As filed with the Securities and Exchange Commission on October 5, 2004
Registration No. 333-73992
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
POST-EFFECTIVE AMENDMENT NO. 5 to FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAGNITUDE INFORMATION SYSTEMS, INC.
(Name of small business issuer in its charter)
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Delaware 7372 75-2228828
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Address and telephone number of principal executive offices and
place of business)
Steven D. Rudnik Joseph J. Tomasek, Esq.
401 State Route 24, Chester, New Jersey 07930 75-77 North Bridge Street, Somerville, New Jersey 08876
(908) 879-2722 (908) 429-0030
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462
(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
Prospectus
Magnitude Information Systems, Inc.
18,693,536 Shares of Common Stock
1,000,000 Shares of Common Stock
Underlying Series C Preferred Stock
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638,900 Shares of Common Stock
Underlying Series D Preferred Stock
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2,002,016 Shares of Common Stock
Underlying Common Stock Purchase Warrants
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5,849,866 Shares of Common Stock
Underlying Stock Option Grants
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998,900 Shares of Common Stock
Underlying Convertible Note
This prospectus covers a total of 29,183,218 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 are also
registering 998,900 common shares that our President and Chief Executive Officer
may obtain by converting his convertible note. We have also filed two additional
registration statements on behalf of other selling shareholders to sell
26,040,037 common shares, registration statement no. 333-112595, and to sell
62,795,841 common shares, registration statement no. 333-118522. All of the
29,183,218 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
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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 29,183,218 shares of common stock, $.0001
par value, including 1,000,000 shares of
common stock issuable upon conversion of
Series C Preferred Stock; 638,900 shares of
common stock issuable upon the conversion of
Series D Preferred Stock; 2,002,016 shares
of common stock issuable upon the exercise
of Warrants; 5.849,866 shares of common
stock issuable upon the exercise of stock
options; 998,900 shares of common stock
issuable upon the conversion of a
convertible note. See "Selling Shareholders"
at page 12.
Selling Shareholders The selling shareholders are identified in
this prospectus at page 12 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 12.
Plan of Distribution Up to 29,183,218 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
$4,025,717 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 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.
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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 preferred
shares, warrants, stock options, and the
convertible note, an additional 10,489,682
common shares, representing part of the
shares being registered, will be
outstanding, and; secondly, we have filed
two additional registration statements,
registering an additional 88,835,518 common
shares for new and existing investors and,
as with the selling shareholders in this
prospectus, if all of them exercise and/or
convert their convertible preferred stock,
stock options, warrants and the convertible
note 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 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 for the 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 7.
6
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.
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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 have 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
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.
8
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.
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.
9
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:
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 $0.134 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 fourth quarter of
2003 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.
10
Further, the stock market has experienced in recent months and may
continue in the future to experience extreme price and volume fluctuations that
particularly affect the market prices of equity securities of high technology
companies that often are not related to or are disproportionate to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political and market conditions have, and may continue to
have, a material adverse effect on the trading price of our common stock.
fluctuations in the price of our common stock may expose us to the risk of
securities class action lawsuits. We cannot assure you that there will not be
lawsuits in the future or that future lawsuits will not have a material adverse
effect on our business, financial condition and results of operations.
Rapid Technological Change; Dependence on New Products
The market for software is characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. The Company must respond rapidly to developments
related to operating systems and applicable programming languages. Such
developments will require the Company to continue to make substantial product
development investments. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenue.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and 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 29,183,218 common shares offered in this prospectus, 18,693,536
common shares have already been issued to the selling shareholders. If the
selling shareholders were to fully exercise their rights under their warrants,
convertible preferred stock, stock options, and convertible note to purchase or
convert into the remaining 10,489,682 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, and stock options had exercise prices above the current market price
of our common stock. In addition, we have filed two additional registration
11
statements, registering a total of 88,835,518 common shares for new and existing
investors. 53,580,219 of these shares have already been issued to the new
investors with the balance of 35,255,299 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 35,096,400 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 88,835,518 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 other 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
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.
12
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."
13
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. Our Securities
and Exchange Commission filings are available to the public over the Internet at
the Securities and Exchange Commission's web site at http://www.sec.gov. You may
also read and copy any document we file at the Securities and Exchange
Commission's public reference room located at 450 Fifth Street, N.W.,
Washington, DC 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms and their
copy charges.
This prospectus is part of a Form SB-2 registration statement that we
filed with the SEC. This prospectus provides you with a general description of
the securities that may be offered for sale, but does not contain all of the
information that is in the registration statement. To see more detail, you
should read the entire registration statement and the exhibits filed with the
registration statement. Copies of the registration statement and the exhibits
are on file at the offices of the Commission and may be obtained upon payment of
the fees prescribed by the Commission, or examined without charge at the public
reference facilities of the Commission described above.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone to provide you with different information.
Neither Magnitude nor any selling shareholder is making an offer of the
securities covered by this prospectus in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
prospectus supplement or in any other document incorporated by reference in this
prospectus is accurate as of any date other than the date on the front of those
documents.
Upon request, we will provide without charge a copy of our Annual,
Quarterly and Current Reports we have filed electronically with the Commission
as well as a copy of any and all of the information that has been or may be
incorporated by reference in this prospectus. Requests for such copies should be
directed to Magnitude Information Systems, Inc., 401 State Route 24, Chester,
New Jersey 07930 (telephone: 908-879-2722).
USE OF PROCEEDS
The selling shareholders will receive all of the net proceeds from 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 $4,025,717 in proceeds from the cash
exercise of the warrants and stock options 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:
14
High/Ask Low/Bid
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.
15
Selling Shareholders
All of the common stock offered is either already issued or is issuable
upon the exercise or conversion of Company warrants, stock options, convertible
preferred stock and convertible note issued or issuable by Magnitude to the
selling shareholders. We may from time to time supplement or amend this
prospectus, as required, to provide other information with respect to the
selling shareholders.
The following table sets forth certain information regarding ownership
of Magnitude's common stock by the selling shareholders as of 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 shareholders listed in the
table do not necessarily intend to sell any of their shares. Magnitude filed the
registration statement, which includes this prospectus, due to the registration
rights granted to the selling shareholders, not because they had expressed an
intent to immediately sell their shares.
