form 10-KSB for the year ended December 31, 1998. Incorporated
herein by reference.
3(i)+ Articles of Incorporation and Amendments thereto, incorporated
herein by reference to Exhibits of previous filings with the
Commission.
3(ii)+ Bylaws of the Company, incorporated herein by reference to Exhibits
of previous filings with the Commission.
4.23# Form of Common Stock Purchase Warrant
4.30# Form of Subscription Agreement.
5.1 ^ Legal opinion and consent of Joseph J. Tomasek, Esq.
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10.1* Resignation Agreement dated July 21, 1999, between J. Swon and B.
Deichl and the Company, incorporated herein by reference to the
Exhibit of Form S-8 filed with the Commission on August 3, 1999.
10.2* Resignation Agreement dated January 28, 2000, between M. Martin and
the Company, incorporated herein by reference to the Exhibit of
Form S-8 filed with the Commission on January 31, 2000.
10.3* Employment Agreement, dated April 15, 1996 between the Company and
Joerg Klaube, incorporated herein by reference and previously filed
as an Exhibit to the Company's Form 10-KSB for the fiscal year
ended December 31, 1997 with the Commission.
10.4* Employment Agreement, dated July 1, 1999 between the Company and
John C. Duncan.
10.5+ Termination Agreement, dated as of August 1, 2001, by and between
the Company and Torneaux Fund, Ltd.
10.6* Contract by and between Lockheed Martin and the Company, dated
December 21, 2000.
10.7# Employment Agreement, dated April 15, 2002 between the Company and
Steven D. Rudnik.
10.8# Employment Agreement, dated February 15, 2002 between the Company
and Mark Fuller.
10.9# Employment Agreement, dated April 15, 2002 between the Company and
Joerg Klaube.
10.10# Employment Agreement, dated April 15, 200 between the Company and
Steven Jagels
10.11 ^ Brokerage Placement Assistance Agreement, Dated January 2, 2004,
between the Company and vFinance Investments, Inc.
10.12 ^ Consulting Agreement, dated December 1, 2003, by and between the
Company and Alan Cohen.
10.13 ^ Consulting Agreement, dated February 12, 2003, by and between
Jackson-Hewitt Investment Services, Inc. and the Company.
10.14 ^ Consulting Agreement, dated September 25, 2003, by and Between
James W. Morton and the Company.
10.15 ^ Consulting Agreement, dated September 15, 2003, by and between
Premium Strategy Partners AG and the Company.
10.16 ^ Consulting Agreement, dated September 25, 2003, by and between
Ulrich Schuerch and the Company.
72
10.17 ^ Consulting Agreement, dated December 1, 2003, by and between
Murray Zaroff and the Company.
10.18 ^ Consulting Agreement, dated November 28, 2003, by and between
The Research Works Inc. and the Company.
23.1 Independent Auditors' Consent
- ----------
+ Documents incorporated by reference to Magnitude's Annual Report previously
filed on Forms 10-KSB for the fiscal years ended December 31, 2001and 2000
and Forms 10-QSB for the quarter ended March 31, 2002, June 30, 2002 and
September 30, 2002 with the Securities and Exchange Commission.
* Previously filed as exhibits to the Registration Statement and amendments
thereto filed on Form SB-2, Registration No. 333-34512, with the Commission.
# Previously filed as exhibits to Form SB-2 Registration Statement and
amendments thereto, Registration No. 333-73992, with the Commission.
^ Previously filed as Exhibits to this Registration Statement
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.
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B. UNDERTAKING IN RESPECT OF INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
MAGNITUDE INFORMATION SYSTEMS, INC., a corporation organized and existing under
the laws of the State of Delaware, has duly caused this Post-Effective Amendment
No. 2 to our Registration Statement on Form SB-2 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Town of Chester, State of New
Jersey, on October 4, 2004.
MAGNITUDE INFORMATION SYSTEMS, INC.
By: /s/ Steven D. Rudnik
-------------------------------
Steven D. Rudnik, President and
Chief Executive Officer
By: /s/ Joerg H. Klaube
-------------------------------
Joerg H. Klaube, Chief Financial
Officer (Chief Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven D. Rudnik, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Registration Statement on Form SB-2, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Steven D. Rudnik President and
- ----------------------------- Chief Executive Officer October 4, 2004
Steven D. Rudnik
/s/ Joerg H. Klaube Chief Financial Officer October 4, 2004
- ----------------------------- (Principal Financial Officer)
Joerg H. Klaube
* Director October 4, 2004
- -----------------------------
Steven L. Gray
* Director October 4, 2004
- -----------------------------
Ivano Angelastri
* Director October 4, 2004
- -----------------------------
Joseph J. Tomasek
BY: /s/ Steven D. Rudnik
ATTORNEY-IN-FACT
75