As filed with the Securities and Exchange Commission on April 11, 2005
Registration No. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAGNITUDE INFORMATION SYSTEMS, INC.
(Name of small business issuer in its charter)
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Delaware 7372 75-2228828
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Address and telephone number of principal executive offices and
place of business)
Steven D. Rudnik, President, Magnitude Information Systems, Inc.
401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
( Name, address and telephone number of agent for service)
With a Copy To:
Joseph J. Tomasek, Esq., 75-77 North Bridge Street
Somerville, New Jersey 08876
(908) 429-0030
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462 (d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
Calculation Of Registration Fee
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PROPOSED PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE
TO BE TO BE PRICE PER OFFERING AMOUNT OF
REGISTERED(1) REGISTERED SHARE PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------
Common Stock 31,530,000 $0.095 (1) $2,995,350 $353.00
$.0001 par value
per share
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(1) Estimated solely for the purpose of computing the registration fee required
by Section 6(B) of the Securities Act and computed pursuant to Rule 457(C) under
the Securities Act. Based upon the average of the high and low prices of the
common stock on April 5, 2005 as reported on the Electronic Bulletin Board
Over-The-Counter Market maintained by The National Association of Securities
Dealers, Inc.
- ------------------
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.
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16,360,000 Shares of Common Stock
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15,170,000 Shares of Common Stock
Underlying Common Stock Purchase Warrants
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This prospectus covers a total of 31,530,000 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 owned by selling
shareholders. We have also filed three additional registration statements on
behalf of other selling shareholders to sell 56,522,134 common shares,
registration statement no. 333-118522, to sell 9,148,595 common shares,
registration statement no. 333-73992, and to sell 15,686,332 common shares,
registration statement no. 333-112595, respectively. All of the 31,530,000
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 April 5, 2005, the
average of the high and low prices paid for our common stock was $ 0.095. 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 7.
Neither the Securities And Exchange Commission nor any state Securities
Commission has approved or disapproved of these Securities or passed upon the
adequacy or accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
The date of this prospectus is April __, 2005
3
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.
4
The Offering
Securities offered 31,530,000 shares of common stock, $.0001 par value,
including 15,170,000 shares of common stock
issuable upon the exercise of Warrants. See "Selling
Shareholders" at page 16.
Selling Shareholders The selling shareholders are identified in this
prospectus at page 16 together with the maximum
amount of our common shares that each may sell
either outright or upon exercise of rights under
their respective warrants or subsequent to
consummation of the subscription agreement. See
"Selling Shareholders" at page 16.
Plan of Distribution Up to 31,530,000 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 $2,275,500 in proceeds from the
cash exercise of the warrants currently outstanding
and included in this prospectus. However, due to
current market conditions as well as the fact that
the exercise prices of all of these warrants 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. If the market price for our common stock
increases to permit the exercise of these warrants,
we intend to use any such cash proceeds received for
general corporate purposes, which may include
repaying indebtedness, making additions to our
working capital, funding future acquisitions or for
further developing our products and hiring
additional personnel.
Securities Outstanding We are authorized to issue up to an aggregate
200,000,000 shares of common stock and 3,000,000
shares of preferred stock of which 139,407,612
common shares and 193,190 preferred shares were
issued and outstanding at April 8, 2005. Two
developments may increase our outstanding number of
common shares: first, if the selling shareholders
exercise all of their rights to convert and/or
exercise all of their warrants, an additional
5
15,170,000 common shares, representing part of the
shares being registered, will be outstanding, and;
secondly, we have filed three additional
registration statements, re-registering an
additional 81,357,061 common shares for earlier
investors and, as with the selling shareholders in
this prospectus, if all of them exercise and/or
convert their stock options, warrants, convertible
preferred stock and a convertible note into common
shares, we will have an additional 32,462,365
outstanding common shares. We have in reserve an
additional 2,806,810 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
fiscal years ending December 31, 2004 and 2003 of
$2,483,602 and $2,337,881, respectively. 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 $27,992,998 as of December 31, 2004 of which
approximately $7 million are attributable to its discontinued hardware product
line. For the fiscal years ended December 31, 2004 and 2003, we incurred losses
of $2,483,602 and $2,337,881, respectively. 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 based upon our financial
condition as shown in our financial statements for our fiscal year that ended on
December 31, 2004, they have substantial doubts whether or not we will be able
to continue in business as an operating company. See "Financial Statements".
We Need Additional Financing.
We could be required to cut back or stop operations if we are unable to
raise or obtain needed funding. Our ability to continue operations will depend
on our positive cash flow, if any, from future operations or our ability to
raise additional funds through equity or debt financing. At present, we have not
received firm commitments for private financings in amounts sufficient to cover
the working capital necessary to continue to finance our operations and execute
our business plan. Although we anticipate that future revenues and new capital
from private and institutional investors with whom we are currently in
negotiations will be sufficient to fund our current operations and capital
requirements for the current fiscal year, we cannot give you any assurance that
these negotiations will result in definite agreements that will provide such
needed capital. We could be required to cut back or stop operations if we are
unable to raise or obtain funds when needed.
7
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, 2004 and 2003
were $121,886 and $162,335, respectively. 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, 2004, revenue from our software products has been
approximately $2,004,000 (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, 2004, we had revenues from the
sales of software product licenses and support services of $121,886. 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 2005, the average high sales price for our common stock traded in
the public market was $0.131 per share while the average low sales price during
the same period was $0.125 per share. Similarly, $0.134 was the average high and
$0.126 the average low trading prices of our stock during the first quarter of
2004.
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 31,530,000 common shares offered in this prospectus, 16,360,000
common shares have already been issued to the selling shareholders. If the
selling shareholders were to fully exercise their rights under their warrants to
convert into the remaining 15,170,000 common shares offered in this prospectus
and then sell them, the market price of our common stock could be materially
adversely affected. As of April 8, 2005, all of the warrants had exercise prices
above the current market price of our common stock. In addition, we have filed
three additional registration statements, registering a total of 81,357,061
common shares for existing investors. 48,894,696 of these shares have already
been issued to the investors with the balance of 32,462,365 shares underlying
stock options and warrants. If these 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.
11
Market Overhang
As of April 8, 2005, we had 139,407,612 common shares outstanding. As of April
8, 2005, we had 11,435,308 outstanding stock options, 40,748,599 outstanding
common stock purchase warrants, 193,190 preferred shares convertible into
1,757,198 common shares. If all the outstanding stock options, preferred stock
and common stock purchase warrants were exercised and/or converted by their
holders an additional 53,941,105 common shares would be outstanding; this would
represent an approximate 39% 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, the resulting dilution could depress the public trading price of our
common shares. We are registering 31,530,000 shares for sale by the Selling
Shareholders in this prospectus and an aggregate 81,357,061 shares for earlier
investors in our three additional registration statements; if a significant
portion of these shares were sold by the Selling Shareholders in this prospectus
and the previous investors further to our three additional registration
statements in the public marketplace, such sales could also have a severe and
adverse material affect on the public trading price of our common shares. Any
increase in the amount of saleable shares increases significantly the
possibility of large amounts of our shares offered for sale and, if sold,
dramatically increases the selling price pressure for our shares which could
result in a further depressed sales and market price for our stock.
The Market Price At Which The Selling Shareholders Resell Their Stock Offered In
This Prospectus May Bear No Relationship To Our Value
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).
14
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 $2,275,500 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:
Low/Bid High/Ask
2002
First Quarter $ 0.29 $ 0.08
Second Quarter $ 0.29 $ 0.12
Third Quarter $ 0.23 $ 0.09
Fourth Quarter $ 0.17 $ 0.09
2003
First Quarter $ 0.15 $ 0.08
Second Quarter $ 0.13 $ 0.06
Third Quarter $ 0.13 $ 0.06
Fourth Quarter $ 0.15 $ 0.07
2004 First Quarter $ 0.20 $ 0.09
Second Quarter $ 0.20 $ 0.10
Third Quarter $ 0.14 $ 0.09
Fourth Quarter $ 0.18 $ 0.10
(b) Shareholders
As of April 8, 2005, there were approximately 400 shareholders of record
for the Company's Common Stock. The number of record holders does not include
shareholders whose securities are held in street names.
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, issued 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 April 8, 2005,
including their names, and the number of shares of common stock owned by them
and offered pursuant to this prospectus. The selling shareholders listed in the
table do not necessarily intend to sell any of their shares. Magnitude filed the
registration statement, which includes this prospectus, due to the registration
rights granted to the selling shareholders, not because they had expressed an
intent to immediately sell their shares.
Name of
Selling Beneficial Holdings Common Shares Transaction % of Class
Securityholder Before the Offering Offered Hereby Note No. after Offering
- -------------------------------- ---------------------- ------------------ ----------- --------------
Blackburn, Theodore J. 850,000 500,000 1 **
Burgman, Sandra R. 390,000 240,000 1 **
Christian, George 500,000 500,000 1 **
DeWolf, Keith G. 1,845,000 600,000 1 **
Ebony Finance Ltd.Trust 800,000 500,000 1 **
Friedmann, John A. 1,000,000 1,000000 1 **
Green, David 4,500,000 2,000,000 1 1.8%
Greenbaum, Leonard 1,000,000 1,000,000 1 **
Grissom, Taylor B. 500,000 500,000 1 **
Hazard, Mark 1,800,000 1,500,000 1 **
Hopmans, John 1,600,000 1,000,000 1 **
Janssen, Peter 1,000,000 1,000,000 1 **
Johnson, Wayne C. 2,250,000 1,500,000 1 **
Lanktree, Charles T. 2,341,667 2,000,000 1 **
Mollo, Dean J. 875,000 500,000 1 **
Oriente, David J. & Jennifer L. 1,200,000 1,000,000 1 **
Pensco Trust Company Inc Cust.
