As filed with the Securities and Exchange Commission on February 15, 2007
Registration No. 333-138961
Registration No. 333-123996
Registration No. 333-118522
Registration No. 333-112595
Registration No. 333-73992
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
PRE-EFFECTIVE AMENDMENT NO.3 to
FORM SB-2 REGISTRATION STATEMENT
And
POST-EFFECTIVE AMENDMENT NO. 6 (Commission No. 333-123996)
POST-EFFECTIVE AMENDMENT NO. 7 (Commission No. 333-118522)
POST-EFFECTIVE AMENDMENT NO. 9 (Commission No. 333-112595)
POST-EFFECTIVE AMENDMENT NO. 12 (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)
-----------------------
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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1250 Route 28, Suite 309,Branchburg, New Jersey 08876
(908) 927-0004
(Address and telephone number of principal executive offices
and place of business)
Edward L. Marney, President
1250 Route 28, Suite 309
Branchburg, New Jersey 08876
(908) 927-0004
(Name, address and telephone number of
agent for service) With a copy to:
Joseph J. Tomasek, Esq.
77 North Bridge Street
Somerville, New Jersey 08876
(908) 429-0030
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462 (d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
Calculation Of Registration Fee
===============================================================================
PROPOSED PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE
TO BE TO BE PRICE PER OFFERING AMOUNT OF
REGISTERED(1) REGISTERED SHARE PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------
Common Stock 85,683,334 (1) $0.03(2) $2,570,500 $228.00 (3)
$.0001 par value
per share
- --------------------------------------------------------------------------------
Common Stock 39,328,417 (4) $0.03 (2) $1,179,852 $109.00 (3)
$.0001 par value
per share
.................................................................................
(1) New Common shares which we are registering for the first time with our
Form SB-2 registration statement, Commission File No. 333-138961.
(2) Estimated solely for the purpose of computing the registration fee
required by Section 6(B) of the Securities Act and computed pursuant to
Rule 457(C) under the Securities Act. Based upon the average of the high
and low prices of the common stock on November 22, 2006 as reported on the
Electronic Bulletin Board Over-The-Counter Market maintained by The
National Association of Securities Dealers, Inc.
(3) Previously paid.
(4) Common shares we are bringing forward by Rule 429 and which were included
in our previously filed Forms SB-2 registration statements, Commission
File No. 333-123996, Commission File No. 333-118522, Commission File No.
333-112595 and Commission File No. 333-73992.
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.
2
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 15, 2007
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Prospectus
Magnitude Information Systems, Inc.
75,646,885 Shares of Common Stock
------------
47,190,000 Shares of Common Stock
Underlying Common Stock Purchase Warrants
------------
2,174,866 Shares of Common Stock
Underlying Stock Option Grants
------------
This prospectus covers a total of 125,011,751 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. All of the
125,011,751 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 January 30, 2007 the average of the high and
low prices paid for our common stock was $0.04. See "Selling Shareholders" and
"Use of Proceeds".
You may contact us at our principal executive offices located at 1250
Route 28, Suite 309, Branchburg, New Jersey 08876 or by phone at (908) 927-0004.
INVESTMENT IN THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A HIGH DEGREE
OF RISK. YOU MAY LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CAREFULLY CONSIDERTHE
HIGH RISKS SET FORTH UNDER "RISK FACTORS" AT PAGE 7 OF THIS PROSPECTUS BEFORE
INVESTING.
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.
The date of this prospectus is February ___, 2007
You should rely only on the information contained in this prospectus. We have
not, and the selling shareholders have not, authorized anyone to provide you
with different information. If anyone provides you with different information,
you should not rely on it. We are not, and the selling shareholders are not,
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
3
Prospectus Summary
This Summary Is Qualified In Its Entirety By The More Detailed Information
Appearing Elsewhere In This Prospectus
The Company
We are a corporation that was organized under the laws of the State of Delaware
(the "Company" or "Magnitude") on April 19, 1988 under the name Fortunistics
Inc. On March 4, 1993, we changed our name to Whitestone Industries, Inc. On
July 14, 1997, the Company changed its name to Proformix Systems, Inc., and on
November 18, 1998, the Company changed its name to Magnitude Information
Systems, Inc.
The Company's primary product is an integrated suite of proprietary software
modules marketed under the name "ErgoManagerTM" which are designed to help
individual computer users and businesses increase productivity and reduce the
risk of potentially preventable repetitive stress injury (RSI). These software
modules can be applied individually or together in a comprehensive ergonomic and
early intervention program that seeks to modify a user's behavior by monitoring
computer usage patterns over time and warning the user when to break a dangerous
trend in repetitive usage of an input device, such as a keyboard or mouse. The
product was developed to train people working on computers, monitor computer-use
related activities and evaluate a user's risk exposure and propensity towards
injury or loss of effectiveness in connection with his/her day-to-day work.
Moreover, the software enables a company to not only address the issue of health
risks involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
Recently, Company management implemented a new business plan, sharply reducing
its overhead expense and restructuring its operations. The Company is engaged in
preliminary discussions to outsource the sales and customer support functions of
its software products. In conjunction with these efforts, the Company is
exploring new product acquisitions, mergers or partnership relationships with
suitable candidate enterprises.
Background
On June 24, 1997, the Company entered into an acquisition agreement whereby it
acquired substantially all of the outstanding stock of Proformix, Inc., a
Delaware corporation and manufacturer of ergonomic keyboarding systems.
Proformix, Inc. in November 1998 changed its name to Magnitude, Inc. and is
hereafter referred to as Magnitude, Inc. The business combination took the form
of a reverse acquisition. The Company and Magnitude, Inc. remain as two separate
legal entities whereby Magnitude, Inc. operates as a subsidiary of Magnitude
Information Systems, Inc.. The operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of Merger
with Rolina Corporation, a privately held New Jersey software developing firm,
and on April 30, 1998, into an Asset Purchase Agreement with Vanity Software
Publishing Co., a Canadian developer of specialized software, whereby the
Company, in return for payments in form of cash and equity, acquired the rights
to certain software products and related assets, with such software products
subsequently forming the basis for the further development during the year of
the Company's proprietary ErgoManagerTM software product.
4
The Offering
Securities Offered 125,011,751 shares of common stock, $.0001 par
value,including 47,190,000 shares of common stock
issuable upon the exercise of Warrants; and
2,174,866 shares of common Stock issuable upon the
exercise of stock options. See "Selling
Shareholders" at page 13.
Selling Shareholders The selling shareholders are identified in this
prospectus at page 13 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 13.
Plan of Distribution Up to 125,011,751 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 $6,657,053 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.
5
Securities Outstanding We are authorized to issue up to an aggregate
300,000,000 shares of common stock and 3,000,000
shares of preferred stock of which 227,235,472
common shares and 109,858 preferred shares were
issued and outstanding at December 29,2006. 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, an additional 49,364,866 common
shares, representing part of the shares being
registered, will be outstanding. Second, we have
in reserve an additional 2,890,142 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 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, 2005 and 2004 of
$2,218,257 and $2,308,948, respectively, and of
$3,221,018 for the nine month period ending
September 30, 2006. We will need additional
funding. No person should invest in our common
shares who cannot afford to risk the loss of his
or her entire investment. See "Risk Factors" at
page 7.
6
RISK FACTORS
You should carefully consider the risks described below when evaluating your
ownership of the Magnitude common stock. The risks and uncertainties described
below are not the only ones Magnitude faces. Additional risks and uncertainties
we are presently not aware of or that we currently consider immaterial may also
impair Magnitude's business operations.
If any of the following risks actually occurs, our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline significantly.
We Continue to Suffer Financial Losses in our Business.
We have a history of losses and if we do not achieve profitability we may not be
able to continue our business in the future. We have incurred substantial
operating losses since our inception, which has resulted in an accumulated
deficit of $31,167,065 as of December 31, 2005 of which approximately $7,000,000
are attributable to its discontinued hardware product line. For the fiscal years
ended December 31, 2005 and 2004, we incurred losses of $2,218,257 and
$2,308,948, respectively., and losses of $3,221,018 for the nine months ended
September 30, 2006. 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, 2005,
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 have recently 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, 2005 and 2004 were $189,552
and $ 121,886, respectively. For the nine months ended September 30, 2006, we
had revenues of only $41,622. 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,
2005, revenue from our software products has been approximately $2,194,000
(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, 2005, we had revenues from the sales of
software product licenses and support services of $189,552. 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.
7
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 Edward L. Marney,
our President and Chief Executive Officer. The loss of the services of Mr.
Marney 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. In addition to Mr. Marney, 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.
8
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. In
fact, we have had to assert our rights to a patent by suing a competitor on the
grounds of alleged infringement. See "Legal Proceedings", below.
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 third quarter of fiscal
year 2006, the average high sales price for our common stock traded in the
public market was $0.049 per share while the average low sales price during the
same period was $0.044 per share. Similarly, $0.076 was the average high and
$0.068 the average low trading prices of our stock during the third quarter of
2005.
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.
9
Possibility of Contingent Liability
In November, 2006, the Company filed this registration statement with the
Securities and Exchange Commission via the electronic EDGAR System, making it
publicly available. While the registration statement was still pending and being
reviewed, by the Securities and Exchange Commission, the Company engaged in two
settlement negotiations: the first was with our former CEO and President, Steven
D. Rudnik, pursuant to which we issued to him 13,861,875 Company securities in
exchange for an outstanding Company note in the approximate amount of $100,000,
accrued interest and a debt of $15,000, and; the second settlement was with our
former executive, Steven Jagels, pursuant to which we issued to him 3,000,000
shares in exchange for his claims against the Company arising under his
employment agreement. Due to the pending public offering at the time, these
transactions could not be deemed transactions by an issuer not involving a
public offering, and therefore could possibly have violated the private
placement offering rules. As a result, if the private offering exemption was not
available to the Company for these transactions they could be deemed integrated
with the public offering. The integration of these two transactions with the
pending public offering, would implicate a possible Section 5 violation under
the Securities Act which prohibits sales of securities while a public offering
is pending. If such a violation is found to have occurred, Messrs. Rudnik and
Jagels would have the legal right to rescind their settlement agreements during
the one year period following the consummation of these transactions.
Any Further Stock Issuances Could Depress Our Share Trading Price
Of the 125,011,751 common shares offered in this prospectus 75,646,885 common
shares have already been issued to the selling shareholders by January 7, 2007.
If the selling shareholders were to fully exercise their rights under their
warrants and stock options, converting them into the remaining 49,364,866 common
shares offered in this prospectus and then sell them, the market price of our
common stock could be materially adversely affected. As of January 30, 2007, the
substantial majority of the warrants had exercise prices above the current
market price of our common stock.
Market Overhang
As of January 30, 2007, we had 227,235,472 common shares outstanding. As of
January 30, 2007, we had 12,357,408 outstanding stock options, 52,273,333
outstanding common stock purchase warrants, 109,858 preferred shares convertible
into 2,423,865 common shares. If all the outstanding stock options, common stock
purchase warrants and convertible preferred shares were exercised and/or
converted by their holders an additional 67,054,606 common shares would be
outstanding; this would represent an approximate 30% 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
75,646,885 already issued 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.
10
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". 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 100 F Street, N.E., Washington,
D.C. 20005. 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., 1250 Route 28, Suite 309, Branchburg, New
Jersey 08876 or by phone at (908) 927-0004.
11
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 $6,657,053 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
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 $ 0.09 $ 0.16
Second Quarter $ 0.06 $ 0.11
Third Quarter $ 0.05 $ 0.08
Fourth Quarter $ 0.04 $ 0.08
2006 First Quarter $ 0.06 $ 0.12
second Quarter $ 0.05 $ 0.09
Third Quarter $ 0.03 $ 0.06
Fourth Quarter $ 0.03 $ 0.04
(b) Shareholders
As of January 30, 2007, 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.
12
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 December 26, 2006,
except where otherwise noted, 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.
Our Common Shares previously registered with the SEC, registration statement
Commission filing Nos: 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
- ------------------------- ---------------------- ------------------ ----------- -----------------
Blackburn, Theodore J. 766,667 500,000 21 **
Burgman, Sandra R. 340,000 120,000 21 **
Carrel, Rene 1,000,000 1,000,000 20 **
Christian, George 500,000 500,000 21 **
Cumming, Frederick 33,619 5,000 1 **
DeWolf, Keith G. 1,786,667 300,000 21 **
Ebony Finance Ltd. Trust 500,000 500,000 21 **
Emen, Barry 300,000 100,000 15 **
Friedmann, John A. 1,400,000 1,000,000 21 **
Friedman, Vicky 3,000,000 2,000,000 21 **
Green, David 3,666,700 2,000,000 21 **
Greenbaum, Leonard 1,000,000 1,000,000 21 **
Gray, Steven L. 5,614,096 1,729,718 6,7,10,12,16 1.1%
Grissom, Taylor B. 500,000 250,000 21 **
Haefeli, Theres 100,000 100,000 20 **
Hazard, Mark III 1,7000,000 1,500,000 15,21 **
Heuberger, Roland 395,000 70,000 15 **
Hinnen, Arvid 400,000 400,000 20 **
Hopmans, John 1,400,000 1,000,000 21 **
Janssen, Peter 1,000,000 1,000,000 21 **
Johnson, Wayne C. 5,000,000 2,500,000 21 **
Klaube, Joerg H 1,400,000 800,000 12 **
Koniak, Morris 4,250,000 3,000,000 21 **
Kroll, Seymour 119,866 119,866 1 **
Laett, Heinz 800,000 400,000 20 **
Langheck, Andreas 240,000 120,000 20 **
Lanktree, Charles T. 1,000,000 1,000,000 21 **
Lucas, Lawrence B. 250,000 83,333 15 **
Martin, Martin G. 13,000,000 100,000 1 4.8%
Marti, Christoph 5,300,000 5,300,000 15,20 **
Mollo, Dean J. 1,125,000 500,000 21 **
Oriente, David J. & Jennifer L. 1,000,000 500,000 21 **
Pensco Trust Company Inc Cust.
FBO Richard H. Keyes IRA 1,000,000 1,000,000 21 **
Rogivue, Nicholas 4,000,000 3,000,000 15,21 **
Roth, Russell 500,000 500,000 21 **
Schuerch, Ulrich 8,230,000 2,220,000 13,15,22 **
Schuerch, Kerstin 250,000 250,000 1 **
Shillan, Nannette 500,000 500,000 21 **
Stangel, Georg 200,000 200,000 1 **
Steeg, Oliver 30,000 30,000 15 **
Thornton, Robert 566,667 100,000 21 **
Tomasek, Joseph J. 2,513,833 880,500 12,18 **
Winthrop, Leslie 300,000 300,000 21 **
Zaroff, Michael 7,875,000 1,000,000 21,22 **
---------
39,328,417
13
Newly registered with this current filing
Name of
Selling Beneficial Holdings Common Shares Transaction % of Class
Security Holder Before the Offering Offered Hereby Note No. after Offering
- ------------------------- ---------------------- ------------------ ----------- -----------------
33 GrSoup LLC 12,500,000 12,500,000 24 **
Azzurri Group, LLC 12,500.000 12,500,000 24 **
Brasch, Fred A. 800,000 800,000 23 **
Coriell, Toby 400,000 400,000 25 **
Demar Investments LLC 5,000,000 5,000,000 23 **
DeCordova, Diane 220,000 120,000 25 **
DeSimone, Leslie 1,000,000 1,000,000 23 **
Franz, Gerald 220,000 120,000 25 **
Friedman, Vicky 3,000,000 1,000,000 23 **
Gray, Steven L. 5,614,096 1,550,000 25 1.1%
Janssen Partners 2,000,000 2,000,000 23 **
Johnson, Wayne C. 5,000,000 2,500,000 23 **
Jordan, Jerry 833,334 833,334 23 **
Keyes Family Trust 2,000,000 2,000,000 23 **
Kirshner, Richard M. 750,000 750,000 23 **
Koniak, Morris 4,250,000 250,000 23 **
Long, Wendy 500,000 500,000 23 **
Magnum Development of Venice Inc. 5,000,000 5,000,000 23 **
Martin, Martin G. 13,000,000 2,000,000 26 5.0%
Morton, James W. 3,459,923 3,333,334 23 **
Mollo, Dean J. 1,125,000 375,000 23 **
Oberst, Dale 700,000 700,000 23 **
Pisani, B. Michael 8,996,666 7,166,666 23,24 **
Rudnik, Steven D. 24,273,388 6,000,000 26 **
Schuerch, Ulrich 8,230,000 5,500,000 23 **
See, Craig A. 250,000 250,000 23 **
Shoemaker, John & Audrey 6,103,334 3,333,334 23 **
Spinosa, Dominic 1,500,000 1,500,000 23 1.3%
Tell Capital AG 660,000 660,000 25 **
Tomasek, Joseph J. 2,847,166 666,666 23 **
Zaroff, Michael 7,875,000 5,375,000 25 **
---------
85,683,334
** less than 1 percent
14
Description of selling security holders and certain transactions:
(1) Shares Underlying Non-Statutory Stock Options
The above table includes 674,866 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.