16
Name of % No. of of Class
Selling Beneficial Holdings Common Shares Transaction after
Securityholder Before the Offering Offered Hereby Note No. Offering
- -----------------------------------------------------------------------------------------------------------------------
Acosta, Elbert R. II 2,880,000 1,250,000 23 2.1%
Angelastri, Ivano 2,012,500 750,000 5,9 1.6%
Angelastri-Keller, Sophie 200,000 200,000 5 **
Ash, Howard 100,000 100,000 23 **
Baumann, Luciano 10,000 10,000 23 **
Beck, Kurt N. 200,000 200,000 23 **
Berek, Roman 25,000 25,000 18 **
Bischoff, Dieter 400,000 400,000 18,23 **
Bischoff, Nina 125,000 125,000 18 **
Boehm-Raffay, Thomasz 25,000 25,000 18 **
Boroski, Eugene 100,000 30,000 21 **
Bourke, Robert L. 48,280 27,780 17 **
Bourke, Delia J. 27,780 27,780 17 **
Brooks, Adam 20,000 20,000 15 **
Brooks, Blake 20,000 20,000 15 **
Burgman, David 20,000 20,000 23 **
Christoph, Marti 50,000 50,000 5 **
Citrus Land & Development Corp. 1,166,777 646,111 +18,21 **
Consulting for Strategic Growth 390,000 390,000 +15 **
Cumming, Frederick 33,619 5,000 9 **
Dean, Mike 50,000 50,000 4 **
DeWolf, Keith G. 1,070,000 820,000 18,20,23 **
Dina Partners 277,780 277,780 +17 **
Done Wright Termite & Pest Control Inc. 100,000 100,000 +23 **
Duncan, John C. 577,500 500,000 9 **
Feld, Ian 81,500 35,000 18 **
Franz, Gerald J. 35,330 30,000 15 **
Fuller, Mark A. 336,676 336,676 21,22 **
GGD Associates 275,000 275,000 9 **
Gamrasni, David 30,000 30,000 15 **
- ----------
+Name of person having voting or investment control identified in the applicable
Transaction Note.
17
Gamrasni, Andre 41,667 41,667 25 **
Gamrasni Ahlen, Nina 41,667 41,667 25 **
Gamrasni, Kerstin 41,666 41,666 25 **
Gamrasni, David (Jr) 41,667 41,667 25 **
Gamrasni, Nicolai 41,667 41,667 25 **
Gamrasni, Ivan 41,666 41,666 25 **
Gibb, Dean A. 100,000 100,000 23 **
Goebel, Jean-Pierre 200,000 200,000 18,21,23 **
Gort, Stefan 50,000 50,000 18,21,23 **
Gray, Steven L. 3,538,604 1,474,829 18,21,22 2.7%
Haering, Greg and Joy 10,000 10,000 21 **
Hauschild, Rudolf 60,000 60,000 18 **
Heuberger, Roland 185,000 100,000 5 **
Hinst, Raymond and Suzanne 50,000 50,000 4 **
Hoefig, Marc 100,000 100,000 23 **
Holian, John W. Jr. 150,000 120,000 21,23 **
Holt Revocable Trust UTA 5-15-97 300,000 300,000 23 **
Kaemper, Siegfried D. 500,000 500,000 18 **
Kaercher, William B. C/F Benjamin Kaercher 38,000 38,000 21 **
Kaercher, William B. C/F Sam Kaercher 47,000 47,000 21 **
Kaercher, William M. 50,000 50,000 23 **
Klaube, Joerg H. 1,660,417 100,000 9 2.0%
Kroll, Seymour 177,602 137,602 9,16 **
Lands, Larry A. 211,120 211,120 17,23 **
Langheck, Andreas M. 338,000 338,000 18 **
Luescher, Dieter 40,000 40,000 5 **
Luethi, Jules 50,000 50,000 23 **
Martin, Martin G. 1,750,000 1,100,000 6,9 1.20%
McGrath, Thomas J. 67,000 67,000 23 **
Meixger, Andreas 200,000 200,000 18 **
Merrill, Bryan G. 610,000 560,000 23 **
Mette, Tim 91,000 26,000 18 **
Mickelson, Sheldon 400,000 400,000 23 **
Miller, Philip C. 500,000 500,000 7,23 **
Miller, Philip C. SSB Keogh MP/PS 300,000 300,000 23 **
Morton, James W.& Karen E. 1,158,000 125,000 18 1.3%
Mueller, Klaus 400,000 100,000 23 **
Noshagya, Jane L. 20,000 20,000 23 **
Oakes, Glenn A. II 130,000 130,000 20,23 **
Pachino, Joseph & Marlene 200,000 100,000 20,23 **
- ----------
+Name of person having voting or investment control identified in the applicable
Transaction Note.
18
Pisani, B.Michael 582,780 552,780 3,17,18,23 **
Pisani, Michael B. 22,000 22,000 3 **
R&A Group Holdings 60,000 60,000 +15 **
RAM Trading 555,560 555,560 +17 **
Reidar's Retreat LLC 100,000 100,000 +23 **
Rodman & Renshaw 50,000 50,000 +15 **
Rogivue, Nicolas 260,000 260,000 12,14,18 **
Rudnik, Steven D. 7,924,595 6,148,900 9,10,11,19,24,27 2.3%
S & I Consulting 165,500 65,500 +21,23 **
Santino, Dennis 1,000,000 1,000,000 23 **
Schuerch, Siegfried 270,000 270,000 18 **
Schuerch Asset Mgmt. GmbH 60,000 60,000 5 **
Schuerch, Kerstin 250,000 250,000 9 **
Schuerch, Ueli 3,010,000 10,000 14 3.8%
Shoemaker, John & Audrey 1,936,667 200,000 18 2.2%
Solid Rock Corp. 136,000 136,000 4 **
Spinnaker Ventures LLC 630,000 525,000 +18,23 **
Stangel, Georg 400,000 200,000 9 **
Staiger, Jochen M. 289,800 279,800 18,23 **
Studer, Marlies E. 175,000 25,000 23 **
T+T Vermoegensverwaltungs AG 1,000,000 500,000 +23 **
Tapio, John A.& Nels D.&Kyle J. JTWROS 1,000,000 1,000,000 23 **
Tapio, Roy W.and ShirleyM. JTWROS 458,000 372,000 23 **
Tauss, Michael 181,000 181,000 18,22 **
Thornton, Robert G. 200,000 200,000 23 **
Tomas, Peter A. 50,000 50,000 23 **
Twomey, Lee J. 350,000 350,000 2,23 **
Stuart H. Zimmerman Rev.Trust 591,389 500,000 21,23 **
Von Mitschke-Collande, Christopher 125,000 125,000 18 **
Wagner, Tomacz 20,000 20,000 5 **
Wider, Harald 34,000 34,000 18 **
Wunderlich, Courtney 25,000 25,000 15 **
Wunderlich, Justin 25,000 25,000 15 **
Zaldastani, Nicholas & Kerri JT TEN 300,000 300,000 23 **
---------- ----------
46,856,776 29,183,218
- ----------
+Name of person having voting or investment control identified in the applicable
Transaction Note.
