Joseph J. Tomasek, Esq.
Tomasek & Associates, LLC
77 North Bridge Street
Somerville, New Jersey 08876
January 5, 2006
FOR THE EXCLUSIVE USE
OF THE SECURITIES AND EXCHANGE COMMISSION ONLY
VIA EDGAR ONLY
Securities and Exchange Commission
Mail Stop 4561
100 F Street, N.E.
Washington, D.C. 20005
Attention: Ms. Kathleen Collins
Accounting Branch Chief
RE: Magnitude Information Systems, Inc.
Form 10-KSB for the Fiscal Year Ended
December 31, 2004 File No. 000-32485
Dear Ms. Collins:
I serve as General Counsel to Magnitude Information Systems, Inc. (the
"Company"). We are filing as supplementary material today via EDGAR, a fax cover
sheet and accompanying telecopied materials sent via telecopy by Daniel A.
Brown, CPA of Rosenberg Rich Baker Berman & Company, independent auditors, to
Mr. Patrick Gilmore of the Commission Staff on January 4, 2006.
Please do not hesitate to contact the undersigned if you require any
further information or documents.
Very truly yours,
/s/ Joseph J. Tomasek
- --------------------------------
Joseph J. Tomasek, Esq.
Encl.
cc: Patrick Gilmore
Division of Corporation Finance
Steve D. Rudnik, President
Magnitude Information Systems, Inc.
Joerg Klaube, Chief Financial Officer
Magnitude Information Systems, Inc.
Rosenberg Rich
Baker Berman & Company
380 Foothill Road, Bridgewater, NJ 08807-0483
FAX MEMORANDUM
TO: Patrick Gilmore-Securities & Exchange Commission
FROM: Daniel A. Brown, CPA / Robert S. Quick, CPA
CLIENT: Magnitude Information Systems
DATE: January 4, 2006 CLIENT NO.: 23-06375
PAGES: 20 Including Cover Page CC: Joseph Tomasek, Esq.
In response to your verbal request, please find the revised documents as
proposed for filing, provided for your review and preliminary comments, as
follows: (1) revised supplementary information, including (a) more detail as to
how our client has addressed the conditions necessary for equity classification
as stipulated in EITF 00-19, (b) inclusion of other security issuances to agree
to issuances on the Statements of Stockholders' Equity (that also had beneficial
conversion features), and (c) revisions to the calculated discounts for
beneficial conversion features (we noted that warrant and BCF discount values
had inadvertently been reversed, which resulted in the intrinsic value of
beneficial conversion features being lower in some cases that the amount
allocable to preferred stock - therefore the total discounts on preferred stock
and related amortization are less in total in 2003 and 2004 than previous
amendment - these adjustments are properly reflected in the restated financial
statements and footnotes to be filed in Amendment No. 3) and (2) revised pages
from the 10-KSB/A to be filed in Amendment NO. 3 based on the correcting
adjustments made for (1)(b) and (1)(c) from above.
In addition, please find the supplemental schedules evaluating the shares
available for settlement of Preferred Stock Conversion in accordance with
paragraph #19 of EITF 00-19 for 2004 and 2003, as well as our revised Auditors
Report.
Please review and provide comments as to whether these revisions may be
sufficient for Amendment No. 3 to the 10-KSB and to comply with documentation
requirements of the SEC for the supplementary information.
As the present time, I am out of the office and would like all questions or
comments to be directed to Robert Quick who is a Partner in our Firm.
Thank you.
Magnitude Information Systems, Inc.
Summary of recalculation of Warrant Cost and Beneficial Conversion Feature, and
2003 Amortization on Convertible Preferred Stock Issued in 2003 FYE December 31,
2003 FS Restatement
Calc Calc
Description Investment to Warr to BCF (3) to Pref.Stock AmortWarr Amort BCF
- -------------------------------------------------------------------------------------------------
Issued with warrants 876,962.00 216,963.92 588,796.23 71,201.84 8,148.50 26,690.60
Issued without warrants 78,632.78 -- 32,442.22 46,190.56 -- --
---------------------------------------------------------------------------------------------------
Recalculated Totals 955,594.78 216,963.92 621,238.45 117,392.40 8,148.50 26,690.60
(1) ------------------------------(2)--------------------- --------------------(4)----------
NOTES:
(1) Total investment recalculated based on elimination of 50% discount of stock
valuation taken on certain issuances
(2) Increased overall value due to elimination of 50% valuation discount caused
re-allocation of warrants and preferred stock (discounted for BCF) based on
relative values under APB 14. The total gross discount on the preferred stock
(warrants and BCF) totaled $838,202, amortized to $803,363 at December 31, 2003.
(3) Intrinsic value of beneficial conversion features calculated under
provisions of EITF 98-5 as amended by EITF 00-27 (see following page).
(4) Discount amortized over period through date of earliest conversion (6
months); certain issuances made on 12/31/03
Consideration was given to the provisions of EITF 00-19, and above securities
issued were classified as permanent equity as the instruments must be physically
settled in a certain number of shares, are not mandatorily redeemable and meet
all other conditions necessary for equity classification, as described below:
EITF 00-19
Paragraph # Condition for Equity Classification Explanation of Compliance
- -----------------------------------------------------------------------------------------------------------
14 - 18 Contract permits company to settle Per contracts, company is permitted to
in unregistered shares physically settle the contracts in
unregistered shares, and there are no
provisions for penalties for lack of
registration or other events.
19 Company has sufficient authorized and Per terms of Certificate of Designation of
unissued shares available to the Series E shares, shares are convertible
physically settle the contracts only upon automatic conversion six months
after issuance, in which case adequate
shares were available for conversion for
each contract as it became convertible
20 - 24 Contract contains explicit limit on number Each agreement stipulated a fixed number
of shares to be delivered upon settlement of shares for physical settlement, with no
provisions for other forms of settlement
(such as net-share or cash settlement); the
Certificate of Designation does contain an
anti-dilution provision, but any adjustment
of shares issuable under this provision
would occur only upon an event which is
under the control of the company
25 No required cash payments to the No provision to make cash payments in
counterparty due to failure to make the contracts
timely SEC filings
26 No required cash payments to the No such provision in the contracts
counterparty for "top-off" or
"make-whole" provisions
27 - 28 Contract requires net-settlement in Net-settlement is not provided for in
certain specific circumstances the contracts
29 - 31 No provisions that indicate that No such provision in the contracts
counterparty has rights that rank
higher than those of shareholder
of the stock underlying the contract
32 No requirement to post collateral No such provision in the contracts
at any point for any reason
Magnitude Information Systems, Inc.
