As filed with the Securities and Exchange Commission on June 22, 2005
Registration No. 333-123996
Registration No. 333-118522
Registration No. 333-112595
Registration No. 333-73992
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
POST-EFFECTIVE AMENDMENT NO. 2 (Commission No. 333-123996)
POST-EFFECTIVE AMENDMENT NO. 3 (Commission No. 333-118522)
POST-EFFECTIVE AMENDMENT NO. 5 (Commission No. 333-112595)
POST-EFFECTIVE AMENDMENT NO. 8 (Commission No. 333-73992)
TO FORMS SB-2 REGISTRATION STATEMENTS
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
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(State or other jurisdiction of (Primary Standard I.R.S. Employer
Incorporation or organization) Industrial Classification Identification No.)
Code Number)
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401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Address and telephone number of principal executive offices
and place of business)
Steven D. Rudnik Joseph J. Tomasek, Esq.
401 State Route 24 75-77 North Bridge Street
Chester, New Jersey 07930 Somerville, New Jersey 08876
(908) 879-2722 (908) 429-0030
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this registration statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement
for the same offering. [ ] ____________. If this form is a post-effective
amendment filed pursuant to Rule 462 (d) under the Securities Act, check
the following box and list the Securities Act registration number of the
earlier effective registration statement for the same offering. [ ]
____________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus
Magnitude Information Systems, Inc.
59,953,363 Shares of Common Stock
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39,384,599 Shares of Common Stock
Underlying Common Stock Purchase Warrants
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7,074,866 Shares of Common Stock
Underlying Stock Option Grants
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998,900 Shares of Common Stock
Underlying Convertible Note
This prospectus covers a total of 107,411,728 common shares registered on
behalf of selling shareholders for resale. Some of these common shares have been
issued already or may be issued under our warrants, stock options and
convertible preferred stock owned by selling shareholders. We are also
registering 998,900 common shares that our President and Chief Executive Officer
may obtain by converting his convertible note. All of the shares covered in this
prospectus had previously been registered with four registration statements,
Commission File Numbers 333-73992, 333-112595, 333-118522, and 333-123996. All
of the 107,411,728 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
May 27, 2005, the average of the high and low prices paid for our common stock
was $0.08. See "Selling Shareholders" and "Use of Proceeds".
You may contact us at our principal executive offices located at 401 State
Route 24, Chester, New Jersey 07930 or by phone at (908)879-2722.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
This Investment Involves Certain High Risks. See "Risk
Factors" Beginning on Page 6.
The date of this prospectus is June ___, 2005
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.
The Offering
Securities Offered 107,411,728 shares of common stock, $.0001 par value,
including 39,384,599 shares of common stock issuable
upon the exercise of Warrants; 7,074,866 shares of
common stock issuable upon the exercise of stock
options, and 998,900 shares of common stock issuable
upon conversion of a convertible note. See "Selling
Shareholders" at page 12.
Selling Shareholders The selling shareholders are identified in this
prospectus at page 16 together with the maximum
amount of our common shares that each may sell either
outright or upon conversion or exercise of rights
under their respective preferred stock, warrants,
stock options and the convertible note or subsequent
to consummation of the subscription agreement. See
"Selling Shareholders" at page 12.
Plan of Distribution Up to 107,411,728 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 $7,942,556 in proceeds from the
exercise of the warrants and stock options currently
outstanding and included in this prospectus. However,
due to current market conditions as well as the fact
that the exercise prices of most of these warrants
and options have been higher than the current market
price of our stock, it is unlikely that we will
realize the receipt of any proceeds from the exercise
of these warrants and options. If the market price
for our common stock increases to permit the exercise
of these warrants and options, we intend to use any
such cash proceeds received for general corporate
purposes, which may include repaying indebtedness,
making additions to our working capital, funding
future acquisitions or for further developing our
products and hiring additional personnel.
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 139,937,612 common
shares and 193,191 preferred shares were issued and
outstanding at May 31, 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 and stock options and convert the
convertible note, an additional 49,262,191 common
shares, representing part of the shares being
registered, will be outstanding. Second, we have in
reserve an additional 2,806,809 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 ended December 31, 2004 and 2003 of
$2,483,602 and $2,337,881, respectively, And of
$591,019 for the first quarter of 2005. We will need
additional funding. No person should invest in our
common shares who cannot afford to risk the loss of
his or her entire investment. See "Risk Factors" at
page 6.
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 $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., and losses of $591,019 for the three months ended
March 31, 2005. We have financed our operations primarily through the sales of
equity and debt securities. Our expense levels are high and our revenues are
difficult to predict. We anticipate incurring additional losses until we
increase our client base and revenues. We may never achieve or sustain
significant revenues or profitability. If we are unable to achieve increased
revenues, we will continue to have losses and may not be able to continue our
operations.
Our Auditors Have Rendered An Opinion Raising Doubts as to Whether We Can
Continue Operations.
Our auditors have expressed their opinion that our financial condition as shown
in our financial statements for our fiscal year that ended on December 31, 2004,
raises substantial doubts whether or not we will be able to continue in business
as an operating company. See "Financial Statements".
We Need Additional Financing.
We could be required to cut back or stop operations if we are unable to raise or
obtain needed funding. Our ability to continue operations will depend on our
positive cash flow, if any, from future operations or our ability to raise
additional funds through equity or debt financing. At present, we have not
received firm commitments for private financings in amounts sufficient to cover
the working capital necessary to continue to finance our operations and execute
our business plan. Although we anticipate that future revenues and new capital
from private and institutional investors with whom we are currently in
negotiations will be sufficient to fund our current operations and capital
requirements for the current fiscal year, we cannot give you any assurance that
these negotiations will result in definite agreements that will provide such
needed capital. We could be required to cut back or stop operations if we are
unable to raise or obtain funds when needed.
We Do Not Have A Proven Software Sales Record
We do not have a proven software sales record and have made only limited sales
of our software products. Our total revenues for software sales and licenses and
support services for the years ended December 31, 2004 and 2003 were $121,886
and $ 162,335, respectively. For the three months ended March 31, 2005, we had
revenues of only $19,264. 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.
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.
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 $0.125per 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
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 107,411,728 common shares offered in this prospectus, 59,953,363 common
shares have already been issued to the selling shareholders. If the selling
shareholders were to fully exercise their rights under their warrants, stock
options and convertible note, converting them into the remaining 49,262,191
common shares offered in this prospectus and then sell them, the market price of
our common stock could be materially adversely affected. As of May 31, 2005, the
substantial majority of the warrants had exercise prices above the current
market price of our common stock.
Market Overhang
As of May 31, 2005, we had 139,937,612 common shares outstanding. As of May 31,
2005, we had 12,635,308 outstanding stock options, 40,358,599 outstanding common
stock purchase warrants, 193,190 preferred shares convertible into 1,757,198
common shares and a convertible promissory note convertible into 998,900 common
shares. If all the outstanding stock options, common stock purchase warrants,
convertible preferred shares and the convertible note were exercised and/or
converted by their holders an additional 55,750,005 common shares would be
outstanding; this would represent an approximate 40% increase in our outstanding
common shares. The vast majority of these outstanding options and warrants are
exercisable at prices currently above the public trading prices of our common
stock. However, in the event that even a portion of these outstanding options
and warrants were to be exercised, or portions of the preferred shares and/or
the convertible promissory note converted, the resulting dilution could depress
the public trading price of our common shares. In addition, we are registering
107,411,728 shares for sale by the Selling Shareholders in this prospectus; if a
significant portion of these shares were sold by the Selling Shareholders in
this prospectus 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.
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."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our Securities and
Exchange Commission filings are available to the public over the Internet at the
Securities and Exchange Commission's web site at http://www.sec.gov. You may
also read and copy any document we file at the Securities and Exchange
Commission's public reference room located at 450 Fifth Street, N.W.,
Washington, DC 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms and their
copy charges.
This prospectus is part of a Form SB-2 registration statement that we filed with
the SEC. This prospectus provides you with a general description of the
securities that may be offered for sale, but does not contain all of the
information that is in the registration statement. To see more detail, you
should read the entire registration statement and the exhibits filed with the
registration statement. Copies of the registration statement and the exhibits
are on file at the offices of the Commission and may be obtained upon payment of
the fees prescribed by the Commission, or examined without charge at the public
reference facilities of the Commission described above.
You should rely only on the information incorporated by reference or provided in
this prospectus or any prospectus supplement. We have not authorized anyone to
provide you with different information.
Neither Magnitude nor any selling shareholder is making an offer of the
securities covered by this prospectus in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
prospectus supplement or in any other document incorporated by reference in this
prospectus is accurate as of any date other than the date on the front of those
documents.
Upon request, we will provide without charge a copy of our Annual, Quarterly and
Current Reports we have filed electronically with the Commission as well as a
copy of any and all of the information that has been or may be incorporated by
reference in this prospectus. Requests for such copies should be directed to
Magnitude Information Systems, Inc., 401 State Route 24, Chester, New Jersey
07930 (telephone: 908-879-2722).
USE OF PROCEEDS
The selling shareholders will receive all of the net proceeds from the resale of
any of the Company's common shares offered in this prospectus. We will not
receive any of the proceeds from any sale of the shares by the selling
shareholders. We will receive up to $7,942,556 in proceeds from the cash
exercise of the warrants and options currently outstanding and included in this
prospectus, if exercised, 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
2005 First Quarter $ 0.18 $ 0.09
(b) Shareholders
As of May 31, 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.