Cumming, Frederick 5,000
Kroll, Seymour 119,866
Martin, Martin G. 100,000
Schuerch, Kerstin 250,000
Stangel, Georg 200,000
(6) Private Placements Pursuant to Section 4(2)
The above table includes 600,000 shares previously registered on behalf of the
current chairman of the Company who purchased these shares pursuant to a private
placement subscription entered into in January 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 the
current chairman 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
10) Private Placements Pursuant to Section 4(2)
The Company is registering 180,000 shares which are part of a total of
14,152,704 shares previously registered. These 180,000 shares are registered on
behalf of the Company's current chairman of the board and were originally issued
pursuant to a private placement subscription entered into between the Company
and such investor in August, 2002.
Gray, Steven L 180,000
(12) Shares Issued Pursuant to Stock Awards
The Company is registering 1,400,000 shares, previously registered and issued to
three officers and directors of the Company, for services rendered during 2003.
Gray, Steven L 300,000
Klaube, Joerg H 800,000
Tomasek, Joseph J 300,000
(13) Shares Issued for Services
The Company is registering 1,500,000 shares underlying a non-statutory stock
option which had previously been registered. The stock option is exercisable at
$0.07 per share and expires in September 2007.
Schuerch, Ulrich 1,500,000
15
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.
15) Private Placements Pursuant to Section 4(2)
The Company is registering a total 1,083,333 shares which are part of 37,297,384
shares registered previously on behalf of 56 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. All 1,083,333 shares 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; 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.; 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.
Emen, Barry 100,000
Heuberger, Roland 70,000
Keyes Family Trust 250,000
Lucas, Lawrence B. 83,333
Marti, Christoph 300,000
Schuerch, Ulrich 500,000
Steeg, Oliver 30,000
(16) Shares Issued for Cancellation of Debt
The Company is registering a total 525,000 shares previously registered on
behalf of the Company's current chairman of the board against cancellation of
payables totaling $31,500.
Gray, Steven L. 525,000
(18) Shares Issued for Services and Interest
The Company is registering 580,500 shares previously registered on behalf of an
outside director of the Company who also serves as the Company's general and
securities counsel. 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. 580,500
(20) Private Placements Pursuant to Section 4(2)
The Company is registering a total 7,020,000 shares previously registered on
behalf of six private foreign investors pursuant to private placement
subscriptions entered into between the Company and such investors, between May
2004 and July 2004. These shares 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.
Carrel, Rene 1,000,000
Haefeli, Theres 100,000
Hinnen, Arvid 400,000
Laett, Heinz 400,000
Langheck, Andreas 120,000
Marti, Christoph 5,000,000
16
21) Private Placements Pursuant to Section 4(2)
The Company is registering a total 25,720,000 shares previously registered on
behalf of 23 private foreign and domestic investors and four assignees pursuant
to private placement subscriptions entered into between the Company and such
investors, between September 2004 and April 2005. 11,300,000 of these shares
have been issued outright and 14,420,000 underlie stock purchase warrants,
issued to these investors. The warrants are exercisable during three years at
the price of $0.15 per common share. Peter Prast is the individual who has
investment and voting control over the Company shares owned of record by Ebony
Finance Ltd. Trust.
Blackburn, Theodore J. 500,000
Burgman, Sandra R. 120,000
Christian, George 500,000
DeWolf, Keith G. 300,000
Ebony Finance Ltd.Trust 500,000
Friedman, Vicky 2,000,000
Friedmann, John A. 1,000,000
Green, David 2,000,000
Greenbaum, Leonard 1,000,000
Grissom, Taylor B. 250,000
Hazard, Mark 1,500,000
Hopmans, John 1,000,000
Janssen, Peter 1,000,000
Johnson, Wayne C. 2,500,000
Koniak, Morris 3,000,000
Lanktree, Charles T. 1,000,000
Mollo, Dean J. 500,000
Oriente, David J. & Jennifer L. 500,000
Pensco Trust Co. Inc. Cust FBO
Richard H. Keyes IRA 1,000,000
Rogivue, Nicholas 3,000,000
Roth, Russell 500,000
Shillan, Nannette 500,000
Thornton, Robert 100,000
Winthrop, Leslie 150,000
Zaroff, Michael 500,000
(22) Shares issued for services rendered
The above table includes 720,000 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.
Schuerch, Ulrich 220,000
Zaroff, Michael 500,000
(23) Private Placements Pursuant to Section 4(2)
The Company is newly registering a total 39,458,334 shares on behalf of
twenty-two private domestic and foreign investors pursuant to private placement
subscriptions entered into between the Company and such investors, between July
2005 and April 2006. 21,541,667 shares have been issued outright and 17,916,667
shares underlie stock purchase warrants, issued to these investors. The warrants
are exercisable during three years at the price of $0.08 per common share. One
of the investors is an outside director of the Company. The Company received an
aggregate $1,322,500 from these investments, less $16,500 paid to a foreign
finder. James Titus has voting and investment control over the shares owned of
record by Demar Investments LLC; Myron Gay has voting and investment control
over the shares owned of record by Magnum Development of Venice Inc.; Peter
Janssen has voting and investment control over the Company shares owned of
record by Janssen Partners.
17
Brasch, Fred A. 800,000
Demar Investments LLC 5,000,000
DeSimone, Leslie 1,000,000
Friedman, Vicky 1,000,000
Janssen Partners 2,000,000
Johnson, Wayne C. 2,500,000
Jordan, Jerry 833,334
Keyes Family Trust 2,000,000
Kirshner, Richard M. 750,000
Koniak, Morris 250,000
Long, Wendy 500,000
Magnum Development of Venice Inc.5,000,000
Morton, James W. 3,333,334
Mollo, Dean J. 375,000
Oberst, Dale 700,000
Pisani, B. Michael 2,166,666
Schuerch, Ulrich 5,500,000
See, Craig A. 250,000
Shoemaker, John & Audrey 3,333,334
Spinosa, Dominic 1,500,000
Tomasek, Joseph J. 666,666
(24) Private Placements Pursuant to Section 4(2)
The Company is newly registering a total 30,000,000 shares on behalf of three
domestic investors pursuant to private placement subscriptions entered into
between the Company and such investors in August 2006. The Company received
$600,000 from these investment, however, is obligated to pay certain legal
expenses on behalf of two of these investors, in form of 3,750,000 stock
purchase warrants exercisable at $0.0001 per share and 1,875,000 stock purchase
warrants exercisable at $0.05 per share. In addition, the Company is obligated
to pay finder's fees totaling $50,000 whereby, however, such fees may only be
paid out of future profits or future equity contributions. The investors are
also entitled to an aggregate 15,000,000 stock purchase warrants, exercisable
anytime during the three-year period, commencing February 18, 2007, at $0.05 per
share, such warrants to be issued on February 18, 2007. In the event the Company
has not issued the warrants to the investors by March 5, 2007, the Company will
be obligated to issue to these investors additional warrants in amounts equal to
1 %, or an aggregate 150,000 warrants, for each business day the warrants are
not delivered. In addition, the Company was obligated to register the common
shares issued to the investors and those underlying the warrants. The Company
has met this filing obligation but if the registration statement of which this
prospectus forms a part is not declared effective by the SEC on or before
February 21, 2007, the Company will be obligated to issue 45,000 addition shares
to each investor for each day thereafter the registration statement has not been
declared effective. Mark DiSimone has voting and investment control over the
Company shares owned of record by 33 Group LLC and Azzurri Group, LLC.
33 Group LLC 12,500,000
Azzurri Group, LLC 12,500.000
Pisani, B. Michael 5,000,000
(25) Shares issued for services rendered
The above table includes 8,225,000 shares newly registered on behalf of six
shareholders, one of which is the current chairman of the Company. 3,750,000 of
these shares underlie warrants exercisable at prices between $0.08 and $0.15 per
share. These securities have been issued as remuneration for management
consulting and for market research and investor relations services performed by
such beneficiaries. Ulrich Schuerch has investment and voting control over the
Company shares owned of record by Tell Capital AG.
Coriell, Toby 400,000
DeCordova, Diane 120,000
Franz, Gerald 120,000
Gray, Steven L. 1,550,000
Tell Capital AG 660,000
Zaroff, Michael 5,375,000
18
(26) Shares issued pursuant to August 8, 2006 settlement agreement.
Pursuant to a settlement agreement with our former CEO and President, Steven D.
Rudnik, Mr. Rudnik agreed to resign as an officer and director and agreed to
terminate his employment agreement in return for the issuance to him of
6,000,000 common shares. Pursuant to a further series of negotiations, on
December 15, 2006, the Company exchanged an aggregate 13,861,875 securities with
Mr. Rudnik for a Company note with an approximate outstanding principal balance
of $100,000, accrued interest due thereunder of approximately $10,000 and a
$15,000 payment due Mr. Rudnik under the August 8, 2006 agreement. The
securities exchanged and issued to Mr. Rudnik consisted of (i) 6,250,000 common
shares, (ii) 3,125,000 warrants to purchase common shares at the exercise price
of $.05 per share anytime during the three-year period, commencing February 18,
2007, (iii) 1,583,333 previously terminated warrants to purchase common shares
at the exercise price of $.10 per share anytime during the three-year period,
commencing February 18, 2007, and; (iv) 2,903,542 previously terminated stock
options to purchase common shares at the exercise price of $.10 per share
anytime during the three-year period commencing February 18, 2007. The Company
had pre-existing obligations to Mr. Rudnik to register the securities underlying
the Company Note as well as the replaced warrants and options and these
securities were included in prior Company registration statements. On January 2,
2007, we also settled a lawsuit with Steven W. Jagels, a former employee,
agreeing, among other things, to issue 3,000,000 common shares to him and
include them in this registration statement. See "Possibility of Contingent
Liability" in "Risk Factors", "Certain Relationships and Related Transactions"
and "Commitments and Contingencies" in "Management's Discussion and Analysis of
Financial Condition and Plan of Operations" sections of our prospectus for the
reasons why we withdrew the securities issued in these transactions from this
registration statement and for further information on these transactions. The
above chart also includes 2,000,000 shares issued to a shareholder pursuant to
an agreement entered into in August 2006 to settle a then outstanding liability
of $55,000.
Rudnik, Steven D. 6,000,000
Martin, Michael G. 2,000,000
SHARES ELIGIBLE FOR FUTURE SALE
This prospectus covers 125,011,751 common shares. As of January 30,2007, there
are 227,235,472 common shares issued and outstanding of which approximately
102,800,000 are freely tradable.
Upon the effectiveness of this registration statement, (a) an additional
75,646,885 common shares already issued and (b) 49,364,866 common shares
underlying stock options and warrants, if exercised, will result in those shares
also being freely tradable.
In addition to our registration statement referenced above, the approximately
17,000,000 remaining shares of common stock presently outstanding that are
restricted and/or affiliate securities and not included in this prospectus as
well as 2,423,865 common shares underlying the issued and outstanding
convertible preferred stock, 375,000 common shares underlying outstanding
warrants, and 7,278,000 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.
19
In general, under Rule 144 as currently in effect, a person (or group of persons
whose shares are aggregated), including affiliates of the Company, can sell
within any nine month period, an amount of restricted securities that does not
exceed the greater of 1% of the total number of outstanding shares of the same
class, or the reported average weekly trading volume during the four calendar
weeks preceding the sale; provided at least one year has elapsed since the
restricted securities being sold were acquired from the Company or any affiliate
of the Company, and provided further that certain other conditions are also
satisfied. If at least two years have elapsed since the restricted securities
were acquired from the Company or an affiliate of the Company, a person who has
not been an affiliate of the Company for at least three months can sell
restricted shares under Rule 144 without regard to any limitations on the
amount. Future sales by current shareholders could depress the market price of
the Common Stock in the public market.
20
PLAN OF DISTRIBUTION
This Prospectus and the registration statements in which it is included relate
to the offer and sale of up to an aggregate 125,011,751 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. On December 22, 2006, the Company, in order to
avoid the increasing costs of litigation, settled this lawsuit with Niche
without any admission of infringement and before any determination of
infringement was made.
21
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
The names and ages of all directors and executive officers of the Company are as
follows:
Name Positions Term Served (Expires)
- -------- --------------- ----------------------
Edward L. Marney Director
President, Chief Executive May 5, 2006
Officer
Director
Joerg H. Klaube Sr. Vice President, Secretary, December 2, 2005
Chief Financial Officer
Steven L. Gray Director
Chairman of the Board August 30, 2006
Joseph J. Tomasek Director Feb. 11, 1999 (2006)
All Directors of the Company hold office until the next annual meeting of the
shareholders and until successors have ben 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.
Edward L. Marney, Age 49 - Director, President and Chief Executive
Officer. Mr. Marney joined Magnitude, Inc. in May 2006 and was appointed a
director in August 2006. From 2003 to 2006, Mr. Marney was Managing Director of
Triad Partners, LLC, a privately held investment company. Prior to that from
2001-2003 Mr. Marney was Vice President, Business Intelligence at Medical
Manager/WebMD Corporation. Mr. Marney founded TouchPoint Software Corporation in
1994 and served as its CEO & President until its acquisition by WebMD
Corporation in 2001. Prior to that Mr. Marney served in various marketing and
sales roles at Medical Information Technology and Burroughs Corporation. He
graduated with a B.S. from the Whittemore School of Business and Economics at
the University of New Hampshire.
Joerg H. Klaube, Age 65 - Director and 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.
Joseph J. Tomasek, Age 59 - 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 57 - 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.
Family Relationships
There are no family relationships between any of the directors or executive
officers.
22
EXECUTIVE COMPENSATION
2006 SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation and executive capacities
for the fiscal years ended December 31, 2006 and December 31, 2005, for the
chief executive officer and for each executive officer whose aggregate cash
remuneration exceeded $100,000, for all executive officers as a group, and for
certain other most highly compensated employees:
(1)
Non-Equity All
Incentive Non-Qualified Other
Stock Option Plan Deferred Compen
Name and Principal Salary Bonus Awards Awards Compensation Compensation sation Total
Position Year ($) ($) ($) ($) ($) Earnings ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- --------------------------------- ---- ------- ----- ------ ------ ------------ ------------- ------- -----
Edward L. Marney 2006 86,538 - - - 5,950 92,488
Chief Executive
Officer,
President
Steven D. Rudnik 2006 64,788 - 577,105 - - 45,000 686,893
Former Chief Executive Officer, 2005 33,333 - - - - 157,639
President
Mark Chroscielewski 2006 82,185 - - - - 82,185
Former Sr. Vice President 2005 125,000 - - - 12,900 137,900
Business Development
Joerg H. Klaube 2006 61,376 - - - 2,626 64,002
Sr. Vice President, 2005 117,308 - - - 12,203 129,511
CFO
Steven W. Jagels 2006 61,875 - - - - 61,875
Former Sr. Vice President 2005 108,333 - - - 13,556 121,889
Information Systems
Joseph J. Tomasek, Esq., Director 2006 - - - - 96,121 96,121
and General Legal Counsel 2005 - - - - 131,140 131,140
Legal Fees:
Steven Gray 2006 30,000 - - - 87,167 117,167
Director
All executive officers 2006 147,914 - - - 8,576 156,490
As a group (2 persons) 2005 117,308 - - - 12,203 12,203
23
Explanation: No current Company officer or employee has an employment agreement
with the Company. All of the items of compensation paid to the officers and
directors listed in the above Summary Compensation Table are discussed in the
following paragraphs, under the individual officer's or director's name.
