SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE OF 1934
For the Transition Period From ___ to ___
Commission File No. 33-20432
MAGNITUDE INFORMATION SYSTEMS, INC.
Exact Name of Registrant as Specified in its Charter
DELAWARE 75-2228828
State or Other Jurisdiction of IRS Employer
Incorporation or Organization Identification Number
50 Tannery Road, Branchburg, New Jersey 08876
Address of Principal Executive Offices Zip Code
(908) 534-6400
Registrants Telephone Number, Including Area Code
PROFORMIX SYSTEMS, INC.
(Former Conformed Name)
November 18, 1998
(Date of Name Change)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Title of Each Class Name of Each Exchange on Which Registered
NONE NONE
Securities Registered pursuant to Section 12(g) of the Exchange Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes _X_ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended December 31, 1998,
were $2,926,455.
Common stock, par value $.0001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on February 26, 1999. Based on the
closing price of the Common Stock on the OTC Electronic Bulletin Board as
reported on February 26, 1999, ($0.875), the aggregate market value of the
6,260,120 shares of the Common Stock held by persons other than officers,
directors and persons known to the Registrant to be the beneficial owners (as
the term is defined under the rules of the Securities and Exchange Commission)
of more than five percent of the Common Stock on February 26, 1999, was
approximately $5,478,000. By the foregoing statements, the Registrant does not
intend to imply that any of the officers, directors, or beneficial owners are
affiliates of the registrant or that the aggregate market value, as computed
pursuant to rules of the Securities and Exchange Commission, is in any way
indicative of the amount which could be obtained for such shares of Common
Stock.
As of February 26, 1999, 8,065,113 shares of Common Stock, $.0001 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX
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MAGNITUDE INFORMATION SYSTEMS, INC.
CONTENTS
PART I. Page
----
Item 1. Business.....................................................4
Item 2. Properties..................................................10
Item 3. Legal Proceedings ..........................................10
Item 4. Submission of Matters to a Vote of Security Holders ........10
PART II.
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters ................................11
Item 6. Management's' Discussion and Analysis of
Financial Condition and Results of Operations ..............12
Item 7. Financial Statements and Supplementary Data ................16
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................16
PART III.
Item 9. Directors and Executive Officers of the Registrant .........17
Item 10. Executive Compensation .....................................19
Item 11. Security Ownership of Certain Beneficial Owners
and Management .............................................21
Item 12. Certain Relationships and Related Transactions .............22
Item 13. Exhibits and Reports on Form 8-K ...........................23
Signatures..................................................24
Exhibit Index...............................................25
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PART I
ITEM 1: BUSINESS
Background
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to Proformix
Systems, Inc., and on November 18, 1998, the Company changed its name to
Magnitude Information Systems, Inc. .
On June 24, 1997, the Company, Royal Capital, Inc., and Proformix, Inc., a
Delaware corporation and manufacturer of ergonomic keyboarding systems, entered
into an Acquisition Agreement. Proformix, Inc. in November 1998 changed its name
to Magnitude, Inc. and is hereafter referred to as Magnitude, Inc.. Pursuant to
the Acquisition Agreement, Magnitude Inc. shareholders were offered 1 share of
the Company's common stock for every 3.4676 shares of Magnitude, Inc. common
stock, and 1 share of preferred stock for every 1 share of Magnitude, Inc.
preferred stock. At the time of this submission, holders of approximately 98% of
Magnitude, Inc. common stock have tendered their shares. The business
combination which took the form of a reverse acquisition has been accounted for
as a purchase. As a result, 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 Proformix EMS Software System.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several related
agreements with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian
designer, manufacturer and distributor of office furniture based in Holland
Landing, Ontario, Canada, pursuant to which OS acquired Magnitude, Inc.'s
hardware product line comprised of the Company's ergonomic keyboard platform
products and accessories, and all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the Proformix
name, against a cash consideration and an ongoing contingent stream of royalty
payments on OS' sales of the Proformix hardware products. The Company will
continue to market its proprietary software under the Proformix label. The
Agreement with OS also provided for the retirement of the Company's then
existing bank debt, out of the proceeds of the transaction. Further details
regarding this transaction may be obtained from the Company's related filing of
February 9, 1999, on Form 8-K.
The Company is currently subject to the reporting requirements of Section
15(d) of the Securities Exchange Act of 1934. The Company has the authority to
issue an aggregate of Thirty Million (30,000,000) Common Shares, par value
$.0001, Three Million (3,000,000) Preferred Shares Series A, par value $.01, and
Two Thousand Five Hundred (2,500) Cumulative Preferred Shares, par value $.001 .
As of December 31, 1998, there were outstanding 6,431,113 Common Shares
and 10 Cumulative Preferred Shares.
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Narrative Description of Business
Until November 18, 1998, when the Company sold its hardware product line
comprised of Magnitude, Inc.'s ergonomic keyboard platform products and
accessories, its business was primarily centered around the design, development,
manufacture, and marketing of research-based ergonomic accessory products for
the computerized workplace. In parallel, and beginning with the February 1998
acquisition by the Company of Rolina Corporation, an early stage software
business which had developed an ergonomic software product that was being
marketed under the name "ErgoSentry", and the subsequent acquisition in May 1998
of substantially all of the assets of Vanity Software Publishing Corporation, a
Canadian software firm, which also included a certain ergonomic software package
known as "ErgoBreak", the Company engaged in the development of a unique suite
of software packages designed to increase productivity in the computer related
work environment which include the before mentioned "ErgoSentry" and "ErgoBreak"
products. These efforts resulted, in November 1998, in the release to the market
of the proprietary "Proformix EMS" (Ergonomic Management System) software
system. With the sale of the hardware product line, the Company's business is
now focused exclusively on the further development and marketing of these
software products. As such, the Company currently must be considered an
enterprise in transition, because it has not yet realized material revenues from
licensing its software.
As the utilization of computers in the office has increased significantly
in the last decade, so has the rate of health problems believed to be related to
the use of computers. Computer ergonomics focuses on optimizing the design of
technology involved in the utilization of computers in the office, and also
attempts to affect the manner in which people interact with computers, so as to
minimize the associated health risks. A successful technology delivery system
positively impacts the cost of doing business by improving the comfort,
productivity, job satisfaction and safety of the computer user, while reducing
the costs of absenteeism and work related disability.
Repetitive stress injury (RSI) is a classification of diseases caused by
the excessive use of joints. It is a subclassification of Cumulative Trauma
Disorders (CTDs). One common form of RSI is Carpal Tunnel Syndrome (CTS) which
can be caused by excessive typing, among other activities, and can be aggravated
by deficient - in the ergonomic sense - equipment and inappropriate work habits.
The carpal tunnel is a channel in the wrist where tendons and the median nerve
connect the arm to the hand. Through excessive use, the tendons become swollen
and pinch the nerve. RSI accounts for a large portion of work-related illnesses,
and the incidence of RSI is expected to grow as the number of people operating
keyboards increases. The impact of RSI is measured not only in the pain and
suffering of its victims, but also in time lost from work and medical costs.
The Company's proprietary software products are designed to help
businesses deal with potentially preventable repetitive stress injuries, by
real-time monitoring of keyboarding activities, pro-active dialog with at-risk
employees, and strategic profiling and management of computer use throughout an
organization.
During 1996, the issues of repetitive stress injuries and the potential of
liability to employers from the effects of carpal tunnel syndrome and other
RSI's on employees were forcibly brought to the forefront of corporate
consciousness through widely publicized suits involving a major computer maker.
The US Bureau of Labor Statistics reported that already in 1995, there were
approximately 70,000 cases of carpal tunnel syndrome and associated tendonitis,
and that 25% of all injuries that result in lost work time are due to repetitive
stress problems. They currently cost employers an estimated $20 billion a year
in workers' compensation claims. The federal government estimates an additional
$80 billion is lost in related costs such as absenteeism and reduced
productivity. The RSI issues in the United States are mirrored in the rest
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of the developed world. The Company believes that the growing recognition of
these trends will give rise to a rapidly expanding market for the Company's
products.
The Industry
The Company operates in only one business segment: the development,
marketing, and licensing of productivity enhancement software products for the
computerized workplace environment. More specifically, the Company licenses
highly sophisticated and proprietary software that provides computer based
training, work pacing and monitoring tools, as well as a computer workstation
assessment tool.
Potential customers for the Company's products are businesses of all
sizes, as well as organizations and government departments and agencies that
employ many staff in computer-related functions. The software industry in
general is comprised of a remarkable variety of providers, ranging from small
boutique-type designers to large international corporations. The industry is
characterized by great dynamics, patterns of rapid growth and well-known success
stories, but also by a high degree of volatility and risk. As such, the Company
with its recent transition from the more stable environment of a supplier of
ergonomic (hardware) accessories, to a software house addressing a specialized
market, has entered new territory. Nevertheless, its chances for success, in
management's opinion, are greatly enhanced by the timeliness of the introduction
of its product into an increasingly receptive market, as described above.
The Company operates primarily in the United States of America, however,
has recently introduced a Portuguese language version of its software products
for the Brazilian market, and is preparing other language versions. The Company
did not so far derive material revenues from the licensing of its software
products, either domestically or in foreign markets.
Products, Patents, Trademarks
All patents, trademarks, and other intellectual property rights associated
with the Company's hardware product line of ergonomic keyboard platforms and
accessories were transferred to 1320236 Ontario Inc. ("OS") pursuant to the
November 18, 1998, Asset Purchase Agreement with OS (see "Background" above).
The Company's primary product is a suite of seven proprietary software
modules marketed under the name "Proformix EMS" (Ergonomic Management System)
which are designed to help individual computer users and businesses deal with
potentially preventable repetitive stress injury (RSI). The seven software
modules can be applied individually or together in a comprehensive ergonomic and
early intervention program that seeks to modify a user's behavior by monitoring
computer usage patterns over time and warning the user when to break a dangerous
trend in repetitive usage of an input device, such as a keyboard or mouse. The
product was developed to train people working on computers, monitor computer-use
related activities and evaluate a user's risk exposure and propensity towards
injury or loss of effectiveness in connection with his/her day-to-day work.
Moreover, the package enables a company to not only address the issue of health
risks involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
The system is highly customizable for management, staff and employees. All
components operate on any PC or workstation running the Microsoft Windows
operating system. The EMS suite employs the International RULA (Rapid Upper Limb
Assessment) standard for compliance with CA OSHA Title 8. The seven modules are
described as follows:
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ErgoSure: A postural risk-assessment tool that records how an employee is
working; it determines injury potential and suggests improvements. It also can
be used to evaluate workstation alternatives prior to purchase.
ErgoSentry(TM): Employing patent-pending algorithms that measure rest against
work in real time, the non intrusive program informs users when to break from
high-risk trends (thresholds definable by the user or corporate safety officer)
when keyboarding or using a mouse. ErgoSentry also includes an "ErgoPak" video
or slides that depict correct workstation setup, posture and repetitive
stress-reducing exercises.
Surveyor(TM): An electronic surveyor used by management to gather
macro-information about employee populations and to gain a clear understanding
of equipment usage, discomfort and comfort patterns, workstation configurations
and employee habits.
UserNotes(TM): An easy, effective means for employees to report workplace
discomfort so staff can address certain issues earlier, at lower cost and with
greater likelihood of success. UserNotes encourages a proactive approach.
Guardian: Captures the frequency of mouse clicks and activation of individual
keys, over time. It also can be used in a review process to assess attributes
such as ease-of-use among competing applications. Guardian also is a good
training tool. By measuring before-and-after results, Guardian can be used to
determine the type of training program needed, measure each program's
effectiveness and highlight needed improvements.
ErgoQuiz: An electronic testing system and awareness-building tool that measures
employees' understanding of ergonomic principles.
EMS Analyzer: A comprehensive report writer and analysis tool for manipulating,
interpreting and evaluating the data collected in the ErgoSentry module - on the
workstation-, department-, and company level .
In addition to the trademarks shown above which are owned by the Company,
Magnitude has applied for other product designators to be afforded trademark
protection, and has filed a US Patent Application for the design principles
underlying several of the above software products. 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.
ErgoSure(TM) which forms part of EMS, is owned by Cornell Ergonomics Inc.
who has granted the Company a license for the exclusive rights to the
ErgoSure(TM) name and product (see "Licenses" below).
Business Strategy
The most important prospective customers for the Company's products are
medium and large companies, organizations, and governmental departments and
agencies that have a relatively large staff working in computer-related
functions. These entities not only are more cognizant of the health risks and
negative effect on productivity associated with many of the traditional tools of
the computerized workplace and therefore tend to be more receptive to new
remedial solutions and alternatives based on the science of Ergonomics, but also
have a significant exposure in terms of legal liabilities if they fail to act
addressing
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these potential risks. On an on-going basis, the increasing costs of Work Comp
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 EMS 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 Proformix EMS Ergonomic Management System constituted a
novel approach.
Since that time, the product has been installed by a rapidly 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 therefore
lies in a comprehensive marketing approach which carries the Company's message
to the largest possible number of prospective clients. Since its own financial
resources are limited, the Company embarked on a strategy to seek marketing
partnerships with entities and individuals in the risk management industry. An
important milestone was reached when the Company, in the fall of 1998, entered
into a joint venture agreement with AON Ergonomic Services, a division of AON,
one of the largest insurance services companies in the world, to market the
Proformix EMS system.
The Company intends to continue developing strategic marketing
relationships with leading business consultants, to broaden its distribution
channels to include multi-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 EMS.
Research and Development
During 1998, the Company invested considerable resources in the further
development of the overall EMS system and the integration of certain software
assets acquired pursuant to the agreements with Rolina Corporation and Vanity
Software Publishing Corporation (see "Narrative Description of Business"), and
in further enhancements to the products. Also during this time, a complete set
of new and necessary documentation and marketing collateral was created. In late
summer, the first official version of EMS, Version 1.78, was released, followed
in October 1998 by Version 2.12.
The Company has expensed all expenditures related to the above efforts.
The portion attributable to direct R&D expenses totaled $130,435 for the year
ended December 31, 1998.
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. These competitors, however,
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typically only target task complexes that are addressed by individual component
parts of the Company's products, such as the ErgoSentry(TM) module, without
offering a comparable breadth of function and integration in such areas as
worksite evaluation, employee training and work pacing.
The Company is not aware of any products which directly compete with its
integrated software product suite which is marketed by the Company under the
trade name "EMS". While the Company believes that it currently has a strategic
competitive advantage in ergonomic software, especially with regard to its
patent-pending algorithms 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 in 1998 derived 97.5% of its total revenues from the sales of
hardware comprised of ergonomic office equipment and accessories, and 2.5% from
the licensing of its proprietary software. Approximately 39% of the hardware
revenues were derived from one customer. The November 18, 1998, Asset Purchase
Agreement with 1320236 Ontario Inc. ("OS"), effectively eliminated the Company's
presence in the hardware sector of its business and the associated revenue base
although it remains the beneficiary of a contingent stream of royalties on OS'
sales of such hardware products. With the Company now being dependent on the
success of a new product line there can be no assurance that its business will
generate enough revenues during the coming periods, in a timely manner and
sufficient in scope, to finance and support the Company's planned future growth
as expected by management.
License Agreements
On December 1, 1997, the Company entered into a two year Software
Distribution and Option Agreement with Cornell Ergonomics Inc., a Delaware
corporation, pursuant to which it is licensed on an exclusive basis, to
distribute and sub-license a certain software product known as "ErgoSure" which
the Company currently markets in conjunction with its own proprietary software
products. The Agreement also grants the Company the right to acquire full title
and ownership to that product, at a later time and under specified
circumstances.
Employees
As of December 31, 1998, the Company employed 13 persons, of whom four
were primarily engaged in research and development and software support
activities, six were primarily engaged in sales and marketing, and three in
general administrative and clerical functions. The Company has no collective
bargaining agreements with its employees.
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ITEM 2: PROPERTIES
The Company leases approximately 4,000 square feet of office space at 50
Tannery Road, Branchburg, New Jersey, where it maintains its executive and
administrative headquarters and product development and support operations. The
current lease agreement ends on December 31, 2001, and calls for monthly rental
payments of approximately $3,500 plus certain expenses.
ITEM 3: LEGAL PROCEEDINGS
Suit was instituted against the Company in the Superior Court of New
Jersey, Law Division, Somerset County, in November 1996, by a shareholder of the
Company. The Company has agreed to a settlement with the plaintiff pursuant to
which the claims will be dismissed against payment by the Company of $20,000 .