FBO Richard H. Keyes IRA 1,000,000 1,000,000 1 **
Premium Strategy Partners AG 110,000 110,000 2 **
Rogivue, Nicholas 6,550,000 4,000,000 1 1.8%
Roth, Russell 500,000 500,000 1 **
Schuerch, Ulrich 5,620,000 2,330,000 1, 2 2.4%
Shillan, Nannette 500,000 500,000 1 **
T+T Vermoegensverwaltungs AG 1,000,000 500,000 1 **
Thornton, Robert 550,000 200,000 1 **
United Charities of America Inc. 6,000,000 6,000,000 1 **
Winthrop, Leslie 300,000 300,000 1 **
Zaroff, Michael 1,750,000 1,250,000 1,2 **
---------- ----------
46,331,667 31,530,000
** less than 1 percent
16
TRANSACTION NOTES
(1) Private Placements Pursuant to Section 4(2)
The Company is registering a total 30,340,000 shares on behalf of 25 private
foreign and domestic investors and one assignee pursuant to private placement
subscriptions entered into between the Company and such investors, between
September 2004 and April 2005. 15,170,000 of these shares have been issued
outright and 15,170,000 underlie stock purchase warrants, issued to these
investors. The warrants are exercisable during three years at the price of $0.15
per common share. The Company had originally received an aggregate $1,542,000
from these investment transactions and has paid an aggregate $113,000 to certain
finders. Peter Prast is the individual who has investment and voting control
over the Company shares owned of record by Ebony Finance Ltd. Trust; Michael
Tauss is the individual who has investment and voting control over the Company
shares owned of record by T+T Vermoegensverwaltungs AG; and Victor Cilli is the
individual who has investment and voting control over the Company shares owned
of record by United Charities of America Inc.
Blackburn, Theodore J. 500,000
Burgman, Sandra R. 240,000
Christian, George 500,000
DeWolf, Keith G. 600,000
Ebony Finance Ltd.Trust 500,000
Friedmann, John A. 1,000,000
Green, David 2,000,000
Greenbaum, Leonard 1,000,000
Grissom, Taylor B. 500,000
Hazard, Mark 1,500,000
Hopmans, John 1,000,000
Janssen, Peter 1,000,000
Johnson, Wayne C. 1,500,000
Lanktree, Charles T. 2,000,000
Mollo, Dean J. 500,000
Oriente, David J. & Jennifer L. 1,000,000
Pensco Trust Co. Inc. Cust FBO
Richard H. Keyes IRA 1,000,000
Rogivue, Nicholas 4,000,000
Roth, Russell 500,000
Schuerch, Ulrich 2,000,000
Shillan, Nannette 500,000
T+T Vermoegensverwaltungs AG 500,000
Thornton, Robert 200,000
United Charities of America Inc. 6,000,000
Winthrop, Leslie 300,000
Zaroff, Michael 500,000
(2) Shares issued for services rendered
The above table includes 1,190,000 shares registered on behalf of one domestic
and two foreign shareholders. These securities have been issued for market
research and investor relations services performed by such beneficiaries. Otto
Koller is the individual who has investment and voting control over the Company
shares owned of record by Premium Strategy Partners AG.
Premium Strategy Partners.AG 110,000
Schuerch, Ulrich 330,000
Zaroff, Michael 750,000
17
SHARES ELIGIBLE FOR FUTURE SALE
This prospectus covers 31,530,000 common shares. As of April 8, 2005,
there are 139,407,612 common shares issued and outstanding of which
approximately 49,000,000 are freely tradable.
Upon the effectiveness of this registration statement, (a) an additional
16,360,000 common shares already issued will be freely tradable and (b)
15,170,000 common shares underlying warrants which, if exercised, will result in
those shares also being freely tradable.
Apart from this prospectus and registration statement, we have filed three
additional registration statements on Form SB-2, re-registering a total of
81,357,061 shares of our common stock on behalf of previous investors. Upon the
effectiveness of these three additional registration statements, (a) a further
48,894,696 common shares already issued and (b) 32,462,365 common shares
underlying stock options, warrants and a convertible note which if exercised
will also become freely tradable.
In addition to our four registration statements referenced above, the
25,152,916 remaining shares of common stock presently outstanding that are
restricted and/or affiliate securities and not included in our four prospectuses
as well as 1,757,198 common shares underlying the issued and outstanding
convertible preferred stock, 430,000 common shares underlying outstanding
warrants, and 4,360,442 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.
18
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 31,530,000 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.
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
On March 21, 2005, the Company filed a patent infringement lawsuit in the
United States District Court, District of New Jersey, against Niche Software,
Ltd. of New Zealand, alleging that its software product called Workplace(TM)
willfully infringed on the Company's patent underlying its ErgoEnterprise(TM)
product line. The Company intends to vigorously prosecute its infringement
claims against this infringer. Except for this infringement lawsuit, the Company
is not a party in any legal proceedings.
19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names of all directors and executive officers of the Company are as follows:
Name Position Term(s) of Office
Steven D. Rudnik Chief Executive Officer, Jan.8, 1999, until present
President, Director
Steven D. Rudnik Chairman of the Board Feb.11, 2000, until present
Mark Chroscielewski Sr. Vice President Jan 2, 2003, until present
Business Development
Joerg H. Klaube Sr. Vice President, Secretary, Jul.31, 1997, until present
Chief Financial Officer
Steven W. Jagels Sr. Vice President Feb 15, 1998, until present
Information Systems
Joseph J. Tomasek Director Feb.11, 1999 until present
Ivano Angelastri Director May 18, 2000 until present
Steven L. Gray Director May 18, 2000 until present
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 45 - Chairman and Chief Executive Officer,
President. Mr. Rudnik personally developed many of the copyrighted software
products offered by Magnitude Information Systems. Mr. Rudnik co-founded Rolina
Corporation in 1996. Prior to 1996, Mr. Rudnik had executive level positions in
software product development and software company operations. In 1983, Mr.
Rudnik joined Randall-Helms International, Inc. Over the next 13 years, he
conceived and developed four independent families of stock market modeling
software products aimed at the worldwide "large cap" institutional investor
market. These product families generated over US$ 25 million in sales from more
than 400 clients in 23 countries. Mr. Rudnik was Executive Vice President and
Partner at Randall-Helms when it was sold in 1995.
Mark Chroscielewski, Age 47 - 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
20
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 63 - Chief Financial Officer, Senior Vice President.
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 45 - 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.
Joseph J. Tomasek, Age 58 - 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
area of corporate law.
Steven L. Gray, Age 56 - Director. Mr. Gray was elected to serve on the
Board on May 18, 2000. He is a resident of Venice, Florida. For the past six
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 42 - 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 a director of T&T Vermoegensverwaltungs AG, Zurich,
Switzerland, whose main business is asset management and financial consulting
services for private and institutional clients. Prior to his current position,
Mr. Angelastri served as Managing Director of Megan Services where he performed
financial advisory and portfolio management services.
21
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company knows of no person, who at any time during the period from the
date at which it filed its annual report on Form 10-KSB for the year ended
December 31, 2003 to the present, was a director, officer, beneficial owner of
more than ten percent of any class of equity securities of the Company (a
"Reporting Person"), that failed to file on a timely basis any reports required
to be furnished pursuant to Section 16(a) except that directors Joseph Tomasek
and Steven Gray as well as director and officer Steven Rudnik each were late
once in the filing of a transactional report.
22
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive
capacities for the fiscal years ended December 31, 2004, December 31, 2003, and
December 31, 2002, 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 2004 133,333(6) -- 13,364 36,000 -- 3,250
Chief Executive Officer, 2003 133,333(7) -- 15,262 27,000 -- 3,250
President 2002 133,333(8) -- 12,560 42,000 -- 3,250
- ---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
Mark Chroscielewski 2004 125,000 -- 6,000 -- -- 8,400
Sr. Vice President 2003 125,000 -- 6,000 -- -- 8,400
Business Development 2002 -- -- -- -- -- --
- ---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
Joerg H. Klaube 2004 125,000 -- 11,404 36,000 -- 1,710
Sr. Vice President, 2003 125,000 -- 11,404 67,000 -- 1,710
CFO 2002 125,000 -- 9,087 42,000 -- 1,710
- ---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
Steven W. Jagels 2004 108,333 -- 9,000 -- -- 1,940
Sr. Vice President 2003 108,333 -- 11,083 -- -- 1,940
Information Systems 2002 108,333 -- 9,000 -- -- --
- ---------------------------- ------- ------------- ------------- ------------------- --------------- ------------- --------------
All executive officers
As a group (4 persons) 2004 491,666 -- 39,768 72,000 -- 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.
23
(2) Consists of automobile expenses allowances and vacation pay-out.
(3) During 2004, the Board of Directors approved stock awards of 300,000
restricted shares to Rudnik and of 300,000 restricted shares to Klaube.
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:
4,744,445 shares - $616,778; J.Klaube: 1,400,000 shares - $182,000. 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 health and personal life insurance.
(6) During 2004, the Board of Directors approved the issuance of 16,667 shares
of Series E Senior Convertible Stock, since converted into 1,666,667
restricted shares, and warrants for the purchase of 833,333 common shares,
exercisable during three years at $0.15/share, in lieu of $100,000 cash
salary; the stated salary figure includes such common shares, valued at the
nominal $100,000 which they replaced.