Edward L. Marney; 2006. Ed Marney joined the Company in May, 2006, becoming
first our Chief Executive Officer, then our President and a director. We paid
Mr. Marney a cash salary of $86,538 and reimbursed $5,950 of healthcare payments
to him during 2006.
Steven D. Rudnik; 2006 and 2005. We paid our former CEO and President, Steven D.
Rudnik, a cash salary of $64,788 during fiscal year 2006. On August 8, 2006, Mr.
Rudnik terminated his employment agreement with us in exchange for 6,000,000
restricted common shares and aggregate cash payments of $60,000. The aggregate
amount of compensation of $577,105 included in the "Stock Awards" column above,
includes these 6,000,000 restricted common shares which we valued at $.04 per
share, the average public market price of the Company's common stock on the date
of this settlement agreement, August 8, 2006. On December 15, 2006, the Company
negotiated a second agreement with Mr. Rudnik, pursuant to which the Company
exchanged (i) 6,250,000 common shares, which we valued at $.03 per share, the
average public market price of the Company's common stock on the date of the
exchange agreement, December 15, 2006, (ii) 3,125,000 common stock purchase
warrants, exercisable over the 3-year period commencing January 18, 2007 and
exercisable at an exercise price of $.05 per common share, which we valued at
$83,750 (iii) 1,583,333 common stock purchase warrants, exercisable over the
3-year period commencing January 18, 2007 and exercisable at an exercise price
of $.10 per common share, which we valued at $23,592 and (iv) 2,903,542 common
stock options, exercisable over the 3-year period commencing January 18, 2007 at
the stock option exercise price of $.10 per common share, which we valued at
$42,263, for a Company promissory note in the approximate principal amount of
$100,000, approximately $10,000 of accrued interest thereunder and a $15,000
debt.
In addition, the amount of "All Other Compensation" represents cash payments of
$45,000 made by the Company in connection with the August 8, 2006 settlement
agreement and $3,250 paid by the Company for Mr. Rudnik's life insurance.
During fiscal year 2005, the Company agreed to convert $100,000 of Mr. Rudnik's
cash salary into 1,000,000 restricted common shares and 1,000,000 common stock
purchase warrants, exercisable over the 3-year period, commencing on June 8,
2005, and exercisable at the exercise price of $0.15 per common share. In
addition, this amount includes Company payments of $21,056 for car payments and
$3,250 representing payments made for Mr. Rudnik's life insurance.
Mark Chroscielewski; 2006 and 2005: During fiscal year 2006, the Company paid
this former executive $82,185 in Salary. During 2005, we paid Mr. Chroscielewski
a cash salary of $125,000 and in the column "All Other Compensation" above for
2005, we made car payments on his behalf in the aggregate amount of $4,000 and
insurance premium payments of $8,900.
Joerg H. Klaube 2006 and 2005. We paid our Chief Financial Officer a cash salary
of $ 61,376 during 2006 and in the column "All Other Compensation" in the above
table for 2006,life insurance premium payments on this executive's behalf in the
amount of $2,626. During fiscal year 2005, the Company paid Mr. Klaube cash
salary of $117,308 and as indicated in the column "All Other Compensation" in
the above table for 2005, we made life insurance premium payments on this
executive's behalf in the amount of $2,626 and car payments in the amount of
$9,577.
Steven Jagels 2006 and 2005: We paid this former executive a cash salary of
$61,875 during 2006. During fiscal year 2005, the Company paid Mr. Jagels a
salary of $108,333 and as indicated in the column "All Other Compensation" in
the above table for 2005, we made life insurance premium payments on this
executive's behalf in the amount of $1,940 and car payments in the amount of
$11,616.
Joseph J. Tomasek 2006 and 2005: During fiscal years 2006 and 2005, the Company
paid $ 96,121 and $ 131,140, respectively, to Mr. Tomasek for his legal services
rendered to the Company.
Steven Gray 2006. During fiscal year 2006, we issued an aggregate 1,550,000
restricted common shares and 500,000 common stock purchase warrants to Mr. Gray
for services rendered to the Company. During 2006, Mr. Gray assisted the Company
in its change of management, providing day-to-day assistance in operations,
customer relations including, interviewing potential candidates for management
positions and coordinating the various audit schedule and management review
projects. As set forth in the column "All Other Compensation" in the above table
for 2006, we valued the 1,550,000 restricted common shares based upon their
average public market trading price as of the dates we issued these shares to
Mr. Gray, totaling $73,000 and thw 500,000 warrants at $14,450, based upon a
formula called the Black Sholes Model.
24
Stock Options and Stock Option Plans:
No stock options or other grants were made to any eligible participants,
including employees during fiscal years 2006 and 2005 pursuant to the Company's
1997 Stock Option Plan or the Company's 2000 Stock Incentive Plan.
1997 Stock Option Plan:
The Company's 1997 Stock Option Plan (the "1997 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.
As adopted, the 1997 Plan permits the grant of stock options to
employees, directors and key consultants of the Company. It provides for the
issuance of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code and non-qualified stock options. The 1997 Plan provides
for options covering up to an aggregate 1,000,000 shares of Common Stock. The
1997 Plan was approved by the Company's stockholders. There are no available
shares of common stock under the 1997 Plan.
The 1997 Plan is administered by the Board of Directors. Each option is
evidenced by a written agreement in a form approved by the Board of Directors.
No options granted under the 1997 Plan are transferable by the optionee other
than by will or by the laws of descent and distribution, and each option is
exercisable, during the lifetime of the optionee, only by the optionee.
Under the 1997 Plan, the exercise price of an incentive stock option must be at
least equal to 100% of the fair market value of the Common Stock on the date of
grant (110% of the fair market value in the case of options granted to employees
who hold more than ten percent of the voting power of the Company's capital
stock on the date of grant). The exercise price of a non-qualified stock option
must be not less than 85% of the fair market value of the Common Stock on the
date of grant. For both incentive stock options and non-qualified stock options,
the exercise price must not be less than the par value of a share of the Common
Stock on the date of grant. The term of any stock option is not to exceed ten
years (five years in the case of an incentive stock option granted to a ten
percent holder). The Board of Directors has the discretion to determine the
vesting schedule and the period required for full exercisability of stock
options; however, in no event can the Board of Directors shorten such period to
less than six months. Upon exercise of any option granted under the 1997 Plan,
the exercise price may be paid in cash, and/or such other form of payment as may
be permitted under the applicable option agreement, including, without
limitation, previously owned shares of Common Stock.
2000 Stock Incentive Plan
The 2000 Incentive Stock Plan (the "2000 Plan") permits the grant of
stock options, stock appreciation rights and stock grants to employees,
directors and key consultants of the Company. It provides for the issuance of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code as well as non-qualified stock options. It also provides for the
grant of stock appreciation rights, either alone or in tandem with other grants,
and restricted stock grants. The 2000 Plan provides for grants covering up to an
aggregate 5,000,000 shares of Common Stock. The 2000 Plan was approved by the
Company's stockholders. There are no available shares of common stock under the
2000 Plan.
The 2000 Plan, as with the 1997 Plan, is administered by the Board of
Directors. Each award or grant is evidenced by a written agreement in a form
approved by the Board of Directors. No awards granted under the 2000 Plan are
transferable by the recipient other than by will or by the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
recipient, only by the recipient.
25
Under the 2000 Plan, the exercise price of an incentive stock option must be at
least equal to 100% of the fair market value of the Common Stock on the date of
grant (110% of the fair market value in the case of options granted to employees
who hold more than ten percent of the voting power of the Company's capital
stock on the date of grant). The exercise price of a non-qualified stock option
may be fixed by the Board of Directors. For incentive stock options, the
exercise price must not be less than the 100% of the fair market value of the
Common Stock on the date of grant. The term of any stock option is not to exceed
ten years (five years in the case of an incentive stock option granted to a ten
percent holder). The Board of Directors has the discretion to determine the
vesting schedule for any awards or grants issued as well as and the period
required for full exercisability of stock options; however, in no event can the
Board of Directors shorten such period to less than six months. Upon exercise of
any option granted under the 2000 Plan, the exercise price may be paid in cash,
and/or such other form of payment as may be permitted under the applicable award
agreement, including, without limitation, previously owned shares of Common
Stock.
Outstanding Equity Awards At Fiscal Year-End Table
Equity Market
Number of Number of Incentive Plan Number of Value of
Securities Securities Awards: Number Shares or Shares or
Name and Underlying Underlying of Underlying Units of Units of
Principal Unexercised Unexercised Unexercised Option Option Stock That Stock
Position Options Options Unearned Exercise Expiration Have Not That Have
Name Exercisable Unexercisable Options Price Date Vested) not Vested
- ------------------------- ----------- ------------- -------------- -------- ----------- ---------- ----------
Edward L. Marney
Chief Executive
Officer,
President
Steven D. Rudnik 2,903,542 - $ 0.10 1/6/10 - -
Former Chief Executive
Officer,
President
Mark Chroscielewski - - -
Former Sr. Vice President
Business Development
Joerg H. Klaube - - -
Sr. Vice President,
CFO
Steven W. Jagels 250,000 - $0.1325 2/18/07 - -
Former Sr. Vice President
Information Systems
Joseph J. Tomasek, Esq.,
Director and General
Legal Counsel
Steven Gray 500,000 $ 0.15 1/01/09
Director
All executive officers 500,000 - - -
As a group (2 persons)
Equity
Incentive
Plan
Awards:
Market
Or
Payout
Value
Equity of
Incentive Unearned
Awards Shares, Units
Shares, Units or
Or Other Other
Name and Rights Rights
Principal That That Total
Position Have Not Have ($)
Name Vested Not Vested (j)
- ------------------------- ------------- ------------- -----
Edward L. Marney -
Chief Executive
Officer, -
President
Steven D. Rudnik
Former Chief Executive
Officer,
President
Mark Chroscielewski 8,400
Former Sr. Vice President
Business Development
Joerg H. Klaube 1,710
Sr. Vice President,
CFO
Steven W. Jagels 1,940
Former Sr. Vice President
Information Systems
Joseph J. Tomasek, Esq.,
Director and General
Legal Counsel
Steven Gray
Director
All executive officers
As a group (2 persons)
26
Compensation of Directors:
The Company has not paid nor does it owe any compensation to any of its
Directors for their service as directors and members of the Board of Directors
during the past two fiscal years of 2006 and 2005.
CORPORATE GOVERNANCE AND CODE OF ETHICS
The Company has always been committed to good corporate governance. In
furtherance of this commitment, during 2002 the Board of Directors expanded the
duties of the Company's Audit Committee by increasing the Committee's duties
specifically to include responsibility and oversight of corporate governance
matters and adherence to the Company's Code of Ethics. A copy of the Corporate
Code of Ethics and Conduct had been included as an exhibit to the Company's
report on Form 10-KSB for the year ended December 31, 2002.
Our Board of Directors has determined that none of its current members,
Edward L. Marney, Joerg H. Klaube, Joseph J. Tomasek and Steven Gray, are
independent in accordance under applicable securities laws. It is the intention,
however, of the Board of Directors, to identify and appoint independent
directors in the current fiscal year.
Board Committees
AUDIT COMMITTEE
The Company has appointed an Audit Committee in accordance with the
provisions of the Sarbanes-Oxley Act of 2002. The Audit Committee is currently
comprised of one director, Steven. Gray, who is a financial expert with
knowledge of financial statements, generally accepted accounting principles and
accounting procedures and disclosure rules. Mr. Gray is not "independent" as
defined in Section10A-3(b)(1)(iv)(A) of the Securities Exchange Act. Our Board
of Directors intends to appoint additional independent members to this Audit
Committee.
27
COMPENSATION AND NOMINATING COMMITTEES
Our board of directors intends to appoint such persons and form such
committees as are required to meet the corporate governance requirements imposed
by the national securities exchanges. Therefore, we intend that a majority of
our directors will eventually be independent directors. Additionally, our board
of directors is expected to appoint a nominating committee and a compensation
committee, and to adopt charters relative to each such committee. Until further
determination by the Board, the full Board of Directors will undertake the
duties of the compensation committee and nominating committee.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of November 15, 2006, 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
Stock Steven L. Gray 5,614,096 (2) 2.5%
Joerg H. Klaube 1,400,000 0.6%
Joseph J. Tomasek 2,847,166 (3) 1.1%
Edward L. Marney 0
Address of all persons above: c/o the Company.
All Directors and Executive Officers 9,861,262 4.3%
as a Group (4 persons)
Michael G. Martin 13,000,000 (4) 5.7%
12 Tillman Ct, Bridgewater, NJ 08807
33 Group LLC 12,500,000 5.7%
3589 NW 61 Circle, Boca Raton, FL 33496
Azzurri Group, LLC 12,500,000 5.7%
3589 NW 61 Circle, Boca Raton, FL 33496
Steven D. Rudnik 24,273,388 (5) 10.4%
)* The Company also has issued and outstanding as of November 15, 2006, 109,857
shares of its Senior Convertible Preferred Stock, with concentrations in excess
of 10% for one or more of the holders of such stock, however, none of such
shares bear any voting rights.
- ----------------------------
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of Common Stock which such
person has the right to acquire within 60 days of November 15, 2006.
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 stock options for 500,000 shares.
(3) Includes warrants for 333,333 shares.
(4) Includes stock options for 750,000 shares.
(5) Includes stock options for 2,903,542 shares and warrants for 4,708,333
shares.
28
DESCRIPTION OF CAPITAL STOCK
Magnitude is currently authorized by its Certificate of Incorporation to issue
an aggregate 303,000,000 shares of capital stock, including 300,000,000 shares
of common stock, $.0001 par value per share of which 227,235,472 were issued and
outstanding as of January 30, 2007 and 3,000,000 shares of Preferred Stock,
$0.01 par value per share of which 109,857 shares have been designated as
Cumulative Preferred Stock, par value $0.0001 per share, of which 1 share was
outstanding as of January 30, 2007 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 January 30, 2007
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 January 30, 2007, 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 no shares were outstanding as of January 30, 2007;
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 shares
were issued and outstanding as of January 30, 2007 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 16,667 shares were issued and
outstanding as of January 30, 2007.
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 therefore. 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 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.
29
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 December 26, 2006, 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.
30
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 December 26, 2006, there were outstanding 217,841,763 Common Shares, 1
Cumulative Preferred Share, and 109,857 Convertible Preferred Shares.
Narrative Description of Business
Magnitude Information Systems, Inc. is a pioneer and leader in the ergonomic
productivity software market. With its Anti-Injury(TM) software as represented
by ErgoEnterprise(TM), an interactive suite of Windows(TM) software products,
Magnitude has developed and delivered the first integrated systems approach to
computer ergonomics. The Company's patented proprietary software products
provide business and government employers with a complete system for the
evaluation and management of ergonomic and productivity risk factors with
respect to the use of computers in the office environment. ErgoEnterprise(TM) is
designed to help employers minimize preventable Repetitive Stress Injuries
("RSI") and enhance productivity through:
o Real-time monitoring of keyboarding activities to ensure proper posture
and work pacing.
o Pro-active dialogue with at-risk employees, including surveys and
training in the best practices for wellness and productivity.
o Strategic profiling and the management of computer use throughout an
organization to employ best practices and to measure health, safety,
and performance results.
o Computer workstation assessment tools.