The settlement has not been consummated because the plaintiff had filed a
petition in bankruptcy.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of this fiscal period.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock currently trades on the Electronic Bulletin
Board of the OTC market, under the symbol MAGY. The following table sets forth,
for the calendar quarters indicated, and beginning with the Company's
acquisition of Proformix, Inc. in July 1997, the high and low sales prices for
the Company's Common Stock (no price notations for prior quarters are listed
here because any such share prices and trading reflected activities which bear
no resemblance to the Company's current business):
OTC-BB
------
High/Ask Low/Bid
-------- -------
1997
Third Quarter ..................... $7 $6 1/8
Fourth Quarter ................... 7 3 1/4
1998
First Quarter ..................... $5 7/8 $4 3/8
Second Quarter ................... 5 7/8 3 3/4
Third Quarter ..................... 4 3/4 1 1/4
Fourth Quarter ................... 2 5/8 3/4
As of February 26, 1999, there were approximately 160 shareholders of
record for the Company's Common Stock. The number of record holders does not
include shareholders whose securities are held in street name.
The Company has not declared or paid, nor has it any present intention to
pay, cash dividends on its Common Stock. The Company is obliged, under certain
circumstances, to pay cash dividends on its outstanding Cumulative Preferred
Stock.
Recent Issues of Unregistered Securities
During the fourth quarter of 1998 and the first quarter of 1999 the
Company issued the following unregistered securities:
(i) 70,000 shares of Common Stock to a creditor of the Company pursuant to
that party's exercise of an option to convert debt into common stock, at $1.00
per share;
(ii) 7,500 shares of Common Stock to two individuals who had invested in
the Company pursuant to a 506 Offering Memorandum;
(iii) An aggregate 110,100 shares of Common Stock to five outside
consultants as compensation for services rendered;
(iv) 565,000 shares of Common Stock to a director and shareholder of the
Company pursuant to a transaction approved by the Board of Directors of the
Company, whereby he canceled an aggregate $282,500 past-due promissory notes and
interest thereon, issued by the Company.
(v) 77,778 shares of Common Stock to an officer and director of the
Company, who also was the principal of Rolina Corporation, pursuant to the terms
of that entity's acquisition by the Company.
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ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1998 and 1997 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.
On July 2, 1997, the Company, then known as Whitestone Industries Inc.,
after divesting itself of substantially all operations, assets, and liabilities,
extended an offer to all holders of the common stock of Magnitude, Inc. f/k/a
Proformix, Inc. to exchange their shares into newly to be issued common stock of
the Company. The business combination which took the form of a reverse
acquisition has been accounted for as a Purchase. Subsequent to the exchange,
the Company and Magnitude, Inc. remain as two separate legal entities whereby
Magnitude, Inc. operates as a subsidiary of Magnitude Information Systems, Inc.,
however, the operations of the newly combined entity are comprised solely of the
operations of Magnitude, Inc. and its wholly owned subsidiary Corporate
Ergonomic Solutions, Inc. Therefore, the discussion ensuing below only pertains
to the operations of Magnitude, Inc. for the prior fiscal year until the date of
the acquisition of Magnitude, Inc. through the Company, and to the operations of
the Company thereafter. The past results of operations for Whitestone
Industries, Inc. are summarized as Discontinued Operations. All intercompany
accounts and transactions have been eliminated in consolidation.
SELECTED FINANCIAL DATA
December 31,
1998 1997
---- ----
Balance Sheet
Total assets ...............................$ 2,138,453 $ 1,152,250
Current liabilities ........................ 2,813,308 3,429,825
Long-term debt ............................. 1,316,839 1,719,435
Working capital (deficit) .................. (2,227,516) (2,806,682)
Shareholders' Equity (deficit) .............$(1,991,694) $(3,997,010)
For The Year Ended December 31,
-------------------------------
1998 1997
---- ----
Statement of Operations
Hardware revenues ...........................$ 2,853,969 $ 3,125,009
Software revenues ........................... 72,486 --
Total revenues ..............................$ 2,926,455 $ 3,125,009
Operating loss .............................. (2,588,762) (1,128,170)
Loss before extraordinary items ............. (3,113,157) (1,507,745)
Net loss .................................... (2,530,909) (1,507,745)
Net loss per common share ...................$ (0.58) $ (0.76)
Number of shares used in computing
per share data .............................. 4,324,292 2,094,724
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Results of Operations for the Year Ended December 31, 1998
For the year ended December 31, 1998, the Company had gross revenues of
$2,926,455 (previous year $3,125,009), all of which was generated by its
subsidiary Magnitude, Inc., primarily through its keyboarding systems business.
A portion of $72,486 during 1998 was attributable to the licensing of the
Company's proprietary software. There were no software revenues in 1997.
Gross profits amounted to $1,336,015 for a 46% gross margin ($1,673,805
respectively 54% in 1997). After deducting selling expenses of $1,363,564 and
general and administrative expenses of $2,561,213, the Company realized an
operating loss of $2,588,762 (compared to an operating loss of $1,128,170 in
1997). Non-operating expenses aside from an item of $686,584 extraordinary
income from the sale of the hardware business to Office Specialty and related
royalty income (see Item 1 "Business") totaled $628,731 and include $342,010 net
interest expense and charges of approximately $255,000 which account for the
write-off of assets which were obsoleted with the sale of the hardware business
and for the dissolution of previously capitalized deferred financing charges,
the latter as the result of the early repayment of bank loans in connection with
the Office Specialty transaction. The year concluded with a net loss of
$2,530,909 or $0.58 per share, compared to a loss of $1,507,745 or $0.76 per
share for the previous year.
The fiscal year's results were primarily determined by a combination of
slightly lower revenues, a decrease in the overall gross profit margin, and
significant increases in general and administrative expenses. Sales of keyboard
platforms and accessories continued at a strong pace throughout the first two
quarters, however, were affected during the third quarter by a worsening
shortage of working capital which brought about disruptions in the supply of
materials and caused a curtailment of marketing activities. During the fourth
quarter and in anticipation of the impending sale of the hardware product line,
management dedicated most of the available resources towards the software
business. Effective with the sale of the hardware business in November 1998 no
further revenues were being generated from this product line, aside from
royalties which amounted to $53,543 for the months of November and December and
which are included in Non-operating Income. In the aftermath of the Office
Specialty transaction, the Company's revenue base is being supplied solely by
the licensing of the Company's proprietary software. The software business
accounted for only $72,486 during 1998, however, is expected to grow
significantly during 1999 (see Item 1 "Business").
Cost-of-goods sold include approximately $95,000 amortization of software
assets. These assets which the Company acquired earlier in 1998 pursuant to the
asset purchase agreements with Rolina Corporation and Vanity Software Publishing
Inc. and which formed the basis for the further development, during the year, of
the Company's proprietary Proformix EMS Software System, are being amortized on
a straight line, 10-year, basis. Such software amortization and higher agency
fees in connection with some hardware sales accounted for the decrease in the
overall gross profit margin which otherwise would have tracked the prior year's
result.
During the year, the Company invested considerable resources in the
further development and enhancement of its acquired software products, and the
formation of new infrastructure for the new business sector. The Company hired
product development and customer support staff and, starting with the fall of
1998, put in place a new sales organization dedicated to the software business.
Related incremental expenditures, not including the outlays for the primary
software assets acquired from Rolina and Vanity Software, totaled more than
$800,000 , most of which are reflected in the financial statements as additional
operating expenses. These expenditures which management categorizes as a
front-end
13
<PAGE>
investment in the future of the Company, caused general and administrative
expenses in total to increase by 63% over the level of the preceding year.
However, the Company is in the process of divesting itself of unneeded
infrastructure previously associated with the hardware business, and a cost
savings trend is expected to take hold during the upcoming fiscal year.
The Software Business
In expectation that - on a going forward basis - the software business
will account for most if not all of future revenues, management is giving
special attention to the fact that this business distinguishes itself from the
Company's traditional hardware business in certain important criteria:
(a) Target Clientele: even more so than with the keyboarding products, the
Company expects its client mix to gravitate towards larger companies and
organizations. A likely consequence, initially, will be a concentration of sales
into a smaller number of larger projects and increased volatility in its revenue
stream.
(b) Sales Cycles: Software that has the potential of affecting a company's
operations especially with respect to utilization of human resources is
subjected to a possibly larger degree of test, scrutiny, and committee decision
making than most other software products. Management therefore expects longer
sales cycles which during the transition period until a break-even sales volume
is achieved, will put additional strain on the Company's liquidity and financial
resources.
(c) Cost Structures: The software business to a significant degree is less
capital intensive than the Company's traditional hardware business. Also, its
overall cost structure is less sensitive to changes in volume. While this
translates into improved predictability of future expenditures, it also burdens
the Company with a certain level of quasi fixed expenses during the period when
it is only beginning to realize cash flow from revenues. However, after passing
the break-even point the Company will be the beneficiary of significant cash
flows from any further revenue increases.
In view of the above and of its limited financial resources the Company,
at least during the upcoming quarters, will need to continue relying on outside
financing to augment working capital until a sufficiently large revenue base has
evolved. Management is working to secure such financing and fully expects to be
able to successfully complete the transition to a specialized software house,
with the goal of becoming the premier supplier of productivity enhancement
software for the computer workplace, concentrating on areas such as worksite
evaluation, employee training and work pacing.
Liquidity and Capital Resources
At December 31, 1998, the working capital deficit amounted to $2,227,516
as compared with a deficit of $2,806,682 at December 31, 1997. The relative
increase in working capital was a direct consequence of financing activities and
other transactions more closely described below, which more than offset the
total of investments in the new software business and the losses incurred .
Such activities fall into four areas: (1) the divestiture of the hardware
business pursuant to the Asset Purchase Agreement with 1320236 Ontario Inc. in
November 1998 (see Item 1 "Business") which generated approximately $1.3 million
cash for the Company; (2) the conversion of certain current and past-due Company
debt totaling approximately $340,000 into common equity at the rate of $1 per
share; (3) the raising of new capital through placement of the Company's Common
Shares with domestic investors under private placement arrangements, and with
foreign investors under exemptions pursuant to Regulation S promulgated under
the Securities Act of 1933, as amended, by way of which the Company received an
aggregate $2,787,000 net in new equity capital against issuance of a total of
1,525,866 shares, consisting
14
<PAGE>
of $2,512,000 cash and $275,000 representing the conversion of subscription
prepayments received prior to December 31, 1997; and (4) loans extended by a
director and shareholder of the Company (see Item 12 "Certain Relationships").
Cash received from the 1320236 Ontario Inc. transaction was used to retire
outstanding bank debt in the amount of approximately $800,000 owed to the
Company's principal lender Carnegie Bank, who held a security interest in the
sold assets, and to pay down certain trade liabilities in the aggregate amount
of approximately $500,000. Cash received from the financing transactions
mentioned under (3) and (4) above was primarily used to partially finance the
software purchases pursuant to the Rolina Corporation and Vanity Software
Publishing Co. acquisitions, and to offset losses from operations. The equity
issues as per (3) took place during the first and second quarter of 1998 and
have been discussed in more detail in the Company's last report on Form 10-KSB
and the quarterly 10-QSB reports filed during 1988, all of which are
incorporated herein by reference.
The Company currently has only very limited financial resources, and needs
to augment working capital through outside financing. Management's efforts in
this direction center around securing additional funding from a variety of
sources including debt instruments and a liquidation of unused NOL's for which
recent New Jersey tax legislation created a market. Until such can be completed
which is expected to occur towards the beginning of the second quarter, certain
members of the Company's management have agreed to provide for needed bridge
funding. Between December 31, 1998, and March 31, 1999, approximately $500,000
of such funds have been received by the Company (see "Certain Relationships").
In addition, during that period approximately $400,000 in debt have been
converted into equity.
Changes in Accounting Treatment of Equity Issued
Throughout the year, the Company has followed a valuation approach by
which in cases where no specific $-amount could serve as independent measure in
a particular transaction involving issuance of shares, any such shares of common
stock issued against goods supplied or services performed by third parties were
valued at the then current market price of Magnitude common shares for purpose
of accounting for such transaction.
During reviews at year-end, management decided to take the most
conservative approach permissible in such matters. While equating the market
price with the "fair market value" and using it as the measure for valuation
usually constitutes the proper methodology, such policy may not necessarily be
appropriate in cases where the shares issued are burdened with restrictions, or
where the market for a company's securities is relatively thin. As a consequence
of these deliberations, management decided to apply a discount of 50% to the
market price in the accounting treatment of certain transactions where shares
were issued and no other independent value measures were readily available. The
financial statements for December 31, 1998, therefore reflect a retroactive
adjustment in the accounting treatment of such transactions, most notably
reductions in the carrying values as reported earlier, of software assets
acquired pursuant to the Rolina and Vanity Software purchases and of certain
other assets, by an aggregate $1,323,890 with a corresponding adjustment of
Paid-in Capital.
15
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Notes to Financial Statements are
attached hereto as Exhibit A and incorporated herein by reference.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On July 26, 1997, the Company dismissed Feldman Radin & Co., P.C. ("FRC"),
the Company's former independent accountant, previously engaged as the principal
accountant to audit the Company's financial statements. On July 26, 1997, the
Company's Board of Directors recommended and approved the hiring of Rosenberg
Rich Baker Berman & Company Certified Public Accountants ("Rosenberg"), 380
Foothill Road, Bridgewater, New Jersey, as the Company's principal independent
accountant.
The Company is unaware of any disagreements between the Company and FRC on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The Company authorized FRC to
respond fully to inquiries of Rosenberg concerning the subject matter of each
and every disagreement or event, if any, known by FRC.
16
<PAGE>
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names and ages of all directors and executive officers of the Company are as
follows:
Name Position Term(s) of Office
---- -------- -----------------
Steven D. Rudnik, Age 39 President, Chief Executive January 8, 1999, until
Officer, Director present
Michael G. Martin, Age 48 Director, Chairman of the July 31, 1997, until
Board present
Jerry Swon, Age 49 President, Chief Executive January 15, 1998, until
Officer December 23, 1998
Jerry Swon, Age 49 Director January 15, 1998, until
present
Joerg H. Klaube, Age 57 Vice President, Secretary, July 31, 1997, until
Chief Financial Officer present
Peter J. Buscetto, Age 51 Director October 7, 1997, until
present
Paul Chernis, Age 64 Director July 31, 1997, until
present
Bruce L. Deichl, Age 52 Director January 8, 1999, until
present
There are no family relationships among the Company's Officers and
Directors.
All Directors of the Company hold office until the next annual meeting of
the shareholders and until successors have been elected and qualified. Executive
Officers of the Company are appointed by the Board of Directors at the annual
meeting of the Company 's Directors and hold office for a term of one year or
until they resign or are removed from office.
Resumes:
Michael G. Martin - Chairman of the Board. Founded Magnitude, Inc. f/k/a
Proformix, Inc. in 1991 and has served as President (until January 1998) and as
a Director of that entity since its inception, and as President and CEO of the
Company from July 1997 until January 1998, and as a Director since July 1997.
Prior to forming Proformix, Inc., from 1983 to 1987, Mr.Martin founded and was
President of CenterCore Inc., where he developed the CenterCore Workstation
system for office furniture. Between 1987 and Proformix, Inc.'s inception in
1991, Mr.Martin was researching, developing and testing ergonomic products for
what is now the Company.
Steven D. Rudnik - President, CEO, and Director. Mr. Rudnik joined the
Company in February 1998 with the acquisition of Rolina Corporation, co-founded
by Mr.Rudnik in 1996, and was appointed President and Chief Executive Officer,
and elected to the Board, in January 1999. Mr. Rudnik has extensive experience
in software product development and an operational background in software
companies extending over the past 20 years. In 1983, Mr.Rudnik joined
Randall-Helms International, Inc. Over the next 13 years, he conceived and
developed four independent families of stock market modeling
17
<PAGE>
software products aimed at the worldwide Institutional Investor market. Over
this time, these product families generated over $25 million in sales, to more
than 400 clients in 23 countries. Mr. Rudnik was Senior VP Development and
Partner at the time Randall-Helms was sold in 1995.
Joerg H. Klaube - Chief Financial Officer. Joined Proformix, Inc. in
December 1994 as Vice President Finance & Administration. 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
public 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.
Jerry Swon - Director. Mr. Swon was appointed President and Chief
Executive Officer in January 1998, an office which he served until December 1998
when the Company repositioned itself towards the software business and Steven D.
Rudnik became President. Mr. Swon was elected to the Board in January 1998.