- ----------
** less than 1 percent
19
TRANSACTION NOTES
(2) Private Placement Pursuant to Section 4(2)
The above table includes 100,000 shares already issued to private investor Lee
J. Twomley and were issued pursuant to his election to convert his convertible
promissory note issued during June 1999.
(3) Private Placement Pursuant to Section 4(2)
The above table includes 22,000 shares already issued to Michael B. Pisani, a
private investor which shares were issued pursuant to his election to convert a
convertible promissory note dated May 28, 1999.
(4) Private Placement Pursuant to Section 4(2)
The above table includes 236,000 shares already issued and 424,000 shares
underlying stock purchase warrants transferred to four assignees of a private
investor. The shares had been issued pursuant to his election to convert several
convertible promissory notes dating between June 1999 and November 1999 into
common shares of the Company; the stock purchase warrants were issued concurrent
with the convertible notes.
Dean, Mike 50,000
Hinst, Raymond and Suzanne 50,000
Gray, Steven L. 424,000
Solid Rock Corp. 136,000
Roy W. Tapio has investment and voting control over the Company shares held of
record by Solid Rock Corp. and beneficially owns an additional 458,000 shares as
a joint tenant with his spouse, giving him voting and investment control over an
aggregate 594,000 Company shares.
(5) Private Placement Pursuant to Section 4(2)
The above table includes 950,000 shares already issued and 20,000 shares
underlying stock purchase warrants issued to six private foreign investors and
one assignee. The investors include Mr. Ivano Angelastri, a director of the
Company. The shares and warrants were issued pursuant to private placement
subscriptions entered into between the Company and such investors between
October 1999 and December 1999.
Angelastri, Ivano 500,000
Angelastri-Keller, Sophie 200,000
Christoph, Marti 50,000
Heuberger, Roland 100,000
Luescher, Dieter 40,000
Schuerch Asset Mgmt.GmbH 60,000
Wagner, Tomacz 20,000
(6) Resignation Agreement of Former Chairman
The above table includes 1,000,000 shares underlying 100,000 shares of Series C
Senior Convertible Preferred Stock issued to the former chairman of the Company
pursuant to the terms of his Resignation Agreement dated January 28, 2000
Martin, Martin G. 1,000,000
(7) Private Placement Pursuant to Section 4(2)
The above table includes 100,000 shares underlying stock purchase warrants
issued to this private investor. The warrants were issued pursuant to a private
placement subscription entered into between the Company and such investor in
February 2000.
Miller, Philip C. 100,000
20
(9) Shares Underlying Non-Statutory Stock Options
The above table includes 3,124,866 shares underlying non-statutory stock options
issued to certain present and past key employees and their assignees.
Angelastri, Ivano 250,000
Cumming, Frederick 5,000
Duncan, John C. 500,000
GGD Associates 275,000
Klaube, Joerg H. 100,000
Kroll, Seymour 119,866
Martin, Martin G. 100,000
Rudnik, Steven D. 1,325,000
Schuerch, Kerstin 250,000
Stangel, Georg 200,000
Gilbert Goldstein has voting and investment control over the Company shares
owned of record by GGD Associates.
(10) Options Issued in Lieu of Cash Compensation to Officer
The above table includes 150,000 shares underlying stock options issued to our
current President and Chief Executive Officer of the Company.
Rudnik, Steven D. 150,000
(11) Shares Underlying Convertible Note Issued to an Officer and Director
The above table includes 998,900 shares underlying a company obligation due the
current President and Chief Executive Officer of the Company. The obligation was
incurred in connection with the acquisition by the Company of Rolina Corporation
in February 1998. On February 20, 2002, the obligation was recast into a
convertible note.
Rudnik, Steven D. 998,900
(12) Private Placement Pursuant to Section 4(2)
The above table includes 125,000 to a private foreign investor pursuant to a
private placement subscription entered into between the Company and such
investor, in March 2000.
Rogivue, Nicolas 125,000
(14) Shares Underlying Warrants Issued Pursuant to Conversion of Preferred Stock
The above table includes 135,000 shares already issued to two foreign based
individuals as consideration for consulting services rendered to the Company and
in connection with their exercise of their respective conversion rights of their
Series B Senior Convertible Preferred Stock.
Rogivue, Nicholas 125,000
Schuerch, Ueli 10,000
(15) Shares Underlying Warrants Issued for Services
The above table includes 650,000 shares underlying warrants issued pursuant to
two consulting agreements involving investor relations services with unrelated
parties, one of which assigned warrants for 210,000 shares to five assignees.
Copies of the two consulting agreements are attached as Exhibits 4.25 and 4.26.
Brooks, Adam 20,000
Brooks, Blake 20,000
Consulting for Strategic Growth 390,000
Franz, Gerald J. 30,000
Gamrasni, David 30,000
21
R&A Capital Holdings 60,000
Rodman & Renshaw 50,000
Wunderlich, Courtney 25,000
Wunderlich, Justin 25,000
Ms. Meryl S. Wunderlich and Stanley Wunderlich are the persons who have
voting and investment control over the shares beneficially owned by Consulting
For Strategic Growth. Mr. Stanley Wunderlich is the person who has voting and
investment control over the shares beneficially owned by R&A Group Holdings. Mr.
Thomas G. Pinou is the person who has voting and investment control over the
shares beneficially owned by Rodman & Renshaw. Rodman & Renshaw received common
stock purchase warrants to purchase up to 50,000 common shares at the exercise
price of $.50 per share for rendering financial advisory services to the Company
pursuant to the terms of a certain Consulting Agreement, dated June 26, 2001,
filed as exhibit 4.26.