(7) 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.
(8) 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 $110,000 which they replaced.
Stock Options :
The following table sets forth stock options granted during 2004 pursuant
to the Company's 1997 Stock Option Plan and 2000 Stock Incentive Plan, to
executive officers, certain other employees with highest remuneration,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
- --------------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted and Directors in FY Price ($/Sh.) Date
- --------------------------------------------------------------------------------
There were no stock options granted to employees and directors under any of the
Company's stock option plans during 2004.
The following table sets forth aggregated stock option and warrant
exercises during 2004 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 2004.
24
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:
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 2004, restricted stock awards for services rendered, as
follows: I. Angelastri 300,000 common shares; S. Gray 450,000 common shares, J.
Tomasek 800,000 common shares.
During 2004, one outside director of the Company who also serves as the
Company's general and securities counsel, was paid an aggregate $164,184 for
legal services. One other outside director was paid $10,400 for services
performed.
25
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 8, 2005, 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) 1.76 %
Stock Mark Chroscielewski -- --
Steven L. Gray 4,626,704 (3) 3.44 %
Steven W. Jagels 622,083 (4) 0.46 %
Joerg H. Klaube 1,910,417 (5) 1.43 %
Steven D. Rudnik 9,725,695 (6) 7.03 %
Joseph J. Tomasek 2,733,250 (7) 2.04 %
Address of all persons above: c/o the Company.
All Directors and Executive Officers 16,454,899 15.51 %
as a Group (7 persons)
Christoph Marti 9,400,000 (8) 6.81 %
Kuerzestrasse 25, CH-4562 Biberist, Switzerland
)* The Company also has issued and outstanding as of March 8, 2005, 193,190
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 March 8, 2005. For purposes of
computing the percentage of outstanding shares of Common Stock held by each
person or group of persons named above, any security which such person or
persons has or have the right to acquire within such date is deemed to be
outstanding but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated
in the footnote to this table and pursuant to applicable community property
laws, the Company believes based on information supplied by such persons,
that the persons named in this table have sole voting and investment power
with respect to all shares of Common Stock which they beneficially own.
(2) Includes options to acquire 512,500 shares and warrants for 125,000 shares.
(3) Includes options to acquire 400,275 shares and warrants for 632,333 shares.
(4) Includes options to acquire 602,083 shares.
(5) Includes options to acquire 510,417 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 shares.
26
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 139,407,612 were
issued and outstanding as of April 8, 2005 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 April 8, 2005, 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 April 8, 2005; 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 April 8, 2005, 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 April 8, 2005; 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 April 8, 2005 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 no shares were issued and outstanding as of April 8,
2005.
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 April
8, 2005 (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 April 8, 2005, (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
April 8, 2005; (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 April 8, 2005, and; (5) up to 500,000 shares of
Preferred Stock designated as Series E Senior Convertible Preferred Stock (the
"Series E Stock") of which no shares were outstanding as of April 8, 2005.
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
27
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
28
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.
29
BUSINESS
The Company
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to Proformix
Systems, Inc., and on November 18, 1998, the Company changed its name to
Magnitude Information Systems, Inc.
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name ErgoEnterprise(TM) which are designed
to help individual computer users and businesses increase productivity and
reduce the risk of potentially preventable repetitive stress injury (RSI). These
software modules can be applied individually or together in a comprehensive
ergonomic and early intervention program that seeks to modify a user's behavior
by monitoring computer usage patterns over time and warning the user when to
break a dangerous trend in repetitive usage of an input device, such as a
keyboard or mouse. The product was developed to train people working on
computers, monitor computer-use related activities and evaluate a user's risk
exposure and propensity towards injury or loss of effectiveness in connection
with his/her day-to-day work. Moreover, the software enables a company to not
only address the issue of health risks involving employees and to minimize
resulting potential liabilities, but delivers a powerful tool to increase
overall productivity.
Background
On June 24, 1997, the Company 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. On November 18, 1998, the Company sold Magnitude,
Inc.'s hardware product line comprised of the ergonomic keyboard platform
products and accessories, all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the Proformix
name, to a Canadian company.
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 acquired the rights to certain software products, with such software
products subsequently forming the basis for the further development of the
Company's proprietary ErgoEnterprise(TM) software system. The operations of
Magnitude Information Systems, Inc. are currently comprised solely of the
operations of Magnitude, Inc.
The Company is currently subject to the reporting requirements of Section
15(d) of the Securities Exchange Act of 1934. The Company has the authority to
issue an aggregate of Two Hundred Million (200,000,000) Common Shares, par value
$.0001, and Three Million (3,000,000) Preferred Shares, par value $.001, of
which at December 31, 2004, Two Thousand Five Hundred (2,500) were designated as
Cumulative Preferred Shares, par value $.001; Three Hundred Thousand (300,000)
were designated as Series A Senior Convertible Preferred Stock, par value
$0.001; Three Hundred Fifty Thousand (350,000) were designated as Series B
Senior Convertible Preferred Stock, par value $0.001; One Hundred Twenty
Thousand (120,000) were designated as Series C Senior Convertible Preferred
Stock, par value $0.001; Five Hundred Thousand (500,000) were designated as
Series D Senior Convertible Preferred Stock, par value $0.001; and Five Hundred
Thousand (500,000) were designated as Series E Senior Convertible Preferred
Stock, par value $0.001.
30
As of April 8, 2005, there were outstanding 139,407,612 Common Shares, 1
Cumulative Preferred Share, and 193,190 Convertible Preferred Shares.
Narrative Description of Business
Magnitude Information Systems, Inc. is a pioneer and leader in the
ergonomic productivity software market. With its Anti-Injury(TM) software as
represented by ErgoEnterprise(TM), an interactive suite of Windows(TM) software
products, Magnitude has developed and delivered the first integrated systems
approach to computer ergonomics. The Company's patented proprietary software
products provide business and government employers with a complete system for
the evaluation and management of ergonomic and productivity risk factors with
respect to the use of computers in the office environment. ErgoEnterprise(TM) is
designed to help employers minimize preventable Repetitive Stress Injuries
("RSI") and enhance productivity through:
o Real-time monitoring of keyboarding activities to ensure proper
posture and work pacing.
o Pro-active dialogue with at-risk employees, including surveys and
training in the best practices for wellness and productivity.
o Strategic profiling and the management of computer use throughout an
organization to employ best practices and to measure health, safety,
and performance results.
o Computer workstation assessment tools.
We have received a patent from the U.S. Patent and Trademark Office
relative to certain core inventions within the ErgoEnterprise(TM) system and we
have applied for several more patents for our products.
As the utilization of computers in the office has increased significantly
in the last decade, so has the rate of health problems believed to be related to
the use of computers. Computer ergonomics focus on optimizing the design of
technology involved in the utilization of computers in the office, and also
attempts to affect the manner in which people interact with computers, so as to
minimize the associated health risks. A successful technology delivery system
positively impacts the cost of doing business by improving the comfort,
productivity, job satisfaction and safety of the computer user, while reducing
the costs of absenteeism and work related disability.
Repetitive stress injury (RSI) is a classification of diseases caused by
the excessive use of joints. It is a sub-classification of Cumulative Trauma
Disorders (CTDs). RSI accounts for a large portion of work-related illnesses,
and the incidence of RSI is expected to grow as the number of people operating
keyboards increases. The impact of RSI is measured not only in the pain and
suffering of its victims, but also in time lost from work, and medical costs.
The Company's software products are designed to help businesses deal with
potentially preventable repetitive stress injuries, by real-time monitoring of
keyboarding activities, pro-active dialog with at-risk employees, and strategic
profiling and management of computer use throughout an organization.
A study released in January 2001 by the National Academy of Sciences,
originally commissioned by Congress and produced by the National Research
Council, finds that work-related back, hand and wrist injuries affect about 1
million U.S. workers every year. The total cost of the resultant disorders is
between $45 billion and $54 billion in compensation, lost wages and lower
productivity. Increased awareness of the health risks and associated costs led
the State of California several years ago implement an ergonomic regulation
which directs qualifying employers to establish and maintain a program designed
to minimize RSI's. Such program shall include work-site evaluation, control of
the exposures that have caused RSI's, and training of employees. State agencies
and employers in California face fines of up to $25,000 per incident for
violating these regulations. The State of Washington adopted similar regulations
in 2000, and other states have indicated a willingness to follow suit. The
Company believes that the growing recognition of these trends will give rise to
a rapidly expanding market for the Company's products.
31
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.
The Company operates primarily in the United States of America, however,
has introduced French and Portuguese language versions of its software products
for the European and Brazilian markets, and will shortly introduce other
language versions. The Company has not yet derived any material revenues from
the licensing or sale of its software products in foreign markets.
Products, Trademarks
The Company's current primary product is a suite of nine proprietary
software modules marketed under the name ErgoEnterprise(TM) which are designed
to help individual computer users and businesses deal with potentially
preventable repetitive stress injury (RSI). The nine 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. ErgoEnterprise(TM) is the first suite of software solutions
that combines ergonomic remediation and productivity enhancement tools. Its nine
component modules are described as follows:
ErgoTutor(TM) delivers a complete office ergonomics training course directly to
employees at their desktop, and provides employees with clear initial awareness
training as well as follow-up training for reinforcement of previously learned
materials.