Recalculation of Beneficial Conversion Feature on
Convertible Preferred Stock Issue in 2003
FYE December 31, 2003 FS Restatement
(A) (B) (C) (A x (C) - (B)
Allocation of Proceeds Shares
Principal/ (see (1) to right) Issuable Effective
Investment to Preferred upon Conversion Market Intrinsic BCF
Amount to Warrants Stock Conversion Price Price Value
- ---------------------------------------------------------------------------------------------------------------
With warrants:
30,000.00 6,706.01 23,293.99 500,000 0.05 0.07 11,706.01 11,706.01
108,000.00 24,139.77 83,860.23 2,000,000 0.04 0.07 56,139.77 56,139.77
100,002.00 25,047.16 74,954.84 1,666,700 0.04 0.12 125,049.16 74,954.84
27,000.00 6,762.65 20,237.35 500,000 0.04 0.12 39,762.65 20,237.35
16,200.00 4,217.75 11,982.25 300,000 0.04 0.15 33,017.75 11,982.25
64,800.00 16,871.01 47,928.99 1,200,000 0.04 0.15 132,071.01 47,928.99
5,400.00 1,405.92 3,994.08 100,000 0.04 0.15 11,005.92 3,994.08
150,000.00 39,053.25 110,946.75 2,500,000 0.04 0.15 264,053.25 110,946.75
7,000.00 1,822.48 5,177.52 116,667 0.04 0.15 12,322.53 5,177.52
30,000.00 7,810.65 22,189.35 500,000 0.04 0.15 52,810.65 22,189.35
10,000.00 2,603.55 7,396.45 166,667 0.04 0.15 17,603.60 7,396.45
6,000.00 1,265.65 4,734.35 100,000 0.05 0.15 10,265.65 4,734.35
24,000.00 5,062.60 18,937.40 400,000 0.05 0.15 41,062.60 18,937.40
15,000.00 3,905.33 11,094.67 250,000 0.04 0.15 26,405.33 11,094.67
20,000.00 5,207.10 14,792.90 333,333 0.04 0.15 35,207.05 14,792.90
20,000.00 5,207.10 14,792.90 333,333 0.04 0.15 35,207.05 14,792.90
41,000.00 10,674.55 30,325.45 683,334 0.04 0.15 72,174.65 30,325.45
24,000.00 6,248.52 17,751.48 400,000 0.04 0.15 42,248.52 17,751.48
30,000.00 7,810.65 22,189.35 500,000 0.04 0.15 52,810.65 22,189.35
11,000.00 2,863.91 8,136.09 200,000 0.04 0.15 21,863.91 8,136.09
10,000.00 2,603.55 7,396.45 166,667 0.04 0.15 17,603.60 7,396.45
10,000.00 2,603.55 7,396.45 166,667 0.04 0.15 17,603.60 7,396.45
82,560.00 18,453.30 64,106.70 1,376,000 0.05 0.07 32,213.30 32,213.30
10,000.00 2,603.55 7,396.45 166,667 0.04 0.15 17,603.60 7,396.45
19,000.00 6,014.38 12,985.62 316,667 0.04 0.15 34,514.43 12,985.62
Without warrants:
6,000.00 - 6,000.00 100,000 0.06 0.15 9,000.00 6,000.00
13,000.00 - 13,000.00 160,000 0.08 0.15 11,000.00 11,000.00
65,632.78 - 65,632.78 580,500 0.11 0.15 21,442.22 21,442.22
- ----------------------------------------------------------------------------------------------------------------
955,594.78 216,963.92 738,630.86 15,783,202 621,238.45
(1) Calculation of proceed allocations:
Per Share Total Total
Principal/ Value No. of Relative Relative
Investment Common Preferred Preferred Preferred Warrant
Amount Share Value Stock Shares Stock Value Value
- ---------------
With warrants:
30,000.00 0.07 7.00 5,000.00 35,000.00 77.65% 10,076.00 22.35%
108,000.00 0.07 7.00 20,000.00 140,000.00 77.65% 40,300.00 22.35%
100,002.00 0.12 12.00 16,667.00 200,004.00 74.95% 66,834.00 25.05%
27,000.00 0.12 12.00 5,000.00 60,000.00 74.95% 20,050.00 25.05%
16,200.00 0.15 15.00 3,000.00 45,000.00 73.96% 15,840.00 26.04%
64,800.00 0.15 15.00 12,000.00 180,000.00 73.96% 63,360.00 26.04%
5,400.00 0.15 15.00 1,000.00 15,000.00 73.96% 5,280.00 26.04%
150,000.00 0.15 15.00 25,000.00 375,000.00 73.96% 132,000.00 26.04%
7,000.00 0.15 15.00 1,166.67 17,500.05 73.96% 6,160.00 26.04%
30,000.00 0.15 15.00 5,000.00 75,000.00 73.96% 26,400.00 26.04%
10,000.00 0.15 15.00 1,666.67 25,000.05 73.96% 8,800.00 26.04%
6,000.00 0.15 15.00 1,000.00 15,000.00 78.91% 4,010.00 21.09%
24,000.00 0.15 15.00 4,000.00 60,000.00 78.91% 16,040.00 21.09%
15,000.00 0.15 15.00 2,500.00 37,500.00 73.96% 13,200.00 26.04%
20,000.00 0.15 15.00 3,333.33 49,999.95 73.96% 17,600.00 26.04%
20,000.00 0.15 15.00 3,333.33 49,999.95 73.96% 17,600.00 26.04%
41,000.00 0.15 15.00 6,833.34 102,500.10 73.96% 36,080.00 26.04%
24,000.00 0.15 15.00 4,000.00 60,000.00 73.96% 21,120.00 26.04%
30,000.00 0.15 15.00 5,000.00 75,000.00 73.96% 26,400.00 26.04%
11,000.00 0.15 15.00 2,000.00 30,000.00 73.96% 10,560.00 26.04%
10,000.00 0.15 15.00 1,666.67 25,000.05 73.96% 8,800.00 26.04%
10,000.00 0.15 15.00 1,666.67 25,000.05 73.96% 8,800.00 26.04%
82,560.00 0.07 7.00 13,760.00 96,320.00 77.65% 27,726.00 22.35%
10,000.00 0.15 15.00 1,666.67 25,000.05 73.96% 8,800.00 26.04%
19,000.00 0.15 15.00 3,166.67 47,500.05 68.35% 22,000.00 31.65%
Without warrants:
6,000.00
13,000.00
65,632.78
- --------------------
955,594.78
Magnitude Information Systems, Inc.