We have received a patent from the U.S. Patent and Trademark Office
relative to certain core inventions within the ErgoEnterprise(TM) system and we
have applied for several more patents for our products.
As the utilization of computers in the office has increased
significantly in the last decade, so has the rate of health problems believed to
be related to the use of computers. Computer ergonomics focus on optimizing the
design of technology involved in the utilization of computers in the office, and
also attempts to affect the manner in which people interact with computers, so
as to minimize the associated health risks. A successful technology delivery
system positively impacts the cost of doing business by improving the comfort,
productivity, job satisfaction and safety of the computer user, while reducing
the costs of absenteeism and work related disability.
Repetitive stress injury (RSI) is a classification of diseases caused
by the excessive use of joints. It is a sub-classification of Cumulative Trauma
Disorders (CTDs). RSI accounts for a large portion of work-related illnesses,
and the incidence of RSI is expected to grow as the number of people operating
keyboards increases. The impact of RSI is measured not only in the pain and
suffering of its victims, but also in time lost from work, and medical costs.
The Company's software products are designed to help businesses deal with
potentially preventable repetitive stress injuries, by real-time monitoring of
keyboarding activities, pro-active dialog with at-risk employees, and strategic
profiling and management of computer use throughout an organization.
A study released in January 2001 by the National Academy of Sciences,
originally commissioned by Congress and produced by the National Research
Council, finds that work-related back, hand and wrist injuries affect about 1
million U.S. workers every year. The total cost of the resultant disorders is
between $45 billion and $54 billion in compensation, lost wages and lower
productivity. Increased awareness of the health risks and associated costs led
the State of California several years ago implement an ergonomic regulation
which directs qualifying employers to establish and maintain a program designed
to minimize RSI's. Such program shall include work-site evaluation, control of
the exposures that have caused RSI's, and training of employees. State agencies
and employers in California face fines of up to $25,000 per incident for
violating these regulations. The State of Washington adopted similar regulations
in 2000, and other states have indicated a willingness to follow suit. The
Company believes that the growing recognition of these trends will give rise to
a rapidly expanding market for the Company's products.
31
The Industry
The Company operates in only one business segment: the development,
marketing, and licensing of risk aversion and productivity enhancement software
products for the computerized workplace environment. More specifically, the
Company licenses highly sophisticated and proprietary software that provides
computer based training, work pacing and monitoring tools, as well as a computer
workstation assessment tool.
Potential customers for the Company's products are businesses of all
sizes, as well as organizations and government departments and agencies that
employ many staff in computer-related functions. The software industry in
general is comprised of a remarkable variety of providers, ranging from small
boutique-type designers to large international corporations. The industry is
characterized by great dynamics, patterns of rapid growth and well-known success
stories, but also by a high degree of volatility and risk.
The Company operates primarily in the United States of America,
however, has introduced French and Portuguese language versions of its software
products for the European and Brazilian markets, and will shortly introduce
other language versions. The Company has not yet derived any material revenues
from the licensing or sale of its software products in foreign markets.
Products, Trademarks
The Company's current primary product is a suite of nine proprietary
software modules marketed under the name ErgoEnterprise(TM) which are designed
to help individual computer users and businesses deal with potentially
preventable repetitive stress injury (RSI). The nine software modules can be
applied individually or together in a comprehensive ergonomic and early
intervention program that seeks to modify a user's behavior by monitoring
computer usage patterns over time and warning the user when to break a dangerous
trend in repetitive usage of an input device, such as a keyboard or mouse. The
product was developed to train people working on computers, monitor computer-use
related activities and evaluate a user's risk exposure and propensity towards
injury or loss of effectiveness in connection with his/her day-to-day work.
Moreover, the package enables a company to not only address the issue of health
risks involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
The system is highly customizable for management, staff and employees.
All components operate on any PC or workstation running the Microsoft Windows
operating system. ErgoEnterprise(TM) is the first suite of software solutions
that combines ergonomic remediation and productivity enhancement tools. Its nine
component modules are described as follows:
ErgoTutor(TM) delivers a complete office ergonomics training course directly to
employees at their desktop, and provides employees with clear initial awareness
training as well as follow-up training for reinforcement of previously learned
materials.
ErgoSURE(TM) is a postural assessment tool designed to allow the evaluation of
employee posture while working at computers. It is an electronic version of the
internationally accepted RULA (Rapid Upper Limb Assessment) system. This system,
developed at the University of Nottingham's Institute for Occupational
Ergonomics in the U.K., allows users to survey a broad range of computer-related
work activities involving repetitive motions, allowing the user to detect - and
remedy - hazardous situations and conditions.
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.
32
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.
- ----------
(1) Hedge, A. "Effects of Ergonomic Management Software on Employee
Performance." Cornell Human Factors Laboratory Technical Report /SP7991,
Cornell University, July 1999.
33
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.
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 $217,067 for the year ended December 31, 2005, and
$221,000 for the year ended December 31, 2004.
34
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.
Current Business Restructure Plan
Company management has embarked on a strategic repositioning of the
Company's business. Currently, the Company is exploring product acquisitions as
well as a merger or partnership with suitable candidate enterprises. The Company
has established a network of relationships with Fortune 1000 clients over the
years and is seeking to leverage these assets with additional product and
network relationships. In addition, the Company is discussing the outsourcing of
its sales and customer support functions for its ergonomic software products.
See "Management Discussion and Analysis" below.
EMPLOYEES
As of December 26, 2006, the Company employed 4 persons, of whom two were
primarily engaged in sales and marketing, and two in general administrative and
managerial functions. The Company has no collective bargaining agreements with
its employees.
PROPERTIES
On September 1, 2006, the Company entered a three year lease (which can be
terminated by either party after 12 months) for approximately 850 square feet of
office space at 1250 Route 28, Suite 309, Branchburg, New Jersey. This lease
agreement calls for a base rental payment of $1,103 per month plus
utility/cam/property tax charges of approximately $600 per month, with nominal
increases after years two and three.
35
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 Nine Months Periods Ended September 30, 2006 and
2005:
Company management is continuing the restructuring of Magnitude's operations and
business goals. Management has implemented a multi-pronged plan that has sharply
reduced cash outflow while exploring product acquisitions, mergers or
partnership relations with potential suitable candidate enterprises.
In line with these efforts, the Company undertook staff reductions in some areas
and relocated its principal office from Chester, New Jersey to Branchburg, New
Jersey. For example, facility expense was reduced from $10,000 per month to
$1,750 per month. These measures resulted in significant reductions of operating
expenses.
Company management is in preliminary discussions with several potential
strategic partners whose businesses and products would either compliment our
current product offerings or present new product and business opportunities.
Management is also exploring the licensing of its ergonomic software products
and customer maintenance contracts to third parties.
Revenues for the quarter totaled $9,468, compared to the $86,027 achieved in the
third quarter of 2005. The nine months figures were $41,622 and $150,860 for
2006 and 2005, respectively. Period revenues were entirely derived from software
support services; no software license contracts were concluded.
Gross profits for the quarter amounted to negative $26,902, including 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. After deducting selling- and general and
administrative expenses, stock-based compensation and R&D expenses of $1,240,989
which significantly exceeded the $557,567 recorded in 2005 the Company realized
a loss from operations of $1,267,891, compared to an operating loss of $507,912
in the third quarter in 2005. The increase in expenses was primarily due to
stock-based compensation and other non-cash expenditures paid for in form of
stock and/or warrants and included $520,522 and $60,000 to be paid in form of
securities and cash, respectively, to the former chief executive officer (see
Note 15). Aside from the before-mentioned, the operating expenses for the
quarter, however, compare favorably with the second quarter total of $1,076,970,
reflecting significant savings realized as a consequence of lower staffing
levels and expense reductions in other areas. Non-operating income and expenses
included $43,146 net interest expense and a credit of $51,560 for the change in
value of derivative liabilities. The period result was a net loss of $1,259,833
compared to a loss of $511,908 for the same period in 2005. The corresponding
nine months result was a net loss of $3,221,018 compared to a loss of $1,700,502
for the nine months ended September 30, 2005.
After accounting for dividend accruals on outstanding preferred stock which
totaled $12,630 the net loss for the quarter applicable to common shareholders
was $1,272,463 or $0.007 per share, compared to a loss of $540,228 or $0.004 per
share for the same quarter in the previous year, and $3,748,912 or $0.023 per
share and $1,785,641 or $0.013 per share for the nine months ended September 30,
2006 and 2005, respectively.
36
Results of Operations for the Fiscal Years Ended December 31, 2005 and 2004
The year noted a relative increase in ordering activity among which,
most importantly, stands out a contract from our major strategic partner Aon
Risk Services Division for our software products, to be utilized in-house by
Aon's staff. We intend to build upon the relationship with Aon Corporation
evidenced by a marketing agreement concluded in the forth quarter 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 2006.
For the year ended December 31, 2005, the Company had revenues of
$189,552 compared to $121,886 in 2004. Revenues consisted of $132,053 licensing
fees for the Company's software products and $57,499 for maintenance and support
services.
Gross profits amounted to $37,839. 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 $2,448,509 which decreased by 7% from the $2,653,313 recorded in 2004, the
Company realized an operating loss of $2,410,670 compared to an operating loss
of $2,687,402 in 2004. Non-operating income and expenses included $21,703
interest expense and income of $4,846 from dissolving certain prior year's
accruals. The Company also realized a credit of $209,894 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 $2,218,257. After accounting for dividends accrued and discounts on
outstanding preferred stock which totaled $123,235 the net loss applicable to
common shareholders was $2,341,492 or $0.02 per share, compared to a loss of
$4,509,167 or $0.05 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 and
issuance of short-term debt.
At September 30, 2006, the deficit in working capital amounted to $2,429,430 as
compared to $1,471,896 at June 30, 2006. Stockholders' equity showed an
impairment of $2,161,057 at the end of the quarter, compared to an impairment of
$1,134,875 at June 30, 2006. The negative cash flow from operations for the nine
months ended September 30, 2006 totaled $920,961 and was substantially financed
by new debt and equity which was obtained through private placements. The new
equity placements were consummated by issuance of common stock and warrants 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
and the reports on Form 10-QSB for the first and second quarters in 2006.
At the time of this submission, the Company had no bank debt. At September 30,
2006 its short-term liabilities, aside from trade payables and accruals,
consisted of certain notes and loans, details of which can be found in the Notes
to Financial Statements in this report. Current liabilities include $309,493
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, and the Company's financial situation remains precarious. In addition,
management does not expect to realize significant revenues from the sale or
licensing of its proprietary software products in the near future. In order to
remedy the current liquidity constraints and improve the market position for the
Company, management is currently investigating the feasibility of entering into
joint ventures with providers of complementary software products (see our
comments above). Concurrent with these efforts, management has embarked on a
program of severe cost containment in order to conserve as much liquidity as
possible, and is seeking to obtain additional working capital in form of debt or
equity. There can be no assurance, however, that these undertakings will lead to
the desired outcome.
37
COMMITMENTS AND CONTINGENCIES
In November, 2006, the Company filed this registration statement with the
Securities and Exchange Commission, via the electronic EDGAR System, making it
publicly available. While the registration statement was still pending and being
reviewed by the Securities and Exchange Commission, the Company engaged in two
settlement negotiations: the first was with our former CEO and President, Steven
D. Rudnik, pursuant to which we issued to him 13,861,875 Company securities in
exchange for an outstanding Company note in the approximate amount of $100,000,
accrued interest and a debt of $15,000, and; the second settlement was with our
former executive, Steven Jagels, pursuant to which we issued to him 3,000,000
shares in exchange for his claims against the Company arising under his
employment agreement. Due to the pending public offering at the time, these
transactions could not be deemed transactions by an issuer not involving a
public offering, and therefore could possibly have violated the private
placement offering rules. As a result, if the private offering exemption was not
available to the Company for these transactions they could be deemed integrated
with the public offering. The integration of these two transactions with the
pending public offering, would implicate a possible Section 5 violation under
the Securities Act which prohibits sales of securities while a public offering
is pending. If such a violation is found to have occurred, Messrs. Rudnik and
Jagels would have the legal right to rescind their settlement agreements during
the one year period following the consummation of these transactions. If Messrs.
Rudnik and Jagels chose to rescind their transactions and a Section 5 violation
was found to have occurred in these cases, the Company would have to either
borrow funds or seek investment funds in order to pay these liabilities, either
or both of which rescissions could have a material adverse effect on the
Company's financial condition.
38
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 May 2005, the Company and its President and Chief Executive Officer
agreed to convert most of his base salary for the remainder of the year 2005
into 1,000,000 shares of restricted common stock and 1,000,000 warrants,
exercisable during three years at the price of $0.15 per share, in lieu of
$100,000 cash.
In September 2005 our officers and directors surrendered for
cancellation 4,507,709 stock options, 2,283,916 common stock purchase warrants
and 11,247,607 common shares in order to provide sufficient authorized common
shares to accommodate the Company's current private placement. We replaced the
surrendered and cancelled common shares with shares of our Series E preferred
stock which are automatically convertible in March, 2006, into 11,247,607 common
shares, the amount of common shares equal to those surrendered. We also intend
to reissue the 4,507,709 stock options and 2,283,916 warrants also surrendered
for cancellation by our officers and directors with an equal amount of common
shares underlying these securities following adoption by the shareholders of a
proposed amendment to the Company's certificate of incorporation which amendment
if adopted would increase the number of authorized common shares from
200,000,000 to 300,000,000. The recipients of the Series E preferred stock have
waived their right to receive any dividends on these shares.
During 2006 and 2005, one outside director of the Company who also
serves as the Company's general and securities counsel, was paid an aggregate
$96,121 and $131,140, respectively, for legal services.
On August 8, 2006, Steven D. Rudnik resigned from the position of
Chairman of the Board of Directors of the Company. Pursuant to the principle
terms of the resignation agreement, (a) his current employment agreement was
terminated, (b) he resigned the position of chairman, (c) he received 6 million
restricted common shares plus cash payments totaling $60,000.00 to be paid in
installments through November 1, 2006, and (d) that options and warrants for an
aggregate 4,486,875 share which were previously cancelled, be re-issued upon the
earlier recurrence of a recapitalization of our securities that would provide
sufficient common shares to accommodate them or two years from the date of the
agreement. The options and warrants will have similar terms as the original
instruments (exercisable at $0.10 and $0.15, respectively), but with expiration
dates as of three years from the date of re-issuance.
On December 15, 2006, the Company and Steven D. Rudnik, our former
President and Chief Executive Officer signed a second settlement agreement,
pursuant to the principal terms of which Mr. Rudnik exchanged a Company
promissory note due him in the principal amount of approximately $100,000, a
$15,000 payment due him under his resignation agreement of August 8, 2006 and
certain interest payments for 6,250,000 common shares and 3,125,000 warrants,
exercisable over a three year period at an exercise price of $.05 per share. The
Company also agreed to reissue previously terminated stock options and warrants
on or before February 18, 2007, comprised of 1,583,333 warrants to purchase
common shares at the exercise price of $.10 per share anytime during the
three-year period, commencing February 18, 2007, and 2,903,542 stock options to
purchase common shares at the exercise price of $.10 per share anytime during
the three-year period commencing February 18, 2007. This agreement also provides
Mr. Rudnik a 12-month "reset" provision that entitles him to automatically
benefit from any terms that are more favorable than those set forth in the
agreement, including a more favorable debt conversion rate or equity investment
price, that the Registrant grants to any party over the next 12 months. See
"Possibility of Contingent Liability" in "Risk Factors", and "Commitments and
Contingencies" in "Management's Discussion and Analysis of Financial Condition
and Plan of Operations" sections of our prospectus for further information on
this transaction.