Prior to joining the Company, Mr.Swon was Chairman of Royal Capital Inc., a New
Jersey corporation specializing in acquisitions and project financing. From 1993
to 1996, Mr. Swon was President and CEO of Concord Energy, Inc., a public oil
and gas company.
Peter J. Buscetto - Director. Mr. Buscetto was appointed director of the
Company in October 1997. He is President /CEO of PJB Associates, Inc., a Georgia
consulting and investment company. Mr. Buscetto has an extensive marketing and
operational background that extends over twenty-five years in the retail field.
He was involved with the expansion of CompUSA where he served as Senior VP of
Operations, CCO, and President of CompUSA East. Prior to that, he served fifteen
years with the Hechinger Company, a Landover based Home Center company. He held
various operational positions with the Hechinger Company, the last of which was
Senior VP Operations for Home Quarters and a wholly owned subsidiary. PJB
Associates is actively involved with several companies both as an investor and
consultant, throughout the US and Europe.
Paul Chernis - Director. Mr. Chernis was appointed a director of the
Company in July 1997. Mr. Chernis has been a partner in the law firm Silverman,
Collura, Chernis & Balzano, P.C. since June 1990 and specializes in corporate
and securities law. The aforesaid law firm renders legal services to the
Company. Mr. Chernis is a graduate of New York University School of Law, and
prior to entering private practice in 1972, he served as Assistant Regional
Administrator of the New York Regional Office the Securities and Exchange
Commission.
Bruce L. Deichl - Director. Mr. Deichl was appointed a director of the
Company effective with January 8, 1999. Mr. Deichl has over 28 years experience
in the banking/investment industry with Marine Midland Municipals as Assistant
Vice President of Retail Sales and as Vice President of Institutional Sales with
Thompson McKinnon. He has also held President positions at Royal Capital and Tax
Transfer Corporation of New Jersey. Mr. Deichl was a director for the Marty
Lyons Foundation for 12 years and founded the New Jersey chapter of the
foundation which he chaired for five years. Mr. Deichl earned a BA in Economics
from the University of Notre Dame in 1969.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company is not subject to the reporting requirements of Section 16(a)
of the Securities Exchange Act of 1934.
18
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive
capacities for the fiscal year ended December 31, 1998, for each executive
officer whose aggregate cash remuneration exceeded $100,000, and for all
executive officers as a group:
Aggregate cash
Name of individual Capacity in which served compensation (1) (2)
- ------------------ -------------------------- ---------------------
Steven D. Rudnik President - Software Division $ 106,923
Michael G. Martin Chairman of the Board $ 139,527
All executive officers
as a group (4 persons) $ 343,545
- -----------------------
(1) The value of other non-cash compensation, except for the items listed under
(2), that was extended to or paid for individuals named above did not
exceed 10% of the aggregate cash compensation paid to such individual, or
to all executive officers as a group.
(2) In November 1998, the Board of Directors of the Company awarded several
stock grants as additional compensation for services during 1998, as
follows:
Beneficiary Position No. of Shares )*
- ----------- -------- ----------------
Michael G. Martin Director 150,000
Jerry Swon President, CEO 150,000
Bruce L. Deichl Director Nominee 100,000
All such shares were registered on Form S-8 , on January 19, 1999.
* the closing price for the Company's common stock at the time of the grants
was $1 per share.
19
<PAGE>
Stock Options :
The following table sets forth stock options granted during 1998 pursuant
to the Company's 1997 Stock
Option Plan to executive officers, directors, and beneficial owners of more than
10 percent of any class of equity securities of the Company:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Klaube 31,162 0.9% 1.00 11/19/08
S. Rudnik 95,235 2.6% 1.00 1/31/08
P. Chernis 40,000 n/a 1.00 11/19/05
</TABLE>
The following table sets forth stock options granted during 1998
outside of the Company's 1997 Stock Option Plan to executive officers,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
<TABLE>
<S> <C> <C> <C> <C>
M. Martin 750,000 20.6% 1.00 5/15/08
S. Rudnik 279,765 7.7% 1.00 1/31/08
S. Rudnik 950,000 26.1% 1.00 11/19/08
J. Swon 900,000 24.7% 1.00 5/15/08
M. Martin 535,000 )* 14.7% 0.50 12/31/08
- ------------------------------------
</TABLE>
* Options granted pursuant to an amendment of Mr. Martin's employment
agreement of July 18, 1997. The shares underlying these options were registered
on Form S-8 on January 19, 1999.
1997 Stock Option Plan:
The Company's 1997 Stock Option Plan, as filed with Information Statement
pursuant to Section 14(c) with the Commission on July 1, 1997, and with
Registration Statement on Form S-8 with the Commission on September 8, 1997, is
hereby incorporated by reference.
Compensation of Directors:
The Company currently pays no outside directors' fees.
20
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 26, 1999, the record and
beneficial ownership of Common stock of the Company by each officer and
director, all 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 Michael G. Martin 2,410,653(2) 26.64%
Stock 65 Nicole Avenue,
Bridgewater, NJ
Jerry Swon 1,535,928(3) 16.23%
5 Kerby Lane,
Mendham, NJ
Joerg H. Klaube 100,000(4) 1.24%
4 Claire Drive,
Bridgewater, NJ
Peter J. Buscetto 79,944(5) 0.99%
c/o the Company
Paul Chernis 40,000 0.50%
c/o the Company
Steven D. Rudnik 1,558,334(6) 16.46%
8 Knollwood Terr.,
Chester, NJ
All Directors and Officers 5,599,859 47.22%
as a Group (7 persons)
- ----------------------------
(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 February 26, 1999. For purposes of computing
the percentage of outstanding shares of Common Stock held by each person or
group of persons named above, any security which such person or persons has or
have the right to acquire within such date is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnote to this table
and pursuant to applicable community property laws, the Company believes based
on information supplied by such persons, that the persons named in this table
have sole voting and investment power with respect to all shares of Common Stock
which they beneficially own.
(2) Includes options to acquire 985,000 shares.
(3) Includes 27,327 shares owned by Royal Capital Inc., and 8,735 shares and
options to acquire 1,399,866 shares, both owned by Jane Swon, spouse (Jane Swon
is a principal shareholder of Royal Capital, Inc.),.
(4) Represents options to purchase a like number of shares.
(5) Includes 47,722 shares held by affiliated trusts, options to acquire 10,000
shares, and warrants to purchase 22,222 shares.
(6) Includes 77,778 shares to be issued pursuant to Mr.Rudnik's employment
agreement, and options to acquire 1,325,000 shares.
21
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1998, a director and principal shareholder extended a working
capital loan of $262,000 to the Company, secured by the assets of the Company,
against issuance of a promissory note bearing interest at the rate of 10% p.a. .
In November 1998, the Company entered into a consulting agreement with an
individual who subsequently in January 1999 - joined the Company's board of
directors, and pursuant to which the Company issued 1,000,000 shares of common
stock. Such shares were registered on Form S-8 on December 22, 1998, which
filing is incorporated herein by reference.
Between December 30, 1998, and March 31, 1999, the director and principal
shareholder first above mentioned extended working capital loans aggregating
$395,560 to the Company, of which a portion of $351,060 was covered by a
promissory note bearing interest at the rate of 10% p.a. During the same time,
this director and shareholder exercised options to purchase 450,000 shares of
the common stock of the Company, and was issued an additional 565,000 shares,
against a combination of cash payments and cancellation of debt owed by the
Company, in the aggregate amount of $507,500.
22
<PAGE>
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits that are filed with this report or that are incorporated by
reference are set forth in the Exhibit Index attached hereto.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended December
31, 1997.
On January 27, 1999, the Company filed a report on Form 8-K, announcing an
Asset Purchase Agreement and related agreements, consummated with 1320236
Ontario, Inc. d/b/a Office Specialty. Also announced was a change in the name of
the Company. The report on Form 8-K including its exhibits is incorporated
herein by reference.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MAGNITUDE INFORMATION SYSTEMS, INC.
By: /s/ Steven D. Rudnik Date: April 14, 1999
-----------------------------
Steven D. Rudnik
President, Chief Executive Officer
(Principal Executive Officer),
Director
By: /s/ Joerg H. Klaube Date: April 14, 1999
-----------------------------
Joerg H. Klaube
Secretary, Chief Financial Officer
(Principal Financial Officer)
In accordance with the requirements of the Securities Exchange Act, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Date
---- ----
/s/ Michael G. Martin April 14, 1999
-----------------------------
Michael G. Martin, Chairman
April __, 1999
-----------------------------
Peter J. Buscetto, Director
/s/ Paul Chernis April 16, 1999
-----------------------------
Paul Chernis, Director
/s/ Bruce Deichl April 14, 1999
-----------------------------
Bruce L. Deichl, Director
/s/ Jerry Swon April 14, 1999
-----------------------------
Jerry Swon, Director
24
<PAGE>
EXHIBIT INDEX
(A) Financial Statements and Notes to Financial Statements
(2.1) Asset Purchase Agreement and Marketing and Development Agreement with
1320236 Ontario Inc. d.b.a Office Specialty, both of the date November 18,
1998, filed with the Commission on Form 8-K on January 17, 1999,
incorporated herein by reference.
(2.2)P 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.
(2.3)P Asset Purchase Agreement with Vanity Software Publishing Corporation,
dated April 30, 1998.
(4) Designation for Cumulative Preferred Stock filed January 13, 1998, with
the State of Delaware, and incorporated herein by reference.
(11) Statement re: Computation of earnings per share.
(16) Documentation regarding change in certifying accountant incorporated by
reference to Form 8-K filed on July 31, 1997, filed by the Company with
the Commission, and incorporated herein by reference.
(21) Subsidiaries of the Company:
(i) Magnitude, Inc. is a corporation formed under the laws of the State of
Delaware and is the name under which it conducts business.
(ii) Corporate Ergonomic Systems Inc. - a wholly owned subsidiary of
Magnitude, Inc. - is a corporation formed under the laws of the State of
New Jersey and is the name under which it conducts business.
(23) Independent Auditors' Consent - attached to Exhibit A.
(27) Financial Data Schedule - attached to Exhibit A.
OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE
(a) The Company's Quarterly Reports on Form 10-QSB for the periods ended March
31, 1998, June 30, 1998, and September 30, 1998.
(b) All other reports filed by the Company pursuant to Section 13(a) or 15(d)
of the Exchange Act since the Company's fiscal year ended December 31,
1997.
25
<PAGE>
EXHIBIT A
Rosenberg Rich
Baker Berman
& Company
A PROFESSIONAL ASSOCIATION OF
CERTIFIED PUBLIC ACCOUNTANTS
380 Foothill Road o P.O. Box 6483 o Bridgewater, NJ 08807-0483
908-231-1000 o FAX: 908-231-6894 o E-Mail: [email protected]
April 7, 1999
To the Audit Committee of
Magnitude Information Systems, Inc. and Subsidiaries
We have audited the financial statements of Magnitude Information Systems, Inc.
and Subsidiaries for the year ended December 31, 1998 and have issued our report
thereon dated April 7, 1999. Professional standards require that we provide you
with the following information related to our audit.
Our Responsibility Under Generally Accepted Auditing Standards
As stated in our engagement letter dated December 22, 1998, our responsibility,
as described by professional standards, is to plan and perform our audit to
obtain reasonable, but not absolute, assurance that the financial statements are
free of material misstatement and are fairly presented in accordance with
generally accepted accounting principles. Because of the concept of reasonable
assurance and because we did not perform a detailed examination of all
transactions, there is a risk that material errors, irregularities, or illegal
acts, including fraud and defalcations, may exist and not be detected by us.
As part of our audit, we considered the internal control structure of Magnitude
Information Systems, Inc. and Subsidiaries. Such considerations were solely for
the purpose of determining our audit procedures and not to provide any assurance
concerning such internal control structure.
Significant Accounting Policies
Management has the responsibility for selection and use of appropriate
accounting policies. In accordance with the terms of our engagement letter, we
will advice management about the appropriateness of accounting policies and
their application. The significant accounting policies used by Magnitude
Information Systems, Inc. and Subsidiaries are described in the notes to the
financial statements. No new accounting policies were adopted and the
application of existing policies was not changed during the year. We noted no
transactions entered into by the Company during the year that were both
significant and unusual, and of which, under professional standards, we are
required to inform you, or transactions for which there is a lack of
authoritative guidance or consensus.
<PAGE>
To the Audit Committee of
Magnitude Information Systems, Inc. and Subsidiaries
April 7, 1999
Page 2
Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared
by management and are based on management's knowledge and experience about past
and current events and assumptions about future events. Certain accounting
estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events affecting
them may differ significantly from those expected.
Significant Audit Adjustments
For purposes of this letter, professional standards define a significant audit
adjustment as a proposed correction of the financial statements that, in our
judgment, may not have been detected except through our auditing procedures.
These adjustments may include those proposed by us but not recorded by the
Company that could potentially cause future financial statements to be
materially misstated, even though we have concluded that such adjustments are
not material to the current financial statements. We proposed no audit
adjustments that could, in our judgment, either individually or in the
aggregate, have a significant effect on the Company's financial reporting
process.
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with
management as a matter, whether or not resolved to our satisfaction, concerning
a financial accounting, reporting, or auditing matter that could be significant
to the financial statements or the auditor's report. We are pleased to report
that no such disagreements arose during the course of our audit.
Consultations with Other Independent Accountants
In come cases, management may decide to consult with other accountants about
auditing and accounting matters, similar to obtaining a "second opinion" on
certain situations. If a consultation involves application of an accounting
principle to the Company's financial statements or a determination of the type
of auditor's opinion that may be expressed on those statements, our professional
standards require the consulting accounting to check with us to determine that
the consultant has all the relevant facts. To our knowledge, there were no such
consultations with other accountants.
<PAGE>
To the Audit Committee of
Magnitude Information Systems, Inc. and Subsidiaries
April 7, 1999
Page 3
Issues Discussed Prior to Retention of Independent Auditors
We generally discuss a variety of matters, including the application of
accounting principles and auditing standards, with management each year prior to
retention as the Company's auditors. However, these discussions occurred in the
normal course of our professional relationship and our responses were not a
condition to our retention.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in
performing and completing our audit.
This information is intended solely for the use of the Audit Committee, Board of
Directors, and management of Magnitude Information Systems, Inc. and should not
be used for any other purpose.
Very truly yours,
/s/Rosenberg Rich Baker Berman & Co.
-------------------------------------
Rosenberg Rich Baker Berman & Co.
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Financial Statements
December 31, 1998
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Index to the Consolidated Financial Statements
December 31, 1998
Page
Independent Auditors' Report............................................ 1
Financial Statements
Consolidated Balance Sheet........................................... 2
Consolidated Statements of Operations................................ 3
Consolidated Statement of Stockholders Equity (Deficit).............. 4-5
Consolidated Statements of Cash Flows................................ 6-7
Notes to the Consolidated Financial Statements....................... 8-21
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
We have audited the accompanying consolidated balance sheet of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 1998 and 1997. 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 generally accepted auditing
standards. 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 provides 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, 1998 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, as of December 31, 1998, the Company has
a negative working capital position and has experienced net losses and negative
cash flows from operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in the notes to the financial statements. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts or
classifications of liabilities that might be necessary should the Company be
unable to continue in operation.
Bridgewater, New Jersey
April 7, 1999
1
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Balance Sheet
December 31, 1998
Assets
Current Assets
Cash $ 9,403
Accounts receivable net of allowance
for doubtful accounts of $109,421 109,249
Inventories 26,789
Miscellaneous receivables 54,743
Prepaid expenses 385,608
-----------
Total Current Assets 585,792
Property, plant and equipment 148,283
Investment in Input Technologies - at cost 60,000
Software, net of accumulated amortization of $116,123 1,339,267
Other assets 5,111
-----------
Total Assets $ 2,138,453
===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses $ 1,673,742
Dividends payable 9,000
Loans payable 369,730
Current maturities of notes payable 550,000
Current maturities of long-term debt 195,010
Current maturities of capitalized lease obligations 15,826
-----------
Total Current Liabilities 2,813,308
Notes payable, less current portion 1,025,000
Long term debt, less current portion 262,000
Obligations under capital leases, excluding
current maturities 29,839
-----------
Total Liabilities $ 4,130,147
-----------
Minority Interest --
Stockholders' Equity (Deficit)
Preferred stock Series A, $.01 par value,
authorized 3,000,000 shares; issued and
outstanding, 0 shares --
Cumulative preferred stock, $.001 par value;
2,500 shares authorized, 10 shares issued
and outstanding --
Common stock, $.0001 par value, 30,000,000 shares
authorized; 6,431,113 shares issued and
outstanding 643
Contributed capital 81,000
Additional paid in capital 6,832,728
Accumulated deficit (8,906,065)
-----------
Total Stockholders' Equity (Deficit) (1,991,694)
-----------
Total Liabilities and Stockholders' Equity (Deficit) 2,138,453
===========
See notes to the consolidated financial statements.