ErgoSURE(TM) is a postural assessment tool designed to allow the evaluation of
employee posture while working at computers. It is an electronic version of the
internationally accepted RULA (Rapid Upper Limb Assessment) system. This system,
developed at the University of Nottingham's Institute for Occupational
Ergonomics in the U.K., allows users to survey a broad range of computer-related
work activities involving repetitive motions, allowing the user to detect - and
remedy - hazardous situations and conditions.
32
ErgoSurveyor(TM) is used to gather usage information from employee populations.
Customized, professional quality surveys are designed to corporate
specifications and gather important information that may be used to plan
ergonomic and corporate business strategies. Responses to risk assessment
surveys are gathered and compiled into a database that may be used to create
comprehensive, customized reports.
UserNotes(TM) is an early reporting and "Rapid Response" Intervention tool
designed to give employees a way to communicate discomfort to designated staff,
allowing issues to be addressed earlier - at a lower cost and a higher
likelihood of success. UserNotes is consistently available to everyone in the
organization at the workstation or notebook with or without Internet access.
ErgoSentry(R) measures rest against work in real time, tracking keyboard and
mouse activity independently. ErgoSentry's patented algorithms, designed for
prevention and control of RSI risk factors, monitor computer usage patterns over
time and alert the user when to take micro-breaks, avoiding high-risk trends in
keyboard or mouse usage through a unique and patented empowering feedback
mechanism. Users are alerted to take these micro-breaks only when risk exposure
exceeds configured limits.
EMSAnalyzer(TM) is designed to measure, analyze and manage all aspects of
day-to-day computer use. Raw actual data of normal, everyday use are gathered
through ErgoSentry(R) and accumulated for standard and customized reports that
track, analyze and qualify how employees are using their computer stations.
Guardian(TM) captures metrics on the frequency of keystroking and mousing during
each minute throughout the day, and optionally tracks which applications and
files users access.
ErgoQuiz(TM) is an electronic testing system used to assess ergonomic awareness
and educate employees.
ErgoMap(TM) offers employees state of the art ergonomic training at the desktop.
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 Granted:
In May 2000 the U.S. Patent and Trademark Office awarded the Company a
patent which covers various innovations including a proven approach that helps
computer users manage their activity to improve productivity and reduce the risk
of repetitive motion injuries.
ErgoPal Introduced, Patent Pending:
New patent-pending ErgoPal software is 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.
33
Studies Involving ErgoEnterprise(TM)
Magnitude has conducted productivity studies using ErgoEnterprise(TM) at
various client and prospect sites.
In July 1999, Cornell University released a study entitled "Effects of
Ergonomic Management Software on Employee Performance," a field experimental
test of the effects of ErgoEnterprise on computer work activity.1 Professor Alan
Hedge tested the effects of using Magnitude's ergonomic work pacing software to
monitor keyboard and mouse activity, and to provide computer users with
information on appropriate, discretionary rest breaks. The software also
provided information on stretching exercises, appropriate postures, and
appropriate workstation adjustments. The Wall Street office of a nationwide
insurance brokerage firm was chosen as the test site for this study.
Data gathered in the study covered 6,195 hours of computer usage,
equivalent to 800 person/days of computer use. Participants used computers an
average of 5.9 hours per day, and typed over 3,949,000 keystrokes during the
course of the study. Employees at the site used their computers for much of the
workday. The study evaluated the performance of 21 individuals including
executives, administrators, customer service specialists, underwriters, and
accountants.
Alerting users to take more short rest and break periods improved work
accuracy, and did not impair overall keystroke and mouse usage. These study
results agree with previous research. In addition, the study concluded that from
an economic standpoint, the performance benefits that may accrue from using
ErgoEnterprise indicate a return on investment of approximately 3 months.
One client, the California State Compensation Insurance Fund, conducted a
survey using ErgoEnterprise in a pilot program from January 2000 - June 2000.
The significant results of the study included:
o A 50% reduction rate in the total number of Musculoskeletal Disorder
(MSD) Claims.
o A reduction by between 20% and 80% of OSHA reported injuries.
o The actual workers' compensation savings in the pilot program was
$120,000.
o State Fund's projected annual workers' compensation cost savings was
approximately $780,000.
o There was a total participation of employees in Pilot Program
o Employees postponed micro-breaks a maximum of nine minutes.
o There was 100% employee satisfaction while using ErgoEnterprise.
o Some employees used program to "warm up" prior to their beginning
work
In February 2001, a study by Cornell/Lockheed Martin titled Ergonomic
Management Software and Work Performance presented an ROI analysis to quantify
the potential economic impact of a 59% improvement in keystroke accuracy for the
test group. Based on a combination of factors including estimated hourly
employee costs which include some of the following: wages, benefits, occupied
internal floor space, pre-study hourly error costs, hourly savings per person,
and the annual "per seat" cost of ErgoEnterprise, the study indicated that the
breakeven/payback period is achieved in 25.1 hours of usage. Several large
industrial clients already have named ErgoEnterprise "Best Practice". The term
"Best Practice" is an acknowledgement that a concept, process, or product is
proven to produce the desired results and is applicable throughout the
enterprise across organizational lines.
- ----------
1 Hedge, A. "Effects of Ergonomic Management Software on Employee
Performance." Cornell Human Factors Laboratory Technical Report /SP7991,
Cornell University, July 1999.
34
Ergonomic Advisory Board
Magnitude has formed an Ergonomic Advisory Board (EAB) comprised of
individuals with noted expertise in the field of ergonomics and productivity to
ensure that Magnitude's ergonomic products remain at the forefront of these
industries. These respected leaders advise Magnitude on product requirements and
put their "stamp of approval" on the Company's EPS products, enhancing product
value and standing in these industries relative to the competition.
The EAB focuses on strategic issues, such as:
>> What product functions, components, and interfaces should Magnitude's
products possess?
>> What markets should Magnitude target? >> What kinds of ergonomics measures
and methods should be provided or recommended?
>> What kinds of ergonomics analyses may companies do with their collected
datasets?
>> What kinds of research studies should Magnitude consider?
>> How will Magnitude's products fit with current and proposed ergonomics
regulations?
>> What other ergonomics issues should Magnitude consider?
EAB members serve two-year terms. Today, the EAB is comprised of:
>> Professor Alan Hedge, Ph.D. - EAB Chairman
Expertise in office ergonomics and computer ergonomics issues.
>> Professor Hal Hendrick, Ph.D., CPE, DABFE
Past-president of the Human Factors and Ergonomics Society, with
expertise in macroergonomics focusing on ergonomics and
organizational effectiveness.
>> Professor Rob Henning, Ph.D., CPE
Expertise in rest-break and human performance issues.
>> Mark Carleson
Consultant and Former Deputy Director and Chief of Enforcement of
Cal/OSHA from 1990-1999.
>> Inger Williams, Ph.D.
Consultant on school ergonomic issues.
>> Chris Grant, Ph.D., CPE
Expertise in office ergonomics and Ergonet.
Members of the EAB do not endorse specific Magnitude products, but do agree to
have their names and brief biographies on Magnitude's Website and included in
press releases about the role and activities of the EAB.
35
Business Strategy
The most important prospective customers for the Company's products are
large and medium 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 by
addressing these potential risks. On an on-going basis, the increasing cost of
workers 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 ErgoEnterprise(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 ErgoEnterprise(TM) system constituted
a novel approach.
Since that time, the product has been installed by a growing number of
corporate and institutional clients. Typically, in view of the new-ness of
product and market, such client initially purchases a license for a "pilot
version" of the software, functionally complete but limited to a smaller number
of users. After undergoing a process of familiarization and evaluation the
client is expected to upgrade to the intended ultimate number of users which, by
definition, should encompass all personnel exposed to the above described risks.
Many tests and evaluations by third parties have confirmed to the Company's
satisfaction that its product is mature, stable, and effective. It is with a
high degree of confidence, therefore, that the Company expects many of the
ongoing trial installations to lead to larger enterprise orders and, thereby, to
the targeted revenue stream. The key to economic success lies in a comprehensive
marketing approach that carries the Company's message to the largest possible
number of prospective clients.
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
ErgoEnterprise(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 $221,000 for the year ended December 31,
2004, and $228,000 for the year ended December 31, 2003.
Competition
The market addressed by the Company's software products is presently
served by a number of smaller software companies, none of which occupies a
dominant position. For the most, these competitors market software products that
address only one or a few of the task complexes covered by the Company's
products, without thereby offering a comparable breadth of function and
integration in such areas as work-site evaluation, employee training and work
pacing.
36
The Company is not aware of any products that compete - in terms of
breadth of functionality - with the integrated software product suite that is
marketed by the Company under the trade name ErgoEnterprise(TM). While the
Company believes that it currently has a strategic competitive advantage in
ergonomic software, especially with regard to its patented algorithms underlying
the product, there can be no assurance that competitors will not attempt to copy
the Company's products or develop and successfully license similar products, to
the Company's detriment.
Seasonality and Dependency
The industry segment in which the Company does business is not seasonal.