(16) Shares Underlying Warrants Issued in lieu of Interest and Dividends
The above table includes 17,736 shares underlying warrants, issued pursuant to
the conversion, during May and June 2001, into such securities for accrued
dividends and interest. The warrants are exercisable at $0.90 per share.
Kroll, Seymour 17,736
(17) Private Placement Pursuant to Section 4(2)
The above table includes a total 1,377,800 shares on behalf of six private
investors pursuant to private placement subscriptions entered into between the
Company and such investors, between September 2000 and March 2001. 738,900
shares have already been issued, 611,120 of such shares underlie conversion
privileges accruing to a total of 61,112 shares of Series D Senior Convertible
Preferred Stock issued to certain of these investors. 27,780 shares underlie
Company Common Stock Purchase Warrants for the purchase of common shares at
$0.50 per share issued to certain of these investors.
Bourke, Robert L. 27,780
Bourke, Delia J. 27,780
Dina Partners 277,780
Lands, Larry A. 111,120
Pisani, B.Michael 377,780
RAM Trading 555,560
Mr. David Solomon is the person that has voting or investment control
over the shares beneficially owned by Dina Partners. Mr. Thane Ritchie is the
person who has voting or investment control over the shares beneficially owned
by RAM Trading Co. RAM Trading Co. purchased its share in the ordinary course of
business and at which time had no agreement or understanding with the Company,
directly or indirectly, to distribute its shares.
(18) Private Placement Pursuant to Section 4(2)
The above table includes a total 4,230,022 shares on behalf of 22 private
investors and two finders pursuant to private placement subscriptions entered
into between the Company and such investors, between March 2001 and September
2001. 3,612,522 of such shares have already been issued to these investors; and
617,500 shares underlie Company Common Stock Purchase Warrants for the purchase
of common shares at $0.90 per share and were issued to these investors. A copy
of the subscription agreement utilized in these transactions is attached as
Exhibit 4.28.
Berek, Roman 25,000
Bischoff, Dieter 250,000
Bischoff, Nina 125,000
Boehm-Raffay, Thomasz 25,000
Citrus Land & Development Corp. 521,111
DeWolf, Keith G. 250,000
22
Feld, Ian 35,000
Goebel, Jean-Pierre 100,000
Gort, Stefan 20,000
Gray, Steven L. 326,111
Hauschild, Rudolf 60,000
Kaemper, Siegfried D. 500,000
Langheck, Andreas M. 338,000
Meixger, Andreas 200,000
Mette, Tim 26,000
Morton, James W.& Karen E. 125,000
Pisani, B.Michael 150,000
Rogivue, Nicholas 10,000
Schuerch, Siegfried 270,000
Shoemaker, John & Audrey 200,000
Spinnaker Ventures LLC 250,000
Staiger, Jochen M. 239,800
Tauss, Michael 25,000
Von Mitschke-Collande, Christopher 125,000
Wider, Harald 34,000
Mr. Patrick Bischoff is the person with voting and investment control
over the shares beneficially owned by Spinnaker Ventures LLC.
(19) Shares Underlying Stock Option
The above table includes 75,000 shares on behalf of Steven D. Rudnik, its chief
executive officer. These shares underlie a stock option issued pursuant to an
agreement between the chief executive officer and the Company whereby in lieu of
the 150,000 shares to be issued for compensation which shares were previously
registered, Mr. Rudnik shall receive stock option for 225,000 shares,
exercisable at $0.75 per share. Since 150,000 of such shares had previously been
included in an earlier amendment of this registration and are already included
in item (10) above.
Rudnik, Steven D. 75,000
(20) Private Placements Pursuant to Section 4(2)
The above table includes a total 230,000 shares on behalf of three private
investors pursuant to private placement subscriptions entered into between the
Company and such investors, between October 2001 and November 2001.
DeWolf, Keith G. 120,000
Oakes, Glenn A. II 60,000
Pachino, Joseph & Marlene 50,000
(21) Private Placements Pursuant to Section 4(2)
The above table includes 1,550,000 shares on behalf of six private investors,
two of who purchased 900,000 of these shares and are officers and directors of
the company, pursuant to private placement subscriptions entered into between
the Company and such investors, between January 2002 and March 2002. The
beneficiaries include five assignees of one of the investors.
23
Boroski, Eugene 30,000
Citrus Land & Development Co. 125,000
Fuller, Mark A. 300,000
Goebel, Jean-Pierre 50,000
Gort, Stefan 10,000
Gray, Steven L. 600,000
Haering, Greg and Joy 10,000
Holian, John W. Jr 50,000
Kaercher, William B
F Benjamin Kaercher 38,000
Kaercher, William B C/F Sam Kaercher 47,000
S&I Consulting 40,000
Stuart H Zimmerman Rev.Trust 250,000
Mr. Michael Tauss is the person who has voting and investment control
over the shares beneficially owned by S&I Consulting and the 1,000,000 shares
owned of record by T+T Vermoegensverwaltungs AG (see Note 23 below) which, if
added to the 181,000 shares owned in his individual name, gives him voting and
investment control over an aggregate 1,221,000 Company shares. James Morton is
the person who has voting and investment control over the shares beneficially
owned by Citrus Land & Development Co. and holds an additional 1,158,000 shares
together with his spouse, giving him investment and voting control over an
aggregate 2,324,777 Company shares.
(22) Shares issued in exchange for debt and shares underlying stock award
The above table includes a total 317,394 shares on behalf of three creditors one
of who is a director of the Company, in return for the cancellation, on various
dates between February and May 2002, of an aggregate $98,753 company
liabilities.
Fuller, Mark A. 36,676
Gray, Steven L. 124,718
Tauss, Michael 156,000
(23) Private Placements Pursuant to Section 4(2)
The above table includes 9,354,500 shares already issued and 145,000 shares
underlying common stock purchase warrants on behalf of 37 private investors
pursuant to private placement subscriptions entered into between the Company and
such investors, between March 2002 and June 2002, 165,500 shares of which were
issued to 3 foreign finders.