Selling Shareholders
All of the common stock offered is either already issued or is issuable upon the
exercise or conversion of Company warrants, stock options and a convertible note
issued or issuable by Magnitude to the selling shareholders. We may from time to
time supplement or amend this prospectus, as required, to provide other
information with respect to the selling shareholders.
The following table sets forth certain information regarding ownership of
Magnitude's common stock by the selling shareholders as of May 31, 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.
Previously registered with filings No's 333-73992; 333-112-595; 333-118522; 333-123996
--------------------------------------------------------------------------------------
Name of
Selling Beneficial Holdings Common Shares Transaction % of Class
Security Holder Before the Offering Offered Hereby Note No. after Offering
- ------------------------- ---------------------- ------------------- --------------- ----------------
Agriogianis, Nicholas 750,000 750,000 15 **
AKB Privatbank Zurich AG 2,000,000 1,000,000 10 **
Angelastri, Ivano 2,062,500 550,000 1,12 1.1%
Angelastri, Nicola 150,000 100,000 10 **
Angelastri, Anastasia 150,000 100,000 10 **
Angelastri, Sophie 250,000 50,000 20 **
Blackburn, Theodore J. 850,000 850,000 10,15,21 **
Burgman, Sandra R. 390,000 390,000 15,21 **
Calter Associates S.A. 800,000 800,000 20 **
Campanella, Richard 85,000 41,667 15 **
Caron, Phyllis 250,000 250,000 15 **
Caron, Raymond P. 125,000 125,000 15 **
Carrel, Rene 1,250,000 1,250,000 15,20 **
Christian, George 500,000 500,000 21 **
Citrus Land & Development Corp. 3,230,777 2,230,666 10,16 **
Cohen, Alan R 245,000 245,000 13,15 **
Cumming, Frederick 33,619 5,000 1 **
DeWolf, Keith G. 1,845,000 775,000 15,21 **
Dufour, John R. 3,750,000 3,750,000 15 **
Duncan, John C. 577,500 500,000 1 **
Ebony Finance Ltd. Trust 700,000 600,000 15,21 **
Emen, Barry 300,000 300,000 15 **
Friedenberg, Douglas 416,666 416,666 10 **
Friedmann, John A. 1,600,000 1,600,000 15,21 **
Fulton, David R. 300,000 300,000 15 **
Green, David 4,500,050 4,500,050 15,21 **
Greenbaum, Leonard 1,000,000 1,000,000 21 **
Gray, Steven L. 4,596,704 2,055,829 4,6,7,10,12,16 1.8%
Gray, Virginia 108,333 83,333 16 **
Grissom, Taylor B. 500,000 500,000 21 **
Haefeli, Theres 200,000 200,000 20 **
Hazard, Mark III 1,800,000 1,800,000 15,21 **
Heckman, Paul and Kathleen JT 395,000 395,000 15 **
Heuberger, Roland 395,000 210,000 15 **
Hinnen, Arvid 800,000 800,000 20 **
Hitz, Martin 150,000 150,000 15 **
Hopmans, John 1,600,000 1,600,000 15,21 **
Hudson Valley Capital Mgmt. LLC 150,000 150,000 15 **
Hunter, Tracy S 958,334 666,667 10,15 **
INSA Stiftung 500,000 500,000 11 **
Janssen, Peter 1,000,000 1,000,000 21 **
Joan Rich Baer Inc. Pension Plan 450,000 450,000 15 **
Johnson, Wayne C. 2,250,000 2,250,000 15,21 **
Kaysons International Corp. 166,667 166,667 15 **
Kareela Business Ltd. 1,000,000 1,000,000 15 **
Kellogg Capital Group LLC 250,000 250,000 15 **
Keyes Family Trust 750,000 750,000 15 **
Kirshner, Richard M. 600,000 600,000 15 **
Klaube, Joerg H 1,910,417 900,000 1,12 **
Kroll, Seymour 159,866 119,866 1 **
Kreulach, Paul E. 900,000 900,000 15 **
Laett, Heinz 800,000 800,000 20 **
Langheck, Andreas 240,000 240,000 20 **
Lanktree, Charles T. 2,685,001 2,341,667 15,21 **
Lucas, Lawrence B. 250,000 250,000 15 **
Maciak, Peter M. 750,000 750,000 15 **
Marot, Richard N. 406,666 406,666 10 **
Martin, Martin G. 1,750,000 100,000 1 1.2%
Marti, Christoph 9,400,000 9,400,000 15,20 **
McEwen, Terry C. 1,250,000 1,250,000 15 **
McEwen, William C. & Cleda B. 250,000 250,000 15 **
McEwen, William C.Jr. & Diana M. 250,000 250,000 15 **
Mette, Tim 50,000 50,000 10 **
Michella, Stephen 375,000 375,000 15 **
Miller, Philip C. 1,150,000 750,000 15 **
Mollo, Dean J. 875,000 875,000 15,21 **
Morton, James W.&Karen E. 1,033,000 500,000 13 **
Najor, Daniel 375,000 375,000 15 **
Oriente, David J. & Jennifer L. 1,200,000 1,000,000 21 **
Pensco Trust Company Inc Cust.
FBO Richard H. Keyes IRA 1,000,000 1,000,000 21 **
Pisani, B. Michael 2,578,890 2,275,000 15,19 **
Premium Strategy Partners AG 110,000 110,000 22 **
Rabish, Mark A. 833,667 416,667 15 **
Real Resources Inc. 166,666 166,666 10 **
Ringer, Dennis 75,000 75,000 15 **
Rogivue, Nicholas 6,550,000 6,550,000 15,21 **
Roth, Russell 500,000 500,000 21 **
Rudnik, Steven D. 11,724,595 9,948,900 1,2,3,5,8,9,12,14,17 1.2%
S & I Consulting 150,000 100,000 10 **
Sacbueken, Haldun 999,000 999,000 15 **
Salaorni, Vittoria 300,000 300,000 15 **
Schuerch, Ulrich 5,980,000 5,830,000 11,13,15,21,22 **
Schuerch, Kerstin 250,000 250,000 1 **
Shillan, Nannette 500,000 500,000 21 **
Shoemaker, John & Audrey 3,186,667 2,916,667 10,15 **
Spinosa, Dominic 750,000 750,000 15 **
Stangel, Georg 200,000 200,000 1 **
Stanley M. Levin Rev.Trust 750,000 750,000 15 **
Steeg, Oliver 30,000 30,000 15 **
Steinberg, Arthur 300,000 300,000 15 **
Szalbirak, Martin 110,000 100,000 16 **
T+T Vermoegensverwaltungs AG 700,000 500,000 21 **
Tannert, Michael H 250,000 250,000 10 **
Tapio, John & Niels & Kyle JTWROS 627,567 350,000 15 **
Thornton, Robert 650,000 450,000 15,21 **
Tolida Corporation 166,667 166,667 15 **
Tomasek, Joseph J. 2,733,250 1,170,750 12,18 1.1%
United Charities of America Inc. 6,000,000 6,000,000 21 **
V. Gray Investments LLC 166,667 166,667 16 **
Wagner, Tomasz 170,000 150,000 15 **
Winthrop, Leslie 300,000 300,000 21 **
Wuerth, Diego 300,000 300,000 15 **
Zaroff, Michael 1,750,000 1,250,000 21,22 **
Zaroff, Murray 1,850,000 1,850,000 13,15 **
----------- -----------
124,466,736 107,411,728
** less than 1 percent
Description of selling security holders and certain transactions:
(1) Shares Underlying Non-Statutory Stock Options
The above table includes 2,849,866 shares underlying non-statutory stock options
issued to certain present and past key employees and their assignees. All of
these shares had been registered previously.
Angelastri, Ivano 250,000
Cumming, Frederick 5,000
Duncan, John C. 500,000
Klaube, Joerg H. 100,000
Kroll, Seymour 119,866
Martin, Martin G. 100,000
Rudnik, Steven D. 1,325,000
Schuerch, Kerstin 250,000
Stangel, Georg 200,000
(2) Options Issued in Lieu of Cash Compensation to Officer.
The above table includes 150,000 shares underlying stock options issued to our
current President and Chief Executive Officer of the Company. These shares had
been registered previously.
Rudnik, Steven D. 150,000
(3) Shares Underlying Convertible Note Issued to an Officer and Director
The above table includes 998,900 shares underlying a company obligation due the
current President and Chief Executive Officer of the Company. The obligation was
incurred in connection with the acquisition by the Company of Rolina Corporation
in February 1998. On February 20, 2002, the obligation was recast into a
convertible note. These shares had been registered previously.
Rudnik, Steven D. 998,900
(4) Shares Issued upon Exercise of Warrants
Consist of 326,111 shares issued to an outside director of the Company. These
shares had been registered previously and were issued pursuant to his exercise
of stock purchase warrants at the price of $0.50/share.
Gray, Steven L. 326,111
(5) Shares Underlying Stock Option
The above table includes 75,000 shares previously registered on behalf of Steven
D. Rudnik, its chief executive officer. These shares underlie a stock option
issued pursuant to an agreement between the chief executive officer and the
Company whereby in lieu of the 150,000 shares to be issued for compensation
which shares were previously registered, Mr. Rudnik shall receive stock option
for 225,000 shares, exercisable at $0.75 per share. 150,000 of such shares had
previously been included in an earlier amendment of this registration and are
already included in item (1) above.
Rudnik, Steven D. 75,000
(6) Private Placements Pursuant to Section 4(2)
The above table includes 600,000 shares previously registered on behalf of an
outside director of the company who purchased these shares pursuant to private
placement subscriptions entered into between the Company and such investor
between January 2002 and March 2002.