2
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Operations
Year Ended December 31,
----------------------------
1998 1997
----------- ------------
Net Sales $ 2,926,455 $ 3,125,009
Cost of goods sold 1,590,440 1,451,204
----------- -----------
Gross Profit 1,336,015 1,673,805
Selling, general and administrative expenses 3,924,777 2,801,975
----------- -----------
(Loss) From Operations (2,588,762) (1,128,170)
----------- -----------
Other Income (Expense)
Miscellaneous income 86,872 90,977
Interest income 1,384 --
Lawsuit settlement (10,000) --
Miscellaneous expense (172,385) --
Interest expense (343,394) (338,038)
Loss on disposition of assets (104,336) (132,514)
----------- -----------
Total Other (Expense) (541,859) (379,575)
----------- -----------
(Loss) From Continuing Operations Before
Provision for Income Taxes (3,130,621) (1,507,745)
Provision for Income Taxes -- --
----------- -----------
(Loss) From Continuing Operations (3,130,621) (1,507,745)
Discontinued Operations
Gain on disposal of hardware line of
business (net of $0 income tax effect) 599,712 --
----------- -----------
Net (Loss) $(2,530,909) $(1,507,745)
=========== ===========
Net (Loss) Per Common Share:
(Loss) From Continuing Operations $ (.72) $ (.76)
Discontinued Operations .14 --
----------- -----------
Net (Loss) $ (.58) $ (.76)
=========== ===========
Weighted Average of Common Shares
Outstanding 4,324,292 2,094,724
=========== ===========
See notes to the consolidated financial statements.
3
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
---------------- ----------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 -- $ -- 10 $ -- 3,417,655 $ 3,418
Dividends on cumulative preferred shares -- -- -- -- -- --
Dividends on cumulative preferred shares
waived -- -- -- -- -- --
Issuances of common stock granted for
services performed -- -- -- -- 1,210,000 1,210
Issuances of common stock pursuant to stock
option exercise per consulting agreement -- -- -- -- 701,343 702
Issuance of common stock for conversion of
accrued interest on private placement notes -- -- -- -- 281,539 282
Issuance of common stock pursuant to consulting
agreement -- -- -- -- 2,900,000 2,900
------ ------ -------- ------ --------- -------
Subtotal - Magnitude, Inc. -- -- 10 -- 8,510,537 8,512
Exchange of Magnitude, Inc. preferred stock for
preferred stock of the Company -- -- (10) -- -- --
Recapitalization pursuant to reverse acquisition: -- -- -- -- -- --
Exchange of Magnitude, Inc. common shares 3.4676
to 1 common share of the Company -- -- -- -- (8,266,757) (8,267
Magnitude, Inc. common shares not tendered and
accounted for as a minority interest -- -- -- -- (243,780) (245)
------ ------ -------- ------ ---------- -------
Subtotal - Magnitude, Inc. -- -- -- -- -- --
Opening common and preferred stock of the Company
prior to the exchange with Magnitude, Inc. -- -- 35,036 -- 43,064 4
Cancelation of the Company's preferred stock -- -- (35,036) -- -- --
Issuance of common stock of the Company to
Royal Capital, Inc. -- -- -- -- 313,600 32
Fractional shares canceled -- -- -- -- (18) --
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc.
Exchange of the Company's preferred stock for
preferred stock of Magnitude, Inc. -- -- 10 -- -- --
------ ------ -------- ------ ---------- -------
Subtotal - the Company -- -- 10 -- 2,740,646 (274)
Issuance of common stock to President pursuant
to grant -- -- -- -- 60,000 6
Issuance of common stock to domestic private
individuals pursuant to an exemption under
Rule 506 -- -- -- -- 28,611 3
Issuance of common stock to foreign investors
pursuant to Reg. S. -- -- -- -- 69,250 7
Net loss, year ended December 31, 1997 -- -- -- -- -- --
------ ------ -------- ------ ---------- -------
-- $ -- 10 $ -- 2,898,507 $ 290
Balances, December 31, 1997 ====== ====== ======== ====== ========== =======
<CAPTION>
Total
Additional Stockholders
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997 $162,000 $1,361,108 $(4,957,411) (3,430,885)
Dividends on cumulative preferred shares -- -- (9,000) (9,000)
Dividends on cumulative preferred shares
waived 81,000 -- (81,000) --
Issuances of common stock granted for
services performed -- 44,790 -- 46,000
Issuances of common stock pursuant to stock
option exercise per consulting agreement -- 216,636 -- 217,338
Issuance of common stock for conversion of
accrued interest on private placement notes -- 281,250 -- 281,532
Issuance of common stock pursuant to consulting
agreement -- (2,900) -- --
----------- ---------- ----------- ------------
Subtotal - Magnitude, Inc. 243,000 1,900,884 (5,047,411) (2,895,015)
Exchange of Magnitude, Inc. preferred stock for
preferred stock of the Company -- -- -- --
Recapitalization pursuant to reverse acquisition: -- -- -- --
Exchange of Magnitude, Inc. common shares 3.4676
to 1 common share of the Company -- 8,267 -- --
Magnitude, Inc. common shares not tendered and
accounted for as a minority interest -- 245 -- --
----------- ----------- ------------ -------------
Subtotal - Magnitude, Inc. 243,000 1,909,396 (5,047,411) (2,895,015)
Opening common and preferred stock of the Company
prior to the exchange with Magnitude, Inc. -- (4) -- --
Cancelation of the Company's preferred stock -- -- -- --
Issuance of common stock of the Company to
Royal Capital, Inc. -- (32) -- --
Fractional shares canceled -- -- -- --
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. -- (238) -- --
Exchange of the Company's preferred stock for
preferred stock of Magnitude, Inc. -- -- -- --
----------- ----------- ------------ -------------
Subtotal - the Company 243,000 1,909,122 (5,047,411) (2,895,015)
Issuance of common stock to President pursuant
to grant -- (6) -- --
Issuance of common stock to domestic private
individuals pursuant to an exemption under
Rule 506 -- 128,747 -- 128,750
Issuance of common stock to foreign investors
pursuant to Reg. S. -- 276,993 -- 277,000
Net loss, year ended December 31, 1997 -- -- (1,507,745) (1,507,745)
----------- ----------- ------------ -------------
$ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
Balances, December 31, 1997 =========== =========== ============ =============
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
---------------- ----------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 -- $ -- 10 $ -- 2,898,507 $ 290
Accrued Dividends on cumulative preferred shares
reversed -- -- -- -- -- --
Dividends on cumulative preferred shares waiver
reversed -- -- -- -- -- --
Issuances of common stock to domestic private
individuals pursuant to an exemption under Rule 506 -- -- -- -- 79,722 8
Issuances of common stock to foreign investors
pursuant to Reg. S. -- -- -- -- 1,453,644 145
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. -- -- -- -- 22,061 2
Issuance of common stock for conversion of accrued
interest on private placement notes -- -- -- -- 10,411 1
Issuance of common stock in exchange for prepaid
advertising -- -- -- -- 150,000 15
Issuance of common stock pursuant to Rolina
Corporation merger -- -- -- -- 155,556 16
Issuance of common stock pursuant to Vanity Software
Publishing Corporation acquisition -- -- -- -- 224,000 22
Issuance of common stock granted for services
performed -- -- -- -- 1,080,177 108
Issuance of common stock for conversion of loan
and accrued interest -- -- -- -- 342,000 34
Issuance of common stock pursuant to sales incentive
awards -- -- -- -- 5,035 1
Issuance of common stock in exchange for product
rights -- -- -- -- 10,000 1
Net loss, year ended December 31, 1998 -- -- -- -- -- --
------ ------ -------- ------ --------- -------
Balances, December 31, 1998 -- $ -- 10 $ -- 6,431,113 $ 643
====== ====== ======== ====== ========= =======
<CAPTION>
Total
Additional Stockholders
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1998 $243,000 $2,314,856 $(6,555,156) (3,997,010)
Accrued Dividends on cumulative preferred shares
reversed -- -- 18,000 18,000
Dividends on cumulative preferred shares waiver
reversed (162,000) -- 162,000 --
Issuances of common stock to domestic private
individuals pursuant to an exemption under Rule 506 -- 199,992 -- 200,000
Issuances of common stock to foreign investors
pursuant to Reg. S. -- 2,586,855 -- 2,587,000
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. -- (2) -- --
Issuance of common stock for conversion of accrued
interest on private placement notes -- 36,101 -- 36,102
Issuance of common stock in exchange for prepaid
advertising -- 374,985 -- 375,000
Issuance of common stock pursuant to Rolina
Corporation merger -- 388,874 -- 388,890
Issuance of common stock pursuant to Vanity Software
Publishing Corporation acquisition -- 559,978 -- 560,000
Issuance of common stock granted for services
performed -- 29,892 -- 30,000
Issuance of common stock for conversion of loan
and accrued interest -- 341,199 -- 341,233
Issuance of common stock pursuant to sales incentive
awards -- (1) -- --
Issuance of common stock in exchange for product
rights -- (1) -- --
Net loss, year ended December 31, 1998 -- -- (2,530,909) (2,530,909)
----------- ---------- ----------- ------------
Balances, December 31, 1998 $ 81,000 $6,832,728 $(8,906,065) $(1,991,694)
=========== ========== =========== ============
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------------
1998 1997
------------ -------------
Cash Flows From Operating Activities
Net Income (Loss) $ (2,530,909) $ (1,507,745)
Adjustments to Reconcile Net (Loss) to
Net Cash (Used) by Operating Activities
Depreciation and amortization 266,589 268,155
Loss on disposition of assets 112,112 132,514
Bad debt provision 94,287 370
Forgiveness of debt (32,893) 90,977
Inventory variance 132,890 --
Return reserve provision 30,000 --
Decreases (Increases) in Assets
Accounts receivable 50,956 144,674
Miscellaneous receivables (54,743) --
Inventories (317,650) 11,139
Prepaid expenses 36,996 11,337
Other assets 414 (1,127)
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses 403,405 170,117
Trade acceptance payable (44,860) 44,860
Advances payable -- 275,000
------------ ------------
Net Cash (Used) by Operating
Activities (1,853,406) (359,729)
------------ ------------
Cash Flows From Investing Activities
Purchases of equipment, fixtures,
and software (569,857) (56,372)
Sales of property and equipment 716,926 --
------------ ------------
Net Cash Provided (Used) by
Investing Activities 147,069 (56,372)
------------ ------------
Cash Flows From Financing Activities
Repayment of notes payable (25,000) --
Proceeds from long-term debt 342,000 --
Repayment of long-term debt (750,577) (148,950)
Repayment of capital lease obligations (7,229) (7,660)
Repayment of officer loans payable (85,000) (30,000)
Proceeds from loans payable -- 25,000
Repayment of loans payable (275,000) (25,000)
Proceeds from issuance of common stock 2,512,000 605,750
------------ ------------
Net Cash Provided by Financing
Activities 1,711,194 419,140
------------ ------------
Net increase in Cash 4,857 3,039
Cash at beginning of period 4,546 1,507
------------ ------------
Cash at end of period $ 9,403 $ 4,546
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest Paid $ 245,916 $ 142,875
============ ============
Taxes Paid $ 4,320 $ 425
============ ============
See notes to the consolidated financial statements.
6
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
Year Ended December 31,
------------------------
1998 1997
---------- ---------
Schedule of non-cash financing activities
In connection with the retirement of
$36,102 of accrued interest on a promissory
note, 10,411 common shares were issued $ 36,102 $ --
========= =========
Capitalized lease obligations incurred for
use of equipment $ 26,376 $ --
========= =========
In connection with the acquisition of a 20%
equity interest in Input Technologies
LLC, $60,000 of accounts receivable were
written off $ 60,000 $ --
========= =========
In connection with the Rolina Corporation
merger, secured payment obligation
incurred $ 100,000 $ --
========= =========
In connection with the issuance of common
stock, 281,539 Magnitude, Inc. shares
were issued as consideration for accrued
interest on $1,175,000 of private
placement notes $ $ 281,539
========= =========
Promissory note issued in connection with
retirement of other promissory notes
and the repayment of a past due
subordinated debenture $ $ 316,849
========= =========
In connection with the issuance of common
stock, 75,000 Magnitude, Inc. shares
were issued as consideration for past
services $ $ 46,000
========= =========
In connection with a stock option exercise,
34,676 Magnitude, Inc. shares were
issued in connection with a reduction in
accrued expenses $ $ 17,338
========= =========
In connection with the obtaining of prepaid
advertising, 150,000 common shares
were issued $ 375,000 $
========= =========
In connection with the Rolina Corporation
merger, 155,556 common shares were
issued $ 388,890 $
========= =========
In connection with the Vanity Software
Publishing Corporation acquisition,
224,000 common shares were issued $ 560,000 $
========= =========
In connection with the issuance of common
stock, 72,677 shares were issued as
consideration for past services $ 30,000 $
========= =========
In connection with the retirement of a
$316,849 promissory note and accrued
interest thereon, 342,000 common shares
were issued $ 341,233 $
========= =========
See notes to the consolidated financial statements.
7
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to
Whitestone Industries, Inc. On July 14, 1997, the Company changed its name
to Proformix Systems, Inc., and on November 18, 1998, the Company changed
its name to Magnitude Information Systems, Inc.
On June 16, 1997, Royal Capital, Inc. ("Royal"), a New Jersey Corporation,
entered into an agreement with the Company, then known as Whitestone
Industries, Inc., and its then president, whereby Royal (i) acquired 100,000
shares of the Company's preferred stock held by the President and (ii)
acquired the voting proxy of 1,120,000 (pre-split) shares of common stock.
The consideration paid to the President was $100,000. Thus, Royal obtained a
voting majority of the Company's capital stock.
On June 24, 1997, the Company, Royal, and Proformix, Inc., a company
incorporated in the State of Delaware in October 1991, entered into an
acquisition agreement as a consequence of which the Company on July 2, 1997,
submitted a stock exchange offer to the shareholders of Proformix, Inc.
Proformix, Inc. in November, 1998 changed its name to Magnitude, Inc. and is
hereafter referred to as Magnitude, Inc. In order to enter into the
aforesaid agreement, the Company's then Board of Directors authorized a 137:
1 reverse split of its outstanding shares of common stock, and spun off the
shares of its wholly owned subsidiary Golden Bear Entertainment Corporation
to its then current shareholders in the form of a stock dividend. This
distribution effectively eliminated all assets and liabilities from the
books of the Company prior to the acquisition of Magnitude, Inc.
The exchange offer to the Magnitude, Inc. shareholders gave them the choice
to exchange their shares of the common stock in Magnitude, Inc. into newly
to be issued common stock of Whitestone at the rate of 3.4676 shares of
Magnitude, Inc. common stock to 1 share of Whitestone common stock, and to
holders of Magnitude Cumulative Preferred Stock, to exchange their shares
into newly to be issued Cumulative Preferred Stock of Whitestone at the rate
of 1 to 1. The exchange transaction resulted in the former Magnitude, Inc.
shareholders owning approximately 90% of the combined entity. Holders of
approximately 98% of Magnitude, Inc. common stock have agreed to the stock
exchange and tendered their common shares in exchange for Whitestone common
shares. The remaining 2% of Magnitude, Inc. stockholders hold a minority
interest which is valued at $0.
For accounting purposes, the acquisition has been treated as an acquisition
of Whitestone by Magnitude, Inc. and a recapitalization of Magnitude, Inc.
The historical financial statements prior to July 2, 1997 are those of
Magnitude, Inc. Proforma information is not presented since the combination
is considered a recapitalization. Subsequent to the exchange, the Company
and Magnitude, Inc. remain as two separate legal entities whereby Magnitude,
Inc. operates as a subsidiary of the Company, however, 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 Proformix EMS
Software System.
8
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
On November 18, 1998, the Company and its wholly owned subsidiary Magnitude,
Inc. entered into an Asset Purchase Agreement and several related agreements
with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian designer,
manufacturer and distributor of office furniture based in Holland Landing,
Ontario, Canada, pursuant to which OS acquired Magnitude, Inc.'s hardware
product line comprised of the Company's ergonomic keyboard platform products
and accessories, and all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the
Proformix name, against a cash consideration and on ongoing contingent
stream of royalty payments on OS' sales of the Proformix hardware products.