Acosta, Elbert R.II 1,250,000
Ash, Howard 100,000
Baumann, Luciano 10,000
Beck, Kurt N 200,000
Bischoff, Dieter 150,000
Burgman, David 20,000
DeWolf, Keith G 450,000
Done Wright Termite
& Pest Ctrl.Inc 100,000
Gibb, Dean A 100,000
Goebel, Jean-Pierre 50,000
Gort, Stefan 20,000
Hoefig, Marc 100,000
Holian, John W. Jr 70,000
Holt Revocable Trust UTA 5-15-97 300,000
Kaercher, William M 50,000
24
Lands, Larry A 100,000
Luethi, Jules 50,000
McGrath, Thomas J 67,000
Merrill, Bryan G 560,000
Mickelson, Sheldon 400,000
Miller, Philip C 400,000
Miller, Philip C.SSB Keogh M/PS 300,000
Mueller, Klaus 100,000
Noshagya, Jane L 20,000
Oakes, Glenn A.II 70,000
Pachino, Joseph and Marlene 50,000
Pisani, B.Michael 25,000
Reidar's Retreat LLC 100,000
S&I Consulting 25,500
Santino, Dennis 1,000,000
Spinnaker Ventures LLC 275,000
Staiger, Jochen M 40,000
Studer, Marlies E 25,000
T+T Vermoegensverwaltungs AG 500,000
Tapio,RoyW.&Shirley M. JTWROS 372,000
Tapio, John A.&Nels D
&Kyle J.HTWROS 1,000,000
Thornton, Robert G 200,000
Tomas, Peter A 50,000
Twomey, Lee J 250,000
Stuart H.Zimmerman Rev.Trust 250,000
Zaldastani, Nicholas & Kerri JT TEN 300,000
Messrs. William Wright, Robert Wright and Vaughn Hackney are the
persons who have voting and investment control over the shares beneficially
owned by Done Wright Termite & Pest Control Inc. Robert L. Holt is the person
who has voting and investment control over the Company shares held of record by
the Holt Revocable Trust. Mr. Gil Carlson is the person who has voting and
investment control over the shares beneficially owned by Reidar's Retreat LLC.
Mr. Michael Tauss is the person with voting and investment control over the
shares beneficially owned by T+T Vermoegensverwaltungs AG (see Note 21 above).
Philip C. Miller is the trustee who has voting and investment control over the
Company shares held of record by the Philip C. Miller Sole Surviving
Beneficiary, Keogh Money Purchase/Profit Sharing Plan.
(24) Shares Issued in Lieu of Cash Compensation to Officer
The above table includes 1,100,000 shares on behalf of the current President and
Chief Executive Officer of the Company, such shares having been issued in lieu
of $110,000 cash compensation payable during February through December of the
year 2002.
Rudnik, Steven D. 1,100,000
(25) Shares Issued for Services
The above table includes 250,000 shares on behalf of a consultant and his
assignees, for management and business consulting services rendered during the
last quarter in 2001 and the first quarter in 2002 and which services shall
continue through December 31, 2002, based upon a verbal agreement. Such shares
have been issued pursuant to a corporate resolution approved by the Company's
board of directors on May 2, 2002.
25
Gamrasni, Andre 41,667
Gamrasni Ahlen, Nina 41,667
Gamrasni, Kerstin 41,666
Gamrasni, David (Jr) 41,667
Gamrasni, Nicolai 41,667
Gamrasni, Ivan 41,666
(27) Shares Underlying Stock Option Issued to Officer
The above table includes 2,500,000 shares on behalf of the current President and
Chief Executive Officer of the Company, such shares underlying a stock option
issued in July 2001.
Rudnik, Steven D. 2,500,000
26
SHARES ELIGIBLE FOR FUTURE SALE
This prospectus covers 29,183,218 common shares. As of August 14, 2004,
there are 110,381,323 common shares issued and outstanding of which
approximately 34,000,000 are freely tradable.
Upon the effectiveness of this registration statement, (a) an
additional 18,693,536 common shares already issued and (b) 10,489,682 common
shares underlying stock options, warrants, convertible preferred stock and
convertible notes which, if converted or 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 Forms SB-2, registering a total of
88,835,518 shares of our common stock on behalf of new and existing investors.
Upon the effectiveness of these two registration statements, (a) a further
53,580,219 common shares already issued and (b) 35,255,299 common shares
underlying stock options and warrants which if exercised will also become freely
tradable.
In addition to these 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 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.
27
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 29,183,218 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.
A certain Selling Shareholders, RAM Trading Co. is a registered
broker-dealers in the U.S. and is deemed an "underwriters" of the Company Common
Shares offered and sold by them it in 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.
28
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.
29
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,
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.
30
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive capacities
for the fiscal years ended December 31, 2003, 2002, and 2001, for the chief
executive officer and for each executive officer whose aggregate cash
remuneration exceeded $100,000, for all executive officers as a group, and for
certain other most highly compensated employees:
- ---------------------------- -------- ------------- ------------ ------------------- --------------- ------------- --------------
Other Restricted Securities All
Name and Annual Stock Underlying Other
Principal Position Year Salary ($) Bonus ($) Compensation($) Awards ($) Options ($) Compens.($)
(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 $110,000 which they replaced.
- ----------
Stock Options :
The following table sets forth stock options granted during 2003
pursuant to the Company's 1997 Stock Option Plan and 2000 Stock Incentive Plan,
to executive officers, certain other employees with highest remuneration,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
31
- --------------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted and Directors in FY Price ($/Sh.) Date .
- --------------------------------------------------------------------------------
There were no stock options granted to employees and directors during 2003.
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
32
compensation to be determined pursuant to a formula established
therein, payable to the officer if the employment agreement is
terminated or is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months
after termination of employment.
In April 2002, the Company entered into an employment agreement with
Joerg H. Klaube, its current Senior Vice President and Chief Financial
Officer, to serve in that capacity for a period of five years,
replacing an earlier employment agreement dated April 1996, as amended.
Base salary under the agreement is $125,000 per year with predetermined
increases effective upon the Company achieving certain revenue goals.
The agreement also calls for the grant of certain stock awards and
incentive and non-statutory stock options and eligibility for the
Company's benefit programs. The Company will also provide reimbursement
of ordinary and necessary business expenses and a monthly car
allowance. The agreement provides for severance compensation to be
determined pursuant to a formula established therein, payable to the
officer if the employment agreement is terminated or is not renewed by
the Company. A non-competition/non-solicitation restriction applies for
24 months after termination of employment.
In April 2002, the Company entered into an employment agreement with
Steven W. Jagels, its current Senior Vice President Information
Technology, to serve in that capacity for a period of five years. Base
salary under the agreement is $108,333 per year with predetermined
increases effective upon the Company achieving certain revenue goals.