Summary of Recalculation of Warrant Cost and Beneficial Conversion Feature and
2004 Amortization on Convertible Preferred Stock Issued in 2003 and 2004 FYE
December 31, 2004 FS Restatement
Calc Calc
Description Investment to Warr to Prf Stock to BCF (3) AmortWarr AmortBCF
- ------------------------------------------------------------------------------------------------------------------------------
Amortization-2003 Issuances 208,815.42 594,547.85
2004 Issuances - PP 935,960.00 241,020.53 -- 694,939.47 241,020.53 694,939.47
2004 Issuances - other 128,100.00 21,145.96 20,796.75 86,157.28 21,145.96 86,157.28
- ------------------------------------------------------------------------------------------------------------------------------
Recalculated Totals 1,064,060.00 262,166.50 20,796.75 781,096.75 470,981.92 1,375,644.60
(1) ----------------------------(2)------------------ ---------------(4)------------
NOTES:
(1) Total for recalculation includes investment plus issuance costs per EITF
00-27 (no 50% discount taken in 2004)
(2) Allocations to warrants and preferred stock (discounted for BCF) based on
relative values under APB 14. The total discount of preferred stock (warrants
and BCF) totaled $1,043,263
(3) Intrinsic value of beneficial conversion features calculated under
provisions of EITF 98-5 as amended by EITF 00-27 (see following page).
(4) Discount amortized over period through date of earliest conversion (6
months)
Consideration was given to the provisions of EITF 00-19, and above securities
issued were classified as permanent equity as the instruments must be physically
settled in a certain number of shares, are not mandatorily redeemable and meet
all other conditions necessary for equity classification.
EITF 00-19
Paragraph # Condition for Equity Classification Explanation of Compliance
- -------------------------------------------------------------------------------------------------------
14 - 18 Contract permits company to settle Per contracts, company is permitted to
in unregistered shares physically settle the contracts in
unregistered shares, and there are no
provisions for penalties for lack of
registration or other events.
19 Company has sufficient authorized and Per terms of Certificate of Designation of
unissued shares available to physically the Series E shares, shares are convertible
settle the contracts only upon automatic conversion six months
after issuance, in which case adequate shares
were available for conversion for each contract
as it became convertible
20 - 24 Contract contains explicit limit on Each agreement stipulated a fixed number
number of shares to be delivered upon of shares for physical settlement, with no
settlement provisions for other forms of settlement (such
as net-share or cash settlement); the
Certificate of Designation does contain an
anti-dilution provision, but any adjustment of
shares issuable under this provision would
occur only upon an event which is under the
control of the company
25 No required cash payments to the No provision to make cash payments
counterparty due to failure to make in the contracts
timely SEC filings
26 No required cash payments to the No such provision in the contracts
counterparty for "top-off" or
"make-whole" provisions
27 - 28 Contract requires net-settlement Net-settlement is not provided for in
in certain specific circumstances the contracts
29 - 31 No provisions that indicate that No such provision in the contracts
counterparty has rights that rank
higher than those of shareholder
of the stock underlying the contract
32 No requirement to post collateral at No such provision in the contracts
any point for any reason
Magnitude Information Systems, Inc.
Recalculation of Beneficial Conversion Feature on
Convertible Preferred Stock Issued in 2004
FYE December 31, 2004 FS Restatement
(A) (B) (C) (A x (C) - (B)
Allocation of Proceeds Shares
Principal/ (see (1) to right) Issuable Effective
Investment to Preferred upon Conversion Market Intrinsic BCF
Amount to Warrants Stock Conversion Price Price Value
- ---------------------------------------------------------------------------------------------------------------
Private Equity Placement Issuances:
50,000.00 12,903.99 37,096.01 833,334 0.04 0.14 79,570.75 37,096.01
12,000.00 3,096.98 8,903.02 200,000 0.04 0.14 19,096.98 8,903.02
60,000.00 15,621.30 44,378.70 1,000,000 0.04 0.15 105,621.30 44,378.70
30,000.00 7,624.78 22,375.22 500,000 0.04 0.13 42,624.78 22,375.22
15,000.00 3,905.33 11,094.67 250,000 0.04 0.15 26,405.33 11,094.67
30,000.00 7,810.65 22,189.35 500,000 0.04 0.15 52,810.65 22,189.35
30,000.00 7,810.65 22,189.35 500,000 0.04 0.15 52,810.65 22,189.35
30,000.00 7,810.65 22,189.35 500,000 0.04 0.15 52,810.65 22,189.35
10,000.00 2,603.56 7,396.44 166,666 0.04 0.15 17,603.46 7,396.44
10,000.00 2,603.56 7,396.44 166,666 0.04 0.15 17,603.46 7,396.44
10,000.00 2,603.56 7,396.44 166,666 0.04 0.15 17,603.46 7,396.44
5,000.00 1,290.32 3,709.68 83,334 0.04 0.14 7,957.08 3,709.68
50,000.00 13,017.74 36,982.26 833,334 0.04 0.15 88,017.84 36,982.26
12,000.00 3,096.98 8,903.02 200,000 0.04 0.14 19,096.98 8,903.02
12,000.00 3,096.98 8,903.02 200,000 0.04 0.14 19,096.98 8,903.02
30,000.00 7,742.45 22,257.55 500,000 0.04 0.14 47,742.45 22,257.55
30,000.00 7,742.45 22,257.55 500,000 0.04 0.14 47,742.45 22,257.55
12,000.00 3,096.98 8,903.02 200,000 0.04 0.14 19,096.98 8,903.02
15,000.00 3,871.22 11,128.78 250,000 0.04 0.14 23,871.22 11,128.78
12,000.00 3,096.98 8,903.02 200,000 0.04 0.14 19,096.98 8,903.02
24,000.00 6,193.96 17,806.04 400,000 0.04 0.14 38,193.96 17,806.04