The Company will continue to market its proprietary software under the
Proformix label. The Agreement with OS also provided for the retirement of
the Company's then existing bank debt, out of the proceeds of the
transaction.
Until November 18, 1998, when the Company sold its hardware product line
comprised of Magnitude, Inc.'s ergonomic keyboard platform products and
accessories, its business was primarily centered around the design,
development, manufacture, and marketing of research-based ergonomic
accessory products for the computerized workplace. In parallel, and
beginning with the February 1998 acquisition by the Company of Rolina
Corporation, an early stage software business which had developed an
ergonomic software product that was being marketed under the name
"ErgoSentry", and the subsequent acquisition in May 1998 of substantially
all of the assets of Vanity Software Publishing Corporation, a Canadian
software firm, which also included a certain ergonomic software package
known as "ErgoBreak", the Company engaged in the development of a unique
suite of software packages designed to increase productivity in the computer
related work environment which include the before mentioned "ErgoSentry" and
"ErgoBreak" products. These efforts resulted, in November 1998, in the
release to the market of the proprietary "Proformix EMS (Ergonomic
Management System) software system. With the sale of the hardware product
line, the Company's business is now focused exclusively on the further
development and marketing of these software products. As such, the Company
currently must be considered an enterprise in transition, because it has not
yet realized material revenues from licensing its software.
Magnitude Inc.'s wholly owned subsidiary, Corporate Ergonomic Solutions,
Inc. (Ergonomics) was incorporated in the State of New Jersey during October
1992. Ergonomics, which commenced operations in September 1998, was formed
primarily to market Proformix's hardware products which has since been
disposed of. Prior to that, its operations had not been significant.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has negative working capital
of $2,227,516 as of December 31, 1998. Additionally, the Company generated
net losses from operations of $3,130,621 and $1,507,745 along with negative
cash flows from operations of $1,853,406 and $359,729 for the years ended
December 31, 1998 and 1997, respectively. A large portion of accounts
payable and accrued expenses are either overdue or otherwise beyond original
terms. The Company has negotiated extended payment terms with key suppliers,
and entered into several pay-out agreements with other creditors.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue
in operation.
The Company's plans to overcome these difficulties, include raising funding
through debt, new equity capital or a combination of both. Management has
provided for bridge funding of which approximately $500,000 has been
subsequently received.
9
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Principles of Consolidation
The consolidated financial statements include the accounts of Magnitude
Information Systems, Inc. and its subsidiaries, Magnitude, Inc. and
Corporate Ergonomic Solutions, Inc. All significant intercompany balances
and transactions have been eliminated.
Inventories
Inventory consists of finished goods which are stated at the lower of cost
(determined by the first-in, first out method) or market. The sale of the
Company's hardware product line resulted in a loss on disposal of inventory
of $74,736.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Certain molds were being
depreciated using the units of production method based upon an estimated
useful life of 1,000,000 units. During 1997, the company changed the
estimated useful life of these molds to 300,000 units. The effect of this
change in estimate increased the Company's net loss for 1997 by $169,073. As
part of the OS Asset Purchase Agreement, molds with a remaining net book
value of $312,258 and equipment with a remaining net book value of $6,110
were sold. Depreciation on remaining 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.
Hardware
System design costs and software acquisition costs are amortized on a
straight-line basis over an estimated useful life of 10 years. As part of
the OS Asset Purchase Agreement, hardware system design costs with a
remaining net book value of $57,920 were sold. Deferred finance charges are
amortized using the straight line method over a period of 4-5 years.
Remaining charges of $19,495 after retirement of the Company's then existing
bank debt as part of the OS Asset Purchase Agreement were written off.
Securities Issued for Services
The Company accounts for stock options issued for services by reference to
the fair market value of the Company's stock on the date of stock issuance
or option grant. Compensation expense is recorded for the fair market value
of the stock issued, or in the case of options, for the difference between
the stock's fair market value on the date of grant and the option exercise
price.
Securities Issued for Services, Continued
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 be accounted for based on the
fair value of the consideration received 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', which does not require compensation to be
recorded if the consideration to be received is at least equal to the fair
value at the measurement date. The adoption of SFAS No. 123 does not have a
material impact on the financial statements.
Investment
Investment in Input Technologies LLC is accounted for under the cost method.
10
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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, the benefit for
income taxes has been offset entirely by a valuation allowance against the
related deferred tax asset for the year ended December 31, 1998.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share," is computed by
dividing net loss by the weighted average number of shares of Common Stock
outstanding during the period. Common Stock equivalents have not been
included in this computation since the effect would be anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of shipment
provided that the resulting receivable is deemed probable of collection.
Revenue from software sales is recognized at the time of licensing provided
that the resulting receivable is deemed probable of collection.
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.
11
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. The Company performs on going 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.
INVENTORIES
Inventories consisted of the following at December 31, 1998:
Finished goods $ 26,789
--------
$ 26,789
========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 1998:
Equipment $195,903
Furniture and fixtures 66,093
Leasehold improvements 45,770
--------
307,766
Less accumulated depreciation 159,483
--------
$148,283
========
Depreciation expense charged to operations was $107,928 and $237,189 in 1998
and 1997, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at December
31, 1998:
Accounts payable $ 782,863
Accrued interest 283,722
Accrued commissions 97,532
Accrued returns 30,000
Accrued legal settlement 20,000
Accrued professional fees 130,000
Deferred royalties 91,531
Accrued payroll 188,014
Miscellaneous accruals 70,080
-----------
$ 1,693,742
===========
12
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
LOANS PAYABLE
Magnitude, Inc. had borrowings under short term loan agreements with the
following terms and conditions at December 31, 1998:
Pursuant to three promissory notes signed throughout
1995 and 1996, an investor advanced Magnitude, Inc.
a total of $90,000 payable upon demand with interest
at 12% per annum. $ 90,000
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,
1998 and no demand for payment has been made through
April 7, 1999 75,000 On December 31, 1998, the
Company's board chairman issued a short-term loan to
the Company 80,000
Pursuant to a promissory note dated January 22, 1996, an
officer of the Company advanced the sum of $64,730
which is due upon demand and accruing interest at the
rate of 12% per annum. 24,730
Pursuant to the Rolina Corporation Agreement & Plan of
Merger dated February 2, 1998 the Company was to
deliver to Steven D. Rudnik $100,000 eight months from
the closing date. Such amount is overdue and as a
result Mr. Rudnik has a lien on certain software
products. 100,000
--------
Total $369,730
========
NOTES PAYABLE
Private Placement Offering
During February through June 1995, an underwriter acting as placement agent
offered on behalf of Magnitude, Inc. in a private placement offering a
minimum of five (5) and a maximum of twenty (20) units. The first 5 units
were offered on a "best efforts all or none" basis and the remaining 15
units on a "best efforts" basis. Each unit consisted of a $100,000, 12%
promissory note and 10,000 shares of Magnitude, Inc.'s common stock. The
promissory notes were originally due on the earlier of 12 months from their
issuance or the completion of a public or private financing of either debt
or equity securities of Magnitude, Inc. whereby, if such financing was for
less than the principal amount of said notes, then the principal amount of
said notes were to be repaid on a pro-rata basis. These notes were
subsequently extended for an additional 6 months, and further by an
additional 9 months. In May 1997 a restructuring agreement caused the
reclassification of $1,175,000 of these notes to long-term debt. These notes
were extended and modified to (i) mature by April 30, 2000, (ii) change from
12% to 8%, (iii) convert all interest accrued until April 30, 1997 into
shares of common stock of Magnitude, Inc. and (iv) paying future interest in
cash an a quarterly basis. Two such notes, however, totaling $200,000 were
extended and modified to (1) mature in dates ranging from January 1, 1999
through April 30, 2000, (ii) change from 12% to 8%, (iii) converted all
interest accrued until April 30, 1997 into shares of common stock, (iv)
paying future interest in cash on a quarterly basis, (v) reverts to 12% for
failure to make interest payment when due, with observance of a two-week
cure period, (vi) balance becomes due and payable immediately for failure to
make principal payments when due, with observance of a two-week cure period,
and (vii) balance convertible into common stock of Magnitude Inc. One of
those notes for $150,000 also grants 10,000 common stock purchase warrants
with a exercise price of $5.00 expiring April 30,2000. The remaining
$450,000 of non-restructured notes are included in current liabilities and
are in default as of December 31, 1998.
The private offering was completed in June 1995 resulting in Magnitude, Inc.
selling a total of sixteen (16) units and receiving net proceeds of
$1,364,061 after deducting private placement agent's commission and legal
fees amounting of $235,939. In connection therewith, Magnitude, Inc. issued
160,000 shares of its $.001 common stock at par. The total amount of such
notes outstanding at December 31, 1998 was $1,575,000, of which $550,000 is
current.
13
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt as of December 31, 1998 is comprised of the following:
Note to the board chairman, principal due
January 15, 2000 accruing interest at a
rate of 10% per annum. This note is secured
by all of Magnitude Inc.'s assets an property $262,000
Note to the board chairman of the Company
issued in place of accrued royalties, principal
due April 14, 1998 accruing interest at a rate
of 5% per annum. This note is overdue and no
demand for payment has been made through April
7, 1999 111,007
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. 33,529
Discounted present value of a non-interest bearing
$176,000 settlement with former counsel of
Magnitude, Inc. to be paid in 24 monthly payments
commencing September 1, 1997. The imputed interest
rate used to discount the note is 8% per annum. 50,474
--------
Total 457,010
Less current maturities 195,010
--------
Long-term debt, net of current maturities $262,000
========
14
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Financial Statements
LONG-TERM DEBT, Continued
Total maturities of long-term debt are as follows:
Year Ending December 31,
1999 $195,010
2000 262,000
--------
$457,010
========
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under non-cancelable capital lease
agreements expiring between January 19, 2001 and October 27, 2002. The
capital lease obligations have been recorded at the present value of future
minimum lease payments, discounted at interest rates of 7.00% to 8.643%. The
capitalized cost of equipment at December 31, 1998 amounted to $32,590 net
of accumulated depreciation of $17,014.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1998:
Year Ending December 31,
1999 $ 19,307
2000 16,456
2001 9,798
2002 6,316
--------
Total minimum capital lease payments 51,877
Less amounts representing interest 6,212
--------
Present value of net minimum capital
lease payments 45,665
Less current maturities of capital
lease obligations 15,826
--------
Obligations under capital leases,
excluding current maturities $ 29,839
========
15
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
INCOME TAXES
At December 31, 1998, The Company has net operating loss carry forwards
approximating $8,900,000 which expire between the years 2008 and 2013 and
are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December
31, 1998 are as follows:
Total deferred tax asset $3,560,000
Less valuation allowance 3,560,000
----------
Net deferred tax asset $ --
==========
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 which may not exceed 3% of the employee's total compensation
for the plan year. Contributions to the plan were $16,095 and $17,800 for
the years ended December 31, 1998 and 1997, 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.
16
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
STOCK OPTION PLANS (cont.)
Qualified and Non-Qualified
Shares Under Option
December 31,
---------------------------
1998 1997
---------- -----------
Outstanding, beginning of year 586,144 --
Granted during the year 501,162 596,144
Exercised during the year at $1.73 per
share -- (10,000)
Forfeited during the year (105,838) --
-------- ---------
Outstanding, end of year (at prices
ranging from $1.00 to $4.50 per share) 981,468 586,144
======== =========
Eligible, end of year for exercise (at
prices ranging from $1.00 to
$4.50 per share) 292,597 283,144
======== =========
At December 31, 1998 and 1997, the weighted average exercise price and
weighted average remaining contractual life is $2.56 and $3.36 per share and
5 years 4 months and 6 years 4 months, respectively.
At December 31, 1998, there were 157,118 shares reserved for future grants.
WARRANTS
The Company issued common stock purchase warrants as follows:
<TABLE>
<CAPTION>
Exercise Exercise Term
No. of Price Per -----------------------------------------------
Date of Grant Shares Share Start Expiration Vesting Rights
- ------------------------ --------------- --------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1997 10,000 5.00 May 1, 1997 April 30, 2000 Upon Issue
August 14, 1997 55,929 4.09 August 14, 1997 August 14, 1999 Upon Issue
May 1, 1998 224,000 5.00 May 1, 1998 April 30, 2003 Upon Issue
</TABLE>
At December 31, 1998, there were 289,929 shares eligible for exercise at
prices ranging from $4.09 to $5.00 per share.
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commences December 16, 1998 and
expires on December 31, 2001 and requires monthly payments of $3,700 from
December 16, 1998 to October 31, 1999 and $3,250 from November 1, 1999 to
December 31,1999. Ergonomics leases office space pursuant to a lease
agreement dated November 1, 1997. Such lease expired November 1, 1998. It is
currently leased on a month-to-month basis and requires monthly payments of
$600. Under such lease agreements, Magnitude, Inc. 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,
1999 $ 43,500
2000 39,000
2001 39,000
--------
Total $121,500
========
Included in general and administrative expenses is rent expense which
amounted to $103,580 and $96,544 for the years ended December 31, 1998 and
1997, respectively.
17
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Two lawsuits were instituted against Magnitude, Inc. by a stockholder of
Magnitude, Inc.
One suit asserts that the stockholder had a consulting agreement with
Magnitude, Inc. pursuant to which Magnitude, Inc. had agreed to pay $125,000
a year for five years and that Magnitude, Inc. has defaulted in performance
of its obligations.
The stockholder has also initiated suit along with other shareholder members
of his family alleging damages because Magnitude, Inc. acted inconsistent
with the best interest of its stockholders. Other miscellaneous claims were
asserted in that suit.
It is Magnitude, Inc.'s position that both of these suits are without merit,
however, a verbal settlement had been reached with the plaintiffs in both
cases pursuant to which all claims would be dismissed upon Magnitude, Inc.
making six monthly payments totaling $20,000 commencing November 1, 1998.
This potential liability has been recorded by Magnitude, Inc. No payments
have yet been made by Magnitude, Inc. since it has not received from the
plaintiff's attorneys the necessary settlement documents. The settlement may
also be contingent upon approval by a bankruptcy court since the stockholder
has filed a petition of reorganization.
An additional suit was bought against Magnitude, Inc. by a claimant for
legal fees. The suit was settled upon the agreement by the Company
(guaranteed by an officer of the Company) to pay a total of $176,000
consisting of an initial payment of $20,000 and the balance in equal monthly
installments of $6,500 each over a period of 24 months, commencing September
1, 1997. In addition, the Company and the officer agreed that in the event
any payment was in default, they each would consent to judgement for the
total legal fees demanded of $238,564 less any payments made to that point.
The Company was not in default as of December 31, 1998.
Licensing Agreement
On August 29, 1997, the Company signed a letter of intent to acquire Cornell
Ergonomics ("Cornell") a software developer of a unique ergonomic assessment
tool. This agreement was subsequently revised on December 1, 1997 through a
Software Distribution and Option Agreement whereby the Company obtained a
two-year exclusive license to distribute and sub-license a certain software
product. The Company also has the exclusive right, under certain
circumstances, to purchase either the assets of Cornell or all of the issued
and outstanding capital stock of Cornell.
18
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Employment Agreements
In July of 1997 the Company entered into an employment agreement with
Magnitude, Inc.'s President, to serve as the Company's President and Chief
Executive Officer for a period of five years. Base salary under the
agreement is $108,000 per annum with annual increases determined by the
Board of Directors. The agreement also calls a first year bonus of 140,000
shares of the Company's stock, and 200,000 shares in any year thereafter in
which the Company's after tax net profits exceed $1,000,000 for each of its
first three full fiscal years during the employment term beginning with
calendar year 1998. The agreement was amended to replace the stock bonuses
with nonqualified options to purchase up to 750,000 shares at a purchase
price of $1 and up to 535,000 shares at a price of .50(cent). Eligibility
for benefit programs, with the exception of any key employee stock option
plan, and a fully paid medical/hospitalization policy is provided under the
agreement. The Company will also provide reimbursement of ordinary and
necessary business expenses and a monthly car allowance. A
noncompetition/nonsolicitation restriction applies for 36 months after
termination of employment. The agreement provides for severance compensation
equal to three months of base salary if employment is terminated by the
Company for cause.