The Company's past revenues come primarily from smaller orders for pilot
projects and field tests, and a limited number of individual larger orders where
successfully completed pilot projects led to departmental or enterprise-wide
deployment. The nature of the business does not usually involve repeat orders
and therefore does not create dependency on a specific customer or group of
customers. The Company's future success is dependent upon its ability to
increase the frequency where initial pilot installations result in larger
contracts, as corporate clients introduce the Company's software products across
the entire spectrum of computer workplaces throughout their company or specific
divisions/departments. The relative major impact of individual larger orders,
the receipt or timing of which cannot be predicted with any degree of accuracy,
creates a significant measure of volatility that adds a degree of uncertainty to
all current planning and forecasting. There can be no assurance that the Company
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, 2004, the Company employed 10 persons, of whom four
were primarily engaged in research and development and software support
activities, two were primarily engaged in sales and marketing, and four in
general administrative and managerial 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 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. During February 2005, the term of the
lease was extended to March 31, 2007, at a monthly rental fee of $10,000.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934
Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-KSB and Form 10-QSB and periodic press
releases, as well as other public documents and statements, contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by the statements. These risks and uncertainties include
general economic and business conditions, development and market acceptance of
the Company's products, and other risks and uncertainties identified in the
Company's reports to the Securities and Exchange Commission, periodic press
releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
Results of Operations for the Year Ended December 31, 2004
The year 2004 was marked by continuing intensive efforts to gain full
market acceptance for our software products. Our financial resources did not
permit us to maintain a larger sales force and pursue a meaningful marketing
campaign targeted directly at end-user clients. We therefore had modified our
sales approach by concentrating almost entirely on developing indirect sales
channels whereby we could leverage the greater marketing capabilities of
distributors and other strategic partners to introduce and promote our products
to a larger audience of potential corporate clients. To that extent we signed,
in December 2004, a marketing agreement with Aon Corporation pursuant to which
Aon's Risk Services division and Magnitude will jointly market our
ErgoEnterprise software solution to clients of both firms. We expect this
venture to produce tangible results in terms of software licensing contracts,
during the first half of 2005.
For the year ended December 31, 2004, the Company had revenues of $121,886
compared to $162,335 in 2003. Revenues consisted of $50,325 licensing fees for
the Company's software products and $71,561 for maintenance and support
services.
Gross profits amounted to negative $34,089. 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 $2,600,359 which increased marginally by 6% from the $2,455,809 recorded in
2003, the Company realized an operating loss of $2,634,448 compared to an
operating loss of $2,449,421 in 2003. Non-operating income and expenses included
$43,069 net interest expense and $20,703 charges for losses on assets. The
Company also realized a credit of $214,618 from the sale of net loss
carry-forward tax credits pursuant to the New Jersey Emerging Technology and
Biotechnology Financial Assistance Act. The year concluded with a net loss of
$2,483,602. After accounting for dividends paid and accrued on outstanding
preferred stock which totaled $174,024 and an accounting charge of $1,629,730
for discounts accrued on preferred stock, the net loss applicable to common
shareholders was $4,287,356 or $0.04 per share, compared to a loss of $2,464,174
or $0.04 per share for the previous year.
38
Liquidity and Capital Resources
In the absence of cash flow from operations, required working capital to
finance ongoing operations was supplied almost entirely from new equity capital.
The Company attracted almost $2 million in new equity funding in the form of
cash, and converted approximately $540,000 debt and accrued expenses into
equity.
At December 31, 2004, the deficit in working capital amounted to $977,831
as compared to $968,183 at December 31, 2003. Stockholders' equity showed an
impairment of $480,228 at the end of the year, compared to an impairment of
$377,851 at the beginning of the year. The negative cash flow from operations
totaled approximately $1.68 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. During 2004, the Company had filed a new
registration statement on Form SB-2 and amendments to two previously filed
registration statements on Form SB-2, all 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 were made on behalf of certain investors
in the Company's equities and proceeds of any sales of such registered
securities will accrue entirely to such investors. The filings will shortly be
updated with the current financial statements and forwarded to the Securities
and Exchange Commission for review. During the first three months of 2005 and up
to the time of this submission, more recent equity financing transactions have
generated approximately $645,000 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, 2004 its short-term liabilities, aside from trade payables and accruals,
consisted of certain notes and loans aggregating approximately $233,000 of which
approximately $100,000 was owed to the chairman and chief executive officer of
the Company in form of a demand note (see "Related Party Transactions").
Accruals include $474,106 unpaid dividends on outstanding preferred stock. Such
dividends will be paid only if and when capital surplus and cash-flow from
operations are sufficient to cover the outstanding amounts without thereby
unduly impacting the Company's ability to continue operating and growing its
business.
Current cash reserves and net cash flow from operations expected during
the near future are inadequate when measured against present and anticipated
future needs. In order to remedy the resulting liquidity constraints and address
any "going-concern" issues, management is currently negotiating with several
financing sources with the goal of obtaining commitments for further investments
in form of debt or equity capital, to be funded during the upcoming quarter.
There can be no assurance, however, that these negotiations will lead to the
desired outcome.
39
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. This
amount is currently open and unpaid and payable on demand.
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.
During the third quarter, five directors and officers of the Company
received a total 1,500,000 restricted common shares as remuneration for services
as members of the board of directors. One outside director who also serves as
the legal and securities counsel of the Company received 500,000 restricted
common shares as compensation for his commitment and agreement to continue to
invoice the Company for legal services at a reduced rate, in connection with
legal services rendered during fiscal year 2004.
During the third quarter the Company's chief executive officer extended
short term loans aggregating $100,000 to the Company. These loans carried
interest at the rate of 10% per year and were subject to a loan origination fee
of 4%. At December 31, 2004, all such loans had been repaid.
During 2004, one outside director of the Company who also serves as the
Company's general and securities counsel, was paid an aggregate $164,184 for
legal services. One other outside director was paid $10,400 for services
performed.
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.
40
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
Page
Independent Auditors' Report........................................... 42
Financial Statements
Consolidated Balance Sheet........................................ 43
Consolidated Statements of Operations............................. 44
Consolidated Statement of Stockholders Equity (Deficit)........... 45-46
Consolidated Statements of Cash Flows............................. 50-68
Notes to the Consolidated Financial Statements.................... 49-
41
[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, 2004 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2004 and 2003, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the notes to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 2, 2005
42
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
Assets
Current Assets
Cash $ 44,144
Accounts receivable, net of allowance for doubtful accounts of $0 30,630
Inventory 6,214
Miscellaneous receivables 11,322
Prepaid expenses 88,811
------------
Total Current Assets 181,121
Property and equipment, net of accumulated depreciation of $145,157 9,997
Software, net of accumulated amortization of $1,041,257 466,033
Deposits 21,829
------------
Total Assets 678,890
============
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable and accrued expenses 398,031
Deferred revenues 49,373
Deferred rental obligation 1,045
Dividends payable 474,106
Loans payable 75,000
Notes payable 25,000
Current maturities of long-term debt 133,419
Current maturities of capitalized lease obligations 2,978
------------
Total Current Liabilities 1,158,952
Capitalized lease obligations, less current portion 256
------------
Total Liabilities 1,159,208
------------
Commitments and Contingencies --
Stockholders' Equity (Impairment)
Preferred Stock, $.001 par value, non-voting, 3,000,000 shares
authorized; 193,191 shares issued and outstanding 193
Common stock, $.0001 par value, 200,000,000 shares authorized;
127,837,612 shares issued and outstanding 12,784
Additional paid in capital 27,499,793
Accumulated (deficit) (27,992,998)
------------
Total Stockholders' Equity (Impairment) (480,228)
------------
Total Liabilities and Stockholders' Equity (Impairment) $ 678,980
============
See notes to the consolidated financial statements
43
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------
2004 2003
------------ ------------
Net Sales
Software $ 121,886 $ 162,335
------------ ------------
Total Net Sales 121,886 162,335
------------ ------------
Cost of Goods Sold
Software 155,975 155,947
------------ ------------
Total Cost of Goods Sold 155,975 155,947
Gross Profit (Loss) (34,089) 6,388
Research and development costs 5,548 12,892
Stock-based compensation 695,692 466,399
Selling, general and administrative expenses 1,899,119 1,976,518
------------ ------------
Loss From Operations (2,634,448) (2,449,421)
------------ ------------
Other Income (Expense)
Miscellaneous income -- 3,745
Interest income 189 --
Interest expense (43,258) (94,823)
Loss on disposition of assets (20,703) (779)
------------ ------------
Total Other Expense (63,772) (91,857)
------------ ------------
Loss Before Provision for Income Taxes (2,698,220) (2,541,278)
Benefit from Income Taxes 214,618 203,397
------------ ------------
Net Loss $ (2,483,602) $ (2,337,881)
------------ ------------
Dividends on Preferred Shares $ (1,803,754) $ (126,293)
------------ ------------
Net Loss Applicable to Common Shareholders $ (4,287,356) $ (2,464,174)
============ ============
Net Loss Per Common Share (0.04) (0.04)
============ ============
Weighted Average of Common Shares Outstanding 96,968,697 66,962,744
============ ============
See notes to the consolidated financial statements.