21,000.00 5,419.71 15,580.29 350,000 0.04 0.14 33,419.71 15,580.29
30,000.00 7,742.45 22,257.55 500,000 0.04 0.14 47,742.45 22,257.55
18,000.00 4,645.47 13,354.53 300,000 0.04 0.14 28,645.47 13,354.53
24,000.00 6,193.96 17,806.04 400,000 0.04 0.14 38,193.96 17,806.04
42,000.00 10,839.43 31,160.57 700,000 0.04 0.14 66,839.43 31,160.57
18,000.00 4,574.87 13,425.13 300,000 0.04 0.13 25,574.87 13,425.13
9,000.00 2,287.44 6,712.56 150,000 0.04 0.13 12,787.44 6,712.56
30,000.00 7,742.45 22,257.55 500,000 0.04 0.14 47,742.45 22,257.55
5,000.00 1,270.88 3,729.12 83,334 0.04 0.13 7,104.30 3,729.12
12,000.00 3,049.91 8,950.09 200,000 0.04 0.13 17,049.91 8,950.09
40,000.00 10,166.43 29,833.57 666,000 0.04 0.13 56,746.43 29,833.57
36,000.00 9,149.74 26,850.26 600,000 0.04 0.13 51,149.74 26,850.26
50,000.00 12,903.99 37,096.01 833,334 0.04 0.14 79,570.75 37,096.01
36,000.00 9,290.94 26,709.06 600,000 0.04 0.14 57,290.94 26,709.06
8,400.00 2,103.94 6,296.06 140,000 0.04 0.12 10,503.94 6,296.06
54,000.00 13,525.30 40,474.70 1,000,000 0.04 0.12 79,525.30 40,474.70
3,560.00 891.67 2,668.33 60,000 0.04 0.12 4,531.67 2,668.33
10,000.00 2,580.89 7,419.11 166,667 0.04 0.14 15,914.27 7,419.11
- ---------------------------------------------------------------------------------------------------------------
935,960.00 241,020.53 694,939.47 15,699,335 694,939.47
- ---------------------------------------------------------------------------------------------------------------
Issued for Compensation:
100,000.00 13,842.72 86,157.28 1,666,667 0.06 0.15 150,000.03 86,157.28
- ---------------------------------------------------------------------------------------------------------------
Issued for Services:
22,500.00 5,857.99 16,642.01 150,000 0.15 0.15 -- --
5,600.00 1,445.26 4,154.74 40,000 0.14 0.14 -- --
- ---------------------------------------------------------------------------------------------------------------
28,100.00 7,303.25 20,796.75 190,000 0.29 0.29 -- --
- ---------------------------------------------------------------------------------------------------------------
Total Issuances:
1,064,060.00 262,166.50 801,893.50 17,556,002 781,096.75
===============================================================================================================
(1) Calculation of proceed allocations:
Per Share Total Total
Principal/ Value No. of Relative Relative
Investment Common Preferred Preferred Preferred Warrant
Amount Share Value Stock Shares Stock Value Value
- ---------------
Private Equity Placement Issuances:
50,000.00 0.14 14.00 8,333.34 116,666.76 74.19% 40,583.00 25.81%
12,000.00 0.14 14.00 2,000.00 28,000.00 74.19% 9,740.00 25.81%
60,000.00 0.15 15.00 10,000.00 150,000.00 73.96% 52,800.00 26.04%
30,000.00 0.13 13.00 5,000.00 65,000.00 74.58% 22,150.00 25.42%
15,000.00 0.15 15.00 2,500.00 37,500.00 73.96% 13,200.00 26.04%
30,000.00 0.15 15.00 5,000.00 75,000.00 73.96% 26,400.00 26.04%
30,000.00 0.15 15.00 5,000.00 75,000.00 73.96% 26,400.00 26.04%
30,000.00 0.15 15.00 5,000.00 75,000.00 73.96% 26,400.00 26.04%
10,000.00 0.15 15.00 1,666.66 24,999.90 73.96% 8,800.00 26.04%
10,000.00 0.15 15.00 1,666.66 24,999.90 73.96% 8,800.00 26.04%
10,000.00 0.15 15.00 1,666.66 24,999.90 73.96% 8,800.00 26.04%
5,000.00 0.14 14.00 833.34 11,666.76 74.19% 4,058.00 25.81%
50,000.00 0.15 15.00 8,333.34 125,000.10 73.96% 44,000.00 26.04%
12,000.00 0.14 14.00 2,000.00 28,000.00 74.19% 9,740.00 25.81%
12,000.00 0.14 14.00 2,000.00 28,000.00 74.19% 9,740.00 25.81%
30,000.00 0.14 14.00 5,000.00 70,000.00 74.19% 24,350.00 25.81%
30,000.00 0.14 14.00 5,000.00 70,000.00 74.19% 24,350.00 25.81%
12,000.00 0.14 14.00 2,000.00 28,000.00 74.19% 9,740.00 25.81%
15,000.00 0.14 14.00 2,500.00 35,000.00 74.19% 12,175.00 25.81%
12,000.00 0.14 14.00 2,000.00 28,000.00 74.19% 9,740.00 25.81%
24,000.00 0.14 14.00 4,000.00 56,000.00 74.19% 19,480.00 25.81%
21,000.00 0.14 14.00 3,500.00 49,000.00 74.19% 17,045.00 25.81%
30,000.00 0.14 14.00 5,000.00 70,000.00 74.19% 24,350.00 25.81%
18,000.00 0.14 14.00 3,000.00 42,000.00 74.19% 14,610.00 25.81%
24,000.00 0.14 14.00 4,000.00 56,000.00 74.19% 19,480.00 25.81%
42,000.00 0.14 14.00 7,000.00 98,000.00 74.19% 34,090.00 25.81%
18,000.00 0.13 13.00 3,000.00 39,000.00 74.58% 13,290.00 25.42%
9,000.00 0.13 13.00 1,500.00 19,500.00 74.58% 6,645.00 25.42%
30,000.00 0.14 14.00 5,000.00 70,000.00 74.19% 24,350.00 25.81%
5,000.00 0.13 13.00 833.34 10,833.42 74.58% 3,692.00 25.42%
12,000.00 0.13 13.00 2,000.00 26,000.00 74.58% 8,860.00 25.42%
40,000.00 0.13 13.00 6,660.00 86,580.00 74.58% 29,504.00 25.42%
36,000.00 0.13 13.00 6,000.00 78,000.00 74.58% 26,580.00 25.42%
50,000.00 0.14 14.00 8,333.34 116,666.76 74.19% 40,583.00 25.81%
36,000.00 0.14 14.00 6,000.00 84,000.00 74.19% 29,220.00 25.81%
8,400.00 0.12 12.00 1,400.00 16,800.00 74.95% 5,614.00 25.05%
54,000.00 0.12 12.00 10,000.00 120,000.00 74.95% 40,100.00 25.05%
3,560.00 0.12 12.00 600.00 7,200.00 74.95% 2,406.00 25.05%
10,000.00 0.14 14.00 1,666.67 23,333.38 74.19% 8,117.00 25.81%
- ---------------
935,960.00
- ---------------
Issued for Compensation:
100,000.00 0.15 15.00 16,666.67 250,000.00 86.16% 40,167.00 13.84%
- ---------------
Issued for Services:
22,500.00 0.15 15.00 1,500.00 22,500.00 73.96% 7,920.00 26.04%
5,600.00 0.14 14.00 400.00 5,600.00 74.19% 1,948.00 25.81%
- ---------------
28,100.00
- ---------------
Total Issuances:
1,064,060.00
===============
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
The Registrant's revenues for the fiscal year ended December 31, 2004, were
$121,886.