The agreement also calls for the grant of certain stock awards and
incentive and non-statutory stock options and eligibility for the
Company's benefit programs. The Company will also provide reimbursement
of ordinary and necessary business expenses and a monthly car
allowance. The agreement provides for severance compensation to be
determined pursuant to a formula established therein, payable to the
officer if the employment agreement is terminated or is not renewed by
the Company. A non-competition/non-solicitation restriction applies for
24 months after termination of employment.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of May 21, 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.
- ----------
(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, warrants for 623,333
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
shares
(7) Includes options to acquire 262,500 shares and warrants for 290,250
shares.
(8) Includes warrants for 4,550,000.
34
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 (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
35
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
36
the Series D Stock, on an equal basis with the holders of any Series A Stock,
Series B Stock and Series C Stock. Magnitude has the right to redeem or buy back
part or all of the Series D Stock three years after their issuance by paying to
the holders the stated value thereof, any accumulated but unpaid dividends and a
payment (a "call premium") equal to 10% of the stated value. Holders of the
Series D Stock can convert their shares into Magnitude Common stock on the basis
of 10 shares of Common stock for one share of Series D Stock at any time.
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.
37
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.
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
38
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.
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:
39
ErgoSure : A postural risk-assessment tool that records how an employee is
working; it determines injury potential and suggests improvements. It also can
be used to evaluate workstation alternatives prior to purchase.
ErgoSentry(TM) : Employing patent-pending algorithms that measure rest against
work in real time, the non intrusive program informs users when to break from
high-risk trends (thresholds definable by the user or corporate safety officer)
when keyboarding or using a mouse. ErgoSentry also includes an "ErgoPak" video
or slides that depict correct workstation setup, posture and repetitive
stress-reducing exercises. Surveyor(TM) : An electronic surveyor used by
management to gather macro-information about employee populations and to gain a
clear understanding of equipment usage, discomfort and comfort patterns,
workstation configurations and employee habits. The ErgoSentry trademark has
been registered with the United States Patent and Trademark Office on September
12, 2000 providing legal protection for a ten year period through September 12,
2010.
UserNotes(TM) : An easy, effective means for employees to report workplace
discomfort so staff can address certain issues earlier, at lower cost and with
greater likelihood of success. UserNotes encourages a proactive approach.
Guardian : Captures the frequency of mouse clicks and activation of individual
keys, over time. It also can be used in a review process to assess attributes
such as ease-of-use among competing applications. Guardian also is a good
training tool. By measuring before-and-after results, Guardian can be used to
determine the type of training program needed, measure each program's
effectiveness and highlight needed improvements.
ErgoQuiz: An electronic testing system and awareness-building tool that measures
employees' understanding of ergonomic principles.
ErgoManager(TM) Analyzer: A comprehensive report writer and analysis tool for
manipulating, interpreting and evaluating the data collected in the ErgoSentry
module - on the workstation-, department-, and company level.
In addition to the trademarks shown above which are owned by the
Company, Magnitude has applied for other product designators to be afforded
trademark protection, and has filed US Patent Application for certain design
principles underlying several of its proprietary software products, including a
patent application for its newest product, a new class of usage tracking and
data collection software that is directed towards e-commerce and a wide range of
other Internet related applications. There can be no assurance, however, that
such patents will be granted or, if granted, that a third party will not design
products which perform the same or similar functions as the Company's products,
using technology other than that covered by the Company's patents.
Patents and New Products
ErgoSentry - Patent Allowed:
A patent was issued to the Company on May 16, 2000 by the United States
Patent and Trademark Office. The patent covers various innovations including a
proven approach that helps computer users manage their activity to improve
productivity and reduce the risk of repetitive motion injuries. Entitled
"Computer Activity Monitoring Station", this patent provides protection under
United States law through January 7, 2017.
ErgoPal Introduced, Patent Pending:
New patent-pending ErgoPal software -- a work pacing tool that helps
users mitigate health risks and improve their productivity by gently alerting
them to increases in stress and fatigue which are occurring before they realize
it.
40
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.
41
Major University Study
Alan Hedge, Phd,, Professor of Ergonomics at Cornell University, in
collaboration with Scott J. Evans, Manager of Facilities and ESH at Lockheed
Martin Enterprise Information Systems, authored a Cornell University study
testing the effects of using "ErgoManager", the Company's ergonomic management
system ("EMS"), an ergonomic work pacing software, on 56 Lockheed Martin
computer software programmers at that company's Orlando, Florida facility (the
"Study"). Professor Hedge serves as the Chairman of the Company's Ergonomics
Advisory Board and is a shareholder of the Company. In accordance with the
policy of Cornell University, neither the results of the Study nor the fact of
its publication, constitutes an endorsement by Cornell University of the
Company's ErgoManager or EMS software products used in the Study.
The performance of the 56 studied-test participants was passively
monitored using the EMS software for four weeks to establish a baseline, without
activating the ErgoManager's icons at rest break capabilities. Following this
initial four-week period, the full capabilities of ErgoManager were activated
for all participants and their work performance was monitored for a further
four-week period. Full activation permitted the EMS software to coach users to
take periodic microbreaks throughout the workday depending upon their work rate.
The results of the Study displayed a significant 59% improvement in
work accuracy following the activation of ErgoManager and the EMS software. The
Study further disclosed that there was no difference in total keystrokes or in
mouse use during either the initial four-week baseline period or the following
four-week ErgoManager activation period, confirming previous research showing
that alerting keyboard users to take more short rest and break periods did not
impair their overall keystroke and mouse use but did improve their work
accuracy. The Study proposed that further studies of this type of ergonomic
workflow software could prove useful and beneficial in evaluating the effects of
microbreaks on participants who are experiencing musculoskeletal problems and in
quantifying the performance benefits of this software for a larger number of
workers over a longer period.
Economic analysis showed that in this Study the performance benefits
alone that accrued from using ErgoManager's ergonomic work pacing software would
operate to provide a return on investment in less than one-week. This Study is
available to the public on the Cornell University Website at :
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
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.
42
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.
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.
43
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
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
44
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 at 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 negotiations 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 Decemberr 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.
45
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
46
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 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 restricted common stock in lieu of cash at the rate of $0.10 per
share, for a total amount of $100,000.
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% p.a.
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.
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, 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.
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.