39
On January 2, 2006, the Company and a former employee, Steven W. Jagels
settled a lawsuit commenced by Mr. Jagels against the Company based upon claims
which included breach of his employment agreement. We agreed to make a payment
of $20,040 to Mr. Jagels and to issue 3,000,000 common shares to him by January
7, 2007. We also agreed to include these shares in this registration statement
and when it is declared effective by the SEC, to cause a buyer to purchase these
shares from Mr. Jagels for $75,000 prior to February 28, 2007. Upon Mr. Jagels'
receipt of these proceeds, the lawsuit will be discontinued with prejudice, or
if not consummated as agreed, the lawsuit will continue. . See "Possibility of
Contingent Liability" in "Risk Factors", and "Commitments and Contingencies" in
"Management's Discussion and Analysis of Financial Condition and Plan of
Operations" sections of our prospectus for further information on this
transaction.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the
aggregate amount of $63,028 and $40,307 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, 2005 and December 31, 2004, 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, 2005 and December 31, 2004.
TAX FEES
Rosenberg billed us in the aggregate amount of $4,790 and $5,961 for
professional services rendered for tax related services for the fiscal years
ended December 31, 2005 and December 31, 2004, 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 $0, 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.
40
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- September 30, 2006 3
Consolidated Statements of Operations
- Three and nine months ended September 30, 2006 and 2005 4
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2006 and 2005 5
Notes to Consolidated Financial Statements 6 - 12
41
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2006 (Unaudited)
Assets
Current Assets
Cash .................................................................... $ 314,247
Accounts receivable, net of allowance for
doubtful accounts of $0 ............................................... 2,031
Prepaid expenses ........................................................ 227,304
------------
Total Current Assets .................................................. 543,582
Property and equipment, net of accumulated
depreciation of $105,992 ................................................ 10,187
Software, net of accumulated amortization of $1,295,951 ................. 211,340
Deposits ................................................................ 596
Covenant not to compete, net of accumulated
amortization of $13,750 ............................................... 46,250
------------
Total Assets .......................................................... 811,955
============
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable and accrued expenses ................................... 524,968
Deferred revenue ........................................................ 108,758
Obligations to be settled in stock ...................................... 568,000
Derivative liabilities .................................................. 860,668
Dividends payable ....................................................... 309,493
Loans and notes payable ................................................. 467,450
Current maturities of long-term debt .................................... 133,419
Current maturities of capitalized lease obligations ..................... 256
------------
Total Current Liabilities ............................................. 2,973,012
Capitalized lease obligations, less current portion ..................... --
------------
Total Liabilities ..................................................... 2,973,012
Stockholders' Equity (Impairment)
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 109,858 shares are issued and outstanding ..... 110
Common Stock, $0.0001 par value, 300,000,000 shares authorized;
issued and outstanding 191,116,763 shares ............................... 19,112
Additional paid-in capital ................................................ 32,735,699
Accumulated (deficit) ..................................................... (34,915,978)
------------
Total Stockholders' Equity (Impairment) ................................. (2,161,057)
Total Liabilities and Equity (Impairment) ............................... $ 811,955
============
The accompanying notes are an integral part of the consolidated financial
statements.
42
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Total Revenues .................. $ 9,468 $ 86,027 $ 41,622 $ 150,860
Cost of Goods Sold ............ 36,370 36,372 109,119 109,114
------------ ------------ ------------ ------------
Gross Profit (Loss) ............. (26,902) 49,655 (67,497) 41,746
Selling expenses .............. 70,984 86,731 381,456 299,349
Stock-based compensation
(see below) ................. 956,948 188,392 1,478,505 312,367
Research and development
cost ........................ 34,301 -- 104,830 14,618
General and
administrative expenses ..... 178,756 282,444 1,047,607 1,121,257
------------ ------------ ------------ ------------
Loss from Operations ............ (1,267,891) (507,912) (3,079,895) (1,705,845)
Other Income (Expense)
Miscellaneous income .......... -- 4,846 -- 22,383
Misc. non-operating
expenses .................... (356) -- (5,356) --
Change in fair value
-derivative liabilities ..... 51,560 -- 57,763 --
Interest income ............... -- -- 20 6
Interest expense .............. (43,146) (8,842) (192,550) (16,416)
------------ ------------ ------------ ------------
Total Other Income (Expense) .. 8,058 (3,996) (140,123) 5,973
------------ ------------ ------------ ------------
Loss before Provision for
Income Taxes .................. (1,259,833) (511,908) (3,220,018) (1,699,872)
Provision for income taxes ... -- -- (1,000) (630)
------------ ------------ ------------ ------------
Net Loss ........................ $ (1,259,833) $ (511,908) $ (3,221,018) $ (1,700,502)
============ ============ ============ ============
Dividends on Preferred Stock .... (12,630) (28,380) (527,894) (85,139)
------------ ------------ ------------ ------------
Net Loss applicable to Common
Shareholders .................. $ (1,272,463) $ (540,288) $ (3,748,912) $ (1,785,641)
============ ============ ============ ============
Net Loss per Common Share ....... $ (0.007) $ (0.004) $ (0.023) $ (0.013)
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding ..... 178,947,329 140,771,743 163,134,242 137,511,211
============ ============ ============ ============
All of the stock-based compensation relates to selling, general and
administrative expenses.
The accompanying notes are an integral part of the consolidated financial
statements.
43
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended
September 30,
-------------------------
2006 2005
----------- -----------
Cash Flows from Operating Activities
Net Loss $(3,221,018) $(1,700,502)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operations
Depreciation and amortization 127,158 116,269
Change in fair value - derivative liabilities (57,763) --
Accretion of beneficial conversion feature 8,000 --
Loss on disposition of assets 356 --
Securities issued for various expenses 1,299,674 363,504
Recognition of expense - deferred compensation 178,832 88,138
Recognition of expense - derivative liabilities 102,762 --
Decreases (Increases) in Assets
Accounts receivable 20,267 (68,031)
Miscellaneous receivables -- 11,322
Inventories -- --
Prepaid expenses (204,518) 30,855
Deposits 23,400 --
Obligations to be settled in stock 568,000 --
Increases (Decreases) in Liabilities
Deferred revenues 83,219 (9,686)
Accounts payable and accrued expenses 150,670 (164,194)
----------- -----------
Net Cash Used by Operating Activities (920,961) (1,332,625)
Cash Flows from Investing Activities
Purchases of equipment and fixtures (7,438) (2,160)
----------- -----------
Net Cash Used by Investing Activities (7,438) (2,160)
Cash Flows from Financing Activities
Proceeds from loans and notes payable 480,700 54,500
Repayment of loans and notes (81,250) (54,500)
Payment of dividends -- (1,020)
Issuance of common and preferred stock 724,500 1,328,000
----------- -----------
Net Cash Provided by Financing Activities 1,123,950 1,326,980
Net Decrease in Cash 195,551 (7,805)
Cash at Beginning of Period 118,696 44,144
----------- -----------
Cash at End of Period $ 314,247 $ 36,339
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
(a) The Company issued 10,250,000 shares of common stock to the holder
of 100,000 shares of Series C convertible preferred stock pursuant
to a settlement agreement whereby in exchange against the above
common shares, the 100,000 preferred shares were cancelled and
$350,895 accrued unpaid dividends forfeited.
44
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(b) Pursuant to the terms of certain private placement subscription
agreements and in accordance with the provisions of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" the Company
reclassified certain outstanding warrants and options as derivative
liabilities, which are marked to fair value periodically pursuant
EITF 00-19. We valued these options and warrants utilizing the
Black-Scholes method of valuation as of the date of the Stock
Purchase Agreements, resulting in a reclassification from
stockholders' equity of $815,669. For the three and nine months
ended September 30, 2006, we recognized $47,399 in accounting income
based on the change in fair value of these liabilities during the
periods.
(c) The Company issued 2,000,000 shares of common stock in lieu of
$55,000 payable pursuant to a settlement agreement entered into with
the holder of the 100,000 shares of Series C convertible preferred
stock described in (a) above.
(d) The Company accrued $50,000 in finder's fees on a $500,000 capital
raise transaction, which was offset against Additional Paid-in
Capital.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
9 Months
ended
September
30, 2006
---------
Interest paid .. $15,354
Taxes paid ..... $ 1,000
45
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
1. 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.
Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These
financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in
the Company's annual report on Form 10-KSB for the year ended
December 31, 2005 and the quarterly reports on Form 10-QSB/A and
10-QSB, respectively, for the quarters ended March 31, 2006 and June
30, 2006.
In the opinion of the Company's management, all adjustments
(consisting of normal recurring accruals) necessary to present
fairly the Company's financial position as of September 30, 2006,
the results of operations for the three and nine months ended
September 30, 2006 and 2005, and the cash flows for the nine months
ended September 30, 2006 and 2005, have been included.
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.
46
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 fair
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, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) 123R, SHARE-BASED
PAYMENT, which establishes accounting for equity instruments
exchanged for employee services. Under the provisions of SFAS
123(R), share-based compensation cost is measured at the grant date,
based on the fair value of the award, and is recognized as an
expense over the employee's requisite service period (generally the
vesting period of the equity grant). Prior to January 1, 2006, the
Company accounted for share-based compensation to employees in
accordance with Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. The Company also followed the disclosure
requirements of SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
The Company elected to adopt the modified prospective transition
method as provided by SFAS 123(R) and, accordingly, financial
statement amounts for the prior periods presented in the Form 10-QSB
have not been restated to reflect the fair value method of expensing
share-based compensation.
Reclassification of certain securities under EITF 00-19
Pursuant to Emerging Issues Task Force (EITF) Issue 00-19, if a
company has more than one contract subject to this Issue, and
partial reclassification is required, there may be different methods
that could be used to determine which contracts, or portions of
contracts, should be reclassified. The Company's method for
reclassification of such contracts is reclassification of contracts
with the latest maturity date first. During the quarter, the company
reclassified securities with a fair value totaling $815,669. The
changes in fair value for all contracts previously reclassified
during the 2006 amounted in total to a credit of $47,399.
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.
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.
47
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
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 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.
2. 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, 2005, 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.
3. 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.
4. PREPAID EXPENSES
Prepaid Expenses at the end of the quarter included $191,510 paid in the
form of common stock and options to four outside consultants for services,
which amounts represent the unearned portions of such payments-in-kind.
The remainder represents prepaid insurance costs and miscellaneous other
expenses.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2006:
Equipment $ 43,949
Furniture and fixtures 72,230
--------
116,179
Less accumulated depreciation 105,992
--------
Total $ 10,187
========
Depreciation expense charged to operations was $4,254 and $7,113 in the first
nine months of 2006 and 2005, respectively. In preparation for the move of the
Company's main offices to new and less expensive premises, an inventory of all
equipment was made. Equipment with a net book value of $356 (original
capitalized value totaling $52,000) was deemed technologically obsolete and was
discarded.
48
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at September
30, 2006:
Accounts payable $217,357
Accrued interest 68,343
Accrued salaries 35,585
Accrued commissions 22,183
Accrued professional fees 129,500
Accrued finder's fees 50,000
Miscellaneous accruals 2,000
--------
Total $524,968
========
Accrued commissions are due to a consultant who was retained in the
capacity of Senior Vice President of Business Development. In accordance
with the terms of the consulting agreement, one half of such commissions
are payable in cash and the other half in form of restricted shares of the
Company's common stock, valued at the market price of the Company's common
stock on the date payment of such commissions are made. At September 30,
2006, the price of the stock was $0.04 which would, had payment of the
commission been made that day, require issuance of 277,288 shares.
7. DEFERRED REVENUES
Deferred revenues at September 30, 2006 consist of prepaid software
maintenance and support charges which are amortized ratably over the
remaining duration of the underlying maintenance agreements. On April 13,
2006 the Company received a deposit of $100,000 from a client who also is
an investor in the Company. These funds were paid pursuant to a contract
for the purchase of a customized version of the Company's software
products. At September 30, 2006 the contract had not been filled and the
revenue has been deferred.
8. LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan
agreements with the following terms and conditions at September 30, 2006:
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 September 30, 2006 and no demand for
payment has been made. $ 75,000
During March 2006 a director of the Company provided for a cash
advance, repayable on demand. 25,000
--------
Total $100,000
========
49
MAGNITUDE INFORMATION SYSTEMS, INC. SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
9. NOTES PAYABLE
At December 31, 1999 the Company had $1,475,000 of notes
outstanding related to a June 1995 private placement offering.
During 2000 the holders of $1,450,000 worth of notes agreed to
accept partial repayment of approximately 30% of the note
balances and converted the remaining balances into common
shares or convertible preferred shares. The total amount of
non-converted notes outstanding at September 30, 2006 is
$25,000. Attempts to locate the holder of this note, to settle
this liability, have been unsuccessful. $ 25,000
In June and July 2006 two shareholders loaned the Company
$240,000 and $102,450 pursuant to which the Company issued
promissory notes bearing interest at the rate of 8% per year.
The notes are repayable on demand. 342,450
--------
Total $367,450
========
10. LONG-TERM DEBT
Long-term debt as of September 30, 2006 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 "due upon demand". On August 8,
2006 the holder and the Company agreed to a one-year
moratorium for repayment, and a provision whereby the holder
has the option, after the twelve months have elapsed, to
convert the outstanding principal into the Company's
securities at rates and terms commensurate with the best rates
and terms offered to any other investor during the preceding
twelve months. The conversion feature has been accounted for
as a derivative liability. $99,890
50
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
LONG-TERM DEBT continued
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 $ --
========
11. CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under a non-cancelable capital lease
agreement expiring in 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 September 30,
2006 amounted to $257 net of accumulated depreciation of $8,252.
12. OBLIGATIONS TO BE SETTLED IN STOCK
The Company had received payments against stock subscriptions pursuant to
private placements where the transactions had not yet been completed at
September 30, 2006. The subscription agreements contain provisions that
among others call for potential penalty shares to be issued if there were
delays in the issuance of warrants, or delays in the registration of
underlying shares (we refer to our related filing on Form 8-K). Based on
these provisions, the Stock Purchase Agreements do not limit the number of
additional common shares that could be subject to issuance as a result of
such defaults and could theoretically result in an infinite number of
additional common shares being subject to issuance for such defaults.
These provisions require the Company to reclassify certain outstanding
warrants and options as derivative liabilities, which are marked to fair
value periodically pursuant to Emerging Issues Task Force guidance EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, A Company's Own Stock" ("EITF 00-19").
13. DERIVATIVE LIABILITIES
We valued the options and warrants utilizing the Black-Scholes method of
valuation as of the date of the Stock Purchase Agreements, resulting in a
reclassification from stockholders' equity of $815,669. For the three and
nine months ended September 30, 2006, we recognized $47,399 in accounting
income based on the change in fair value of these liabilities during the
periods. Also included in Derivative Liabilities is a derivative
obligation for $92,398 related to the conversion feature and warrants
underlying a convertible debt instrument due to a former officer (see Note
10). We recognized $4,161 and $10,364 in accounting income based on the
change in fair value of these liabilities during the three and nine months
ended September 30, 2006, respectively.
51
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
14. 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 had
subsequently negotiated a lease renewal which extended the term of the
lease to March 31, 2007 at a monthly rental of $10,000. The Company
vacated the premises in October 2006 and is presently negotiating with the
landlord for an early termination of the lease.
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,
------------------------
2006 30,000
2007 $30,000
-------
Total minimum payments $60,000
=======
Consulting Agreements
During the second quarter in 2006 the Company's board of directors
ratified a two-year consulting agreement with an outside director to
provide specialized business advisory services and to work directly for
the chief executive officer in connection with certain sales and marketing
projects. The agreement provides for a compensation package which includes
the issuance of (a) 200,000 restricted common shares and an option to
purchase 500,000 shares at the price of $0.15/share at the beginning of
the consultancy and again after twelve month, and (b) 150,000 restricted
shares per month during the term.
In August 2006 the Company entered into a one-year agreement with a firm
specializing in technology and IP transfers, for the purpose of
discovering potential candidate firms or products that would enhance
Magnitude's own software products and marketing stance. Under the
agreement, the Company issued 2,254,151 restricted common shares valued at
$112,708 which vest at the rate of 187,846 shares per month. The agreement
may be cancelled by either party with 30 day's notice.