Gray, Steven L. 600,000
(7) Shares issued in exchange for debt and shares underlying stock award
The above table includes 124,718 shares previously registered on behalf of an
outside director of the Company issued in return for the cancellation, on
various dates between February and May 2002, of an aggregate $12,500 company
liabilities.
Gray, Steven L. 124,718
(8) Shares Issued in Lieu of Cash Compensation to Officer
The above table includes 1,100,000 shares previously registered on behalf of the
current President and Chief Executive Officer of the Company, such shares having
been issued in lieu of $110,000 cash compensation payable during February
through December of the year 2002.
Rudnik, Steven D. 1,100,000
(9) Shares Underlying Stock Option Issued to Officer
The above table includes 2,500,000 shares previously registered on behalf of the
current President and Chief Executive Officer of the Company, such shares
underlying a stock option issued in July 2001.
Rudnik, Steven D. 2,500,000
10) Private Placements Pursuant to Section 4(2)
The Company is registering a total 5,119,998 which are part of a total
14,152,704 shares previously registered on behalf of (a) 36 private foreign and
U.S. investors pursuant to private placement subscriptions entered into between
the Company and such investors, and (b) 5 individuals and their 4 assignees who
converted an aggregate $132,170 of debt into 1,510,833 Company shares. In the
case of U.S. investors, subscriptions and investments were received during the
periods (i) August 16, 2002 to August 22, 2002, prior to the termination of the
Company's 2002 private placement on August 27, 2002, and (ii) February 21, 2003
to December 19, 2003, the period the Company's 2003 private placement commenced
through December 19,2003. In the case of the Company's foreign investors,
subscriptions and investments were received during the period November 8, 2002
through November 11, 2003, all of which shares were issued outright to these
investors. The above mentioned common shares include 180,000 shares that have
been issued to one of the investors who also serves as a director of the
Company. The Company received an aggregate $1,137,112 from these investment
transactions. A copy of the subscription agreement utilized in these
transactions had been included in the previous registration.
AKB Privatbank Zurich AG 1,000,000
Angelastri, Nicola 100,000
Angelastri, Anastasia 100,000
Blackburn, Theodore 100,000
Citrus Land & Development Corp. 166,666
Friedenberg, Douglas 416,666
Gray, Steven L 180,000
Hunter, Tracy S 416,667
Marot, Richard N. 406,666
Mette, Tim 50,000
Real Resources Inc. 166,666
S & I Consulting 100,000
Shoemaker, John & Audrey 1,666,667
Tannert, Michael H 250,000
The following persons have voting and investment control over the Company shares
held by the entities named above as selling stockholders: Hans-Rudi Strasser for
AKB Privatbank Zurich AG; James Morton for Citrus Land & Development Corp who
also, in his individual capacity, has beneficial ownership of 1,284,589 shares
with his spouse, giving him an aggregate 3,827,366 Company shares over which he
has investment and voting control; James Morton for Real Resources Inc.; Josiane
Keller for S&I Consulting.
(11) Shares Underlying Warrants
The Company is registering 1,000,000 shares underlying stock purchase warrants,
previously registered and issued to two foreign finders in recognition of their
services in promoting the Company to accredited private investors in Europe.
Such warrants are exercisable at $0.15 per share and expire in 2006.
INSA Stiftung 500,000
Schuerch, Ulrich 500,000
INSA Stiftung, a Swiss entity controlled by Hans-Rudi Strasser, who has voting
and investment control over their shares as well as those owned of record by AKB
Privatbank Zurich AG, giving him voting and investment control over an aggregate
2,500,000 Company shares, and Ulrich Schuerch served as the Company's European
placement agents in connection with our private placement to accredited European
investors, identified in Transactional Note (10) above, and received the shares
we are registering as payment for these services.
(12) Shares Issued Pursuant to Stock Awards
The Company is registering 2,000,000 shares, previously registered and issued to
five officers and directors of the Company, for services rendered during 2003.
Angelastri, Ivano 300,000
Gray, Steven L 300,000
Klaube, Joerg H 800,000
Rudnik, Steven D 300,000
Tomasek, Joseph J 300,000
(13) Shares Issued for Services
The Company is registering 1,645,000 shares issued outright and 1,500,000 shares
underlying non-statutory stock options, all of which had previously been
registered. These securities were issued to four consultants pursuant to
consulting agreements involving business consulting and investor relations
services with unrelated parties. The stock options are exercisable at $0.07 per
share and expire in September 2006. Copies of the consulting agreements were
attached as Exhibits to the previous registration.
Cohen, Alan R 45,000
Morton, James W 500,000
Schuerch, Ulrich 1,500,000
Zaroff, Murray 1,100,000
Alan R. Cohen received 45,000 shares of Company stock for his agreement to
introduce software sales and licensing prospects to the Company. James W. Morton
received a retainer payment of 500,000 Company shares pursuant to the terms of
his consulting agreement for his marketing assistance during the one-year term
and for his investor relations services for strategic shareholders located in
the Southeast region of the United States. We are registering an aggregate
1,500,000 shares for Ulrich Schuerch. Mr. Schuerch has been the Company's
principal representative in the European markets for several years, and the
Company and Mr. Schuerch entered into a formal, two-year contract for his
dedicated services: continue developing potential licensing partners, arrange
for research reports from European software/ergonomic industry analysts and
maintain surveillance over the European ergonomic markets as they develop,
targeting sector companies for presentations and strategic distribution
alliance/partnerships. The Company hired Mr. Murray Zaroff to serve as one of
the Company's independent sales/marketing representatives for our software
products.
(14) Shares Issued in Lieu of Cash Compensation to Officer
The Company is registering 1,000,000 shares on behalf of the current President
and Chief Executive Officer of the Company, such shares having been issued in
lieu of cash compensation for most of the year 2003. These shares had been
registered previously.
Rudnik, Steven D 1,000,000
15) Private Placements Pursuant to Section 4(2)
The Company is registering a total 35,167,385 shares which are part of
37,297,384 shares registered previously on behalf of 57 private foreign and
domestic investors and two assignees pursuant to private placement subscriptions
entered into between the Company and such investors, between November 2003 and
February 2004. 22,906,034 of these shares have been issued pursuant to the
conversion of 229,060.34 shares of the Company's Series E Senior Convertible
Preferred Stock and 14,391,350 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 $1,640,566
from these investment transactions. Peter Prast is the individual who has
investment and voting control over the Company shares owned of record by Ebony
Finance Ltd. Trust; Mark J. Gillis is the individual who has investment and
voting control over the Company shares owned of record by Hudson Valley Capital
Mgmt. LLC.; Karl-Heinz Hemmerle is the individual who has investment and voting
control over the Company shares owned of record by Kareela Business Ltd.;
Nasrollah Khosrowshahi is the individual who has investment and voting control
over the Company shares owned of record by Kaysons International Corp.; Charles
K. Kellogg is the individual who has investment and voting control over the
Company shares owned of record by Kellogg Capital Group LLC; Kellogg Capital
Group, LLC is an NASD registered broker-dealer which purchased our shares in the
ordinary course of its business and had no agreements or understandings,
directly or indirectly, with any person to distribute our shares at the time of
its investment; see "Plan of Distribution", below; Richard H. Keyes is the
individual who has investment and voting control over the Company shares owned
of record by Keyes Family Trust; Stanley M. Levin is the individual who has
investment and voting control over the Company shares owned of record by Stanley
M. Levin Rev. Trust; Nasrollah Khosrowshahi is the individual who has investment
and voting control over the Company shares owned of record by Tolida
Corporation.
Agriogianis, Nicholas 750,000
Blackburn, Theodore J. 250,000
Burgman, Sandra R. 150,000
Campanella, Richard 41,667
Caron, Phyllis 250,000
Caron, Raymond P. 125,000
Carrel, Rene 250,000
Cohen, Alan R. 200,000
DeWolf, Keith G. 175,000
Dufour, John R. 3,750,000
Ebony Finance Ltd. Trust 100,000
Emen, Barry 300,000
Friedman, John 600,000
Fulton, David R. 300,000
Green, David 2,500,050
Hazard, Mark III 300,000
Heckman, Paul and Kathleen JT 395,000
Heuberger, Roland 210,000
Hitz, Martin 150,000
Hopmans, John 600,000
Hudson Valley Capital Mgmt. LLC 150,000
Hunter, Tracy S. 250,000
Joan Rich Baer Inc. Pension Plan 450,000
Johnson, Wayne C. 750,000
Kareela Business Ltd. 1,000,000
Kaysons International Corp. 166,667
Kellogg Capital Group LLC 250,000
Keyes Family Trust 750,000
Kirshner, Richard M. 600,000
Kreulach, Paul E. 900,000
Lanktree, Charles T. 341,667
Lucas, Lawrence B. 250,000
Maciak, Peter M. 750,000
Marti, Christoph 900,000
McEwen, Terry C. 1,250,000
McEwen, William C. & Cleda B. 250,000
McEwen, William C.Jr. & Diana M. 250,000
Michella, Stephen 375,000
Miller, Philip C. 750,000
Mollo, Dean 375,000
Najor, Daniel 375,000
Pisani, B. Michael 1,750,000
Rabish, Mark A. 416,667
Ringer, Dennis 75,000
Rogivue, Nicolas 2,550,000
Sacbueken, Haldun 999,000
Salaorni, Vittoria 300,000
Shoemaker, John F. 1,250,000
Schuerch, Ulrich 1,500,000
Spinosa, Dominic 750,000
Stanley M. Levin Rev.Trust 750,000
Steeg, Oliver 30,000
Steinberg, Arthur 300,000
Tapio, John & Niels & Kyle JTWROS 350,000
Thornton, Robert 250,000
Tolida Corporation 166,667
Wagner, Tomasz 150,000
Wuerth, Diego 300,000
Zaroff, Murray 750,000
(16) Shares Issued for Cancellation of Debt
The Company is registering a total 2,939,000 shares previously registered on
behalf of three creditors and two assignees, pursuant these creditors exchanging
a total of $117,560 current promissory notes into convertible preferred stock
and warrants. 1,959,334 of these shares underlie 19,593.34 shares of the
Company's Series E Senior Convertible Preferred Stock and 979,666 underlie stock
purchase warrants. The warrants are exercisable during three years at the price
of $0.15 per common share. One of the creditors is an outside director of the
Company, who accounts for 525,000 of the shares being registered. James Morton
is the individual who has investment and voting control over the Company shares
owned of record by Citrus Land & Development Corp.; Virginia Gray is the
individual who has investment and voting control over the Company shares owned
of record by V. Gray Investments LLC.