47
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.
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.
48
MAGNITUDE INFORMATION SYSTEMS, INC.
INDEX
- -----
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- June 30, 2004 50
Consolidated Statements of Operations
- Three and six months ended June 30, 2004 and 2003 51
Consolidated Statements of Cash Flows
- Six months ended June 30, 2004 and 2003 52
Notes to Consolidated Financial Statements 53-59
49
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
50
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
51
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
=========== ===========
See notes to consolidated financial statements
52
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 and six
months ended June 30, 2004 and 2003, and the cash flows for the six months ended
June 30, 2004 and 2003, have been included.
53
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
54
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
55
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 2004:
Equipment $ 81,157
Furniture and fixtures 72,230
--------------
153,387
Less accumulated depreciation 139,953
--------------
Total $ 13,434
==============
Depreciation expense charged to operations was $2,472 in the first three months
of 2004 and $11,767 in the first three months of 2003.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at March 31,
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
=============
56
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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
=========
57
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.
58
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
59
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
60
[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
were issued $ 398,125
================
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
29,183,218 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
- ---------------------------------------------------------------------- ---------
Risk Factors 6
- ---------------------------------------------------------------------- ---------
Where You Can Find More Information 9
- ---------------------------------------------------------------------- ---------
Use of Proceeds 11
- ---------------------------------------------------------------------- ---------
Market for Company's Common Equity & Dividend Policy 11
- ---------------------------------------------------------------------- ---------
Selling Shareholders 12
- ---------------------------------------------------------------------- ---------
Shares Eligible for Future Sale 22
- ---------------------------------------------------------------------- ---------
Plan of Distribution 23
- ---------------------------------------------------------------------- ---------
Legal Proceedings 23
- ---------------------------------------------------------------------- ---------
Management 24
- ---------------------------------------------------------------------- ---------
Principal Shareholders 28
- ---------------------------------------------------------------------- ---------
Description of Capital Stock 29
- ---------------------------------------------------------------------- ---------
Business 30
- ---------------------------------------------------------------------- ---------
Management's Discussion and Analysis 36
- ---------------------------------------------------------------------- ---------
Certain Transactions 39
- ---------------------------------------------------------------------- ---------
Financial Statements 41
- ---------------------------------------------------------------------- ---------
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.
61
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.
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.
62
FISCAL YEAR 2003
(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.
63
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;
(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.
64
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;
65
(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;
(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;
(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;
66
(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;
(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.
67
Of the 22 accredited investors, 3 are current Company officers and directors, 8
were pre-existing shareholders and 4 were non-U.S. residents. All of the
Company's securities placed with these investors bore the appropriate
restrictive legend, designating such securities as restricted securities;
(ii) 50,000 shares of common stock pursuant to the conversion of 5,000 shares of
the Company's Series D Convertible Preferred Stock;
(iii) 720,718 shares of common stock pursuant to the conversion of certain
payables into equity, at a rate of $0.10 per share;
(iv) 1,250 shares of common stock for services performed;
(v) 700,000 shares as stock grants and 1,165,000 shares in lieu of compensation
(see "Related Party Transactions").
FISCAL YEAR 2001
During the fourth quarter of 2001 the Company had issued the following
unregistered securities:
(i) 220,000 shares of common stock accompanied by warrants for the purchase of
110,000 shares of common stock at a price of $0.50 per share, to three
accredited investors pursuant to private placement subscriptions under Section
4(2) of the Securities Act, which resulted in the receipt by the Company of
$49,500 in cash. All of the accredited investors had a pre-existing relationship
with the Company and no general solicitation or advertisement was utilized to
solicit any of the accredited investors. Each of the accredited investors (a)
executed and delivered to the Company a subscription agreement which included
the investor's representations that such investor qualified as an accredited
investor, had the financial experience and resources to appreciate the risk of
such investment and (b) had the time to ask questions and make inquiries to the
Company before their investment funds were accepted. All of the Company's
securities placed with these investors bore the appropriate restrictive legend,
designating such securities as restricted securities;;
(ii) Warrants for the purchase of 600,000 shares of common stock at various
prices averaging $1.13 per share to a consultant and his assignees for services
rendered.
In addition, during the fourth quarter of 2001 and the first quarter of
2002 through March 26, 2002, the board of directors of the Company approved
resolutions affecting previously issued or to be issued securities, as follows:
(i) During a meeting on October 16, 2001, the board approved a downward
adjustment of the exercise price of previously issued warrants for the purchase
of common stock, to $0.25 per share, for an aggregate of up to $500,000 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.
68
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;
(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.
69
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;
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.
70
(xiii) 500,000 shares of Common stock to three individual foreign investors
pursuant to private placement subscriptions under Section 4 (2) of the
Securities Act, which resulted in the receipt by the Company of $250,000 in
cash. The Company placed these investments with accredited investors with whom
the Company had established a business relationship and without the use of any
general solicitation or advertisement.
(xiv) 194,440 shares of Series B Senior Convertible Preferred Stock to five
individual foreign investors pursuant to private placement subscriptions under
Section 4 (2) of the Securities Act, which resulted in the receipt by the
Company of $1,750,000 in cash, whereby such shares, among other things, have the
following rights and privileges: (i) 7% annual preferential dividend, payable
semi-annually, (ii) conversion at the holders' option into shares of Common
stock at a conversion rate equivalent to $0.90 per share, and (iii) callable by
the Company under certain terms and conditions. The Company placed these
investments with accredited investors with whom the Company had established a
business relationship and without the use of any general solicitation or
advertisement.
100,000 shares of Series C Senior Convertible Preferred Stock to the former
chairman of the Company pursuant to the terms of a Resignation Agreement entered
into between the Company and this individual, whereby such shares, among other
things, have the following rights and privileges: (i) 7% annual preferential
dividend, payable monthly, (ii) conversion at the holders' option into 1,000,000
shares of Common, and (iii) callable by the Company under certain terms and
conditions.