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.
15. RELATED PARTY TRANSACTIONS
In September 2005 our officers and directors surrendered for cancellation
4,507,709 stock options, 2,283,916 common stock purchase warrants and
11,247,607 common shares in order to provide sufficient authorized common
shares to accommodate a private placement offering. We replaced the
surrendered and cancelled common shares with shares of our Series E
preferred stock which were automatically convertible after six months into
11,247,607 common shares, which conversion occurred during the quarter
ended June 30, 2006. Pursuant to a settlement agreement with a former
officer, we granted the re-issuance of 2,903,542 options and 1,583,333
warrants that were previously cancelled (see below). We also intend to
reissue the remaining 1,604,167 stock options and 700,583 warrants also
surrendered for cancellation by our officers and directors with an equal
amount of common shares underlying these securities.
52
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
RELATED PARTY TRANSACTIONS continued
During March 2006, a director of the Company extended a cash advance of
$25,000 to the Company, repayable on demand.
During May 2006 the Company's board of directors ratified a consulting
agreement with an outside director to provide specialized business
advisory services. (see Note 13 above)
On August 8, 2006 Steven D. Rudnik resigned from the position of Chairman
of the Board of Directors of the Company. A settlement agreement
stipulated among others that (a) his current employment agreement be
terminated, (b) he resign the position of chairman, (c) he receive 6
million restricted common shares plus cash payments totaling $60,000.00 to
be paid in installments through November 1, 2006, and (d) that options and
warrants for an aggregate 4,486,875 share which were previously cancelled,
be re-issued upon the earlier recurrence of a recapitalization of our
securities that would provide sufficient common shares to accommodate them
or two years from the date of the agreement. The options and warrants will
have similar terms as the original instruments (exercisable at $0.10 and
$0.15, respectively), but with expiration dates as of three years from the
date of re-issuance. We recognized stock-based compensation of $520,522
for the common stock issued ($360,000 - at market value) and warrants and
options granted ($160,522 - based on the Black-Scholes model) under the
agreement. In his place, Steven Gray was appointed Chairman of the Board,
and Edward Marney was named a director of the Company. On August 17, 2006
Edward Marney vacated the position of President, however, continues to
serve as Chief Executive Officer. Matthew Scott assumed the office of
President of the Company.
16. REDEMPTION OF PREFERRED STOCK
During the second quarter of 2006, the Company issued 10,250,000 shares of
common stock to the holder of 100,000 shares of Series C convertible
preferred stock pursuant to a settlement agreement whereby in exchange
against the above common shares, the 100,000 preferred shares will be
cancelled and $350,895 accrued unpaid dividends forfeited. Since the fair
value of shares issued to the holder in settlement of the dividend
obligation and redemption of the preferred stock held exceeded the
carrying value of the preferred stock, the Company recorded the excess as
a reduction in income available to common shareholders, shown in the
Statement of Operations as preferred dividends of $469,005.
The agreement furthermore stipulated that $60,000 would be paid in cash
over the course of twelve months for covenants in the agreement by the
former holder, including a covenant not to compete for a period of two
years. This amount has been recorded as an intangible asset, amortizable
over the term of the agreement. In August 2006 the Company and the former
shareholder agreed to settle the then outstanding amount of $55,000 plus
additional settlement compensation of $65,000 by issuance of 2,000,000
restricted common shares.
17. CONTINGENCY
On September 25, 2006, a former employee of the Company filed a complaint
against the Company in the Superior Court, Morris County, State of New
Jersey, stating claims based upon alleged breech of employment contract
and seeking damages of approximately $150,000 for unpaid salary and wages
among other claims. The Company intends to vigorously defend this lawsuit.
Subsequent Event
In November, 2006, the Company filed this registration statement with the
Securities and Exchange Commission via the electronic EDGAR System, making
it publicly available. While the registration statement was still pending
and being reviewed by the Securities and Exchange Commission, the Company
engaged in two settlement negotiations: the first was with our former CEO
and President, Steven D. Rudnik, pursuant to which we issued to him
13,861,875 Company securities in exchange for an outstanding Company note
in the approximate amount of $100,000, accrued interest and a debt of
$15,000, and; the second settlement was with our former executive, Steven
Jagels, pursuant to which we issued to him 3,000,000 shares in exchange
for his claims against the Company arising under his employment agreement.
Due to the pending public offering at the time, these transactions could
not be deemed transactions by an issuer not involving a public offering,
and therefore could possibly have violated the private placement offering
rules. As a result, if the private offering exemption was not available to
the Company for these transactions they could be deemed integrated with
the public offering. The integration of these two transactions with the
pending public offering, would implicate a possible Section 5 violation
under the Securities Act which prohibits sales of securities while a
public offering is pending. If such a violation is found to have occurred,
Messrs. Rudnik and Jagels would have the legal right to rescind their
settlement agreements during the one year period following the
consummation of these transactions.
53
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2005
54
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 2005
Page
-----
Report of Independent Registered Public Accounting Firm...... 2
Financial Statements
Consolidated Balance Sheet................................. 3
Consolidated Statements of Operations...................... 4
Consolidated Statements of Stockholders Equity (Deficit)... 5-6
Consolidated Statements of Cash Flows...................... 7-9
Notes to the Consolidated Financial Statements............. 10-31
[letterhead of
Rosenberg Rich Baker Berman & Company
380 Foothill Road, Bridgewater, New Jersey]
Report of Independent Registered Public Accounting Firm
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, 2005 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 2005 and 2004. 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, 2005 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2005 and 2004, 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 and significant
working capital deficiency 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.
Bridgewater, New Jersey
March 23, 2006
2
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2005
Assets
Current Assets
Cash $ 118,696
Accounts receivable, net of allowance for doubtful accounts
of $0 22,298
Prepaid expenses 22,786
------------
Total Current Assets 163,780
Property and equipment, net of accumulated depreciation
of $153,383 7,359
Software, net of accumulated amortization of $1,186,796 320,494
Deposits 23,996
------------
Total Assets 515,629
============
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable and accrued expenses 319,296
Deferred revenues 25,539
Dividends payable 601,499
Loans payable 75,000
Notes payable 25,000
Current maturities of long-term debt (including $99,890 due
to officer) 133,419
Current maturities of capitalized lease obligations 257
------------
Total Current Liabilities 1,180,010
------------
Commitments and Contingencies --
Stockholders' Equity (Impairment)
Convertible preferred stock, $.001 par value, non-voting,
3,000,000 shares authorized; 322,333
shares issued and outstanding 322
Common stock, $.0001 par value, 200,000,000 shares
authorized; 140,606,672 shares issued
and outstanding 14,061
Additional paid in capital 30,516,359
Accumulated (deficit) (31,167,065)
Deferred compensation (28,058)
------------
Total Stockholders' Equity (Impairment) (664,381)
------------
Total Liabilities and Stockholders' Equity (Impairment) $ 515,629
============
See notes to the consolidated financial statements.
3
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
--------------------------
2005 2004
------------ -----------
Net Sales
Software $ 189,552 $ 121,886
------------ -----------
Total Net Sales 189,552 121,886
------------ -----------
Cost of Goods Sold
Software 151,713 155,975
------------ -----------
Total Cost of Goods Sold 151,713 155,975
Gross Profit (Loss) 37,839 (34,089)
Research and development costs 217,067 221,000
Stock-based compensation (see below) 430,239 748,646
Selling, general and administrative expenses 1,801,203 1,683,667
------------ -----------
Loss From Operations (2,410,670) (2,687,402)
------------ -----------
Other Income (Expense)
Miscellaneous income 4,846 --
Interest income 6 189
Interest expense (21,703) (43,258)
Loss on disposition of assets -- (20,703)
Change in fair value of options and warrants -- 227,608
------------ -----------
Total Other Income (Expense) (16,851) 163,836
------------ -----------
(2,427,521) (2,523,566)
Loss Before Provision for Income Taxes
Benefit from Income Taxes 209,264 214,618
------------ -----------
$ (2,218,257) $(2,308,948)
Net Loss
------------ -----------
Dividends and Discount on Preferred Shares $ (123,235) $(2,200,219)
------------ -----------
$ (2,341,492) $(4,509,167)
Net Loss Applicable to Common Shareholders, basic and diluted
============ ===========
Net Loss Per Common Share, basic and diluted (0.02) (0.05)
============ ===========
Weighted Average of Common Shares Outstanding 138,097,577 96,968,697
============ ===========
All of the stock-based compensation relates to selling, general and
administrative expenses.
See notes to the consolidated financial statements.
4
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 2005
Convertible Cumulative
Preferred Shares Preferred Shares Discount Common Stock
----------------- ---------------- on Preferred ---------------------
Shares Amount Shares Amount Stock Shares Amount
-------- ------ ------ ------- ------------ ----------- -------
Balances, January 1, 2004 351,022 $ 351 1 $-- $ (874,566) 77,213,808 $ 7,721
Issuance of convertible preferred
stock pursuant to private equity
placements 156,993 157 -- -- (1,055,806) -- --
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) -- -- -- 33,349,202 3,334
Issuance of common stock for accrued
bonus -- -- -- -- -- 196,680 20
Issuance of common stock for stock
awards -- -- -- -- -- 2,000,000 200
Issuance of common stock pursuant to
exercise of options -- -- -- -- 250,000 25
Issuance of common stock for rent -- -- -- -- -- 200,000 20
Issuance of common stock pursuant to
private equity placements -- -- -- -- -- 12,215,000 1,222
Issuance of common stock granted for
private placement finders' fees -- -- -- -- -- 673,333 67
Issuance of common stock for services
performed -- -- -- -- -- 1,680,000 169
Issuance of common stock for accrued
interest -- -- -- -- -- 59,589 6
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 -- -- -- -- 1,930,372 -- --
Change in fair value of options and --
warrants -- -- -- -- -- --
-------- ----- --- --- ----------- ----------- -------
Balances, December 31, 2004 193,190 $ 193 1 $-- $ -- 127,837,612 $12,784
======== ===== === === =========== =========== =======
Total
Additional Stockholders'
Paid in Accumulated Deferred Equity
Capital Deficit Compensation (Deficit)
----------- ------------ ------------ -------------
Balances, January 1, 2004 $24,890,819 $(24,316,404) $(171,544) $ (463,623)
Issuance of convertible preferred
stock pursuant to private equity
placements 1,991,609 -- -- 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 (3,000) -- -- --
Issuance of common stock for accrued
bonus 19,648 -- -- 19,668
Issuance of common stock for stock
awards 224,800 -- -- 225,000
Issuance of common stock pursuant to
exercise of options 2,475 -- -- 2,500
Issuance of common stock for rent 23,980 -- -- 24,000
Issuance of common stock pursuant to
private equity placements 1,176,828 -- -- 1,178,050
Issuance of common stock granted for
private placement finders' fees (67) -- -- --
Issuance of common stock for services
performed 139,281 -- -- 139,450
Issuance of common stock for accrued
interest 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 -- (2,308,948) -- (2,308,948)
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 96,320 (2,026,692) -- --
Change in fair value of options and
warrants (227,608) -- -- (227,608)
----------- ------------ --------- -----------
Balances, December 31, 2004 $28,365,186 $(28,825,573) $ (65,636) $ (513,046)
=========== ============ ========= ===========
See notes to the consolidated financial statements.
5
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Year Ended December 31, 2005
Convertible Cumulative Total
Preferred Shares Preferred Shares Common Stock Additional Stockholders'
---------------- ---------------- --------------------- Paid in Accumulated Deferred Equity
Shares Amount Shares Amount Shares Amount Capital Deficit Compensation (Deficit)
------- ------ ------ ------- ----------- ------- ----------- ------------ ------------ -------------
Balances,
January 1, 2005 193,190 $193 1 $-- 127,837,612 $12,784 $28,365,186 $(28,825,573) $ (65,636) $ (513,046)
Issuance of
convertible
preferred stock
pursuant to
private equity
placements 16,667 17 -- -- -- -- 99,983 -- -- 100,000
Conversion of
common stock
into
convertible
preferred stock 112,476 112 -- -- 11,247,607 (1,125) 1,013 -- -- --
Issuance of
common stock
for
compensation -- -- -- -- 1,000,000 100 99,900 -- (100,000) --
Issuance of
common stock
pursuant to
private equity
placements -- -- -- -- 19,666,667 1,967 1,558,033 -- -- 1,560,000
Issuance of
common stock
for services
performed -- -- -- -- 3,350,000 335 297,465 -- (205,000) 92,800
Issuance of
warrants for
services
performed -- -- -- -- -- -- 46,700 -- (32,900) 13,800
Issuance of
options for
services
performed -- -- -- -- -- -- 108,780 -- -- 108,780
Private placement
finders fees -- -- -- -- -- -- (67,000) -- -- (67,000)
Dividends on
convertible
preferred stock -- -- -- -- -- -- -- (116,936) -- (116,936)
Recognition of
expense on
deferred
compensation -- -- -- -- -- -- -- -- 375,478 375,478
Amortization of
discount on
preferred stock -- -- -- -- -- -- 6,299 (6,299) -- --
Net loss, year
ended December
31, 2005 -- -- -- -- -- -- -- (2,218,257) -- (2,218,257)
------- ---- --- --- ----------- ------- ----------- ------------ --------- -----------
Balances,
December
31, 2005 322,333 $322 1 $-- 140,606,672 $14,061 $30,516,359 $(31,167,065) $ (28,058) $ (664,381)
======= ==== === === =========== ======= =========== ============ ========= ===========
See notes to the consolidated financial statements.
6
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
As Restated - See Notes to Consolidated Financial Statements
Year Ended December 31,
-------------------------
2005 2004
----------- -----------
Cash Flows From Operating Activities
Net Loss $(2,218,257) $(2,308,948)
Adjustments to Reconcile Net Loss to Net Cash Used by Operations
Depreciation and amortization 153,766 166,144
Stock/options issued for various expenses 106,197 541,172
Recognition of expense - deferred compensation 375,478 105,908
Loss on disposition of assets -- 20,703
Write-down of inventories 6,214 --
Bad debt provision -- (212)
Decreases (Increases) in Assets
Accounts receivable 8,332 5,422
Miscellaneous receivables 11,322 (9,522)
Prepaid expenses 33,207 (27,322)
Other assets (2,167) 1,954
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses 38,905 17,499
Deferred revenue (23,834) 32,732
Deferred rental obligation (1,045) (3,811)
----------- -----------
Net Cash Used by Operating Activities (1,509,884 (1,458,284)
----------- -----------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (5,587) (5,209)
----------- -----------
Net Cash Used by Investing Activities (5,587) (5,209)
----------- -----------
Cash Flows From Financing Activities
Dividends paid -- (58,991)
Repayment of capital lease obligations (2,977) (2,805)
Proceeds from loans payable 54,500 --
Repayment of loans payable (54,500) (282,851)
Changes in fair value of warrants and options -- (227,608)
Proceeds from issuance of common and preferred stock 1,593,000 1,981,914
----------- -----------
Net Cash Provided by Financing Activities 1,590,023 1,409,659
----------- -----------
Net Increase (Decrease) in Cash 74,552 (53,834)
Cash at beginning of period 44,144 97,978
----------- -----------
Cash at end of period $ 118,696 $ 44,144
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 21,960 $ 36,604
=========== ===========
Taxes Paid $ 630 $ 1,800
=========== ===========
See notes to the consolidated financial statements.
8
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31, 2005
Schedule of non-cash investing and financing activities
In connection with consideration for settlement of accruals for past services,
130,000 common shares and options for 1,200,000 common shares were issued $121,780
========
In connection with consideration for future services, 3,500,000
common shares and warrants for 1,000,000 were issued
and recorded initially as deferred compensation $337,900
========
See notes to the consolidated financial statements
9
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31, 2005
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
========
Changes in fair value of options and warrants $227,608
========
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.