The Vice President and Chief Financial Officer of Magnitude, Inc. entered
into an employment agreement on April 15, 1996. The agreement is for a term
of three years expiring April 14, 1999. Pursuant to the terms of the
agreement, the officer is to receive an annual salary of $100,000 subject to
annual review by the Board of Directors with the first such review at
September 1, 1996, and an annual bonus as determined by the Board. Pursuant
to the agreement, Magnitude, Inc. would pay the premiums on a $400,000 life
insurance policy for the benefit of individuals designated by the officer.
The agreement restricts the officer from competing with Magnitude, Inc. for
a period of two years after the termination of his employment under certain
circumstances. The agreement provides for severance compensation to be
determined pursuant to a formula established therein to be paid to the
officer if his employment with Magnitude, Inc. is not renewed upon
expiration of the initial or any renewal term thereof, his employment is
terminated by Magnitude, Inc. other than as permitted by the agreement, or
any successor to Magnitude, Inc. after a change of control or other
reorganization of Magnitude, Inc. fails to assume the agreement.
Consulting Agreements
On May 12, 1997, the Company's subsidiary Magnitude, Inc. entered into a
financial and marketing consulting agreement with Royal Capital, Inc.
("Royal"), whereby Royal would act as a consultant to the company. In
consideration of such services, Royal was granted, in addition to other
consideration, options to purchase 692,122 common shares of the Company or
any succeeding or acquiring entity at exercise prices ranging from $1.04 to
$5.62 per share of the Company. Through December 31, 1998, options to
acquire 192,256 shares of the Company were exercised at a price of $1.04 per
share. Through April 7, 1999, an aggregate of approximately $2,787,000 in
additional equity has been raised pursuant to Royal's efforts.
On May 12, 1997, the Company's subsidiary Magnitude, Inc. entered into an
agreement with a management consultant. In consideration of such services,
whereby, in addition to other consideration, the consultant was awarded
options equal to 43,258 shares of the Company of which 33,258 remain
unexercised at December 31, 1998.
19
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS
During July 1997 one of the Company's board members advanced the Company
$100,000 as evidenced by two 8% promissory notes which were subsequently
agreed to be converted to common shares pursuant to the filing of an
Offering Memorandum offering shares pursuant to an exemption provided by
Rule 504 of Regulation D promulgated under the Securities Act of 1933, as
amended. The Company, however, decided not to consummate such offering, and
instead pursued an offering under Rule 506 of Regulation D promulgated under
the Securities Act of 1933 under which the notes were converted to 22,222
common shares and warrants in May 1998. During November and December 1997,
one investor advanced the Company $175,000 which was to be used for the
purchase of common stock pursuant to the filing of a Private Placement
offering shares to qualified investors pursuant to an exemption provided by
Regulation S promulgated under the Securities Act of 1933, as amended. On
January 26, 1998, 87,500 shares of common stock were issued to this
investor.
In November 1998, a director and principal shareholder extended a working
capital loan of $262,000 to the Company, secured by the assets of the
Company, against issuance of a promissory note bearing interest at the rate
of 10% per annum.
In November 1998, the Company entered into a consulting agreement with an
individual who subsequently, in January 1999, joined the Company's board of
directors, and pursuant to which the Company issued 1,000,000 shares of
common stock. Such shares were registered on Form S-8 on December 22, 1998.
During the first quarter of 1999, this individual pursuant to the consulting
agreement obtained the release of approximately $436,000 of the Company's
liabilities.
Between December 30, 1998, and March 31, 1999, the director and principal
shareholder extended working capital loans aggregating $395,560 to the
Company, of which a portion of $351,060 was covered by a promissory note
bearing interest at the rate of 10% p.a. During the same time, this director
and shareholder exercised options to purchase 450,000 shares of the common
stock of the Company, and was issued an additional 565,000 shares, against a
combination of cash payments and cancellation of debt owed by the Company,
in the aggregate amount of $507,500.
20
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix S ystems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
MAJOR CUSTOMERS
For the year ended December 31, 1998, the Company had a major customer,
sales of hardware products to which represented approximately 38% of the
Company's revenues. The Company had an accounts receivable balance due from
this customer of $35,730 at December 31, 1998. With the sale of the hardware
product line, the Company's business is now focused exclusively on the
further development and marketing of these software products. As such, the
Company currently must be considered an enterprise in transition, because it
has not yet realized material revenues from licensing its software.
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.
SUBSEQUENT EVENTS
Changes in Key Personnel
In January 1999, Steven D. Rudnik was appointed President and CEO of the
Company, taking over the position previously occupied by Jerry Swon.
21
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter the "Agreement"), made and
entered into on February 2, 1998 by and between PROFORMIX SOFTWARE, INC., a
Delaware corporation authorized to do business in the State of New Jersey with
offices located at 50 Tannery Road, Branchburg, New Jersey 08876 (hereinafter
referred to as "SOFTWARE"), a wholly owned subsidiary of PROFORMIX SYSTEMS,
INC., a Delaware corporation authorized to do business in the State if New
Jersey with offices located at 50 Tannery Road, Branchburg, New Jersey 08876
(hereinafter referred to as "PROFORMIX"); ROLINA CORPORATION, a New Jersey
corporation with offices located at 8 Knollwood Terrace, Chester, New Jersey
07930 hereinafter referred to as ("ROLINA") and STEVEN D. RUDNIK, residing at 8
Knollwood Terrace, Chester, New Jersey 07930, the owner of 100% of all of the
issued and outstanding shares of stock of ROLINA, (hereinafter "SHAREHOLDER").
WHEREAS, SHAREHOLDER and ROLINA desire to merge ROLINA into SOFTWARE
whereupon SOFTWARE shall be the surviving constituent corporation in accordance
with the terms and conditions hereinafter set forth; and
WHEREAS, SOFTWARE, desires to merge ROLINA into itself in accordance with
the terms and conditions hereinafter set forth; and
WHEREAS, SOFTWARE and ROLINA deem it advisable that ROLINA be merged into
SOFTWARE pursuant to this Agreement and in accordance with the applicable
statutes of the States of New Jersey and Delaware.
NOW THEREFORE, in consideration of the covenants set forth herein, it is
agreed as follows:
ARTICLE 1
MERGER CONSIDERATION AND SHARE CONVERSION
1.1 Merger. Upon the Closing contemplated herein and the filing of the
certificates of merger, ROLINA shall be merged with and into SOFTWARE. Upon the
filings of the certificates of merger, the separate corporate existence of
ROLINA shall cease and SOFTWARE shall become the owner, without other transfer,
of all of the rights and property of both corporations and shall become subject
to all of the debts and liabilities of both corporations in the same manner as
if SOFTWARE had itself incurred them. The Certificate of Incorporation and
Bylaws of SOFTWARE, as in effect immediately prior to the Closing hereof, shall
continue in full force and effect.
1.2 Terms of Transaction. On the basis of the representations,
warranties, covenants and agreements contained herein, and subject to the terms
and conditions of this Agreement:
(a) All the shares of ROLINA issued and outstanding immediately
prior to the Closing hereof (exclusive of shares held in the treasury of
ROLINA, which shares shall be canceled upon the Closing hereof) shall,
without any action on the part of ROLINA, SOFTWARE or any holder of such
shares, be converted by the merger into the amount of shares of stock of
PROFORMIX and cash as set forth in (c) hereinafter.
(b) None of the issued shares of SOFTWARE shall be converted as a
result of the merger, but all such shares shall remain issued shares of
capital stock of SOFTWARE.
SHAREHOLDER shall surrender to SOFTWARE at the Closing (as hereinafter
defined) all of his 500
1
<PAGE>
shares of stock representing 100% of the issued and outstanding shares of stock
in ROLINA (the "Shares") in accordance with this Agreement. SHAREHOLDER shall
surrender to SOFTWARE, or its designees, at the Closing, certificates
representing the Shares duly endorsed in blank or accompanied by such stock
powers of authority duly endorsed in blank as may be reasonably required, in
each case in proper form for cancellation, with signature guaranteed as
reasonably requested by SOFTWARE.
(c) In consideration for and conversion of the Shares, SOFTWARE
shall cause shares of Common Stock of PROFORMIX, to be issued to
SHAREHOLDER in conversion of the Shares and shall pay funds to be
delivered to SHAREHOLDER as follows:
(i) SOFTWARE shall deliver to SHAREHOLDER at Closing the sum
of $150,000.00 which amount shall be reduced by the amount of
liabilities to be paid by SOFTWARE set forth on Schedules 3.6 A
through F hereof;
(ii) SOFTWARE shall deliver to SHAREHOLDER at Closing 155,556
restricted shares of Proformix Systems Inc.'s Common Stock. These
shares shall be restricted as to any sale, transfer or other
disposition for a period of twenty-four (24) months from the date of
Closing as such term is hereinafter defined. Furthermore,
SHAREHOLDER shall have the limited and non-transferable right to
"put" or sell any and all of such shares back to PROFORMIX at a
predetermined price of $2.41 per share (subject to subsequent
adjustments along with other current common shareholders of
PROFORMIX). The foregoing right to so sell back shares totaling, in
all events, not more than 155,556 shares shall be exercisable at any
time commencing twenty-four (24) months after the Closing and shall
cease ninety (90) days thereafter. Any exercise of such right by
SHAREHOLDER shall be accompanied by a written notice of exercise
delivered by SHAREHOLDER to PROFORMIX during the foregoing recited
exercise period stating the number of shares which SHAREHOLDER elect
to so sell to PROFORMIX. Upon timely receipt of such notice from
SHAREHOLDER, PROFORMIX shall have a period of sixty (60) days within
which to deliver payment as aforesaid against the tender of such
shares with properly endorsed stock powers as PROFORMIX may direct.
In no event shall the full exercise of the "put" by SHAREHOLDER
result in net proceeds to SHAREHOLDER of more than $375,000.
Notwithstanding anything contained herein to the contrary, the
foregoing 155,556 shares assume a total four million shares of
PROFORMIX stock as being issued and outstanding. Therefore, except
with respect to the foregoing "put", said 155,556 shares shall not
be subject to any dilution unless and until the total number of
issued and outstanding PROFORMIX shares shall exceed six million, at
which time all of the foregoing shares shall be subject to dilution
and adjustment similarly affecting all other common shareholders of
the Company who have no anti-dilution provisions protecting their
shares. The foregoing computations of four million or six million
shares are calculated on the total number of PROFORMIX shares issued
and outstanding, assuming on a fully diluted basis and to account
for the possible exercises of all options, warrants, conversion
rights or such other rights as may require the issuance of Proformix
shares, providing such options, warrants, conversion rights or such
other rights are "in the money" as that term is used within the
traded stock market. The term "in the money" shall, for the purposes
of this Agreement, be defined as an option, warrant or other right
issued and outstanding where the exercise price is equal to or less
than the bid market price as established by the market or exchange
where PROFORMIX common stock is traded. For purposes of the
foregoing anti-dilution provision, any additional shares required to
be issued to SHAREHOLDER pursuant to the foregoing provision shall
be calculated quarterly and credited or debited to a liability
account on the books of PROFORMIX until the earlier of (I) the
termination of SHAREHOLDER's employment, (ii) the total amount of
common shares and "in the money" options equal 6.6 million shares,
or (iii) February 1, 2005
(iii) SOFTWARE shall deliver to SHAREHOLDER, four (4) months
from the date of Closing, the sum of $125,000.00; and
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(iv) SOFTWARE shall deliver to SHAREHOLDER, eight (8) months
from the date of Closing, the sum of $100,000.00.
(d) To secure SHAREHOLDER with respect to the payment obligations in
(iii) and (iv) above and the common stock put option in (ii) , SOFTWARE
shall execute and deliver at Closing a security agreement granting
SHAREHOLDER a lien on certain software products commonly known as
ErgoSentry and Surveyor. PROFORMIX shall have thirty (30) days to cure any
default in the foregoing payment obligations. Thereafter, SHAREHOLDER may
exercise his rights under the security agreement, in which event there
shall be an offset for the then existing value of the secured software
products as established by an appraiser that is mutually acceptable to
SHAREHOLDER and SOFTWARE. In the event the parties cannot agree upon an
appraiser within sixty (60) days of SHAREHOLDER exercising his rights
under the security agreement, then the parties hereto shall submit the
matter to binding arbitration through the American Arbitration
Association. In all events the provisions contained in Section 9.2 hereof
shall in any case, survive any termination hereof.
ARTICLE 2
CLOSING
2.1 The Closing contemplated by Article I of this Agreement shall be held
at the offices of SOFTWARE within three (3) business days following the
satisfaction and/or waiver of the conditions set forth in Article 8 of this
Agreement, or at such other time and place as is agreed upon by the parties (the
"Closing"). SOFTWARE shall immediately thereafter cause the filing of the
Certificates of Merger with the appropriate offices of the States of New Jersey
and Delaware.
2.2 After the Closing and from time to time thereafter, the remaining
parties to this Agreement shall execute such additional instruments and take
such other action as may reasonably be required in order to effectuate the
merger contemplated by this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ROLINA
ROLINA and the SHAREHOLDER, jointly and severally, represent and warrant
to SOFTWARE as follows:
3.1 Organization and Standing. ROLINA is a corporation duly organized,
validly existing and in good standing under the laws of the State of New Jersey
and has all requisite power, qualification and authority to own, lease and
operate its properties and assets and carry on its business as and in the places
where such properties and assets are now owned, leased or operated or such
business is now being conducted. ROLINA has not formally qualified as a foreign
entity doing business in another jurisdiction. However, ROLINA has no knowledge
that its failure to qualify or to be formally recognized to be in good standing
in another jurisdiction would have an adverse effect on its financial condition,
the conduct of its business or the ownership of its assets. Annexed hereto as
Schedule 3.1 are true, complete and correct copies of ROLINA's certificate of
incorporation, by-laws and all amendments thereto, as presently in effect, all
corporate minutes of Board and Shareholder Meetings and the stock ledger and
minute books of ROLINA.
3.2 Authorization. ROLINA and the SHAREHOLDER have the requisite power and
authority to execute, deliver and perform this Agreement. All necessary
proceedings of ROLINA have been duly taken to authorize the execution, delivery
and performance of this Agreement. This Agreement has been duly authorized,
executed and delivered by ROLINA and the SHAREHOLDER and constitutes the legal
valid and binding obligation of ROLINA and the SHAREHOLDER, and is enforceable
as to them in accordance with the terms
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hereof.
3.3 No Further Action Needed. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority or any court or other
tribunal is required by ROLINA and/or the SHAREHOLDER, for the execution,
delivery and/or performance of this Agreement. No consent of any party to any
contract, agreement, instrument, lease, license, arrangement, or understanding
to which ROLINA and/or the SHAREHOLDER is a party, or to which they or any of
their respective properties or assets are subject, is required for the
execution, delivery and/or performance of this Agreement (except as to any such
consent referred to on Schedule 3.3 annexed hereto, which consents will be
delivered to SOFTWARE prior to the Closing). The execution, delivery and
performance of this Agreement will not (i) violate, result in a breach of,
conflict with, or entitle any party to terminate or call a default under any
term of any contract, agreement, instrument, lease, license, arrangement, or
understanding whereby ROLINA and/or the SHAREHOLDER is a party to or (ii)
violate or result in a breach of any term of the Certificate of Incorporation
(or other charter document) or by-laws of ROLINA; (iii) violate, result in a
breach of, or conflict with any law, rule, regulation, order, judgment, decree
or agreement binding on ROLINA and/or any of the SHAREHOLDER or to which any of
its or his operations, business, properties or assets are subject; and/or (iv)
cause or give any person grounds to cause (with or without notice, the passage
of time, or both), the maturity of any liability or obligation of ROLINA and/or
any of the SHAREHOLDER to be accelerated or will increase any such liability or
obligation.
3.4 Capitalization.
The authorized capital stock of ROLINA consists of 1,000 shares of common
stock with no par value, of which 500 shares are outstanding, (the "Shares").
Each of the Shares are validly authorized, validly issued and fully paid and
non-assessable, have not been issued and are not owned or held in violation of
any preemptive right of stockholders. Except as set forth in Schedule 3.3, the
Shares are owned of record and beneficially by the SHAREHOLDER, free and clear
of all liens, charges, encumbrances, pledges, conditional sales agreements
and/or security interests of any kinds (collectively the "Encumbrances").
3.5 Lack of Commitment to Issue Securities. There is not presently
outstanding nor is there any commitment, plan, or arrangement to issue, any
options, warrants or other rights calling for the issuance of any shares of
common or preferred stock of ROLINA or any other security or other instrument
convertible into, exercisable for or exchangeable for securities of ROLINA.