Citrus Land & Development Corp. 2,064,000
Gray, Steven L. 525,000
Gray, Virginia 83,333
V. Gray Investments LLC 166,667
Szalbirak, Martin 100,000
(17) Shares Issued in Lieu of Cash Compensation to Officer
The Company is registering 2,500,000 shares previously registered on behalf of
the current President and Chief Executive Officer of the Company, 1,666,667 of
which are underlying 16,666.67 shares of the Company's Series E Senior
Convertible Preferred Stock and 833,333 underlying stock purchase warrants. The
warrants are exercisable during three years at the price of $0.15 per common
share. The securities have been issued in lieu of $100,000 cash compensation
payable during the year 2004.
Rudnik, Steven D. 2,500,000
(18) Shares Issued for Services and Interest
The Company is registering 870,750 shares previously registered on behalf of an
outside director of the Company who also serves as the Company's general and
securities counsel, 580,500 of which are underlying 5,805 shares of the
Company's Series E Senior Convertible Preferred Stock and 290,250 underlying
stock purchase warrants. The warrants are exercisable during three years at the
price of $0.15 per common share. The securities have been issued in lieu of
accrued interest on Company liabilities and for professional services rendered
during the year 2004.
Tomasek, Joseph J. 870,750
(19) Shares Issued for Services
The Company is registering 525,000 shares previously registered on behalf of a
consultant, 350,000 of which are underlying 3,500 shares of the Company's Series
E Senior Convertible Preferred Stock and 175,000 underlying stock purchase
warrants. The warrants are exercisable during three years at the price of $0.15
per common share. The securities have been issued for management consulting and
investor relations services performed during the year 2004.
Pisani, B. Michael 525,000
(20) Private Placements Pursuant to Section 4(2)
The Company is registering a total 12,390,000 shares previously registered on
behalf of 8 private foreign investors pursuant to private placement
subscriptions entered into between the Company and such investors, between May
2004 and July 2004. 6,095,000 of these shares have been issued to such investors
outright and 6,295,000 underlie stock purchase warrants, issued to these
investors. The warrants are exercisable during three years at the price of $0.15
per common share. One of the investors is the spouse of an outside director of
the Company. The Company had originally received an aggregate $566,550 from
these investment transactions. Karl-Heinz Hemmerle is the individual who has
investment and voting control over the Company shares owned of record by Calter
Associates S.A.
Angelastri, Sophie 50,000
Calter Associates S.A. 800,000
Carrel, Rene 1,000,000
Haefeli, Theres 200,000
Hinnen, Arvid 800,000
Laett, Heinz 800,000
Langheck, Andreas 240,000
Marti, Christoph 8,500,000
21) Private Placements Pursuant to Section 4(2)
The Company is registering a total 30,340,000 shares previously registered 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
(22) Shares issued for services rendered
The above table includes 1,190,000 shares previously 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
SHARES ELIGIBLE FOR FUTURE SALE
This prospectus covers 107,411,728 common shares. As of May 31, 2005, there are
139,937,612 common shares issued and outstanding of which approximately
51,000,000 are freely tradable.
Upon the effectiveness of this registration statement, (a) an additional
59,953,363 common shares already issued and (b) 49,262,191 common shares
underlying stock options, warrants and a convertible note which, if exercised,
will result in those shares also being freely tradable.
In addition to our registration statement referenced above, the 28,984,249
remaining shares of common stock presently outstanding that are restricted
and/or affiliate securities and not included in this prospectus as well as
1,757.,198 common shares underlying the issued and outstanding convertible
preferred stock, 974,000 common shares underlying outstanding warrants, and
5,560,442 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.
PLAN OF DISTRIBUTION
This Prospectus and the registration statements in which it is included relates
to the offer and sale of up to an aggregate 107,411,728 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.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
The names and ages of all directors and executive officers of the Company are as
follows:
Name Positions Term Served (Expires)
-------- --------------- ------------------------
Steven D. Rudnik Director (Chairman Feb. 11, 2000 (2006)
of the Board)
President, Chief Executive Jan. 8, 1999 (March 2, 2006)
Officer
Mark Chroscielewski Sr. Vice President
Business Development
Joerg H. Klaube Sr. Vice President, Secretary,
Chief Financial Officer
Steven W. Jagels Sr. Vice President
Steven L. Gray Director May 18, 2000 (2006)
Ivano Angelastri Director May 18, 2000 (2006)
Joseph J. Tomasek Director Feb. 11, 1999 (2006)
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.
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
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 64 - 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.
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.
(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.
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.
AUDIT COMMITTEE
The Company has appointed an Audit Committee in accordance with the
provisions of the Sarbanes-Oxley Act of 2002, comprised of two independent
outside directors of the Company, one of whom, S. Gray, is a financial expert
with knowledge of financial statements, generally accepted accounting principles
and accounting procedures and disclosure rules.
Employment Agreements
In April 2002, the Company entered into an employment agreement with Steven D.
Rudnik, its current President and Chief Executive Officer, to serve as President
and Chief Executive Officer of the Company for a period of five years, replacing
an earlier employment agreement dated February 1998, as amended. Base salary
under the agreement is $133,333 per year with predetermined increases effective
upon the Company achieving certain revenue goals. The agreement also calls for
the grant of certain stock awards and incentive and non-statutory stock options
and eligibility for the Company's benefit programs. The Company will also
provide reimbursement of ordinary and necessary business expenses and a monthly
car allowance. The agreement provides for severance compensation to be
determined pursuant to a formula established therein, payable to the officer if
the employment agreement is terminated or is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months after
termination of employment.
In April 2002, the Company entered into an employment agreement with Joerg H.
Klaube, its current Senior Vice President and Chief Financial Officer, to serve
in that capacity for a period of five years, replacing an earlier employment
agreement dated April 1996, as amended. Base salary under the agreement is
$125,000 per year with predetermined increases effective upon the Company
achieving certain revenue goals. The agreement also calls for the grant of
certain stock awards and incentive and non-statutory stock options and
eligibility for the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses and a monthly car
allowance. The agreement provides for severance compensation to be determined
pursuant to a formula established therein, payable to the officer if the
employment agreement is terminated or is not renewed by the Company. A non-
competition/non-solicitation restriction applies for 24 months after termination
of employment.
In April 2002, the Company entered into an employment agreement with Steven W.
Jagels, its current Senior Vice President Information Technology, to serve in
that capacity for a period of five years. Base salary under the agreement is
$108,333 per year with predetermined increases effective upon the Company
achieving certain revenue goals. The agreement also calls for the grant of
certain stock awards and incentive and non-statutory stock options and
eligibility for the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses and a monthly car
allowance. The agreement provides for severance compensation to be determined
pursuant to a formula established therein, payable to the officer if the
employment agreement is terminated or is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months after
termination of employment.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of May 31, 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 2,062,500 (2) 1.47 %
Stock Mark Chroscielewski - -
Steven L. Gray 4,626,704 (3) 3.28 %
Steven W. Jagels 622,083 (4) 0.44 %
Joerg H. Klaube 1,910,417 (5) 1.36 %
Steven D. Rudnik 10,725,695 (6) 7.40 %
Joseph J. Tomasek 2,733,250 (7) 1.95 %
Address of all persons above: c/o the Company.
All Directors and Executive Officers 22,680,649 15.30 %
as a Group (7 persons)
Christoph Marti 9,400,000 (8) 6.51 %
Kuerzestrasse 25, CH-4562 Biberist, Switzerland
)* The Company also has issued and outstanding as of May 31, 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.
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 139,937,612 were issued and
outstanding as of May 31, 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 May 31, 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 May 31, 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
May 31, 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 May 31, 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 May 31, 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 May 31, 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 May 31,
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 May 31, 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 May
31, 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 May 31, 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 93,667 shares were outstanding as of May 31, 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 liquidation,
dissolution or winding up of the affairs of Magnitude and after payment of its
debts and liabilities, the holders are entitled to be paid out of the remaining
assets a liquidation price of $5.00 per share of Series A Stock, on an equal
basis with the holders of any Series B Stock and Series C Stock.
Magnitude has the right to redeem or buy back part or all of the Series A Stock
three years after their issuance by paying to the holders the liquidation price
($5.00 per share), any accumulated but unpaid dividends and a payment (a "call
premium") equal to 15% of the liquidation price. Holders of the Series A Stock
can convert their shares into Magnitude Common stock at a conversion rate equal
to 150% of the "market price" of Magnitude's Common Stock at the time of
conversion. "Market price" is based upon the average bid and asked prices for
Magnitude's Common Stock as quoted by the then stock exchange during the 20
consecutive trading day period immediately preceding the conversion.