Common stock, par value $.0001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on March 29, 2005. Based on the
closing price of the Common Stock on the OTC Electronic Bulletin Board as
reported on March 29, 2005, ($0.10), the aggregate market value of the
119,056,671 shares of the Common Stock held by persons other than officers,
directors and persons known to the Registrant to be the beneficial owners (as
the term is defined under the rules of the Securities and Exchange Commission)
of more than five percent of the Common Stock on March 29, 2005, was
approximately $11,905,667. By the foregoing statements, the Registrant does not
intend to imply that any of the officers, directors, or beneficial owners are
affiliates of the registrant or that the aggregate market value, as computed
pursuant to rules of the Securities and Exchange Commission, is in any way
indicative of the amount which could be obtained for such shares of Common
Stock.
As of March 29, 2005, 136,437,612 shares of Common Stock, $.0001 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX
Explanatory Note
This Form 10-KSB/A is being filed for the purpose of restating the financial
statements for the fiscal years ended December 31, 2004 and 2003 as contained in
the Company's Form 10-KSB filed with the U.S. Securities and Exchange Commission
on March 30, 2005. The restatement involves reclassifying certain equity
positions in connection with beneficial conversion rights accrued to warrants
and shares of convertible preferred stock issued in 2003 and 2004 due to the
elimination of a discount of 50% applied to the market price of the Company's
common stock when valuing certain securities issued prior to January 1, 2004 to
employees and non-employees for services rendered as well as a reclassification
of deferred compensation. The restatements add $276,530 to net losses prior to
2003, $315,450 to the net loss in 2003 and $52,954 to the net loss in 2004. All
amounts, however, have been offset by similar credits to Paid-in Capital, and as
a consequence there was no material effect on total stockholders' equity. In
addition, the reclassifications and revaluations give rise to corrections in the
reported dividends positions and per-share earnings figures which again,
however, do not materially affect total stockholders' equity.
As discussed in the footnote to the financial statements entitled "RESTATEMENT
OF RESULTS", certain errors resulting from improper valuation of securities
issued to non-employees during the years ended December 31, 2001, 2002 and 2003
and the related effect on warrant value allocation and recognition of beneficial
conversion features during the years ended December 31, 2003 and 2004 were
discovered by management of the Company during the current year. Accordingly,
the 2004 and 2003 financial statements have been restated and an adjustment has
been made to retained deficit as of January 1, 2004 due to corrections made for
the years ended December 31, 2001 through 2003. This Form 10-KSB/A has not been
updated for events or information subsequent to the date of filing of the
original Form 10-KSB, except in connection with the foregoing.
ITEM 6: SELECTED FINANCIAL DATA
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, current dependence on the willingness of investors to
continue to fund operations of the Company 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.
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
2004 and 2003 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.
The financial data are those of Magnitude Information Systems, Inc.
including the operations of Magnitude, Inc. All inter-company accounts and
transactions have been eliminated in consolidation.
SELECTED FINANCIAL DATA
Balance Sheet December 31, 2004,
(As restated)
------------------
Total assets ............................ $ 646,162
Current liabilities ..................... 1,158,952
Long-term debt .......................... 256
Working capital ......................... (1,010,649)
Shareholders' equity .................... $ (513,046)
Statement of Operations For the Year Ended December 31,
2004 (as restated) 2003 (as restated)
------------------ ------------------
Total revenues ................... $ 121,886 $ 162,335
Operating income (loss) .......... (2,687,402) (2,764,871)
Net (loss) ....................... (2,536,556) (2,653,331)
Net (loss) after dividends
On Preferred Shares .............. (4,556,711) (2,798,406)
Net loss per common share ........ $ (0.05) $ (0.04)
Number of shares used in computing
per share data ................... 96,968,697 66,962,744
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934
Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-KSB and Form 10-QSB and periodic press
releases, as well as other public documents and statements, contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by the statements. These risks and uncertainties include
general economic and business conditions, development and market acceptance of
the Company's products, and other risks and uncertainties identified in the
Company's reports to the Securities and Exchange Commission, periodic press
releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking
statements. The Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events.
Results of Operations for the Year Ended December 31, 2004
The year 2004 was marked by continuing intensive efforts to gain full
market acceptance for our software products. Our financial resources did not
permit us to maintain a larger sales force and pursue a meaningful marketing
campaign targeted directly at end-user clients. We therefore had modified our
sales approach by concentrating almost entirely on developing indirect sales
channels whereby we could leverage the greater marketing capabilities of
distributors and other strategic partners to introduce and promote our products
to a larger audience of potential corporate clients. To that extent we signed,
in December 2004, a marketing agreement with Aon Corporation pursuant to which
Aon's Risk Services division and Magnitude will jointly market our
ErgoEnterprise software solution to clients of both firms. We expect this
venture to produce tangible results in terms of software licensing contracts,
during the first half of 2005.
For the year ended December 31, 2004, the Company had revenues of $121,886
compared to $162,335 in 2003. Revenues consisted of $50,325 licensing fees for
the Company's software products and $71,561 for maintenance and support
services.
Gross profits amounted to negative $34,089. Gross profits are burdened
with a fixed charge for amortization of certain proprietary software assets.
Such software assets underlie the Company's products and are being amortized on
a straight line over 10 years, resulting in a level charge of approximately
$13,000 per month to cost-of-goods-sold. Owing to the fact that variable
cost-of-goods-sold expenses are less than 5%, the gross margins will increase
with larger revenues, as the portion of fixed expenses decreases relatively.
After deducting selling -, research -, and general and administrative expenses
of $2,653,313 which decreased marginally by 4% from the $2,771,259 recorded in
2003, the Company realized an operating loss of $2,687,402 compared to an
operating loss of $2,764,871 in 2003. Non-operating income and expenses included
$43,069 net interest expense and $20,703 charges for losses on assets. The
Company also realized a credit of $214,618 from the sale of net loss
carry-forward tax credits pursuant to the New Jersey Emerging Technology and
Biotechnology Financial Assistance Act. The year concluded with a net loss of
$2,536,556. After accounting for dividends paid and accrued on outstanding
preferred stock which totaled $173,529 and an accounting charge of $1,846,626
for discounts accrued on preferred stock, the net loss applicable to common
shareholders was $4,556,711 or $0.05 per share, compared to a loss of $2,798,406
or $0.04 per share for the previous year.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Notes to Financial Statements are
attached hereto as Exhibit A and incorporated herein by reference.