109,926 shares of Common stock pursuant to the conversion of $54,963 in
convertible promissory notes, issued in reliance upon exemptions provided under
Section 4(2) of the Securities Act;
12,000 shares of Common stock for services rendered;
11,535 shares of Common stock in exchange against 40,000 common shares of
Magnitude, Inc., pursuant to the Company's stock exchange offer of July 1997;
617,616 shares of Common stock and warrants for the purchase of 100,000 shares
at a price of $1 per share, in exchange against the cancellation of a $460,000
liability in form of a past-due promissory note and accrued interest thereon;
Warrants for the purchase of 36,000 shares of Common stock at $1 per share, for
services rendered;
(xv) 83,364 shares of Series B Senior Convertible Preferred Stock accompanied by
warrants for the purchase of 416,820 shares at a price of $0.90 per share, to a
foreign investor pursuant to private placement subscriptions under Section 4 (2)
of the Securities Act, which resulted in the receipt by the Company of $750,276
in cash, whereby such shares, among other things, have the following rights and
privileges: (i) 7% annual preferential dividend, payable semi-annually, (ii)
conversion at the holders' option into shares of Common Stock at a conversion
rate of 10 common shares for 1 preferred share. The Company placed these
investments with accredited investors with whom the Company had established a
business relationship and without the use of any general solicitation.
(xvi) 55,556 shares of Series D Senior Convertible Preferred Stock accompanied
by warrants for the purchase of 555,560 shares at a price of $0.50 per share, to
two investors pursuant to private placement subscriptions under Section 4 (2) of
the Securities Act, which resulted in the receipt by the Company of $500,000 in
cash, whereby such shares, among other things, have the following rights and
privileges: (i) 7% annual preferential dividend, payable semi-annually, (ii)
conversion at the holders' option into shares of Common stock at a conversion
rate of 10 common shares for 1 preferred share. The Company placed these
investments with accredited investors with whom the Company had established a
business relationship and without the use of any general solicitation or
advertisement.
71
ITEM 27. EXHIBITS INDEX
SEC No. Document
- ------- --------
2.2+ Agreement and Plan of Merger with Rolina Corporation and Steven D.
Rudnik, and Employment Agreement with Steven D. Rudnik, both of the
date February 2 , 1998, as filed as Exhibit to the Company's report on
Form 10-KSB for the year ended December 31, 1998. Incorporated herein
by reference.
3(i)+ Articles of Incorporation and Amendments thereto, incorporated herein
by reference to Exhibits of previous filings with the Commission.
3(ii)+ Bylaws of the Company, incorporated herein by reference to Exhibits of
previous filings with the Commission.
4.1* Term Sheet
4.2* Form of Subscription Agreement
4.3* Form of Common stock Purchase Warrant
4.4* Form of Convertible Promissory Note
4.5* Form of Subscription Agreement
4.6* Form of Convertible Grid Promissory Note
4.7* Form of Common stock Purchase Warrant
4.8* Form of Convertible Promissory Note
4.9* Form of Common stock Purchase Warrant
4.10* Loan Agreement with S.Kroll
4.11* Form of Convertible Promissory Note
4.12* Form of Subscription Agreement
4.13* Form of Subscription Agreement
4.14* Form of Subscription Agreement
4.15* Form of Subscription Agreement
4.16* Form of Subscription Agreement
4.17* Form of Common stock Purchase Warrant
4.18* Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series B Senior Convertible Preferred
Stock.
4.19* Form of Common stock Purchase Warrant
4.20+ Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series C Senior Convertible Preferred
Stock
4.21* Agreement with S.Rudnik, re: convertible debt
4.22* Consulting agreement with G.Shemano
4.23* Form of Common Stock Purchase Warrant
4.24+ Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series A Senior Convertible Preferred
Stock.
4.25# Letter Agreement by and between the Company and Consulting for
Strategic Growth, Ltd., dated May 8, 2001.
4.26# Letter Agreements by and between the Company and Rodman & Renshaw, Inc.
dated June 26, 2001 and September 4, 2001, respectively.
4.27# Form of Subscription Agreement.
4.28# Form of Subscription Agreement.
4.29# Form of Subscription Agreement.
4.30# Form of Subscription Agreement.
72
5.1# Legal opinion and consent of Joseph J. Tomasek, Esq.
10.1* Resignation Agreement dated July 21, 1999, between J. Swon and B.
Deichl and the Company, incorporated herein by reference to the Exhibit
of Form S-8 filed with the Commission on August 3, 1999.
10.2* Resignation Agreement dated January 28, 2000, between M. Martin and the
Company, incorporated herein by reference to the Exhibit of Form S-8
filed with the Commission on January 31, 2000.
10.3* Employment Agreement, dated April 15, 1996 between the Company and
Joerg Klaube, incorporated herein by reference and previously filed as
an Exhibit to the Company's Form 10-KSB for the fiscal year ended
December 31, 1997 with the Commission.
10.4* Employment Agreement, dated July 1, 1999 between the Company and John
C. Duncan.
10.5+ Termination Agreement, dated as of August 1, 2001, by and between the
Company and Torneaux Fund, Ltd.
10.6* Contract by and between Lockheed Martin and the Company, dated December
21, 2000.
10.7# Employment Agreement, dated April 15, 2002 between the Company and
Steven D. Rudnik.
10.8# Employment Agreement, dated February 15, 2002 between the Company and
Mark Fuller.
10.9# Employment Agreement, dated April 15, 2002 between the Company and
Joerg Klaube.
10.10# Employment Agreement, dated April 15, 2002 between the Company and
Steven Jagels
23.1 Independent Auditors' Consent
- ----------
+ Documents incorporated by reference to Magnitude's Annual Report previously
filed on Forms 10-KSB for the fiscal years ended December 31, 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 this Registration Statement and amendments
thereto on Form SB-2, Registration No. 333-73992, with the Commission.
ITEM 28. UNDERTAKINGS
A. UNDERTAKING PURSUANT TO RULE 415
The undersigned Registrant hereby undertakes: (1) To file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement: (i) to include any prospectus required by Section
10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; (2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; (3) To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of this offering.
73
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.
74
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. 5 to Registration Statement on Form SB-2 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Chester, State of New Jersey, on October 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 October 4, 2004
- ----------------------------- President and
Steven D. Rudnik Chief Executive Officer
October 4, 2004
/s/ Joerg H. Klaube
- ----------------------------- Chief Financial Officer
Joerg H. Klaube (Principal Financial Officer)
October 4, 2004
* Director
- -----------------------------
Steven L. Gray
October 4, 2004
* Director
- -----------------------------
Ivano Angelastri
October 4, 2004
* Director
- -----------------------------
Joseph J. Tomasek
BY: /s/ Steven D. Rudnik
ATTORNEY-IN-FACT
75