The Series B Stock
The Series B Stock has no voting rights and their holders do not have a right to
cast a vote on shareholder matters. The holders of Series B Stock are entitled
to receive semi-annual cumulative dividends before any dividends are declared
and paid upon the Common Stock, but on a par with the holders of any Series A
Stock and Series C Stock, calculated against their liquidation price of $9.00
per share at the rate of 7% annually. In the event of a liquidation, dissolution
or winding up of the affairs of Magnitude and after payment of its debts and
liabilities, the holders are entitled to be paid out of the remaining assets a
liquidation price of $9.00 per share of Series B Stock, on an equal basis with
the holders of any Series A Stock and Series C Stock. Magnitude has the right to
redeem or buy back part or all of the Series B Stock three years after their
issuance by paying to the holders the liquidation price ($9.00 per share), any
accumulated but unpaid dividends and a payment (a "call premium") equal to 10%
of the liquidation price. Holders of the Series B Stock can convert their shares
into Magnitude Common Stock on the basis of 10 shares of Common stock for one
share of Series B Stock at any time.
The Series C Stock
The Series C Stock has no voting rights and their holders do not have a right to
cast a vote on shareholder matters. The holders of Series C Stock are entitled
to receive monthly cumulative dividends before any dividends are declared and
paid upon the Common Stock, but on par with the holders of any Series A Stock
and Series B Stock, calculated against their liquidation price of $9.00 per
share at the rate of 7% annually. In the event of a liquidation, dissolution or
winding up of the affairs of Magnitude and after payment of its debts and
liabilities, the holders are entitled to be paid out of the remaining assets a
liquidation price of $9.00 per share of Series C Stock, on an equal basis with
the holders of any Series A Stock and Series B Stock. Magnitude has the right to
redeem or buy back part or all of the Series C Stock three years after their
issuance by paying to the holders the liquidation price ($9.00 per share), any
accumulated but unpaid dividends and a payment (a "call premium") equal to 10%
of the liquidation price. Holders of the Series C Stock can convert their shares
into Magnitude Common Stock on the basis of 10 shares of Common stock for one
share of Series C Stock at any time.
The Series D Stock
The Series D Stock has no voting rights and their holders do not have a right to
cast a vote on shareholder matters. The holders of Series D Stock are entitled
to receive semi-annually cumulative dividends before any dividends are declared
and paid upon the Common Stock, but on par with the holders of any Series A
Stock, Series B Stock and Series C Stock calculated against their respective
stated value per share at the rate of 7% semi-annually. In the event of a
liquidation, dissolution or winding up of the affairs of Magnitude and after
payment of its debts and liabilities, the holders are entitled to be paid out of
the remaining assets a liquidation price equal to their stated value for the
Series D Stock, on an equal basis with the holders of any Series A Stock, Series
B Stock and Series C Stock. Magnitude has the right to redeem or buy back 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 May 31, 2005, one share is issued and outstanding. The Cumulative
Preferred Stock is non-voting. Each share shall be entitled to receive out of
the surplus or net profits of the Company, cumulative dividends thereon at the
rate of $9,000 per year, payable quarterly, semi-annually, or annually, as and
when declared by the Board of Directors. The Cumulative Preferred Stock shall,
with respect to dividend rights, rights on liquidation, winding up and
dissolution and rights upon redemption, rank prior to all classes and series of
Common stock.
BUSINESS
Background
On June 24, 1997, the Company entered into an acquisition agreement whereby it
acquired substantially all of the outstanding stock of Proformix, Inc., a
Delaware corporation and manufacturer of ergonomic keyboarding systems.
Proformix, Inc. in November 1998 changed its name to Magnitude, Inc. and is
hereafter referred to as Magnitude, Inc. The business combination took the form
of a reverse acquisition. The Company and Magnitude, Inc. remain as two separate
legal entities whereby Magnitude, Inc. operates as a subsidiary of Magnitude
Information Systems, Inc.. The operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of Merger
with Rolina Corporation, a privately held New Jersey software developing firm,
and on April 30, 1998, into an Asset Purchase Agreement with Vanity Software
Publishing Co., a Canadian developer of specialized software, whereby the
Company, in return for payments in form of cash and equity, acquired the rights
to certain software products and related assets, with such software products
subsequently forming the basis for the further development during the year of
the Company's proprietary ErgoManagerTM software product.
As of May 31, 2005, there were outstanding 139,937,612 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.
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.
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.
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.
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.
- ----------------------
(1) Hedge, A. "Effects of Ergonomic Management Software on Employee
Performance." Cornell Human Factors Laboratory Technical Report /SP7991, Cornell
University, July 1999.
>> 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.
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.
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 May 31, 2005, 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.
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 Three Months Period Ended March 31, 2005 and 2004:
Our marketing efforts during the quarter were focused on broadening our
cooperative programs with our strategic partners Aon Risk Services Division and
U.S. HealthWorks whereby Magnitude will jointly market our ErgoEnterprise(TM)
software solutions to clients of both firms. We expect these ventures to produce
tangible results in terms of software licensing contracts during the upcoming
quarters in 2005. No such sales were as yet recorded during the first quarter
ended March 31, 2005 which yielded revenues of only $19,264, compared to the
$44,580 achieved in the first quarter of 2004.
Gross profits for the quarter amounted to negative $17,103, as a result of a
fixed charge for amortization of certain proprietary software assets. Such
software assets underlie the Company's products and are being amortized on a
straight line over 10 years, resulting in a level charge of approximately
$12,000 per month to cost-of-goods-sold. Our expense and cost structure was
essentially unchanged from prior periods, and, after deducting selling - and
general and administrative expenses of $587,643 which significantly decreased
from the $702,342 recorded in 2004, the Company realized an operating loss of
$604,746, compared to an operating loss of $696,717 in 2004. The decrease in
expenses was primarily attributable to lesser expenditures in non-cash
transactions for compensation and services. Non-operating income and expenses
consisted of $3,180 net interest expense and a credit of $17,537 for
cancellation of accruals for prior year expenses. The period result was a net
loss of $591,019, compared to a loss of $702,513 for the same periods in 2004.
After accounting for dividend accruals on outstanding preferred stock which
totaled $28,379 the net loss for the quarter applicable to common shareholders
was $619,398 or less than $0.01 per share, compared to a loss of $1,476,329 or
$0.02 per share for the same quarter in the previous year.
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 $20703 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.
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 $670,000 in new equity funding in the form of cash.
At March 31, 2005, the deficit in working capital amounted to $707,462 as
compared to $977,831 at December 31, 2004. Stockholders' equity showed an
impairment of $246,825 at the end of the quarter, compared to an impairment of
$480,228 at the beginning of the year. The negative cash flow from operations
totaled approximately $469,000 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. Details of such transactions
can be found in the "Changes and Issuance of Securities" section of this report.
In April 2005 the Company had filed a new registration statement on Form SB-2
and amendments to three 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.
At the time of this submission, the Company had no bank debt. At March 31, 2005
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"). Current
liabilities include $501,466 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.
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.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the
aggregate amount of $40,307 and $39,947 for professional services rendered for
their audit of our annual financial statements and their reviews of the
financial statements included in our Forms 10-QSB for the year ended December
31, 2004 and December 31, 2003, respectively.
AUDIT-RELATED FEES
Rosenberg did not bill us for, nor perform professional services
rendered for assurance and related services that were reasonably related to the
performance of audit or review of the Company's financial statements for the
fiscal years ended December 31, 2004 and December 31, 2003.
TAX FEES
Rosenberg billed us in the aggregate amount of 5,961 and $3,073 for
professional services rendered for tax related services for the fiscal years
ended December 31, 2004 and December 31, 2003, respectively.
ALL OTHER FEES
The aggregate fees billed by Rosenberg for services rendered to the
Company during the last two fiscal years, other than as reported above, were $0
and $4,775, respectively.