3.6 Financial Condition. Annexed hereto as Schedule "3.6" are true and
complete copies of (i) the balance sheet of ROLINA for the fiscal year ended
December 31, 1997 and the related statement of income prepared by ROLINA and
certified by SHAREHOLDER to comply with the requirements of this Section 3.6
(collectively the "Financial Statements") and the unaudited balance sheet of
ROLINA as of January 15, 1998 and the related unaudited statement of income,
together with Schedules attached thereto for: Accounts Receivable; Prepaid
Expenses; Furniture, Fixtures and Equipment; Other Assets; Accounts Payable; and
Other Liabilities, respectively referred to as Schedules 3.6 A through F, with
all related notes thereto (collectively referred to herein as the "Interim
Financial Statements"). The Financial Statements and the Interim Financial
Statements (i) were prepared in accordance with the books of account and other
financial records of ROLINA (ii) present fairly the financial condition ROLINA
as of the dates thereof and for the periods covered thereby (iii) have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP")
applied on a basis consistent with the past practices of ROLINA and (iv) include
all adjustments (consisting only of normal recurring accruals) that are
necessary for a fair presentation of the financial conditions of ROLINA, as of
the dates thereof or for the periods covered thereby.
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3.7 Lack of Material Changes. Except as set forth on Schedule 3.7 annexed
hereto, since January 15, 1998 (the most recent interim financial statement
date):
(a) There has not been any change having a "material adverse effect"
on ROLINA. The term "material adverse effect", as used in this Agreement,
means any circumstance, change, event, transaction, loss, failure, effect
or other occurrence that is, or is reasonably likely to be materially
adverse to the business, operations, properties (including any intangible
properties), condition (financial or otherwise) assets, liabilities,
results of operations or projects of ROLINA.
(b) ROLINA has not authorized, declared, paid, or effected any
dividend or liquidating or other distribution in respect of its capital
stock or any direct or indirect redemption, purchase, or other acquisition
of any such stock.
(c) The operations and business of ROLINA have been conducted in all
respects only in the ordinary course except for its recent merger with
Trillion, Inc., a New Jersey corporation.
(d) ROLINA has not mortgaged, pledged or subjected to lien or other
encumbrances any of its assets, except as set forth in Schedule 3.3.
(e) ROLINA has not suffered an extraordinary loss (whether or not
covered by insurance) or waived any right of substantial value.
(f) ROLINA has not sold or transferred any of its assets having a
book value of $5,000 or more or canceled any debts or claims, except, in
each case, in the ordinary course of business, except for the reduction of
a claim by Brian J. Gould.
(g) ROLINA has not issued any common stock, preferred stock, capital
stock, bonds, warrants, options, rights or any other form of corporate
securities, except as relates to its formation and merger with Trillion,
Inc.
(h) There has not been any strike, lockout, labor trouble or any
similar event or condition of any character which would have a material
adverse effect on ROLINA.
(i) There has not been any increase in the compensation payable or
to become payable by ROLINA to any of its respective officers, employees
or agents, or any known payment or arrangement made to or with any such
persons.
(j) ROLINA has not made any change in the method of accounting or
accounting practice or policy used by ROLINA, other than changes required
by GAAP.
(k) ROLINA has not made any material changes in the customary
methods of operations of ROLINA, including practice and policies relating
to purchasing, inventory, marketing, selling or pricing.
(l) ROLINA has not merged with, been merged with or entered into a
consolidation with or acquired (by purchase, merger, consolidation, stock
acquisition or otherwise) a substantial portion of the assets of any
entity or otherwise acquired assets other than in the ordinary course,
except as may be specifically set forth herein and further set forth in
detail in the Financial Statements with notes thereto which include its
merger with Trillion, Inc.
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(m) ROLINA has not agreed, whether in writing or otherwise, to
engage in any of the acts specified in this Article 3.7, except for those
contemplated by this Agreement.
(n) There is no fact known to ROLINA and/or SHAREHOLDER which will
have a material adverse effect or in the near future (as far as ROLINA or
SHAREHOLDER can foresee) may have a material adverse effect on the
financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of ROLINA which has not been disclosed to
SOFTWARE in this Agreement; provided, however, that ROLINA and SHAREHOLDER
express no opinion as to political or economic matters of general
applicability.
3.8 Absence of Undisclosed Liabilities. (i) Except as set forth on
Schedule 3.8 annexed hereto, ROLINA does not have any liabilities or obligations
of any nature (whether absolute, accrued, contingent, or otherwise) including
without limitation liabilities for federal, state, local, or foreign taxes,
liabilities to customers or suppliers, direct or indirect claims, losses,
damages, deficiencies (including deferred income tax and other net tax
deficiencies), costs, expenses, obligations guarantees, or responsibilities,
whether accrued, absolute, or contingent, known or unknown, fixed or unfixed,
liquidated or unliquidated, secured or unsecured, (hereinafter collectively
referred to as "Liabilities").
3.9 Taxes. The term "Tax" or "Taxes" as used in this Agreement means all
income, gross receipts, sales, use, transfer, employment, franchise, profits,
property, excise or other similar taxes, estimated import duties, fees, stamp
taxes and duties, value added taxes, assessments or charges of any kind
whatsoever (whether payable directly or by withholding), together with any
interest and penalties, additions to tax or additional amounts imposed by any
taxing authority with respect thereto.
(a) Except as set forth in Schedule 3.9(a) annexed hereto (i)(A) all
material returns and reports in respect of federal, local, state and/or local
Taxes ("Tax Returns" or "Return") required to be filed with respect to ROLINA
have been timely filed; (B) all Taxes shown to be payable on such Returns or
otherwise due, and all assessments of Tax made against ROLINA with respect to
such Returns, have been paid; (C) all such Returns are true, correct, and
complete in all material respects, and (D) no adjustment relating to such
Returns has been proposed formally or informally by any Tax authority and, to
the best knowledge of ROLINA, no basis exists for any such adjustment; (ii)
there is no pending or, to the best knowledge of ROLINA, threatened actions or
proceedings for the assessment or collection of Taxes against ROLINA; (iii)
there are no Tax liens on any assets of ROLINA; (iv) there are no outstanding
waivers or agreements extending the statute of limitations with respect to any
Tax to which ROLINA may be subject; (v) there are no outstanding requests for
information made by a taxing authority to ROLINA; (vi) ROLINA has not been
advised by any taxing authority of any proposed reassessments of the value (or
other Tax base) of any property owned by ROLINA that could increase the amount
of property Tax to which ROLINA would be subject; (vii) ROLINA has made all
payments of estimated Taxes required to be made under the Internal Revenue Code
of 1986, as amended (the "Code") and all state or local Tax provisions; (viii)
all Taxes required to be withheld, collected or deposited, as the case may be,
and, to the extent required, have been paid to the relevant taxing authority,
and (iv) no power of attorney that is currently in force has been granted with
respect to any matter relating to Taxes that could affect ROLINA. SHAREHOLDER
shall be responsible, at his sole cost and expense, for the preparation and
filing of all ROLINA tax return and the payment of all taxes, penalties and
interest thereon for and through the period ending upon the period ending
December 31, 1997.
(b) Schedule 3.9(b) annexed hereto (i) lists by type all income, franchise
and other material Tax Return (federal, state, local, and foreign filed with
respect to ROLINA for taxable periods since ROLINA's inception; (ii) indicated
for which jurisdictions Returns have been filed on a combined basis for taxable
periods since ROLINA's inception, and the companies joining in such Returns, if
any; (iii) indicates the most recent income, franchise, or other material Tax
Return for each relevant jurisdiction for which an audit has been
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completed or the statute of limitations has lapsed, and (iv) indicated all Tax
Returns that currently are the subject of audit.
(c) Schedule 3.9(c) annexed hereto (i) lists the amount and expiration
dates of any net operating loss, net capital loss, unused business credit,
unused foreign tax credit, or excess charitable contribution allocable to ROLINA
as of its year end.
(d) Reserves and allowances have been provided on the Financial Statements
and the Interim Financial Statements that are adequate to satisfy all
Liabilities for Taxes relating to ROLINA for periods through the date of such
financial statements (without regard to the materiality thereof).
(e) To the extent that they exist, ROLINA has delivered or made available
to SOFTWARE correct and complete copies of all federal, state and local tax
returns of ROLINA since it's inception and forward, and correct and complete
copies (or summaries) of all examination reports, correspondence with taxing
authorities, statements of deficiencies assessed against or agreed to by ROLINA
since its inception and any formal or informal tax sharing arrangements to which
ROLINA is a party.
3.10 Litigation and Claims.
(a) There is no litigation, arbitration, claim, governmental,
administrative, regulatory or other proceeding or investigation (formal or
informal) pending, or to the best of ROLINA's knowledge threatened, or in the
process (or any basis therefore known to ROLINA or SHAREHOLDER) with respect to
ROLINA, any transaction in ROLINA's securities, the transactions contemplated by
this Agreement, or any of ROLINA's business, properties, or assets except as
described on Schedule 3.10(a) annexed hereto. To the best of SHAREHOLDER' and
ROLINA's knowledge, they is not in violation of, or in default with respect to,
any law, rule, regulation, order, judgment, decree or agreement; nor is any
action required to be taken in order to avoid such violation or default. Except
as set forth on Schedule 3.10(a) annexed hereto, there are no citations, fines
or penalties heretofore asserted against ROLINA under any federal, state or
local laws which bind unpaid or which otherwise bind the assets of ROLINA.
(b) Annexed hereto as Schedule 3.10(b) are true and complete copies of all
pleadings, orders and other relevant documents regarding all matters identified
on Schedule 3.10(a).
3.11 Assets. Attached hereto as Schedule 3.11 is a true and complete list
of all assets of ROLINA whether fixed or otherwise, and all inventory items with
a book value of Two Thousand Five Hundred Dollars ($2,500.00) or more.
3.12 Title to Assets. ROLINA has good and marketable titles to all its
Assets, including but not limited to certain ergonomic software marketed under
the trade names of Ergo Sentry and Surveyor, (except as described more
particularly on Schedule 3.12 annexed hereto and such real and other properties
and assets as are held pursuant to leases as described on Schedule 3.15 annexed
hereto) free and clear of all liens, mortgages, security interests, pledges,
charges, conditional sales agreements and security investments, and encumbrances
(except as are listed in Schedule 3.22 and Schedule 3.3 attached hereto).
3.13 Lack of Restrictions. ROLINA does not own, lease or use any real
property and therefore there are no restrictions upon ROLINA with respect to the
same.
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3.14 Contracts and other Instruments.
(a) Schedule 3.14 accurately and completely details all contracts,
licenses, instruments, powers of attorney and agreements to which ROLINA is a
party, directly or indirectly, including but not limited to, all license
agreements (except license agreements granted as part of sales of the ErgoSentry
and Surveyor products); supply agreements; manufacturer agreements; price
protection agreements; distributorship agreements; OEM agreements; partnership
agreements; dealership agreements; fiduciary agreements; agency agreements;
marketing agreements; commission agreements (except for verbal revocable
arrangements); sales license agreements; bank credit agreements; factoring
agreements; loan agreements; indentures; promissory notes; guarantees;
undertakings; other evidences of indebtedness; letters of credit; joint venture
agreements; agreements of acquisition or merger or combination with any other
company, corporation or business signed within the last three years; employment
agreements; labor agreements; salesmen Commission agreements; independent
contractor agreements; sales or purchase agreements for a term in excess of one
year which have an aggregate sale or purchase price in excess of $5,000.00;
contracts, agreements, arrangements, or understandings with SHAREHOLDER, any
director, officer, or employee, any relatives or affiliate of ROLINA or of any
such director, officer, or employee, or any other corporation or enterprise in
which ROLINA, any such director, officer, or employee, or any such relative or
affiliate then had or now has a 5% or greater equity or voting or other
substantial interest; government contracts; franchise agreements; management
agreements; advisory agreements; consulting agreements; advertising agreements;
construction agreements; warehousing agreements; engineering agreements; design
agreements; major utility agreements, any other agreements which are material to
ROLINA; and any other agreements which involve the payment of in excess of
$5,000 prior to the date it can be terminated without penalty or premium; (all
of which contracts, licenses, instruments, powers of attorney and agreements are
hereinafter referred to collectively as the "Contracts").
(b) To the best of SHAREHOLDER'S and ROLINA's knowledge, it is not nor
does it expect to be in the future, in violation or breach of, or in default
with respect to complying with, any material provision of any such Contract
thereof, and each such Contract, is in full force and effect and is the legal,
valid, and binding obligation of the parties thereto and is enforceable as to
them in accordance with their respective terms. Neither ROLINA, nor any other
party to any such Contract has given notice of termination or taken any action
inconsistent with the continuance thereof. The execution, delivery, and
performance of this Agreement will not prejudice any such Contract. ROLINA
and/or SHAREHOLDER are not a party to or bound by any other contract, agreement,
instrument, lease, license, arrangement, or understanding, or subject to any
charter or other restriction, which has had or may in the future have a material
adverse effect on the financial condition, results of operations, business
properties, assets, liabilities, or future prospects of ROLINA.
3.15 Leases. ROLINA is not a party to any leases or subleases.
3.16 Capital Projects. As of the date of this Agreement, ROLINA has not
undertaken any capital projects the cost of completion of which would exceed
$5,000.
3.17 Environmental Laws
(a) (i) To the best of ROLINA's knowledge, the assets utilized by ROLINA
have, and continue to be, owned and operated by it in material compliance with
all applicable Environmental Laws.
(ii) ROLINA has not received notice of any pending or threatened claims,
complaints or requests for information with respect to any alleged violation of
any environmental Laws.
(iii) There have been no material releases, as defined under any
Environmental laws, or
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Hazardous Substancfes, by ROLINA
(iv) ROLINA has not received notice of pending or threatened claims
whether or not the subject of any indemnity, under any Environmental Law or
involving any hazardous Substances.
(b) As used in the preceding paragraph and elsewhere in this Agreement the
following terms shall have the following meaning:
(i) Environmental Laws means any federal, state or local statute, code,
ordinance, rule, regulation, permit, consent, approval, license, judgment,
order, writ, judicial decision, decree, agency interpretation, injunction or
other authorization or requirement whenever promulgated, issued, or modified,
relating to:
(A) emissions, discharges, spills, release or threatened releases of
pollutants, contaminants, Hazardous Substances, materials containing Hazardous
Substances, or hazardous or toxic materials or wastes into ambient air, surface
water, groundwater, watercourses, publicly or privately owned treatment works,
drains, sewer systems, wetlands, septic systems or onto land;
(B) the use, treatment, storage, disposal, handling, manufacturing,
transportation, or shipment of Hazardous Substances, materials containing
Hazardous Substances or hazardous and/or toxic wastes, material, products or
by-products (or of equipment or apparatus containing Hazardous Substances) as
defined in or regulated under the following statutes and their implementing
regulations: the Hazardous Materials Transportation Act, 49 U.S.C. ss.ss.1801 et
seq., the Resource Conservation and Recovery Act, 42 U.S.C, ss.ss.6901 et seq.,
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss.ss.960l et seq. ("CERCLA"), The Clean Water Act, 33 U.S.C. ss.ss.1251
et seq., The Clean Air Act, 42 U.S.C. ss.ss.7401 et seq., and/or the Toxic
Substances Control Act, 15 U.S.C. ss.ss.2601 et seq., each as amended from time
to time.
(ii) Hazardous Substances means (A) hazardous materials, hazardous wastes
and hazardous substances as defined or regulated under any Environmental Laws,
(B) any mixtures, blends, compounds or liquids containing any hazardous
substances in any proportions, (C) petroleum and petroleum products including
crude oil and any fractions thereof, (D) asbestos and/or any material which
contains any hydrated mineral silicates, whether friable or non-friable, (E)
PCBs, or PCB containing materials or fluids, (V) any other hazardous
radioactive, toxic or noxious substance, material, pollutant, or solid, liquid
or gaseous waste, and (G) any substance with respect to which a federal, state
or local agency requires environmental investigation, monitoring or remediation.
(iii) CERCLA has the meaning specified in the definition of "Environmental
Laws".
(iv) CERCLIS means the Comprehensive Environmental Responsive,
Compensation and Liability Information System, 42 U.S.C. ss.9616(a).
3.18 Compliance with Laws. Annexed hereto as Schedule 3.18 is a list of
all permits, licenses, orders, certificates, and approvals (collectively
"Licenses") of all federal, state or local governmental regulatory bodies
required for ROLINA to conduct its business as presently conducted; all such
Licenses, are in full force and effect and no suspension or cancellation of any
of them is pending or threatened; and none of such Licenses, will be adversely
affected by the consummation of the transaction contemplated by this Agreement.