10
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.
11
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Amortization
Software assets have been 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 $811 and $491 for the years ended December
31, 2005 and 2004, 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/warrant
grant is used. The Company determined the fair market value of the
warrants/options issued under the Black-Scholes Pricing Model.
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-based Compensation". The statement generally suggests, but
does not require, employee stock-based compensation transactions to
be accounted for based on the fair value of the services rendered or
the fair value of the equity instruments issued, whichever is more
reliably measurable. As permitted by the statement, the Company has
elected to continue to follow the requirements of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees' for employees under the intrinsic value method.
Reclassification of certain securities under EITF 00-19
Pursuant to Emerging Issues Task Force (EITF) Issue 00-19, if a
company has more than one contract subject to this Issue, and
partial reclassification is required, there may be different methods
that could be used to determine which contracts, or portions of
contracts, should be reclassified. The Company's method for
reclassification of such contracts is reclassification of contracts
with the latest maturity date first. The changes in fair value for
any contracts reclassified during 2005 were not material.
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, 2005.
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.
12
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.
Reclassifications
Certain reclassifications have been made to amounts previously
reported to conform to the presentation for the year ended December
31, 2005.
GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
net losses of $2,218,257 and $2,308,948 during the years ended December
31, 2005 and 2004, 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 world 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 December 31, 2005 consist of:
Insurance $13,341
Other 9,445
-------
$22,786
=======
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2005:
Equipment $ 88,512
Furniture and fixtures 72,230
--------
160,742
Less accumulated depreciation 153,383
--------
$ 7,359
========
Depreciation expense charged to operations was $8,226 and $10,225 in 2005 and
2004, respectively.
13
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, 2005:
Accounts payable $158,005
Accrued interest 58,763
Accrued consulting fees 28,550
Accrued commissions 22,183
Accrued professional fees 44,500
Accrued taxes --
Accrued payroll 5,295
Miscellaneous accruals 2,000
--------
$319,296
========
Accrued commissions are due to a consultant who is retained in the
capacity of Senior Vice President of Business Development. In accordance with
the terms of the consulting agreement, one half of such commissions are payable
in cash and the other half in form of restricted shares of the Company's common
stock, valued at the market price of the Company's common stock on the date
payment of such commissions are made. At December 31, 2005, the price of the
stock was $0.08 which would, had payment of the commission been made that day,
require issuance of 138,644 shares.
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan
agreements with the following terms and conditions at December 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 December 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 or convertible preferred shares. The total amount of
non-converted notes outstanding at December 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
=======
14
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
LONG-TERM DEBT
Long-term debt as of December 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 $ --
========
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, 2005 amounted to $257 net of accumulated depreciation of
$8,252.
15
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
DEFERRED REVENUES
Deferred revenues at December 31, 2005, amounted to $25,539 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, 2005 is $0 with a liquidation price of $100,000. As of December 31,
2005, 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, 2005 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.
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 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, 2005 there were $52,984 Series A Senior
Convertible Preferred share dividends accrued and unpaid
representing $1.81 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, 2005 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.
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 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, 2005 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, 2005 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.
18
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, 2005 there were $315,000 Series C Senior
Convertible Preferred share dividends accrued and unpaid
representing $3.15 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, 2005 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.
19
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, 2005 there were $209,621 Series D Senior
Convertible Preferred share dividends accrued and unpaid
representing $3.28 per share.
Series E of the Senior Convertible Preferred Stock series which was issued
in 2005 has 500,000 shares designated, 129,143 shares issued and
outstanding. The total outstanding Series E Senior Convertible, Preferred
Stock at December 31, 2005 is $129 with a liquidation price of $774,858.
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. The holders of
the currently outstanding shares of Series E Senior Convertible
Stock have waived their right for dividends, consequently, no
dividends have been accrued on this 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 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.
20
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
(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.
21
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
PREFERRED STOCK - (Continued)
During the month of November2005, the company issued shares of
Series E Convertible Preferred Stock with detachable warrants for an
investment of $100,000. Due to the convertible nature of the stock
and the fact that the security was in-the-money at the commitment
date, the Company recorded a charge due to the beneficial conversion
feature of $25,194 in accordance with EITF Issue No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and EITF
Issue No. 00-27, Application of EITF Issue No. 98-5 to Certain
Convertible Instruments. The value of the beneficial conversion
feature was measured using the intrinsic value and is being
amortized to implied preferred stock dividends to the date of
earliest exercise, which is six months from the date of issuance.
The amount amortized to implied preferred stock dividends in 2005
was approximately $6,298. The warrants issued in connection with the
preferred stock remain outstanding.
In September 2005, certain officers of the Company surrendered
11,247,607 common shares in exchange for 112,476.07 shares of Series
E Convertible Preferred Stock. The holders have also waived their
dividend rights on this stock. Concurrently with this transaction,
these officers also surrendered for cancellation 4,507,709 stock
options and 2,283,916 common stock purchase warrants, which would be
re-issued if shareholder approval is obtained to increase the number
of authorized common shares from 200,000,000 to 300,000,000.
As of December 31, 2005 there were no Series E Senior Convertible
Preferred share dividends accrued.
INCOME TAXES
The income tax provision (benefit) is comprised of the following:
Year Ended December 31,
-----------------------
2005 2004
--------- ---------
State current provision (benefit) $(209,264) $(214,618)
State deferred provision (benefit) -- --
--------- ---------
$(209,264) $(214,618)
========= =========
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 $209,264 in 2005 and $216,418 in 2004.
The Company's total deferred tax asset and valuation allowance are as
follows:
December 31,
-------------------------
2005 2004
----------- -----------
Total deferred tax asset, noncurrent $ 9,155,000 $ 7,882,000
Less valuation allowance (9,155,000) (7,882,000)
----------- -----------
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,
-----------------------
2005 2004
----------- ---------
Tax benefit 40% 40%
Valuation allowance 40% 40%
--- ---
Effective tax rate -- --
=== ===
22
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES - (Continued)
At December 31, 2005, the Company has available approximately $26,319,000
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
2025.
At December 31, 2005, the Company has available approximately $3,415,000
of net operating losses to carry-forward and which may be used to reduce
future state taxable income which expire December 31, 2012.
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 $13,017 and $14,389 for the years ended December 31, 2005 and 2004,
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.
23
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS - (Continued)
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.
Qualified and
Non-Qualified
Shares Under
Option Pursuant
to the 1997 Plan
December 31,
-------------------
2005 2004
-------- --------
Outstanding, beginning of year 437,000 607,000
Granted during the year -- --
Expired during the year (7,000) (170,000)
Surrendered during the year (10,000) --
-------- --------
Outstanding, end of year (at a price of $1.00 per share) 420,000 437,000
-------- --------
Eligible, end of year for exercise (at a price of $1.00
per share) 420,000 437,000
======== ========
At December 31, 2005 and 2004, the weighted average exercise price and
weighted average remaining contractual life is $1.00 and $1.00 per share
and 4 months and 1 year 4 months, respectively.
At December 31, 2005, there were 580,000 shares reserved for future option
grants.
Qualified and
Non-Qualified
Shares Under
Option Pursuant
to the 2000 Plan
December 31,
-----------------------
2005 2004
---------- ----------
Outstanding, beginning of year 2,688,442 2,818,942
Granted during the year -- --
Exercised during the year -- --
Surrendered during the year (1,865,484) --
Expired during the year (39,000) (130,500)
---------- ----------
Outstanding, end of year (at prices ranging from
$0.10 to $1.00) 783,958 2,688,442
---------- ----------
Eligible, end of year for exercise (at prices ranging
from $0.10 to $1.00) 783,958 2,688,442
========== ==========
At December 31, 2005 and 2004 the weighted average exercise price and
weighted average remaining contractual life is $0.53 and $0.61 per share
and 10 months and 1 years 5 months, respectively.
At December 31, 2005, there were 4,216,042 shares reserved for future
option grants.
24
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
STOCK OPTION PLANS - (Continued)
At December 31, 2005 the company has four stock-based employee
compensation plans, which are described more fully above. The company
accounts for those plans under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The Company has not granted any options to
employees during the years 2004 and 2005.
The Company also issues options outside of the Stock Incentive Plans which
are comprised as follows:
December 31,
-----------------------
2005 2004
---------- ----------
Outstanding, beginning of year 8,566,866 9,054,866
Granted during the year 1,200,000 250,000
Exercised during the year -- (250,000)
Surrendered during the year (2,632,225) --
Expired during the year (908,525) (488,000)
---------- ----------
Outstanding, end of year (at prices ranging from
$0.01 to $1.00) 6,226,116 8,566,866
---------- ----------
Eligible, end of year (at prices ranging from
$0.01 to $1.00) 6,226,116 8,566,866
========== ==========
At December 31, 2005 and 2004 the weighted average exercise price and
weighted average remaining contractual life is $0.57 and $0.32 per share,
and 2 years 5 months and 3 years 9 months, respectively.
WARRANTS
The Company granted common stock purchase warrants between May 1, 1998 and
December 31, 2005 which are comprised as follows:.
December 31,
-------------------------
2005 2004
----------- -----------
Outstanding, beginning of year 30,688,599 11,973,018
Granted during the year 23,343,334 20,433,000
Exercised during the year -- --
Surrendered during the year (2,631,916) --
Expired during the year (514,000) (1,717,419)
----------- -----------
Outstanding, end of year (at prices ranging from
$.08 to $1.00) 50,886,017 30,688,599
=========== ===========
At December 31, 2005 and 2004, the weighted average exercise price and
weighted average remaining contractual life is $0.14 and $0.18 per share
and 1 year 10 months and 2 years 2 months, 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 extends to March 31, 2007 at
a monthly rental of $10,000.
25
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,
------------
2006 $120,000
2007 30,000
--------
Total minimum payments $150,000
========
Included in general and administrative expenses is rent expense which
amounted to $125,742 and $116,734 for the years ended December 31, 2005
and 2004, 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.
Stock-Based Compensation Agreements
In August 2004, the Company entered into an agreement with an
individual to serve in an independent advisory function. The term of
this agreement is for two years, and provides for the grant of
600,000 fully-vested common stock options at commencement, and
grants an additional 600,000 common stock options, which vest
100,000 at commencement of the agreement and 25,000 each subsequent
month, in consideration for services under the agreement. The
Company issued these options during 2005. These options expire on
July 1, 2007.
In March 2005, the Company entered into an agreement with a
consultant providing 500,000 common shares as a sign-up bonus,
750,000 common shares for services rendered during the initial six
month period of the contract and an additional 750,000 common shares
for an extension period of six months (through March 2006). The
Consultant is also entitled to contingent remuneration based on the
achievement by the Company of certain profit goals. No obligation
was incurred for this contingent provision in 2005. The consultant
is also contingently entitled to a fee based on proceeds that may be
obtained through mergers or other business combinations, as follows:
5% of first $1,000,000 in consideration, 4% of the second
$1,000,000, 3% of the third $1,000,000, 2% of the fourth $1,000,000
and 1% of the consideration above $4,000,000.
In October 2005, the Company entered into an agreement with two
consultants, providing for a monthly retainer of $12,000 for a three
month period. The retainer is to be paid as follows: (1) $4,000 per
month starting October 2005, (2) $4,000 per month accruing until due
in January 2006 and (3) warrants to purchase 200,000 of the
Company's common shares, exercisable at $0.10 per share. The
consultants are contingently entitled to additional fees and
warrants based on certain achievements for the remainder of the term
of the agreement of one year, unless extended, and success fees for
revenues generated at a rate of 15% for the first year of revenues
from an introduced party and 7.5% for such revenues for the
subsequent four years.
Also during 2005, the Company enterered into agreements for
consulting services, with the following provisions: (1) cash
commission on sales and/or licensing of 5% on revenues within the
first year and 2.5% on subsequent years' revenues from such
transactions; (2) if determined to be directly involved in securing
the initial sale, the consultants' commission rates per above would
be 15% and 7.5%, respectively, for transactions with a Federal or
State entity and 10% and 5%, respectively, for other clients; (3)
any cash commission earned per the above shall be matched by the
Company with a non-qualified stock option to purchase that number of
shares of the Company's common stock which equates the amount of
commission earned (for example, $10,000 in commission would equate
to 10,000 options). The exercise price of such options would be
based on 90% of the average of the bid and ask prices of the
Company's common stock during the 20 day trading period preceding
the consummation of the transaction, with a minimum exercise price
of $0.10 per share.
26
RELATED PARTY TRANSACTIONS
In January 2004, the Company and its President and Chief Executive Officer
agreed to convert most of his base salary for the remainder of the year
2004 into 16,667 shares of convertible preferred stock, convertible into
1,666,667 restricted common shares, and 833,333 warrants, exercisable
during three years at the price of $0.15 per share, in lieu of $100,000
cash. The Company also repaid $239,088 notes payable due to this officer.
During the first quarter 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 2005 and 2004, 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 $10,400 for services performed during 2004, and $0
during 2005. At December 31, 2005, the Company has $12,717 due to these
parties which is included in accounts payable.
27
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
RELATED PARTY TRANSACTIONS (continued)
In May 2005 the Company issued 1,000,000 shares of common stock,
accompanied by warrants for the purchase of 1,000,000 common shares,
exercisable during three years at the price of $0.15 per share, to the
Company's president and chief executive officer, in lieu of $100,000
salary payable in cash.
In September 2005 our officers and directors surrendered for cancellation
4,507,709 stock options, 2,283,916 common stock purchase warrants and
11,247,607 common shares in order to provide sufficient authorized common
shares to accommodate the Company's current private placement. We replaced
the surrendered and cancelled common shares with shares of our Series E
preferred stock which are automatically convertible in March, 2006, into
11,247,607 common shares, the amount of common shares equal to those
surrendered. We also intend to reissue the 4,507,709 stock options and
2,283,916 warrants also surrendered for cancellation by our officers and
directors with an equal amount of common shares underlying these
securities following adoption by the shareholders of a proposed amendment
to the Company's certificate of incorporation which amendment if adopted
would increase the number of authorized common shares from 200,000,000 to
300,000,000. The recipients of the Series E preferred stock have waived
their right to receive any dividends on these shares.
MAJOR CUSTOMERS
The Company had three major customers for the year ended December 31,
2005, which comprised 36%, 26% and 16%, respectively, of total sales, and
two major customers for the year ended December 31, 2004, which comprised
31% and 19%, respectively, of total sales. One customer comprises 90% of
accounts receivable at December 31, 2005.
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.
28
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes
and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS No. 154 also requires that retrospective application
of a change in accounting principle be limited to the direct effects of the
change. Indirect effects of a change in accounting principle, such as a change
in nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this Statement is issued. Management does not expect
the implementation of this new standard to have a material impact on the
Company's financial position, results of operations and cash flows.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements.
That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June 15,
2005.
29
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NEW ACCOUNTING PRONOUNCEMENTS (continued)
On August 31, 2005, the FASB issued FASB Staff Position FSP FAS 123R-1,
"Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FASB Statement No. 123R." In this
FSP, the FASB decided to defer the requirements in FASB Statement No. 123
(Revised 2004), Share-Based Payment, that make a freestanding financial
instrument subject to the recognition and measurement requirements of other GAAP
when the rights conveyed by the instrument are no longer dependent on the holder
being an employee. The guidance in this FSP should be applied upon initial
adoption of Statement 123R. The FSP includes transition guidance for those
entities that have already adopted Statement 123R in their financial statements.
The Company does not expect that the adoption of SFAS 123(R) and the
implementation of this new standard to have a material impact on the Company's
financial position, results of operations and cash flows.
LITIGATION
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.
1
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Form 10-QSB for the quarter
ended September 30, 2006, an 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, as defined in
Exchange Act Rule 13(a)-14(c), and; based upon that evaluation, Company
management, including the Chief Executive Officer and the Chief Financial
Officer, 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-QSB
and ensured that all material information required to be disclosed in the
subject Form 10-QSB, was recorded, processed, summarized and reported as of the
end of the period covered by the subject Form 10-QSB.