TRANSFER AGENT
The transfer agent for the Company is Securities Transfer Corporation, located
at 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
ANNUAL REPORT
The Company intends to continue its practice of furnishing annual reports to its
shareholders containing financial statements audited by independent certified
public accountants.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- March 31, 2005 3
Consolidated Statements of Operations
- Three months ended March 31, 2005 and 2004 4
Consolidated Statements of Cash Flows
- Three months ended March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6 - 11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 Controls and Procedures 13
PART II - OTHER INFORMATION 14 - 15
SIGNATURES 16
PART I - Item 1 Financial Statements
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
Assets
Current Assets
Cash .................................................................... $ 242,334
Accounts receivable, net of allowance for
doubtful accounts of $0 ............................................... 9,404
Inventories ............................................................. 6,214
Prepaid expenses ........................................................ 102,783
Miscellaneous receivables ............................................... 5,052
------------
Total Current Assets ................................................ 365,787
Property and equipment, net of accumulated
depreciation of $147,899 .................................................. 9,416
Software, net of accumulated amortization of $1,077,642 ................... 429,648
Deposits .................................................................. 21,829
------------
Total Assets .......................................................... 826,680
============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses ................................... 295,397
Deferred revenue ........................................................ 38,944
Deferred rental obligation .............................................. 1,045
Dividends payable ....................................................... 501,466
Loans and notes payable ................................................. 100,000
Current maturities of long-term debt .................................... 133,419
Current maturities of capitalized lease obligations ..................... 2,978
------------
Total Current Liabilities ........................................... 1,073,249
Capitalized lease obligations, less current portion ....................... 256
------------
Total Liabilities ..................................................... 1,073,505
Stockholders' Equity (Deficit)
Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized:
2,500 shares have been designated Cumulative Preferred Stock,
of which 1 share is issued and outstanding ................................ 0
300,000 shares have been designated Series A Convertible Preferred Stock,
350,000 shares have been designated Series B Convertible Preferred Stock,
120,000 shares have been designated Series C Convertible Preferred Stock,
500,000 shares have been designated Series D Convertible Preferred Stock,
500,000 shares have been designated Series E Convertible Preferred Stock,
of which a combined total 193,190 shares are issued and outstanding ....... 193
Common Stock, $0.0001 par value, 200,000,000 shares authorized,
issued and outstanding 136,687,612 shares ................................. 13,669
Additional paid-in capital ................................................ 28,351,708
Accumulated deficit ....................................................... (28,612,395)
------------
Total Stockholders' Equity (Deficit) .................................. (246,825)
Total Liabilities and Equity (Deficit) ................................ $ 826,680
============
The accompanying notes are an integral part of the consolidated financial
statements.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2005 2004
-------------- --------------
Total Revenues ........................... $ 19,264 $ 44,580
Cost of Goods Sold .................. 36,367 38,955
-------------- --------------
Gross Profit (Loss) ...................... (17,103) 5,625
Selling expenses .................... 96,219 118,237
Stock-based compensation ............ 66,123 150,055
General and administrative expenses . 425,301 434,050
-------------- --------------
Loss From Operations ..................... (604,746) (696,717)
Other Income (Exopense)
Miscellaneous income ................ 17,537 --
Interest income ..................... 2 160
Interest expense, net ............... (3,182) (5,956)
-------------- --------------
Total Other Income (Expense) . 14,357 (5,796)
-------------- --------------
Loss Before Provision for Income Taxes ... (590,389) (702,513)
Provision for Income Taxes .......... (630) --
Net Loss ................................. $ (591,019) $ (702,513)
============== ==============
Dividends on Preferred Stock ............. (28,379) (57,380)
Discount on Convertible Preferred Stock .. -- (716,436)
Net Loss Applicable to Common Shareholders $ (619,398) $ (1,476,329)
============== ==============
Net Loss per Common Share ................ $ (0.00) $ (0.02)
============== ==============
Weighted Average Number of
Common Shares Outstanding ........... 132,657,612 78,136,586
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
-------------- --------------
Cash Flows from Operating Activities
Net Loss ................................ $ (591,019) $ (702,513)
Adjustments to Net Loss
Depreciation and amortization ........ 39,126 41,453
Securities issued for various expenses 182,800 276,350
Decreases (Increases) in Assets
Accounts receivable .................. 21,227 14,827
Miscellaneous receivables ............ 6,270 --
Prepaid expenses ..................... (13,973) (166,180)
Other assets ......................... -- 5,693
Increases (decreases) in Liabilities
Deferred revenues .................... (10,429) 50,041
Accounts payable and accrued expenses (102,632) (111,894)
-------------- --------------
Net Cash Used by Operating Activities ........ (468,630) (592,223)
Cash Flows from Investing Activities
Purchases of equipment and fixtures ..... (2,160) (3,443)
-------------- --------------
Net Cash Used by Investing Activities ........ (2,160) (3,443)
Cash Flows from Financing Activities
Dividends paid .......................... (1,020) --
Repayment of loans and notes ............ -- (282,851)
Issuance of common and preferred stock .. 670,000 881,364
-------------- --------------
Net Cash Provided by Financing Activities .... 668,980 598,513
Net Increase (Decrease) in Cash .............. 198,190 2,847
Cash at Beginning of Period .................. 44,144 97,978
-------------- --------------
Cash at End of Period ........................ $ 242,334 $ 100,825
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
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 and Amortization
Property and equipment are recorded at cost. Depreciation on equipment,
furniture and fixtures and leasehold improvements is computed on the
straight-line method over the estimated useful lives of such assets
between 3-10 years. Maintenance and repairs are charged to operations as
incurred. Software assets are capitalized at the fair value of stock
exchanged/granted upon acquisition and are amortized on the straight-line
method on a product-by-product basis over the estimated economic life of
the products which has been determined to be 10 years.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock on
the date of stock issuance or option/grant is used. The Company determined
the fair market value of the warrants/options issued under the
Black-Scholes Pricing Model. Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standard (SFAS) No. 123,
"Accounting for Stock-based Compensation". The statement generally
suggests, but does not require, employee stock-
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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.
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 accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
GOING CONCERN
The ability of the Company to continue its operations is dependent on
increasing sales and obtaining additional capital and financing. In their
report for the fiscal year ended December 31, 2004, our auditors had
expressed an opinion that, as a result of the losses incurred, there was
substantial doubt regarding our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
be necessary if the Company were unable to continue as a going concern.
Management's plans are to continue seeking additional working capital
through equity and debt placements with private and institutional
investors.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in a financial institution which is
insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. and overseas. The Company performs ongoing
credit evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
PREPAID EXPENSES
Prepaid Expenses at the end of the quarter included $60,602 representing
the unamortized portions of the value of restricted stock and options
issued to certain consultants for services rendered, and approximately
$41,000 prepaid rent and insurance costs.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2005:
Equipment $ 85,084
Furniture and fixtures 72,231
--------
157,315
Less accumulated depreciation 147,899
--------
Total $ 9,416
========
Depreciation expense charged to operations was $2,742 in the first three months
of 2005 and $2,472 in the first three months of 2004.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at March 31,
2005:
Accounts payable $ 98,283
Accrued interest 56,751
Accrued salaries 14,647
Accrued professional fees 120,716
Miscellaneous accruals 5,000
--------
Total $295,397
========
DEFERRED REVENUES
Deferred revenues at March 31, 2005 consist of prepaid software
maintenance and support charges which are amortized ratably over the
remaining duration of the underlying maintenance agreements.
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan
agreements with the following terms and conditions at March 31, 2005:
On December 4, 1996, Magnitude, Inc. repurchased 500,000 shares of its
common stock and retired same against issuance of a promissory note
maturing twelve months thereafter accruing interest at 5% per annum and
due December 4, 1998. This note is overdue at March 31, 2005 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 March 31, 2005 is $25,000.
Attempts to locate the holder of this note, to settle this liability, have
been unsuccessful. $ 25,000
----------------
Total $ 25,000
================
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
LONG-TERM DEBT
Long-term debt as of March 31, 2005 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
----------------
Total 133,419
Less current maturities 133,419
----------------
Long-term debt, net of current maturities $ -
================
INCOME TAXES
The Company's total deferred tax asset and valuation allowance are as
follows:
December 31,
2004
---------------
Total deferred tax asset, non-current $ 7,882,000
Less valuation allowance (7,882,000)
---------------
Net deferred tax asset, non-current $ -
===============
At December 31, 2004, the Company had available approximately $24,377,000
of net operating losses to carry-forward 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 had available approximately $3,616,000
of net operating losses to carry-forward and which may be used to reduce
future state taxable income which expire December 31, 2011.
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
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:
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
==============
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 expired on March 31, 2005. The Company has
recently negotiated a lease renewal which extended the term of the lease to
March 31, 2007 at a monthly rental of $10,000.
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
-------
Total minimum payments $ 251,309
=======
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
The Company did not record any Related Party transactions during the first
quarter in 2005.
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 2004
Page
Independent Auditors' Report................................... 1
Financial Statements
Consolidated Balance Sheet................................ 2
Consolidated Statements of Operations..................... 3
Consolidated Statement of Stockholders Equity (Deficit)... 4-5
Consolidated Statements of Cash Flows..................... 6-8
Notes to the Consolidated Financial Statements............ 9-27
[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
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
2
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
--------------- ---------------
$ (2,483,602) $ (2,337,881)
Net Loss
--------------- ---------------
Dividends on Preferred Shares $ (1,803,754) $ (126,293)
--------------- ---------------
$ (4,287,356) $ (2,464,174)
Net Loss Applicable to Common Shareholders
=============== ===============
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.
3
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 2003
Discount on
Convertible Cumulative Preferred
Preferred Shares Preferred Shares Stock
---------------------------- ----------------------------------------------
Shares Amount Shares Amount Amount
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2003 195,968 $ 196 1 $ -- $ --
Issuance of convertible
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 -- -- -- --
Issuance of common stock
pursuant to conversion of debt -- -- -- -- --
Issuance of common stock
pursuant to exercise of options -- -- -- --
Issuance of common stock
pursuant to exercise of warrants -- -- -- -- --
Issuance of common stock
pursuant to private equity
placements -- -- -- -- --
Issuance of common stock
granted for private placement
finders' fees -- -- -- -- --
Issuance of common stock
pursuant to conversion of
accounts payable -- -- -- -- --
Issuance of common stock for
services performed -- -- -- -- --
Issuance of common stock for
compensation -- -- -- -- --
Issuance of common stock for
stock awards -- -- -- -- --
Issuance of common stock for
services performed -- -- -- -- --
Issuance of warrants for
services performed -- -- -- -- --
Net loss, year ended
December 31, 2003 -- -- -- -- --
Dividends on convertible
preferred stock -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Amortization of discount on -- -- -- -- 16,056
------------ ------------ ------------ ------------ ------------
Balances, December 31, 2003 351,022 $ 351 1 $ -- $ (630,896)
============ ============ ============ ============ ============
Total
Stock Adtional Stockholders'
Subscriptions Paid in Accumulated Equity
Common Stock Receivable Capital Deficit (Deficit)
--------------------------- ----------- ----------- ------------ ------------
Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balances, January 1, 2003 56,395,817 $ 5,640 $ (3,297) $ 20,902,010 $(21,241,467) $ (336,918)
Issuance of convertible
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 -- -- 3,297
Issuance of common stock
pursuant to conversion of debt 220,000 22 -- 21,978 -- 22,000
Issuance of common stock
pursuant to exercise of options 81,000 8 -- 8,092 -- 8,100
Issuance of common stock
pursuant to exercise of warrants 3,552,752 355 -- 319,792 -- 320,147
Issuance of common stock
pursuant to private equity
placements 9,122,171 912 -- 646,480 -- 647,392
Issuance of common stock
granted for private placement
finders' fees 30,000 3 -- (3) -- --
Issuance of common stock
pursuant to conversion of
accounts payable 5,620,533 62 -- 41,055 -- 41,117
Issuance of common stock for
services performed 3,828,035 383 -- 158,873 -- 159,256
Issuance of common stock for
compensation 1,000,000 100 -- 99,900 -- 100,000
Issuance of common stock for
stock awards 2,363,500 236 -- 105,554 -- 105,790
Issuance of common stock for
services performed -- -- -- 48,543 -- 48,543
Issuance of warrants for
services performed -- -- -- 55,349 -- 55,349
Net loss, year ended
December 31, 2003 -- -- -- -- (2,337,881) (2,337,881)
Dividends on convertible
preferred stock -- -- -- -- (110,237) (110,237)
------------ ------------ ------------ ------------ ------------ ------------
Amortization of discount on -- -- -- -- (16,056) --
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2003 77,213,808 $ 7,721 $ -- $ 23,950,614 $(23,705,641) $ (377,851)
============ ============ ============ ============ ============ ============
See notes to the consolidated financial statements.