ITEM 8a: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer participated in an
evaluation by our management of the effectiveness of the design and operation of
our disclosure controls and procedures of the end of our fiscal quarter that
ended on December 31, 2004 as defined in Exchange Act Rule 13(a)-15(e),. Based
on their participation in that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures were effective as of December 31, 2004 to
ensure that required information is disclosed on a timely basis in our Form
10-KSB filed and furnished under the Securities Exchange Act of 1934, as
amended, and ensured that all material information required to be disclosed in
the subject Form 10-KSB was recorded, processed, summarized and reported, within
the time period specified by the Commission's rules and forms.
As of the end of the period covered by this Form 10-KSB for the fiscal year
ended December 31, 2004, an evaluation (the "Evaluation") was undertaken by the
Company's Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, and; based upon that Evaluation, Company management, including
the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), has
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by the subject Form 10-KSB
Our CEO and our CFO reviewed with our management whether our need to restate our
financial results for the fiscal year ended December 31, 2004 affected their
conclusions, set forth under the caption Evaluation of Disclosure Controls and
Procedures in our Annual Report on Form 10-K for the year ended December 31,
2004, that our disclosure controls and procedures were effective as of that date
to ensure that required information is disclosed on a timely basis in our
reports filed or furnished under the Securities Exchange Act of 1934, as
amended.
In connection with this review, our CEO and CFO noted that our decision to
restate our financial results did not call into question whether the relevant
information was recorded, processed, summarized or reported within the time
periods specified in the SEC's rules and forms. It also did not involve any
issue about whether information required to be disclosed in the Form 10-KSB we
filed under the Exchange Act was accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure. Conversely,
the restatements resulted solely from reconsideration of a decision made by
management regarding how generally accepted accounting principles required the
classification of beneficial conversion rights accruing to certain equity
securities and of certain deferred compensation and the valuation of equity
securities issued for services rendered, two particular items of information,
that were properly recorded in our financial records and made available to our
management in a timely manner, to be classified and valued on our financial
statements. Our CEO and CFO do not find that management's subsequent decisions,
that its prior classification and valuation were not in accordance with
generally accepted accounting principles, raises any question about whether our
disclosure controls and procedures were effective to ensure that required
information was disclosed to them as appropriate to allow timely decisions
regarding required disclosure. Therefore, based on that review, our CEO and our
CFO determined that their prior conclusions, that our disclosure controls and
procedures were effective at December 31, 2004, had not changed.
We reported in a current report on Form 8-K today that we would be restating our
results for the fiscal year ended December 31, 2004. The restatements add
$276,530 to net losses prior to 2003, $315,450 to the net loss in 2003 and
$52,954 to the net loss in 2004. All amounts, however, have been offset by
similar credits to Paid-in Capital, and as a consequence there was no material
effect on total stockholders' equity. In addition, the reclassifications and
revaluations give rise to corrections in the reported dividends positions and
per-share earnings figures which again, however, do not materially affect total
stockholders' equity.
The decision to restate our results, comprised principally of reclassifying
beneficial conversion rights accruing to certain equity securities and of
certain deferred compensation and the valuation of equity securities issued for
services rendered, does not cause our management to change its conclusion,
described in its disclosures in Item 8a. Controls and Procedures contained in
our Annual Report on Form 10-K for the year ended December 31, 2004, that our
internal control over financial reporting was effective as of December 31, 2004.
The terms of accrued beneficial conversion rights and the number of securities
issued for the services rendered that are subject to the restatement were
visible and disclosed on the face of our financial statements. Although these
beneficial conversion rights were misclassified and the securities issued for
services were not correctly valued, we had employed this classification of these
beneficial conversion rights and valuation of the securities issued for services
rendered for a number of years. We previously received unqualified opinions on
our consolidated financial statements included in our Annual Report on Form
10-K.
During the financial closing and reporting process relating to the third quarter
of our 2005 fiscal year, we reviewed the classification of these beneficial
conversion rights and of certain deferred compensation and the valuation of the
securities issued for services rendered, and dialogued with RRBB about the
presentation. Based on these procedures, we reached the conclusion that the
classification of the beneficial conversion rights should be reclassified and
the valuation of the securities rendered for services rendered revalued was
appropriate. Subsequent to our third quarter review, we have reconsidered the
accounting treatment for beneficial conversion rights and valuation of the
securities issued for services rendered, and we now believe that beneficial
conversion rights and certain deferred compensation should be reclassified and
the securities issued for services rendered be revalued. The restatements
conform our financial statements to generally accepted accounting principles.
Under the circumstances, our management does not believe that the restatements
resulted from, or require a finding of, a material weakness in our internal
control over financial reporting.
That conclusion was discussed with, and approved by, the Audit Committee of our
Board of Directors.
Changes in Internal Control Over Financial Reporting
Our CEO and CFO also participated in an evaluation by our management of any
changes in our internal control over financial reporting that occurred during
the quarter ended December 31, 2004. That evaluation did not identify any
changes that have materially affected, or are likely to materially affect, our
internal control over financial reporting.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Registrant's
independent auditors during the last two years.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2004
As Restated - See Notes to Consolidated Financial Statements
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 55,993
------------
Total Current Assets 148,303
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 646,162
============
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 28,412,728
Accumulated (deficit) (28,873,115)
Deferred compensation (65,636)
------------
Total Stockholders' Equity (Impairment) (513,046)
------------
Total Liabilities and Stockholders' Equity (Impairment) $ 646,162
============
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
As Restated - See Notes to Consolidated Financial Statements
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 (see below) 748,646 781,849
Selling, general and administrative expenses 1,899,119 1,976,518
------------ ------------
Loss From Operations (2,687,402) (2,764,871)
------------ ------------
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 (2,751,174) (2,856,728)
Benefit from Income Taxes 214,618 203,397
------------ ------------
Net Loss $ (2,536,556) $ (2,653,331)
------------ ------------
Dividends on Preferred Shares $ (2,020,155) $ (145,075)
------------ ------------
Net Loss Applicable to Common Shareholders $ (4,556,711) $ (2,798,406)
============ ============
Net Loss Per Common Share (0.05) (0.04)
============ ============
Weighted Average of Common Shares Outstanding 96,968,697 66,962,744
============ ============
All of the stock-based compensation relates to selling, general and
administrative expenses.