The Company maintains a system of internal controls designed to provide
reasonable assurance that: (i) the Company's transactions are properly
authorized; (ii) the Company's assets are protected against unauthorized or
improper use, and (iii) the Company's transactions are properly recorded and
reported, all to permit the preparation of complete and accurate financial
statements in conformity with generally accepted accounting principles.
(b) Changes in Internal Control over Financial Reporting
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive Officer and Chief Financial Officer, there have
not been any significant changes in the Company's internal controls or other
factors for the period covered by the subject Form 10-QSB that materially
affected or were likely to materially affect the Company's internal control over
financial reporting.
2
125,011,751 Shares
Magnitude Information Systems, Inc.
Common stock
PROSPECTUS
February __, 2007
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING
STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
- --------------------------------------------------------------------- ----------
Prospectus Summary 4
- --------------------------------------------------------------------- ----------
Risk Factors 7
- --------------------------------------------------------------------- ----------
Where You Can Find More Information 10
- --------------------------------------------------------------------- ----------
Use of Proceeds 12
- --------------------------------------------------------------------- ----------
Market for Company's Common Equity & Dividend Policy 12
- --------------------------------------------------------------------- ----------
Selling Shareholders 13
- --------------------------------------------------------------------- ----------
Shares Eligible for Future Sale 21
- --------------------------------------------------------------------- ----------
Plan of Distribution 22
- --------------------------------------------------------------------- ---------
Legal Proceedings 22
- --------------------------------------------------------------------- ----------
Management 23
- --------------------------------------------------------------------- ----------
Principal Shareholders 26
- --------------------------------------------------------------------- ----------
Description of Capital Stock 27
- --------------------------------------------------------------------- ----------
Business 29
- --------------------------------------------------------------------- ----------
Management's Discussion and Analysis 34
- --------------------------------------------------------------------- ----------
Certain Transactions 36
- --------------------------------------------------------------------- ----------
Financial Statements 37
- --------------------------------------------------------------------- ----------
UNTIL ________________, 2007 (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.
3
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
During the past three years, we have issued unregistered securities in the
transactions described below. All of these offerings and sales were deemed
to be exempt under rule 506 of Regulation D and/or Section 4(2) of the
Securities Act of 1933. In all of these transactions, no advertising or
general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of the Company or executive
officers of the Company, and the Company instituted transfer restrictions
was restricted by the Company in accordance with the requirements of the
Securities Act. In addition, all of these persons were provided with
access to our Securities and Exchange Commission filings and had
sufficient time to ask questions of Company management before making an
investment decision. All of the certificates representing all of the
Company securities issued in all of the following transactions bore a
restricted legend permitting their transfer only upon registration under
the Securities Act or pursuant to an exemption therefrom.
On January 2, 2007, we entered into an agreement with Steven W. Jagels to
settle his lawsuit against the Company for claims which included breach of
his employment agreement. We agreed to make a payment to him of $20,040
and to issue 3,000,000 common shares to him on January 7, 2007. We also
agreed to include his shares in this registration statement and following
the issuance of an SEC order of effectiveness, to locate a purchaser of
his shares for the purchase price of $75,000 on or before February 28,
2007. Due to a violation of the private placement offering rules,
described in detail below, we have removed Mr. Jagels' 3,000,000 shares
from this registration statement. Mr. Jagels was an affiliate of the
Company, was sophisticated and represented by counsel in the transaction
and accordingly, the Company relied upon the private placement exemption
provided by Section 4(2) of the Securities Act to engage in this
conversion tranaction.
4
On December 15, 2006, the Company and Steven D. Rudnik, our former President and
Chief Executive Officer, signed a second settlement agreement, pursuant to the
principal terms of which Mr. Rudnik exchanged a Company promissory note due him
in the principal amount of approximately $100,000, a $15,000 payment due him
under his resignation agreement of August 8, 2006 and certain interest payments
for 6,250,000 common shares and 3,125,000 warrants, exercisable over a three
year period at an exercise price of $.05 per share. The Company also agreed to
reissue previously terminated stock options and warrants on or before February
18, 2007, comprised of 1,583,333 warrants to purchase common shares at the
exercise price of $.10 per share anytime during the three-year period,
commencing February 18, 2007, and 2,903,542 stock options to purchase common
shares at the exercise price of $.10 per share anytime during the three-year
period commencing February 18, 2007. The Company relied upon the exemption
provided by Section 3(a)(9) of the Securities Act to issue the securities
exchanged with Mr. Rudnik for the Company note, a Company security, without
paying any commission or other remuneration, paid or given, directly or
indirectly, in connection with the solicitation or negotiation of the exchange.
Due to a violation of the private placement offering rules, described in detail
below, we have removed 13,861,875 of Mr. Rudnik's shares from this registration
statement.
Note Regarding The Settlement Transactions with Messrs. Jagels and Rudnik
In November, 2006, the Company filed this registration statement with the
Securities and Exchange Commission via the electronic EDGAR System, making it
publicly available. While the registration statement was still pending and being
reviewed by the Securities and Exchange Commission, the Company engaged in two
settlement negotiations: the first was with our former CEO and President, Steven
D. Rudnik, pursuant to which we issued to him 13,861,875 Company securities in
exchange for an outstanding Company note in the approximate amount of $100,000,
accrued interest and a debt of $15,000, and; the second settlement was with our
former executive, Steven Jagels, pursuant to which we issued to him 3,000,000
shares in exchange for his claims against the Company arising under his
employment agreement. Due to the pending public offering at the time, these
transactions could not be deemed transactions by an issuer not involving a
public offering, and therefore could possibly have violated the private
placement offering rules. As a result, if the private offering exemption was not
available to the Company for these transactions they could be deemed integrated
with the public offering. The integration of these two transactions with the
pending public offering, would implicate a possible Section 5 violation under
the Securities Act which prohibits sales of securities while a public offering
is pending. If such a violation is found to have occurred, Messrs. Rudnik and
Jagels would have the legal right to rescind their settlement agreements during
the one year period following the consummation of these transactions.
(i) 30,000,000 shares of common stock to three accredited investors who
had pre-existing relationships with the Company pursuant to stock
purchase agreements; issued in reliance upon exemptions provided
under Section 4(2) of the Securities Act, altogether resulting in
the receipt by the Company of $600,000 in cash. The agreements also
stipulate that the Company issue, no later than March 5, 2007,
15,000,000 warrants and if not issued by this date, the Company will
be obligated to issue to these investors additional warrants in
amounts equal to 1 %, or an aggregate 150,000 warrants, for each
business day the warrants are not delivered. In addition, the
Company is obligated to register the common shares issued to the
investors and those underlying the warrants. The Company has met
this filing obligation but if the registration statement of which
this prospectus forms a part is not declared effective by the SEC on
or before February 21, 2007, the Company will be obligated to issue
45,000 addition shares to each investor for each day thereafter the
registration statement has not been declared effective.
(ii) 2,254,151 shares of common stock valued at $ $112,708 which shares
vest at the rate of 187,846 shares per month to a consulting firm
for services to be rendered (see section "Consulting Agreements" in
Note 13) as compensation for services under a Management Agreement.
The recipient was an accredited investor and had access to business
and financial information concerning our company. The issuance was
exempt from registration under the Securities Act in reliance on an
exemption provided by Section 4(2) of that Act.
(iii) 2,000,000 shares of common stock in settlement of a liability in the
amount of $55,000 and additional compensation in the amount of
$65,000 to a former preferred shareholder who was a former officer
and director of the Company(see Note 15). The recipient was an
accredited investor and had access to business and financial
information concerning our company. The issuance was exempt from
registration under the Securities Act in reliance on an exemption
provided by Section 4(2) of that Act.
5
(iv) 19,861,875 shares of common stock to the former chief executive
officer of the Company pursuant to a settlement agreements (see Note
26 14). The recipient was an accredited investor and had access to
business and financial information concerning our company. The
issuance was exempt from registration under the Securities Act in
reliance on the private placement exemption provided by Section 4(2)
of the Securities Act.
(b) No underwriters were utilized in any of the foregoing transactions.
(c) No commissions were paid in connection with the foregoing transactions.
FISCAL YEAR 2005
During the quarter ended March 31, 2005, the Company issued the following
unregistered securities:
(ii) 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. Limited to only 18 U.S. and 2 foreign
accredited investors during our private placement that began in
November, 2004 ( the 11 investors in this quarter and the 9
investors in the prior quarter), these private placement investors
had pre-existing relationships with the Company and signed
subscription agreements containing their representations confirming
their status as accredited investors, their investment intent and
acknowledgement that they were acquiring restricted and
non-transferable securities.
(ii) 1,600,000 shares of common stock valued at $139,450 to three
consultants for investor relations and general business consulting
services. The consultants were all accredited investors and had
access to business and financial information concerning our company.
These issuances were exempt from registration under the Securities
Act in reliance on the private placement exemption provided by
Section 4(2) of the Securities Act.
(b) No underwriters were utilized in any of the foregoing transactions.
(c) No commissions were paid in connection with the foregoing transactions.
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. Limited to only 20 accredited investors (the 9
investors in this quarter and the 11 investors in the following
quarter), these private placement investors had pre-existing
relationships with the Company and signed subscription agreements
containing their representations confirming their status as
accredited investors, their investment intent and acknowledgement
that they were acquiring restricted and non-transferable securities.
(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 to
an accredited investor who had a pre-existing relationship with the
Company and had access to all of our business and financial
information. These issuances were exempt from registration under the
Securities Act in reliance on the private placement exemption
provided by Section 4(2) of the Securities Act.
6
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. The 6 non-U.S. investors signed
subscription agreements containing their representations confirming
their status as accredited investors, their investment intent and
acknowledgement that they were acquiring restricted and
non-transferable securities.
(ii) 285,000 shares of common stock valued at $57,000 to a consultant for
investor relations and general business consulting services. The
consultant was an accredited investor who had access to business and
financial information concerning our company. This issuance was
exempt from registration under the Securities Act in reliance on the
private placement exemption provided by Section 4(2) of the
Securities Act.
(iii) 150,000 shares of common stock in lieu of cash, for rent expenses of
$21,309. The landlord who made the investment decision to accept our
stock was an accredited investor who had a pre-existing relationship
with our Company as well as access to our business and financial
information concerning our company. This issuance was exempt from
registration under the Securities Act in reliance on the private
placement exemption provided by Section 4(2) of the Securities Act.
(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. The consultants
were all accredited investors and had access to business and
financial information concerning our company. These issuances were
exempt from registration under the Securities Act in reliance on the
private placement exemption provided by Section 4(2) of the
Securities Act.
(ii) 673,333 shares of common stock to a financial services firm for
finder's fees in connection with the private placement of
convertible preferred stock. The finder was an accredited investor
who had a pre-existing relationship with the Company and had access
to the business and financial information concerning our company.
This issuance was exempt from registration under the Securities Act
in reliance on the private placement exemption provided by Section
4(2) of the Securities Act.
(iii) 50,000 shares of common stock in lieu of cash, for rent expenses.
The landlord who made the investment decision to accept our stock
was an accredited investor who had a pre-existing relationship with
our Company as well as access to our business and financial
information concerning our company. This issuance was exempt from
registration under the Securities Act in reliance on the private
placement exemption provided by Section 4(2) of the Securities Act.
(iv) 150,000 shares of common stock to an outside director of the Company
for services rendered. The same director was issued 250,000 shares
pursuant to his exercise of an option at the price of $0.01 per
share which option was acquired by him in a private transaction with
an unrelated party. This issuance was exempt from registration under
the Securities Act in reliance on the private placement exemption
provided by Section 4(2) of the Securities Act.
(v) 156,993 shares of Series E Convertible Preferred Stock convertible
into 15,699,333 common shares, accompanied by warrants for the
purchase of 7,849,667 common shares at the price of $0.15 per share,
to thirty-nine accredited investors pursuant to private placement
subscriptions, issued in reliance upon exemptions provided under
Section 4(2), Rule 506 of Regulation D and Regulation S of the
Securities Act, altogether resulting in the receipt by the Company
of approximately $880,000 in cash. The 39 accredited investors
signed subscription agreements containing their representations
confirming their status as accredited investors, their investment
intent and acknowledgement that they were acquiring restricted and
non- transferable securities.
(vi) 16,667 shares of Series E Convertible Preferred Stock convertible
into 1,666,667 common shares, accompanied by warrants for the
purchase of 833,333 common shares, exercisable during three years at
the price of $0.15 per share, to the Company's chief executive
officer in lieu of $100,000 salary. The recipient was an accredited
investor and had access to business and financial information
concerning our company. The issuance was exempt from registration
under the Securities Act in reliance on the private placement
exemption provided by Section 4(2) of the Securities Act.
7
(b) No underwriters were utilized in any of the foregoing transactions.
(c) No commissions were paid in connection with the foregoing transactions.
ITEM 27. EXHIBITS INDEX
SEC No. Document
- ------- --------
2.2+ Agreement and Plan of Merger with Rolina Corporation and Steven D.
Rudnik, and Employment Agreement with Steven D. Rudnik, both of the
date February 2 , 1998, as filed as Exhibit to the Company's report
on Form 10-KSB for the year ended December 31, 1998. Incorporated
herein by reference.
3(i)+ Articles of Incorporation and Amendments thereto, incorporated
herein by reference to Exhibits of previous filings with the
Commission.
3(ii)+ Bylaws of the Company, incorporated herein by reference to Exhibits
of previous filings with the Commission.
4.23# Form of Common Stock Purchase Warrant
4.30# Form of Subscription Agreement.
5.1 Legal opinion and consent of Joseph J. Tomasek, Esq.
10.1* 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.
8
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.
10.19 X Stock Purchase Agreement, dated August 18, 2006, by and between 33
Group, LLC and the Company.
10.20 X Stock Purchase Agreement, dated August 18, 2006, by and between
Azzurri Group, LLC and the Company.
10.21 X Form of Company Warrant to be issued in connection with the Stock
Purchase Agreements, Exhibits 10.19 and 10.20, respectively.
10.22 X Settlement Agreement, dated August 8, 2006, between the Company and
Steven D. Rudnik.
10.23 X Settlement Agreement, dated December 13, 2006, between the Company
and Steven D. Rudnik.
10.24 = Settlement Agreement, dated January 2, 2007, between the Company
And Steven W. Jagels.
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 Form SB-2 Registration Statement and
amendments thereto, Registration Statement No.333-123996, with the Commission.
X Previously filed as Exhibits to Amendment No.1 to Form SB-2 Registration
Statement, Registration No. 333-138961
= Previously filed as Exhibits to Amendment No.2 to Form SB-2 Registration
Statement, Registration No. 333-138961
9
ITEM 28. UNDERTAKINGS
The undersigned registrant undertakes to:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(a) include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement;
(c) Include any additional or changed material information on the
plan of distribution.
2. For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "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 Securities and Exchange Commission such
indemnification is against public policy as expressed in the 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.
That, for the purpose of determining liability under the Securities Act to any
purchaser:
Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it
is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such
document immediately prior to such date of first use.
10
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 Amendment No. 3 to
Registration Statement on Forms SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Branchburg, State of New
Jersey, on February 14, 2007.
MAGNITUDE INFORMATION SYSTEMS, INC.
By: /s/ Edward L. Marney
----------------------------------------------------
Edward L. Marney, 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 Edward L. Marney, 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, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Edward L. Marney February 14, 2007
- ----------------------------- President and
Edward L. Marney Chief Executive Officer
February 14, 2007
/s/ Joerg H. Klaube
- ----------------------------- Chief Financial Officer
Joerg H. Klaube (Principal Financial Officer)
February 14, 2007
* Director
- -----------------------------
Steven L. Gray
February 14, 2007
/s/ Joseph J. Tomasek Director
- -----------------------------
Joseph J. Tomasek
BY: /s/ Edward L. Marney
ATTORNEY-IN-FACT
11