4
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 2004
Discount on
Convertible Cumulative Preferred
Preferred Shares Preferred Shares Stock
---------------------------- ---------------------------------------------
Shares Amount Shares Amount Amount
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2004 351,022 $ 351 1 $ -- $ (630,896)
Issuance of convertible
preferred stock pursuant to
private equity placements 156,993 157 -- -- (999,330)
Issuance of convertible
preferred stock for services
performed 1,900 2 -- -- --
Issuance of convertible
preferred stock for
compensation 16,667 17 -- -- --
Conversion of convertible
preferred stock into common
stock (333,392) (334) -- -- --
Issuance of common stock for
accrued bonus -- -- -- -- --
Issuance of common stock for
stock awards -- -- -- -- --
Issuance of common stock
pursuant to exercise of options -- -- -- --
Issuance of common stock for
rent -- -- -- -- --
Issuance of common stock
pursuant to private equity
placements -- -- -- -- --
Issuance of common stock
granted for private placement
finders' fees -- -- -- -- --
Issuance of common stock for
services performed -- -- -- -- --
Issuance of common stock for
accrued interest -- -- -- -- --
Issuance of options for
services performed -- -- -- -- --
Private placement finders fees -- -- -- -- --
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 $ -- $ --
============ ============ ============ ============ ============
Total
Additional Stockholders'
Paid in Accumulated Equity
Common Stock Capital Deficit (Deficit)
--------------------------- ------------ ------------ ------------
Shares Amount
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2004 77,213,808 $ 7,721 $ 23,950,614 $(23,705,641) $ (377,851)
Issuance of convertible
preferred stock pursuant to
private equity placements -- -- 1,935,133 -- 935,960
Issuance of convertible
preferred stock for services
performed -- -- 28,098 -- 28,100
Issuance of convertible
preferred stock for
compensation -- -- 99,983 -- 100,000
Conversion of convertible
preferred stock into common
stock 33,349,202 3,334 (3,000) -- --
Issuance of common stock for
accrued bonus 196,680 20 19,648 -- 19,668
Issuance of common stock for
stock awards 2,000,000 200 224,800 -- 225,000
Issuance of common stock
pursuant to exercise of options 250,000 25 2,475 -- 2,500
Issuance of common stock for
rent 200,000 20 23,980 -- 24,000
Issuance of common stock
pursuant to private equity
placements 12,215,000 1,222 1,176,828 -- 1,178,050
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 -- 139,450
Issuance of common stock for
accrued interest 59,589 6 3,966 -- 3,972
Issuance of options for
services performed -- -- 30,150 -- 30,150
Private placement finders fees -- -- (132,096) -- (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 127,837,612 $ 12,784 $ 27,499,793 $(27,992,998) $ (480,228)
============ ============ ============ ============ ============
See notes to the consolidated financial statements
5
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 receivables (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 consolidated financial statements
6
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
7
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.
8
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.
9
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.
10
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.
11
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
================
12
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
============
13
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.
14
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series 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.
15
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series 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.
16
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(4) The Company shall have the right to redeem pro rata any or all of
its Series 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.
17
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
18
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.
19
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.
20
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.
21
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 $1.78 437,000 607,000
per share)
-------------- ---------------
Eligible, end of year for exercise (at prices ranging from $1.00 to 437,000 607,000
$1.78 per share)
============== ===============
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.
22
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.
23
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.
24
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.
25
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.
26
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
27
107,411,728 Shares
Magnitude Information Systems, Inc.
Common stock
PROSPECTUS
June __, 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
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Prospectus Summary 3
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Risk Factors 6
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Where You Can Find More Information 9
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Use of Proceeds 11
- --------------------------------------------------------------------- ----------
Market for Company's Common Equity & Dividend Policy 11
- --------------------------------------------------------------------- ----------
Selling Shareholders 12
- --------------------------------------------------------------------- ----------
Shares Eligible for Future Sale 17
- --------------------------------------------------------------------- ----------
Plan of Distribution 18
- --------------------------------------------------------------------- ---------
Legal Proceedings 18
- --------------------------------------------------------------------- ----------
Management 19
- --------------------------------------------------------------------- ----------
Principal Shareholders 23
- --------------------------------------------------------------------- ----------
Description of Capital Stock 24
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Business 26
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Management's Discussion and Analysis 32
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Certain Transactions 35
- --------------------------------------------------------------------- ----------
Financial Statements 37
- --------------------------------------------------------------------- ----------
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.
1
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
As permitted by the Delaware General Corporation Law, Magnitude has included in
its Certificate of Incorporation a provision to eliminate the personal liability
of it's directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, subject to certain exceptions. In addition, the
Bylaws of Magnitude require the Company to (i) indemnify the officers and
directors under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and (ii) advance expenses to
the officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. Magnitude has entered into
indemnification agreements with the officers and directors containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the Delaware General Corporation Law. The indemnification
agreements may require the companies, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance expenses incurred as a
result of any proceeding against them as to which they may be indemnified, and
to obtain directors' and officers' insurance if available on reasonable terms.
Magnitude believes that these charter provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and officers.
Magnitude understands that the staff of the Securities and Exchange Commission
is of the opinion that statutory, charter and contractual provisions as are
described above have no effect on claims arising under the federal securities
laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Magnitude will pay all expenses incident to the offering and sale to the public
of the shares being registered other than any commissions and discounts of
underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except the
Securities and Exchange Commission ("SEC") registration fee.
Legal fees and expenses 15,000.00
Accounting fees and expenses 5,000.00
Printing expenses 2,500.00
Miscellaneous expenses 5,000.00
---------------------------------------------------------------
Total $27,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
FISCAL YEAR 2005
During the quarter ended March 31, 2005, the Company issued the following
unregistered securities:
(i) 7,250,000 shares of common stock, accompanied by warrants for the
purchase of 7,810,000 common shares, exercisable during three years
at the price of $0.15 per share, to eleven accredited investors
pursuant to private placement subscriptions, issued in reliance upon
exemptions provided under Section 4(2), Rule 506 of Regulation D of
the Securities Act, altogether resulting in the receipt by the
Company of $670,000 in cash.
(ii) 1,600,000 shares of common stock to three consultants for investor
relations and general business consulting services.
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;
2
(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:
(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.
(iii) 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.
(iv) 50,000 shares of common stock in lieu of cash, for rent expenses.
(v) 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.
(vi) 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.
(vii) 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;
3
(vi) 19,593 shares of Series E Senior Convertible Preferred Stock, convertible
into 1,959,300 shares of common stock, and stock purchase warrants for the
purchase of 979,650 shares of common stock, exercisable during three years
at $0.15 per share, to four creditors, one of who is a director of the
Company, in return for cancellation of $117,600 debt;
(vii) 7,405 shares of Series E Senior Convertible Preferred Stock, convertible
into 740,500 shares of common stock, and stock purchase warrants for the
purchase of 370,250 shares of common stock, exercisable during three years
at $0.15 per share, to two individuals, one of who is a director of the
Company, for services rendered.
(i) 1,900,000 shares of common stock to 7 accredited investors During the
quarter ended September 30, 2003, the Company issued the following
unregistered securities:
(i) 4,296,870 shares of common stock to nine accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S of
the Securities Act, altogether resulting in the receipt by the Company of
approximately $258,000 in cash;
(ii) 1,642,500 shares of common stock and options for the purchase of 1,535,000
shares, for marketing consulting and investor relations services;
During the quarter ended June 30, 2003, the Company issued the following
unregistered securities:
(i) 1,900,000 shares of common stock to 7 accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S of
the Securities Act, and 1,115,500 shares of common stock pursuant to the
exercise of stock purchase warrants previously issued, altogether
resulting in the receipt by the Company of approximately $250,000 in cash;
(ii) 500,000 shares of common stock for marketing consulting and investor
relations services performed;
(iii) 163,500 shares of common stock pursuant to a stock grant to an outside
director of the Company.
During the quarter ended June 30, 2003, the Company issued the following
unregistered securities:
(i) 1,900,000 shares of common stock to 7 accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S of
the Securities Act, and 1,115,500 shares of common stock pursuant to the
exercise of stock purchase warrants previously issued, altogether
resulting in the receipt by the Company of approximately $250,000 in cash;
(ii) 500,000 shares of common stock for marketing consulting and investor
relations services performed;
(iii) 163,500 shares of common stock pursuant to a stock grant to an outside
director of the Company.