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 2003 - As Restated - See Notes to Consolidated Financial
Statements
Cumulative Discount on
Convertible Preferred Preferred
Preferred Shares Shares Stock Common Stock
----------------------------- ---------------------------- ------------ ------------
Shares Amount Shares Amount Amount Shares
------------ ------------ ------------ ------------ ------------ ------------
Balances, January 1, 2003 195,968 $ 196 1 $ -- $ -- 56,395,817
Issuance of convertible
preferred stock pursuant to
private equity placements 130,834 131 -- -- (688,200) --
Issuance of convertible
preferred stock for services
performed and accr. Interest 7,405 7 -- -- (32,442) --
Issuance of preferred stock
pursuant to conversion of debt 19,593 20 -- -- (117,560) --
Repurchase of preferred stock (2,778) (3) -- -- -- --
Receipt of stock subscription
receivable -- -- -- -- -- --
Issuance of common stock
pursuant to conversion of debt -- -- -- -- -- 220,000
Issuance of common stock
pursuant to exercise of options -- -- -- -- 81,000 8
Issuance of common stock
pursuant to exercise of warrants -- -- -- -- -- 3,552,752
Issuance of common stock
pursuant to private equity
placements -- -- -- -- -- 9,122,171
Issuance of common stock
granted for private placement
finders' fees -- -- -- -- -- 30,000
Issuance of common stock
pursuant to conversion of
accounts payable -- -- -- -- -- 5620,533
Issuance of common stock for
services performed -- -- -- -- -- 3,828,035
Issuance of common stock for
compensation -- -- -- -- -- 1,000,000
Issuance of common stock for
stock awards -- -- -- -- -- 2,363,500
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 -- -- -- -- -- --
Recognition of expense on
deferred compensation -- -- -- -- -- --
Amortization of discount on
preferred stock -- -- -- -- 34,839 --
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2003 351,022 $ 351 1 $ -- $ (803,363) 77,213,808
============ ============ ============ ============ ============ ============
Total
Stock Additional Stockholders'
Subscriptions Paid in Accumulated Deferred Equity
Common Stock Receivable Capital Deficit Compensation (Deficit)
------------ ----------------------------- ------------ ------------ ------------
Amount
------------ ----------------------------- ------------ ------------ ------------
Balances, January 1, 2003 $ 5,640 $ (3,297) 21,178,540 $(21,517,997) $ -- $ (336,918)
Issuance of convertible
preferred stock pursuant to
private equity placements -- -- 1,447,471 -- -- 759,402
Issuance of convertible
preferred stock for services
performed and accr. Interest -- -- 111,067 -- -- 78,632
Issuance of preferred stock
pursuant to conversion of debt -- -- 235,100 -- -- 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 22 -- 21,978 -- -- 22,000
Issuance of common stock
pursuant to exercise of options -- 8,092 -- -- 8,100
Issuance of common stock
pursuant to exercise of warrants 355 -- 319,792 -- -- 320,147
Issuance of common stock
pursuant to private equity
placements 912 -- 646,480 -- -- 647,392
Issuance of common stock
granted for private placement
finders' fees 3 -- (3) -- -- --
Issuance of common stock
pursuant to conversion of
accounts payable 62 -- 41,055 -- -- 41,117
Issuance of common stock for
services performed 383 -- 316,013 -- (211,001) 105,395
Issuance of common stock for
compensation 100 -- 99,900 -- -- 100,000
Issuance of common stock for
stock awards 236 -- 211,344 -- -- 211,580
Issuance of common stock for
services performed -- -- 97,086 -- -- 97,086
Issuance of warrants for
services performed -- -- 110,698 -- -- 110,698
Net loss, year ended
December 31, 2003 -- -- -- (2,653,331) -- (2,653,331)
Dividends on convertible
preferred stock -- -- -- (110,237) -- (110,237)
Recognition of expense on
deferred compensation -- -- -- -- 39,457 39,457
Amortization of discount on
preferred stock -- -- -- (34,839) -- --
------------ ----------------------------- ------------ ------------ ------------
Balances, December 31, 2003 $ 7,721 $ -- 24,819,616 $(24,316,404) $ (171,544) $ (463,623)
============ ============================= ============ ============ ============
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 2004 - As Restated - See Notes to Consolidated Financial
Statements
Cumulative Discount on
Convertible Preferred Preferred
Preferred Shares Shares Stock Common Stock
----------------------------- ---------------------------- ------------ ------------
Shares Amount Shares Amount Amount Shares
------------ ------------ ------------ ------------ ------------ ------------
Balances, January 1, 2004 351,022 $ 351 1 $ -- $ (803,363) 77,213,808
Issuance of convertible
preferred stock pursuant
to private equity
placements 156,993 157 -- -- (935,960) --
Issuance of convertible
preferred stock for
services performed 1,900 2 -- -- (7,303) --
Issuance of convertible
preferred stock for
compensation 16,667 17 -- -- (100,000) --
Conversion of
convertible preferred
stock into common stock (333,392) (334) -- -- - 33,349,202
Issuance of common stock
for accrued bonus -- -- -- -- -- 196,680
Issuance of common stock
for stock awards -- -- -- -- -- 2,000,000
Issuance of common stock
pursuant to exercise of
options -- -- -- -- 250,000 25
Issuance of common stock
for rent -- -- -- -- -- 200,000
Issuance of common stock
pursuant to private
equity placements -- -- -- -- - 12,215,000
Issuance of common stock
granted for private
placement finders' fees -- -- -- -- -- 673,333
Issuance of common stock
for services performed -- -- -- -- -- 1,680,000
Issuance of common stock
for accrued interest -- -- -- -- -- 59,589
Issuance of options for
services performed -- -- -- -- -- --
Private placement
finders fees -- -- -- -- -- --
Net loss, year ended
December 31, 2004 -- -- -- -- -- --
Dividends on convertible
preferred stock -- -- -- -- -- --
Recognition of expense
on deferred compensation -- -- -- -- -- --
Amortization of discount
on preferred stock -- -- -- -- 1,846,626 --
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2004 193,190 $ 193 1 $ -- $ -- 127,837,612
============ ============ ============ ============ ============ ============
Total
Additional Stockholders'
Paid in Accumulated Deferred Equity
Common Stock Capital Deficit Compensation (Deficit)
------------ ------------ ------------ ------------ ------------
Amount
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2004 $ 7,721 $ 24,819,616 $(24,316,404) $ (171,544) $ (463,623)
Issuance of convertible
preferred stock pursuant
to private equity
placements -- 1,871,763 -- -- 935,960
Issuance of convertible
preferred stock for
services performed -- 35,401 -- -- 28,100
Issuance of convertible
preferred stock for
compensation -- 199,983 -- -- 100,000
Conversion of
convertible preferred
stock into common stock 3,334 (3,000) -- -- --
Issuance of common stock
for accrued bonus 20 19,648 -- -- 19,668
Issuance of common stock
for stock awards 200 224,800 -- -- 225,000
Issuance of common stock
pursuant to exercise of
options 2,475 -- -- 2,500
Issuance of common stock
for rent 20 23,980 -- -- 24,000
Issuance of common stock
pursuant to private
equity placements 1,222 1,176,828 -- -- 1,178,050
Issuance of common stock
granted for private
placement finders' fees 67 (67) -- -- --
Issuance of common stock
for services performed 169 139,281 -- -- 139,450
Issuance of common stock
for accrued interest 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 -- -- (2,536,556) -- (2,536,556)
Dividends on convertible
preferred stock -- -- (173,529) -- (173,529)
Recognition of expense
on deferred compensation -- -- -- 105,908 105,908
Amortization of discount
on preferred stock -- -- (1,846,626) -- --
------------ ------------ ------------ ------------ ------------
Balances, December 31, 2004 $ 28,412,728 $(28,873,115) $ (65,636) (513,046) $ 12,784
============ ============ ============ ============ ============
See notes to the consolidated financial statements.