44
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2003
Discount on Stock
Convertible Cumulative Preferred Subscriptions
Preferred Shares Preferred Shares Stock Common Stock Receivable
------------------- ---------------- ---------- ---------------------- ------------
Shares Amount Shares Amount Amount Shares Amount
-------- --------- ------ ------- ---------- ---------- --------- ------------
Balances, January 1, 2003 195,968 $ 196 1 $ - $ - 56,395,817 $ 5,640 $ (3,297)
Issuance of convertible
preferred stock pursuant to
private equity placements 130,834 131 - - (598,289) - - -
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 - - - - - - 3,297
Issuance of common stock
pursuant to conversion of debt - - - - - 220,000 22 -
Issuance of common stock
pursuant to exercise of options - - - - 81,000 8 -
Issuance of common stock
pursuant to exercise of warrants - - - - - 3,552,752 355 -
Issuance of common stock
pursuant to private equity placements - - - - - 9,122,171 912 -
Issuance of common stock
granted for private placement
finders' fees - - - - - 30,000 3 -
Issuance of common stock
pursuant to conversion of
accounts payable - - - - - 5,620,533 62 -
Issuance of common stock for
services performed - - - - - 3,828,035 383 -
Issuance of common stock for
compensation - - - - - 1,000,000 100 -
Issuance of common stock for
stock awards - - - - - 2,363,500 236 -
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) 77,213,808 $ 7,721 $ -
======== ========= ====== ======= ========== ========== ========= ============
Total
Additional Stockholders'
Paid in Accumulated Equity
Capital Deficit (Deficit)
------------ ------------- -------------
Balances, January 1, 2003 $ 20,902,010 $ (21,241,467) $ (336,918)
Issuance of convertible
preferred stock pursuant to
private equity placements 1,357,560 - 759,402
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
Issuance of common stock
pursuant to conversion of debt 21,978 - 22,000
Issuance of common stock
pursuant to exercise of options 8,092 - 8,100
Issuance of common stock
pursuant to exercise of warrants 319,792 - 320,147
Issuance of common stock
pursuant to private equity placements 646,480 - 647,392
Issuance of common stock
granted for private placement
finders' fees (3) - -
Issuance of common stock
pursuant to conversion of
accounts payable 41,055 - 41,117
Issuance of common stock for
services performed 158,873 - 159,256
Issuance of common stock for
compensation 99,900 - 100,000
Issuance of common stock for
stock awards 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 $ 23,950,614 $ (23,705,641) $ (377,851)
============ ============= =============
See notes to the consolidated financial statements.
45
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2004
Discount on Additional
Convertible Cumulative Preferred Paid in
Preferred Shares Preferred Shares Stock Common Stock Capital
------------------- ---------------- ---------- ---------------------- ------------
Shares Amount Shares Amount Amount Shares Amount
-------- --------- ------ ------- ---------- ----------- --------- ------------
351,022 $ 351 1 $ - $ (630,896) $77,213,808 $ 7,721 $ 23,950,614
Balances, January 1, 2004
Issuance of convertible
preferred stock pursuant to
private equity placements 156,993 157 - - (999,330) - - 1,935,133
Issuance of convertible
preferred stock for services performed 1,900 2 - - - - - 28,098
Issuance of convertible
preferred stock for compensation 16,667 17 - - - - - 99,983
Conversion of convertible
preferred stock into common stock (333,392) (334) - - - 33,349,202 3,334 (3,000)
Issuance of common stock for
accrued bonus - - - - - 196,680 20 19,648
Issuance of common stock for
stock awards - - - - - 2,000,000 200 224,800
Issuance of common stock
pursuant to exercise of options - - - - 250,000 25 2,475
Issuance of common stock for rent - - - - - 200,000 20 23,980
Issuance of common stock
pursuant to private equity placements - - - - - 12,215,000 1,222 1,176,828
Issuance of common stock
granted for private placement
finders' fees - - - - - 673,333 67 (67)
Issuance of common stock for
services performed - - - - - 1,680,000 169 139,281
Issuance of common stock for
accrued interest - - - - - 59,589 6 3,966
Issuance of options for
services performed - - - - - - - 30,150
Private placement finders fees - - - - - - - (132,096)
Net loss, year ended December 31, 2004 - - - - - - - -
Dividends on convertible
preferred stock - - - - - - - -
Amortization of discount on
preferred stock - - - - 1,630,226 - - -
-------- --------- ------ ------- ---------- ----------- --------- ------------
Balances, December 31, 2004 193,190 $ 193 1 $ - $ - 127,837,612 $ 12,784 $ 27,499,793
======== ========= ====== ======== ========== =========== ========= ============
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
------------ -------------
------------ -------------
$(23,705,641) $ (377,851)
Balances, January 1, 2004
Issuance of convertible
preferred stock pursuant to
private equity placements - 935,960
Issuance of convertible
preferred stock for services performed - 28,100
Issuance of convertible
preferred stock for compensation - 100,000
Conversion of convertible
preferred stock into common stock - -
Issuance of common stock for
accrued bonus - 19,668
Issuance of common stock for
stock awards - 225,000
Issuance of common stock
pursuant to exercise of options - 2,500
Issuance of common stock for rent - 24,000
Issuance of common stock
pursuant to private equity placements - 1,178,050
Issuance of common stock
granted for private placement
finders' fees - -
Issuance of common stock for
services performed - 139,450
Issuance of common stock for
accrued interest - 3,972
Issuance of options for
services performed - 30,150
Private placement finders fees - (132,096)
Net loss, year ended December 31, 2004 (2,483,602) (2,483,602)
Dividends on convertible
preferred stock (173,529) (173,529)
Amortization of discount on
preferred stock (1,630,226) -
------------ -------------
Balances, December 31, 2004 $(27,992,998) $ (480,228)
============ =============
See notes to the consolidated financial statements.
46
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------
2004 2003
----------- -----------
Cash Flows From Operating Activities
Net Loss $(2,483,602) $(2,337,881)
Adjustments to Reconcile Net Loss to Net Cash Used by Operations
Depreciation and amortization 166,144 178,447
Stock/options issued for various expenses 541,172 466,399
Loss on disposition of assets 20,703 779
Bad debt provision (212) 30,905
Forgiveness of debt -- 3,745
Decreases (Increases) in Assets
Accounts receivable 5,422 (20,952)
Miscellaneous receivable (9,522) 1,929
Inventories -- 30
Prepaid expenses 25,629 (3,052)
Other assets 1,954 --
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses 17,499 (147,402)
Deferred revenue 32,732 1,396
Deferred rental obligation (3,811) (1,339)
Deposits payable -- (14,075)
----------- -----------
Net Cash Used by Operating Activities (1,685,892) (1,841,071)
----------- -----------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (5,209) (3,695)
----------- -----------
Net Cash Used by Investing Activities (5,209) (3,695)
-----------
Cash Flows From Financing Activities
Dividends paid (58,991) --
Repayment of capital lease obligations (2,805) (2,981)
Proceeds from loans payable -- 183,323
Repayment of loans payable (282,851) (44,793)
Proceeds from officer loans -- 83,881
Proceeds from issuance of common and preferred stock 1,981,914 1,713,338
----------- -----------
Net Cash Provided by Financing Activities 1,637,267 1,932,768
----------- -----------
Net Increase (Decrease) in Cash (53,834) 88,002
Cash at beginning of period 97,978 9,976
----------- -----------
Cash at end of period $ 44,144 $ 97,978
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 36,604 $ 36,564
=========== ===========
Taxes Paid $ 1,800 $ 2,800
=========== ===========
See notes to the consolidated financial statements.
47
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2004
Schedule of non-cash investing and financing activities
In connection with consideration for current consulting services,
stock options for 250,000 common shares were issued $ 30,150
=========
In exchange for accrued interest, 59,589 common shares were issued $ 3,972
=========
In connection with the retirement of accrued bonuses, 196,680 common
shares were issued $ 19,668
=========
In connection with consideration for current services, 4,363,333
common shares were issued $ 364,450
=========
In exchange for rent, 200,000 common shares were issued $ 24,000
=========
In connection with consideration of current year expenses, 250,000
common shares were issued in conjunction with an option exercise $ 2,500
=========
In connection with consideration for current compensation, 16,667
convertible preferred shares with attached warrants were issued $ 100,000
=========
In connection with consideration for current consulting services,
1,900 convertible preferred shares with attached warrants were issued $ 28,100
=========
See notes to the consolidated financial statements
48
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2003
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
shares were issued $ 22,000
=========
In connection with the retirement of accounts payable 30,235 common
shares were issued $ 2,116
=========
In connection with consideration for current services, 7,781,833
common shares were issued $ 404,047
=========
In connection with consideration for current services and accrued
interest, 7,405 preferred shares were issued $ 44,232
=========
In connection with the retirement of short-term loans, 19,593
preferred shares were issued $ 117,560
=========
In connection with the purchase of equipment, a capitalized lease
obligation resulted $ 8,509
=========
See notes to the consolidated financial statements.
49
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.
The Company's primary product is an integrated suite of proprietary
software modules marketed under the name ErgoEnterpriseTM 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 inter-company 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.
50
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 $491 and $31,546 for the years ended December 31, 2004 and
2003, 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, 2004.
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.
51
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 (SOP) 97-2 "Software
Revenue Recognition" and SOP 98-9 "Software Revenue recognition" which
modifies SOP 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 $2,483,602 and $2,337,881 during the years ended December
31, 2004 and 2003, respectively, and has a significant working capital
deficiency. 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, 2004:
Equipment $ 82,924
Furniture and fixtures 72,230
-----------
155,154
Less accumulated depreciation 145,157
-----------
$ 9,997
===========
Depreciation expense charged to operations was $10,225 and $22,529 in 2004 and
2003, respectively.
52
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, 2004:
Accounts payable $ 79,293
Accrued interest 56,080
Accrued consulting fees 168,292
Accrued commissions 17,537
Accrued professional fees 57,114
Accrued taxes 6,862
Accrued payroll 6,596
Miscellaneous accruals 6,257
-----------
$ 398,031
===========
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan
agreements with the following terms and conditions at December 31, 2004:
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,
2004 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 orconvertible
preferred shares. The total amount of non-converted
notes outstanding at December 31, 2004 is $25,000.