During the quarter ended March 31, 2003, the Company issued the following
unregistered securities:
(i) 2,063,000 shares of common stock to 14 accredited investors pursuant to
private placement subscriptions, issued in reliance upon exemptions
provided under Section 4(2), Rule 506 of Regulation D and Regulation S of
the Securities Act, and 2,437,252 shares of common stock pursuant to the
exercise of stock purchase warrants previously issued, altogether
resulting in the receipt by the Company of approximately $408,000 in cash;
(ii) 81,000 shares of common stock to five employees pursuant to their exercise
of stock options at a price of $0.10 per share;
(iii) 1,000,000 shares of common stock to the Company's chief executive officer
in lieu of $100,000 cash salary (see "Related Party Transactions");
(iv) 743,035 shares of common stock for marketing consulting and investor
relations services performed;
(v) 200,000 shares of common stock pursuant to a stock grant to an outside
director of the Company;
(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:
4
(i) 2,125,000 shares of common stock to seven foreign accredited investors
pursuant to private placement subscriptions under Section 4(2), Rule 506
of Regulation D and Regulation S of the Securities Act, which resulted in
the receipt by the Company of $191,250 in cash;
(ii) 262,500 shares of common stock and 463,890 shares of common stock pursuant
to the exercise of stock options and warrants, respectively, at the price
of $0.10 per share which resulted in the receipt by the Company of $26,250
in cash and the cancellation of $46,389 in current liabilities;
(iii) 90,000 shares of common stock to two consultants for services rendered.
(iv) 16,441 shares of common stock issued to an employee for sales commissions.
(v) During the quarter, the issuance of 81,000 shares previously recorded in
connection with the exercise of stock options, was reversed
In addition, during the fourth quarter of 2002, the board of directors of the
Company approved resolutions affecting previously issued or to be issued
securities, as follows:
(i) During a meeting on October 8, 2002, the board approved a downward
adjustment of the exercise price of stock options for 262,500 shares,
previously issued to an outside director, to $0.10 per share, conditioned
upon the exercise of such restated options;
(ii) During a meeting on December 23, 2002, the board approved the placement of
common stock with accredited private foreign investors pursuant to private
placement subscriptions under Section 4(2), Rule 506 of Regulation D and
Regulation S of the Securities Act, at a price of $0.10 per share for an
aggregate of up to $3,000,000 in proceeds.
During the quarter ended September 30, 2002, the Company issued the following
unregistered securities:
(i) 2,290,000 shares of common stock to 5 accredited investors including an
outside director of the Company pursuant to private placement
subscriptions, issued in reliance upon exemptions provided under Section
4(2) S of the Securities Act, and 1,500,067 shares of common stock
pursuant to the exercise of stock purchase warrants previously issued,
altogether resulting in the receipt by the Company of approximately
$379,000 in cash;
(ii) 30,000 shares of common stock to two employees pursuant to the terms of
their employment agreements;
(iii) 138,890 shares of common stock pursuant to the conversion of 13,889 shares
of the Company's Series D Convertible Preferred Stock;
(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;
5
(v) 250,000 shares pursuant to a stock grant to a business consultant for the
Company;
(vi) 20,000 shares pursuant to the exercise of options at a price of $0.10 per
share.
During the quarter ended March 31, 2002, the Company issued the following
unregistered securities:
(i) 7,052,000 shares of common stock to 21 U.S. accredited investors and
non-U.S. investors pursuant to private placement subscriptions, issued in
reliance upon exemptions provided under Section 4(2) and, in the case of
the non-U.S. investors, Regulation S of the Securities Act; and 679,111
shares of common stock pursuant to the exercise of stock purchase warrants
previously issued, which resulted in the receipt by the Company of
approximately $753,000 in cash. All of the accredited investors had a
pre-existing relationship with the Company and no general solicitation or
advertisement was utilized to solicit any of the accredited investors.
Each of the accredited investors (a) executed and delivered to the Company
a subscription agreement which included the investor's representations
that such investor qualified as an accredited investor, had the financial
experience and resources to appreciate the risk of such investment and (b)
had the time to ask questions and make inquiries to the Company before
their investment funds were accepted. Of the 22 accredited investors, 3
are current Company officers and directors, 8 were pre-existing
shareholders and 4 were non-U.S. residents. All of the Company's
securities placed with these investors bore the appropriate restrictive
legend, designating such securities as restricted securities;
(ii) 50,000 shares of common stock pursuant to the conversion of 5,000 shares
of the Company's Series D Convertible Preferred Stock;
(iii) 720,718 shares of common stock pursuant to the conversion of certain
payables into equity, at a rate of $0.10 per share;
(iv) 1,250 shares of common stock for services performed;
(v) 700,000 shares as stock grants and 1,165,000 shares in lieu of
compensation (see "Related Party Transactions").
6
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(i) Legal opinion and consent of Joseph J. Tomasek, Esq., Registration
No. 333-73992
5.1(ii) Legal opinion and consent of Joseph J. Tomasek, Esq., Registration
No. 333-112595
5.1(iii) Legal opinion and consent of Joseph J. Tomasek, Esq., Registration
No. 333-118522
5.1(iv) Legal opinion and consent of Joseph J. Tomasek, Esq., Registration
No. 333-123996
10.1* Resignation Agreement dated July 21, 1999, between J. Swon and B.
Deichl and the Company, incorporated herein by reference to the
Exhibit of Form S-8 filed with the Commission on August 3, 1999.
10.2* Resignation Agreement dated January 28, 2000, between M. Martin and
the Company, incorporated herein by reference to the Exhibit of
Form S-8 filed with the Commission on January 31, 2000.
10.3* Employment Agreement, dated April 15, 1996 between the Company and
Joerg Klaube, incorporated herein by reference and previously filed
as an Exhibit to the Company's Form 10-KSB for the fiscal year
ended December 31, 1997 with the Commission.
10.4* Employment Agreement, dated July 1, 1999 between the Company and
John C. Duncan.
10.5+ Termination Agreement, dated as of August 1, 2001, by and between
the Company and Torneaux Fund, Ltd.
10.6* Contract by and between Lockheed Martin and the Company, dated
December 21, 2000.
10.7# Employment Agreement, dated April 15, 2002 between the Company and
Steven D. Rudnik.
10.8# Employment Agreement, dated February 15, 2002 between the Company
and Mark Fuller.
10.9# Employment Agreement, dated April 15, 2002 between the Company and
Joerg Klaube.
7
10.10# Employment Agreement, dated April 15, 200 between the Company and
Steven Jagels
10.11^ Brokerage Placement Assistance Agreement, Dated January 2, 2004,
between the Company and vFinance Investments, Inc.
10.12^ Consulting Agreement, dated December 1, 2003, by and between the
Company and Alan Cohen.
10.13^ Consulting Agreement, dated February 12, 2003, by and between
Jackson-Hewitt Investment Services, Inc. and the Company.
10.14^ Consulting Agreement, dated September 25, 2003, by and Between
James W. Morton and the Company.
10.15^ Consulting Agreement, dated September 15, 2003, by and between
Premium Strategy Partners AG and the Company.
10.16^ Consulting Agreement, dated September 25, 2003, by and between
Ulrich Schuerch and the Company.
10.17^ Consulting Agreement, dated December 1, 2003, by and between
Murray Zaroff and the Company.
10.18^ Consulting Agreement, dated November 28, 2003, by and between
The Research Works Inc. and the Company.
23.1 Independent Auditors' Consent
- ----------
+ Documents incorporated by reference to Magnitude's Annual and Quarterly
Reports previously filed on Forms 10-KSB and Forms 10-QSB with the Securities
and Exchange Commission.
* Previously filed as exhibits to the Registration Statement and amendments
thereto filed on Form SB-2, Registration No. 333-34512, with the Commission.
# Previously filed as exhibits to Form SB-2 Registration Statement and
amendments thereto, Registration No. 333-73992, with the Commission.
^ Previously filed as Exhibits to this Registration Statement
ITEM 28. UNDERTAKINGS
A. UNDERTAKING PURSUANT TO RULE 415
The undersigned Registrant hereby undertakes: (1) To file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement: (i) to include any prospectus required by Section
10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; (2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; (3) To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of this offering.
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B. UNDERTAKING IN RESPECT OF INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
MAGNITUDE INFORMATION SYSTEMS, INC., a corporation organized and existing under
the laws of the State of Delaware, has duly caused this (1) Post-Effective
Amendment No.21, Commission No. 333-123996); (2) Post-Effective Amendment No. 3,
Commission No. 333-118522; (3) Post-Effective Amendment No.5, Commission No.
333-112595), and; (4) Post-Effective Amendment No.8, Commission No. 333-73992 to
Registration Statements on Forms SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Chester, State of New
Jersey, on June 22, 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 these Registration Statements on Forms 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, these Registration Statements have been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Steven D. Rudnik June 22, 2005
- ----------------------------- President and
Steven D. Rudnik Chief Executive Officer
/s/ Joerg H. Klaube June 22, 2005
- ----------------------------- Chief Financial Officer
Joerg H. Klaube (Principal Financial Officer)
* Director June 22, 2005
- -----------------------------
Steven L. Gray
* Director June 22, 2005
- -----------------------------
Ivano Angelastri
* Director June 22, 2005
- -----------------------------
Joseph J. Tomasek
BY: /s/ Steven D. Rudnik
- -------------------------------------
ATTORNEY-IN-FACT
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