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
RESTATEMENT OF RESULTS
The Company has restated its financial statements for the years ended
December 31, 2003 and 2004. The restated financial results reflect a
revision in its accounting procedures related to the valuation of
securities such as restricted stock and stock options and warrants issued
to non-employees for services performed during the years ended December
31, 2001 through December 31, 2003. These corrections also necessitated
the reclassification of certain equity positions in connection with
beneficial conversion rights to related warrants and shares of convertible
preferred stock issued in 2003 and 2004. Its original financial statements
reflected a valuation of such instruments based on the market price for
the Company's common stock, less a discount of 50% which in the Company's
opinion compensated for the trading nature of the market for the common
stock and the liquidity constraints associated with these securities. The
Company has reconsidered this valuation approach and is restating its
financial results, eliminating the 50% discount. The corrections for the
results of operations for years ended prior to December 31, 2004 resulted
in an adjustment of $(295,313) on Retained Deficit at January 1, 2004, as
previously reported. The impact of these adjustments of the Company's
financial results as originally reported is summarized below:
Year Ended December 31, 2003
----------------------------
As Reported As Restated
----------- -----------
Retained earnings (deficit) $(23,705,641) $(24,316,404)
Discount on Preferred Stock (630,896) (803,363)
Additional paid-in capital 23,950,614 24,819,616
Total stockholders' equity (impairment) (377,851) (463,623)
Working capital (deficiency) (968,183) (1,086,773)
Net (loss) (2,337,881) (2,653,331)
Loss per share (after dividends and amortization $ (0.04) $ (0.04)
of discount on Preferred Stock)
Year Ended December 31, 2004
----------------------------
As Reported As Restated
----------- -----------
Retained earnings (deficit) $(27,992,998) $(28,873,115)
Additional paid-in capital 27,499,793 28,412,728
Total stockholders' equity (impairment) (480,228) (513,046)
Working capital (deficiency) (977,831) (1,010,649)
Net (loss) (2,483,602) (2,536,556)
Loss per share (after dividends and amortization $ (0.04) $ (0.05)
of discount on Preferred Stock)
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.
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Steven D. Rudnik, certify that:
1. I have reviewed this amended Annual Report on Form 10-KSB of Magnitude
Information Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal controls over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: December 29, 2005 By: /s/ Steven D. Rudnik
--------------------------------------------
President and Chief Executive Officer
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Chapter 63, Title 18 USC Section 1350 (A) and (B)
I, Joerg H. Klaube, certify that:
1. I have reviewed this amended Annual Report on Form 10-KSB of Magnitude
Information Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal controls over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: December 29, 2005 By: /s/ Joerg H. Klaube
--------------------------------------------
Chief Financial Officer
[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.
As discussed in the footnote to the financial statements entitled "RESTATEMENT
OF RESULTS", certain errors resulting from improper valuation of securities
issued to non-employees during the years ended December 31, 2001, 2002 and 2003
and the related effect on warrant value allocation and recognition of beneficial
conversion features during the years ended December 31, 2003 and 2004 were
discovered by management of the Company during the current year. Accordingly,
the 2004 and 2003 financial statements have been restated and an adjustment has
been made to retained deficit as of January 1, 2003 and 2004 due to corrections
made for the years ended December 31, 2001 through 2003.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 2, 2005, except as to
RESTATEMENT OF RESULTS Note
as to which the date is October 26, 2005
Magnitude Information Systems, Inc.
Evaluation of Shares Available for Settlement of Preferred Stock Conversions
At December 31, 2003
Total Authorized Shares: 100,000,000
Total Issued Shares: 77,213,808
Total Authorized and Unissued: 22,786,192
Issuable at December 31, 2003
Series A Convertible Prfd. - 29,300 shares (each at Liquidation Price of $5
divided by 150% of market value of common on last twenty days prior 118,298
to date of the election to convert original note
Series B Convertible Prfd. - none outstanding --
Series C Convertible Prfd. - 100,000 shares convertible 10 for 1 1,000,000
Series D Convertible Prfd. - 63,890 shares convertible 10 for 1 638,900
Series E Convertible Prfd. - 157,832 shares convertible 100 for 1 15,783,202
Common Stock Options 12,480,808
Common Stock Warrants 11,973,018
------------
Total Shares Issuable 41,994,226
Less Total Authorized and Unissued (22,786,192)
------------
Sub-Total 19,208,034
Less: Series E Issuances - 2003 (not convertible for 6 months) (15,783,202)
Warrants issued with Series E (not exercisable) (8,041,599)
------------
Excess Shares Issuable (Authorized and Unissued) (4,616,767)
Magnitude Information Systems, Inc.
Evaluation of Shares Available for Settlement of Preferred Stock Conversions
At December 31, 2004
Total Authorized Shares: 200,000,000
Total Issued Shares: 127,837,612
Total Authorized and Unissued: 72,162,388
Issuable at December 31, 2004:
Series A Convertible Prfd. - 29,300 shares (each at Liquidation Price of $5
divided by 150% of market value of common or $0.13) 118,298
Series B Convertible Prfd. - none outstanding --
Series C Convertible Prfd. - 100,000 shares convertible 10 for 1 1,000,000
Series D Convertible Prfd. - 63,890 shares convertible 10 for 1 638,900
Series E Convertible Prfd. - none outstanding --
Common Stock Options 11,710,308
Common Stock Warrants 30,688,599
------------
Total Shares Issuable 44,156,105
Less Total Authorized and Unissued (72,162,388)
------------
Excess Shares Issuable (Authorized and Unissued) (28,006,283)