Attempts to locate the holder of this note, to settle
this liability, have been unsuccessful. $ 25,000
------------
Total $ 25,000
============
53
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT
Long-term debt as of December 31, 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. 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. During the first
quarter of 2004, $175,000 was repaid and the maturity of
the unpaid balance was changed to January 1, 2005, and
is currently due upon demand. The obligation includes an
option to the holder for conversion of the outstanding
principal into shares of the Company's common stock at
the rate of $0.06 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 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
------------
133,419
Total
Less current maturities 133,419
------------
Long-term debt, net of current maturities $ --
============
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, 2004 amounted to $2,442 net of accumulated depreciation of
$6,067.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 2004:
Year Ending December 31, 2004
Total minimum capital lease payments $ 3,349
Less amounts representing interest 115
------------
Present value of net minimum capital lease payments 3,234
Less current maturities of capital lease obligations 2,978
------------
Obligations under capital leases, excluding
current maturities $ 256
============
54
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED REVENUES
Deferred revenues at December 31, 2004, amounted to $49,373 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, 2004 is $0 with a liquidation price of $100,000. As
of December 31, 2004, 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, 2004 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, C and D 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, C and D Senior
Preferred, the holders of these series shall receive payments on a
pro rata basis.
55
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, 2004 there were $42,729 Series A Senior
Convertible Preferred share dividends accrued and unpaid
representing $1.46 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, 2004 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, C and D 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, C and D Senior
Preferred, the holders of these series shall receive payments on a
pro rata basis.
56
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, 2004 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, 2004 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, B and D 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, C and D Senior
Preferred, the holders of these series shall receive payments on a
pro rata basis.
57
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, 2004 there were $252,000 Series C Senior
Convertible Preferred share dividends accrued and unpaid
representing $2.52 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, 2004 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.
58
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, 2004 there were $169,357 Series D Senior
Convertible Preferred share dividends accrued and unpaid
representing $2.65 per share.
Series E of the Senior Convertible Preferred Stock series which was issued
in 2004 has 500,000 shares designated, 0 shares issued and outstanding.
The total outstanding Series E Senior Convertible Preferred Stock at
December 31, 2004 is $0 with a liquidation price of $0. 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 the holders of Common Stock or Cumulative Preferred Stock
of the (1)
59
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK - (Continued)
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, 2004 there were $1,020 Series E Senior
Convertible Preferred share dividends accrued.
60
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,
----------------------
2004 2003
--------- ---------
State current provision (benefit) $(214,618) $(203,397)
State deferred provision (benefit) -- --
--------- ---------
$(214,618) $(203,397)
========= =========
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 2004
and 2003, 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 $216,418 in 2004 and $209,084 in 2003.
The Company's total deferred tax asset and valuation allowance are as
follows:
December 31,
--------------------------
2004 2003
----------- -----------
Total deferred tax asset, noncurrent $ 7,882,000 $ 7,274,000
Less valuation allowance (7,882,000) (7,274,000)
----------- -----------
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,
----------------------------
2004 2003
----------- ------------
Tax benefit 40% 40%
Valuation allowance 40% 40%
----------- ------------
Effective tax rate -- --
=========== ============
At December 31, 2004, the Company has available approximately $24,377,000
of net operating losses to carryforward and which may be used to reduce
future federal taxable income and expire between December 31, 2007 and
2024.
At December 31, 2004, the Company has available approximately $3,616,000
of net operating losses to carryforward and which may be used to reduce
future state taxable income which expire December 31, 2011.
61
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 $14,389 and $16,175 for the years ended December 31, 2004 and 2003,
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.
62
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,
---------------------------
2004 2003
----------- ------------
Outstanding, beginning of year 607,000 607,000
Granted during the year -- --
Expired during the year (170,000) --
Forfeited during the year -- --
----------- ------------
Outstanding, end of year (at prices ranging
from $1.00 to $1.78 per share) 437,000 607,000
----------- ------------
Eligible, end of year for exercise (at prices
ranging from $1.00 to $1.78 per share) 437,000 607,000
=========== ============
At December 31, 2004 and 2003, the weighted average exercise price and
weighted average remaining contractual life is $1.01 and $1.06 per share
and 1 year 4 months and 1 year 11 months, respectively.
At December 31, 2004, there were 563,000 shares reserved for future option
grants.
Qualified and Non-Qualified
Shares Under Option Pursuant
to the 2000 Plan
December 31,
---------------------------
2004 2003
------------ -----------
Outstanding, beginning of year 2,818,942 3,053,942
Granted during the year -- 5,000
Exercised during the year -- (50,000)
Forfeited during the year -- --
Expired during the year (115,500) (190,000)
------------ -----------
Outstanding, end of year (at prices ranging
from $0.10 to $1.00) 2,703,442 2,818,942
------------ -----------
Eligible, end of year for exercise (at prices
ranging from $0.10 to $1.00) 2,703,442 2,818,942
============ ===========
At December 31, 2004 and 2003 the weighted average exercise price and
weighted average remaining contractual life is $0.61 and $0.60 per share
and 1 year 5 months and 2 years 4 months, respectively.
At December 31, 2004, there were 2,296,558 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, 2004 and 2003 would have increased by $0 and $0,
respectively, resulting in net loss of $2,483,602 and $2,337,881 net of
tax, respectively, and loss per share of $0.04 and $0.04, 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.
63
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,
------------------------
2004 2003
---------- ----------
Outstanding, beginning of year 9,054,866 7,174,866
Granted during the year 250,000 2,180,000
Exercised during the year (250,000) --
Forfeited during the year -- (250,000)
Expired during the year (485,000) (50,000)
---------- ----------
Outstanding, end of year (at prices ranging
from $0.07 to $1.00) 8,569,866 9,054,866
---------- ----------
Eligible, end of year (at prices ranging from
$0.07 to $1.00) 8,569,866 9,054,866
========== ==========
At December 31, 2004 and 2003 the weighted average exercise price and
weighted average remaining contractual life is $0.32 and $0.34 per share,
and 3 years 9 months and 4 years 7 months, respectively.
WARRANTS
The Company granted common stock purchase warrants between May 1, 1998 and
December 31, 2004 which are comprised as follows:.
December 31,
------------------------
2004 2003
---------- ----------
Outstanding, beginning of year 11,973,018 7,398,164
Granted during the year 20,433,000 9,241,599
Exercised during the year -- (3,552,752)
Forfeited during the year -- (27,780)
Expired during the year (1,717,419) (1,086,213)
---------- ----------
Outstanding, end of year (at prices ranging
from $.15 to $1.00) 30,688,599 11,973,018
========== ==========
Callable, end of year (at $2.00) -- 100,000
========== ==========
At December 31, 2004 and 2003, the weighted average exercise price and
weighted average remaining contractual life is $0.18 and $0.32 per share
and 2 years 2 months and 2 years 8 mpnths, 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. The Company has
subsequently negotiated a lease renewal which extends the term of the
lease to March 31, 2007 at a monthly rental of $10,000.
64
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,
------------------------
2005 $ 101,309
2006 120,000
2007 $ 30,000
Included in general and administrative expenses is rent expense which
amounted to $116,734 and $110,784 for the years ended December 31, 2004 and
2003, 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 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.
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.
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.
65
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RELATED PARTY TRANSACTIONS (continued)
During the first quarter of 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.
During the third quarter of 2004, five directors and officers of the Company
received a total 1,500,000 restricted common shares as remuneration for
services as members of the board of directors. One outside director who also
serves as the legal and securities counsel of the Company received 500,000
restricted common shares as compensation for his commitment and agreement to
continue to invoice the Company for legal services at a reduced rate, in
connection with legal services rendered during fiscal year 2004.
During the third quarter of 2004 the Company's chief executive officer
extended short term loans aggregating $100,000 to the Company. These loans
carried interest at the rate of 10% per year and were subject to a loan
origination fee of 4%. At December 31, 2004, all such loans have been repaid.
During 2004 and 2003, one outside director of the Company who also serves as
the Company's general and securities counsel, was paid an aggregate $164,184
and 132,000, respectively, for legal services. One other outside director was
paid $14,900 for services performed during 2003, and $10,400 during 2004.
CAPITALIZATION
During the second quarter of 2004, a majority of our shareholders of record
at the close of business on May 14, 2004, voted to amend the Company's
Certificate of Incorporation to increase our authorized common shares from
100 million shares to 200 million shares.
MAJOR CUSTOMERS
The Company had two major customers for the year ended December 31, 2004,
which comprised 31% and 19%, respectively, of total sales, and one major
customer for the year ended December 31, 2003 which comprised 25% of total
sales.
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.
66
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
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 did not 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 did not have a
significant impact on the Company's results of operations or financial
position.
67
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.
In 2004, the FASB issued SFAS Statement No. 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". This Statement amends the guidance in
ARB No. 43, Chapter 4 "Inventory Pricing" to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials (spoilage). This Statement requires that these items be recognized
as current-period charges regardless of whether they meet the criterion of
"so abnormal". In addition, this Statement requires the allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement shall
be effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after the date this Statement is issued. The
provisions of this Statement shall 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.
SUBSEQUENT EVENTS
During the first quarter of 2005, equity financing transactions have
generated approximately $645,000 of cash in the aggregate from the issuance
of 7,000,000 common shares
68
31,530,000 Shares
Magnitude Information Systems, Inc.
Common stock
------------
PROSPECTUS
April __, 2005
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
Prospectus Summary.................................................. 4
Risk Factors........................................................ 7
Where You Can Find More Information................................. 14
Use of Proceeds..................................................... 15
Market for Company's Common Equity & Dividend Policy................ 15
Selling Shareholders................................................ 16
Shares Eligible for Future Sale..................................... 18
Plan of Distribution................................................ 19
Legal Proceedings................................................... 19
Management.......................................................... 20
Principal Shareholders.............................................. 26
Description of Capital Stock........................................ 27
Business............................................................ 30
Management's Discussion and Analysis................................ 38
Certain Transactions................................................ 40
Financial Statements................................................ 41
UNTIL ________________, 2005 (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.
69
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.
70
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Magnitude will pay all expenses incident to the offering and sale to the
public of the shares being registered other than any commissions and discounts
of underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except the
Securities and Exchange Commission ("SEC") registration fee.
SEC Filing Fee _________
Legal fees and expenses 10,000.00
Accounting fees and expenses 1,000.00
Printing expenses 2,500.00
Miscellaneous expenses 1,000.00
- -------------------------------------------------------
Total $14,500.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
FISCAL YEAR 2004
During the fourth quarter of 2004 the Company had issued the following
unregistered securities:
(i) 4,720,000 shares of common stock accompanied by warrants for the
purchase of 4,720,000 shares of common stock, exercisable at $0.15/share during
three years, to two foreign and seven domestic 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 $426,000 in cash;
(ii) 1,016,667 shares of common stock pursuant to the conversion of 10,167
shares of Series E Senior Convertible Preferred Stock, in accordance with the
designation for such preferred shares;
(iii) 39,726 shares of common stock in lieu of $2,780 interest payable.
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:
71
(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. 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.
(i) 50,000 shares of common stock in lieu of cash, for rent expenses.
(ii) 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.
(iii) 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.
(iv) 16,667 shares of Series E Convertible Preferred Stock convertible
into 1,666,667 common shares, accompanied by warrants for the
purchase of 833,333 common shares, exercisable during three years at
the price of $0.15 per share, to the Company's chief executive
officer in lieu of $100,000 salary.
FISCAL YEAR 2003
During the quarter ended December 31, 2003, the Company issued the
following unregistered securities:
(i) 1,350,000 shares of common stock to eight accredited investors
pursuant to private placement subscriptions, issued in reliance upon
exemptions provided under Section 4(2), Rule 506 of Regulation D and
Regulation S of the Securities Act, altogether resulting in the
receipt by the Company of approximately $73,000 in cash;
(ii) 947,500 shares of common stock to three consultants for marketing
and investor relations services rendered;
(iii) 172,833 shares of common stock issued to a creditor in return for
cancellation of $10,370 debt;
(iv) 2,000,000 shares of common stock to certain directors and officers
of the Company, for services rendered;
(v) 130,834 shares of Series E Senior Convertible Preferred Stock,
convertible into 13,083,400 shares of common stock, and stock
purchase warrants for the purchase of 6,691,600 shares of common
stock, exercisable during three years at $0.15 per share, to 18
accredited investors and three assignees pursuant to private
placement subscriptions, issued in reliance upon exemptions provided
under Section 4(2), Rule 506 of Regulation D and Regulation S of the
Securities Act, altogether resulting in the receipt by the Company
of approximately $741,000 in cash;
(vi) 19,593 shares of Series E Senior Convertible Preferred Stock,
convertible into 1,959,300 shares of common stock, and stock
purchase warrants for the purchase of 979,650 shares of common
stock, exercisable during three years at $0.15 per share, to four
creditors, one of who is a director of the Company, in return for
cancellation of $117,600 debt;
72
(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.
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.
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.
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During the quarter ended March 31, 2003, the Company issued the following
unregistered securities:
(i) 2,063,000 shares of common stock to 14 accredited investors pursuant
to private placement subscriptions, issued in reliance upon
exemptions provided under Section 4(2), Rule 506 of Regulation D and
Regulation S of the Securities Act, and 2,437,252 shares of common
stock pursuant to the exercise of stock purchase warrants previously
issued, altogether resulting in the receipt by the Company of
approximately $408,000 in cash;
(ii) 81,000 shares of common stock to five employees pursuant to their
exercise of stock options at a price of $0.10 per share;
(iii) 1,000,000 shares of common stock to the Company's chief executive
officer in lieu of $100,000 cash salary (see "Related Party
Transactions");
(iv) 743,035 shares of common stock for marketing consulting and investor
relations services performed;
(v) 200,000 shares of common stock pursuant to a stock grant to an
outside director of the Company;
(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.
74
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;
(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.
75
During the quarter ended March 31, 2002, the Company issued the following
unregistered securities:
(i) 7,052,000 shares of common stock to 21 U.S. accredited investors and
non-U.S. investors pursuant to private placement subscriptions, issued in
reliance upon exemptions provided under Section 4(2) and, in the case of the
non-U.S. investors, Regulation S of the Securities Act; and 679,111 shares of
common stock pursuant to the exercise of stock purchase warrants previously
issued, which resulted in the receipt by the Company of approximately $753,000
in cash. All of the accredited investors had a pre-existing relationship with
the Company and no general solicitation or advertisement was utilized to solicit
any of the accredited investors. Each of the accredited investors (a) executed
and delivered to the Company a subscription agreement which included the
investor's representations that such investor qualified as an accredited
investor, had the financial experience and resources to appreciate the risk of
such investment and (b) had the time to ask questions and make inquiries to the
Company before their investment funds were accepted. Of the 22 accredited
investors, 3 are current Company officers and directors, 8 were pre-existing
shareholders and 4 were non-U.S. residents. All of the Company's securities
placed with these investors bore the appropriate restrictive legend, designating
such securities as restricted securities;
(ii) 50,000 shares of common stock pursuant to the conversion of 5,000
shares of the Company's Series D Convertible Preferred Stock;
(iii) 720,718 shares of common stock pursuant to the conversion of certain
payables into equity, at a rate of $0.10 per share;
(iv) 1,250 shares of common stock for services performed;
(v) 700,000 shares as stock grants and 1,165,000 shares in lieu of
compensation (see "Related Party Transactions").
ITEM 27. EXHIBITS INDEX
SEC No. Document
- ------ ----------------------------------------------------------------------
2.2+ Agreement and Plan of Merger with Rolina Corporation and Steven D.
Rudnik, and Employment Agreement with Steven D. Rudnik, both of the
date February 2 , 1998, as filed as Exhibit to the Company's report on
Form 10-KSB for the year ended December 31, 1998. Incorporated herein
by reference.
3(i)+ Articles of Incorporation and Amendments thereto, incorporated herein
by reference to Exhibits of previous filings with the Commission.
3(ii)+ Bylaws of the Company, incorporated herein by reference to Exhibits of
previous filings with the Commission.
4.23# Form of Common Stock Purchase Warrant
4.30# Form of Subscription Agreement.
5.1 Legal opinion and consent of Joseph J. Tomasek, Esq.
10.7# Employment Agreement, dated April 15, 2002 between the Company and
Steven D. Rudnik.
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
10.11v Brokerage Placement Assistance Agreement, Dated January 2, 2004,
between the Company and vFinance Investments, Inc.
10.12v Consulting Agreement, dated December 1, 2003, by and between the
Company and Alan Cohen.
10.13v Consulting Agreement, dated February 12, 2003, by and between
Jackson-Hewitt Investment Services, Inc. and the Company.
76
10.14v Consulting Agreement, dated September 25, 2003, by and Between James
W. Morton and the Company.
10.16v Consulting Agreement, dated September 25, 2003, by and between Ulrich
Schuerch and the Company.
10.17v Consulting Agreement, dated December 1, 2003, by and between Murray
Zaroff and the Company.
10.18v Consulting Agreement, dated November 28, 2003, by and between The
Research Works Inc. and the Company.
23.1 Independent Auditors' Consent
99.1 Certification of Officers
- ----------
+ Documents incorporated by reference to Magnitude's Annual and Quarterly
Reports previously filed on Forms 10-KSB and Forms 10-QSB with the Securities
and Exchange Commission.
# Previously filed as exhibits to Form SB-2 Registration Statement and
amendments thereto, Registration No. 333-73992, with the Commission.
v Previously filed as exhibits to the Registration Statement and amendments
thereto, Registration No. 333-112595 with the Commission.
ITEM 28. UNDERTAKINGS
A. UNDERTAKING PURSUANT TO RULE 415
The undersigned Registrant hereby undertakes: (1) To file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement: (i) to include any prospectus required by Section
10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; (2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; (3) To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of this offering.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, MAGNITUDE INFORMATION SYSTEMS, INC., a corporation organized and
existing under the laws of the State of Delaware, has duly caused this
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 April 11, 2005.
MAGNITUDE INFORMATION SYSTEMS, INC.
By: /s/ Steven D. Rudnik
---------------------------------
Steven D. Rudnik, President and
Chief Executive Officer
By: /s/ Joerg H. Klaube
---------------------------------
Joerg H. Klaube, Chief Financial
Officer (Chief Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven D. Rudnik, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Registration Statement on Form SB-2, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------- ----------------------------- --------------
/s/ Steven D. Rudnik President and
- --------------------------- Chief Executive Officer April 11, 2005
Steven D. Rudnik
/s/ Joerg H. Klaube Chief Financial Officer April 11, 2005
- --------------------------- (Principal Financial Officer)
Joerg H. Klaube
/s/ Steven L. Gray Director April 11, 2005
- ---------------------------
Steven L. Gray
/s/ Ivano Angelastri Director April 11, 2005
- ---------------------------
Ivano Angelastri
/s/ Joseph J. Tomasek Director April 11, 2005
- ---------------------------
Joseph J. Tomasek
78