3.19 ERISA Matters and Employees. ROLINA does not have, nor does it
contribute to any pension, profit sharing, option, other incentive plan, or any
other type of employee benefit plan (as defined in Section 3(3)
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of the Employee Retirement Income Security Act of 1974), or any obligation to or
customary arrangement with employees for bonuses, incentive compensation, or
severance pay. Annexed hereto as Schedule 3.19 is a list detailing the name and
current salary (or rate of pay) and other compensation now paid by ROLINA to
each employee whose total annual compensation is $25,000 or more, including a
description of any increase scheduled to be effective after the date of this
Agreement.
3.20 Insurance. Schedule 3.20 attached hereto and made a part hereof is a
complete and correct list of all insurance policies, of any kind held by ROLINA.
Each such policy is valid and enforceable; all premiums and other payments due
from ROLINA on account of any such policy have been paid and there is no act or
failure to act which has or might cause any such policy to he canceled or
terminated.
3.21 Labor Disputes. Except as set forth on Schedule 3.21 annexed hereto,
ROLINA is not a party to any union representation or labor contract. ROLINA has
not received any notice from any labor union or group of employees that such
union or group represents or believes or claims it represents or intends to
represent any of their employees; no strike or work interruption by any of their
employees is planned, under consideration, threatened or imminent; and ROLINA
has not made any loan or given any-thing of value, directly or indirectly, to
any officer, official, agent or representative of any labor union or group of
employees. ROLINA is not delinquent in payments to any of its employees for any
wages, salaries, commissions, bonuses or other direct compensation for any
services performed by them to the date hereof or amounts required to be
reimbursed to such employees. In the event of termination of the employment of
any said employees, ROLINA will not by reason of anything done prior to the
Closing be liable to any of said employees for "severance pay" or any other
payments except as set forth in Schedule 3.21. To the best of ROLINA's
knowledge, ROLINA is in compliance with all Federal, state and local laws and
regulations respecting labor, employment and wages and hours; and there is no
unfair labor practice complaint against them pending before the National Labor
Relations Board or any comparable state or local agency.
3.22 Liens on Assets. Except as set forth on Schedule 3.22 and Schedule
3.3 attached hereto ROLINA has good and marketable title to all of their
respective Assets and such Assets are not subject to any mortgages, pledges,
liens, conditional sales agreements, encumbrances and security interests or
claims of any kind.
3.23 Condition of Tangible Assets. As of the Closing, ROLINA's Tangible
Assets will be in normal, operating and useable condition, in a state of good
maintenance and repair subject to ordinary wear and tear and scheduled
maintenance items, taking into consideration the age and utilization thereof and
conform to all applicable ordinances, regulations and other laws including those
relating to building and zoning and environmental protection and occupational
safety and health.
3.24 Validity of Contemplated Transactions . The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby (a) have been duly approved by the unanimous consent of
SHAREHOLDER and the Board of Directors of ROLINA; (b) do not and will not
contravene, violate and/or result in a breach or default under any provision of
the Articles of Incorporation or by-laws of ROLINA which are in effect; (c) do
not violate, are not in conflict with, and do not constitute a default under, or
cause the acceleration of any payments pursuant to, or otherwise impair the good
standing, validity, or effectiveness of any agreement, contract, license,
indenture, instrument, lease, or mortgage, or subject SHAREHOLDER or ROLINA or
any of its Assets to any indenture, mortgage, contract, commitment, or
agreement, other than this Agreement, to which they are a party or by which any
of the Assets are bound except as set forth in Schedule 3.3; and (d) do not
violate any material provision of law, rule, regulation, order, permit, or
license to which ROLINA is subject.
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3.25 Directors and Officers. A true and complete list as of the date of
this Agreement indicating ROLINA's directors and officers, each of whom has been
duly elected is as follows:
NAME POSITION
Steven D. Rudnik, Director and President
Kathleen A. Rudnik, Secretary
3.26 Patents, Trademarks, Et Cetera. Schedule 3.26 accurately sets forth
all patents, patent applications, trademarks, trademark applications,
copyrights, copyright applications, trade names, service marks, franchises, or
other intangible property or assets (all of the foregoing being herein called
"Intangibles"), owned by, licensed by and/or pending on behalf of ROLINA. All
Intangibles which are validly and completely owned by ROLINA are Assets and are
specified as such on Schedule 3.26 and all Intangibles are in good standing and
uncontested. Schedule 3.26 accurately sets forth with respect to Intangibles
owned by ROLINA, where appropriate, a statement of cost, book value and reserve
for depreciation of each item for financial reporting purposes, and with respect
to Intangibles licensed by ROLINA from or to a third party, a detailed
description of such license. Neither SHAREHOLDER nor any employee of ROLINA, any
relative or affiliate of SHAREHOLDER, any director, officer, or employee of the
foregoing, or any such relative or affiliate had or now has any equity or voting
or other substantial interest in or possesses any intangible which relates to
the business of ROLINA. There is no right under any Intangible necessary to the
business of ROLINA as presently conducted or as it contemplates conducting,
except such as are so designated in Schedule 3.26. ROLINA has not infringed, is
infringing, or has received notice of infringement with asserted Intangibles of
others. There is no infringement by others of Intangibles of ROLINA. There is no
Intangible of others which may materially adversely affect the financial
condition, results of operations, business, properties, assets, liabilities, or
future prospects of ROLINA.
3.27 Accounts and Notes Receivable. Except as set forth on Schedule 3.27,
to the best of ROLINA's knowledge, all accounts and notes receivable reflected
on the Financial Statements and the Interim Financial Statements annexed hereto
as Schedule 3.6 constitute valid and binding obligations, have been collected or
are and will be good and collectible, in each case at the aggregate recorded
amounts thereof without right of recourse, defense, deduction, return of goods,
counterclaim, offset, or set off on the part of the obligor, and, if not
collected, can reasonably be anticipated to be paid within 60 days of the date
incurred.
3.28 Inventories. All inventories of ROLINA are good and marketable on a
normal basis in the existing product lines of ROLINA.
3.29 Customer, Supplier, Franchisees. Schedule 3.29 attached hereto lists
the names and addresses of all of material customers, suppliers and franchisees
of ROLINA. None of such suppliers, customers, and/or franchisees has asserted
any claim against or threatened to terminate its relationship with ROLINA.
Except as set forth in Schedule 3.14(b) annexed hereto ROLINA does not have any
direct involvement, interest in or affiliation with any customer, supplier or
franchisee of ROLINA.
3.30 Bank Accounts. Schedule 3.30 annexed hereto lists the names and
address of every bank and other financial institution in which ROLINA maintains
an account (whether checking, savings or otherwise), lock box or safe deposit
box, and the account numbers and names of persons having signing authority or
other access thereof.
3.31 Veracity of Statements. Neither this Agreement nor the
representations and warranties by ROLINA and/or SHAREHOLDER contained herein or
in any documents, instruments, certificates or schedules
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furnished pursuant hereto or in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements or facts contained herein and
therein not misleading. There is no fact which has a material effect, or in the
future may have a material adverse effect (to the knowledge of ROLINA and/or
SHAREHOLDER) on the business, operations, affairs, condition or prospects of
ROLINA, its assets, or its business, which has not been set forth in this
Agreement, provided however that ROLINA and/or SHAREHOLDER expresses no opinion
as to political or economic matters of general applicability.
3.32 SHAREHOLDER Suitability Standards and Additional Representations.
SHAREHOLDER hereby represents, warrants and agrees as follows:
(a) He has the right, power and authority to enter into this Agreement.
(b) He is the sole party in interest with respect to his interest in
ROLINA and has all legal, beneficial and equitable rights in such interest.
(c) He is sufficiently experienced in financial matters generally and this
type of investment in particular to be able to evaluate the merits and risks
involved in this transaction and he along with his financial and legal advisors
have been provided with ample opportunity to ask questions of and receive
answers from SOFTWARE and/or PROFORMIX and have been provided with ample
opportunity to request and have received copies for review of any documents
which he and/or they deem relevant with respect to his investment decision
herein and that he has not relied upon any oral representations in the making of
his investment decision herein.
(d) He understands that his right to transfer all or any portion of his
interest in PROFORMIX upon the consummation of the contemplated transaction
hereunder is restricted by the terms and provisions of this Agreement and that
no market for his PROFORMIX shares may develop, and that he must therefore be
prepared to bear the economic risks of his investment in PROFORMIX for an
indefinite period of time.
(e) He is "Accredited" as such term is defined under the rules promulgated
pursuant to the Securities Act of 1933, as amended.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SOFTWARE
4. SOFTWARE hereby represents and warrants to ROLINA and SHAREHOLDER as
follows:
4.1 Organization and Standing.
SOFTWARE is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite power,
qualification and authority, corporate or otherwise, to own, lease and/or
operate its properties and assets and carry on its business as and in the places
where such properties and assets are now owned, leased or operated or such
business is now being conducted. SOFTWARE is in good standing in each and every
jurisdiction where its failure to qualify or to be in good standing would have
an adverse effect on its financial condition, the conduct of its business or the
ownership of its assets. The foregoing representations are likewise true of
SOFTWARE's parent, PROFORMIX, of which SOFTWARE is a wholly owned subsidiary.
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4.2 Authorization. SOFTWARE has all requisite power and authority to
execute, deliver and perform this Agreement. All necessary corporate proceedings
of SOFTWARE have been duly taken to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly authorized, executed
and delivered by SOFTWARE, constitutes the legal valid and binding obligation of
SOFTWARE, and is enforceable as to it in accordance with the terms hereof.
4.3 Legality of Shares to be Issued. The shares of common stock of
PROFORMIX to be delivered to SHAREHOLDER pursuant to this Agreement, when so
delivered in accordance with this Agreement will be fully paid, nonassessable
and shall be duly and validly authorized and issued.
4.4 No Covenant as to Tax Consequences. It is expressly understood and
agreed that neither SOFTWARE, PROFORMIX, nor its officers or agents has made any
warranty or agreement, express or implied, as to the tax consequences of the
transactions contemplated by this Agreement or the tax consequences of any
action pursuant to or growing out of this Agreement.
4.3 No Further Action Needed. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority or any court or other
tribunal is required by SOFTWARE, for the execution, delivery and/or performance
of this Agreement. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding to which SOFTWARE is a
party or to which it or any of its properties or assets are subject, is required
for the execution, delivery and/or performance of this Agreement except as to
any such consents referred to on Schedule 4.3 annexed hereto, which consents
will be delivered to SOFTWARE prior to the Closing. The execution, delivery and
performance of this Agreement will not (i) violate, result in a breach of,
conflict with, or entitle any party to terminate or call a default under any
term of any contract, agreement, instrument, lease, license, arrangement, or
understanding whereby SOFTWARE is a party to, or (ii) violate, result in a
breach of, or conflict with SOFTWARE's certificate of incorporation, any law,
rule, regulation, order, judgment, or decree binding on SOFTWARE or to which any
of its or his/her operations, business, properties or assets are subject; and/or
(iii) cause or give any person grounds to cause (with or without notice, the
passage of time, or both), the maturity of any liability or obligation of
SOFTWARE to be accelerated or will increase any such liability or obligation.
4.6 Veracity of Statements. Neither this Agreement nor the representations
and warranties by SOFTWARE contained herein or in any documents, instruments,
certificates or schedules furnished pursuant hereto or in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements or facts
contained herein and therein not misleading. There is no fact which adversely
affects, or in the future may have a material adverse effect (to the knowledge
of SOFTWARE) on the business, operations, affairs, condition or prospects of
SOFTWARE, its assets and/or business, which has not been set forth in this
Agreement, provided however that SOFTWARE expresses no opinion as to political
or economical matters of general applicability.
4.7 PROFORMIX Current in Reporting Obligations. PROFORMIX is a "Reporting
"Company" and as such, is required to file periodic reports with the Securities
and Exchange Commission ("SEC") pursuant to Section 15 of the Securities
Exchange Act of 1934. SOFTWARE is a wholly owned subsidiary of PROFORMIX.
PROFORMIX is current with respect to the filing of such reports, has received no
comments from the SEC relating thereto and knows of no proceeding or
investigation pending against it at the instance of the SEC, the NASD or any
other federal or state agency or self-regulating body. PROFORMIX is not aware of
any respect in which any previously filed report is materially inaccurate or
incomplete.
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ARTICLE 5
PRE-CLOSING
5. Pre-Closing. The obligations of the parties to Close hereunder is
conditioned upon compliance with the requirements of Articles 6,7,8 and 9
hereof.
ARTICLE 6
COVENANTS OF ROLINA AND SHAREHOLDER
6. ROLINA and SHAREHOLDER, jointly and severally, covenant to SOFTWARE as
follows:
6.1 The representations and warranties of ROLINA and SHAREHOLDER
contained in this Agreement and in the schedules hereto shall be true and
correct in all respects as of the Closing. ROLINA and SHAREHOLDER shall give
SOFTWARE prompt notice of any change in any of the information contained in the
representations and warranties of ROLINA and SHAREHOLDER, the schedules hereto
or the documents furnished by ROLINA and/or SHAREHOLDER in connection herewith
which occurs prior to the Closing. Upon the happening of any occurrence or event
prior to the Closing, which shall have a material adverse effect upon the
business or assets of ROLINA, SOFTWARE shall have the right to terminate this
Agreement by written notice to and upon such termination, no party shall have
any further liability or obligation under this Agreement.
6.2 ROLINA shall, at or prior to the Closing, prepare and present to
SOFTWARE unanimous Consents of SHAREHOLDER and ROLINA's board evidencing the
approval of this Agreement and the transactions contemplated hereby.
6.3 ROLINA will, prior to the Closing, comply with all laws affecting
operation of its business, will not operate the said business other than in the
ordinary course, and will give notice to SOFTWARE of any event or circumstance
not in the ordinary course which materially affect ROLINA or its Assets.
6.4 ROLINA and SHAREHOLDER shall use their best efforts to take or cause
to be taken all action and do or cause to be done all things necessary, proper
or advisable to consummate the transactions contemplated by this Agreement,
including, without limitation, to obtain all consents, approvals and
authorizations of third parties, to make all filings with and give all notices
to third parties which may be necessary or required in order to effectuate the
transactions contemplated hereby.
6.5 ROLINA and SHAREHOLDER will cause ROLINA to conduct ROLINA's affairs
so that at the Closing no representation or warranty contained in this
agreement, will be inaccurate, no covenant, commitment or agreement of ROLINA
and/or SHAREHOLDER will be breached, and no condition in this Agreement will
remain unfulfilled by reason of the actions or omissions of ROLINA and/or
SHAREHOLDER. Except as otherwise requested by SOFTWARE in writing, ROLINA and/or
SHAREHOLDER will, use their respective best efforts to preserve the business
operation of ROLINA intact, to keep available the services of their present
personnel, to preserve in full force and effect the Contracts, and Leases and to
preserve the goodwill of ROLINA's suppliers, customers, and others having
business relations with them. Unless this Agreement is rightfully terminated,
ROLINA and SHAREHOLDER will cause ROLINA to conduct its business and operation
in all respects only in the ordinary course.
6.6 ROLINA and SHAREHOLDER shall make available for inspection all of its
books, records,
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documents and assets, and will otherwise afford to SOFTWARE and its
representatives reasonable access to all documentation, contracts, agreements,
patents, patent applications and all other information concerning the business,
financial and legal conditions of ROLINA for the purpose of conducting due
diligence investigation thereof, SOFTWARE agrees that all information so
provided and marked as "Confidential" will be treated as such, that SOFTWARE
will not make any use of such information, other than for the purpose of
consummating the transactions in this Agreement, unless the same was previously
in SOFTWARE's possession, or became available to SOFTWARE through
non-confidential means or shall otherwise come into the public domain.
6.7 ROLINA will not engage in any of the acts set forth in Article 3.7 or
enter into any agreement, whether in writing or otherwise, to engage in any of
the acts specified in Article 3.7.
ARTICLE 7
COVENANTS OF SOFTWARE
7. SOFTWARE covenants to ROLINA and SHAREHOLDER as follows:
7.1 The representations and warranties of SOFTWARE contained in this
Agreement and in the schedules hereto shall be true and correct in all respects
as of the Closing. The SOFTWARE shall give ROLINA and SHAREHOLDER prompt notice
of any change in any of the information contained in the representations and
warranties of the SOFTWARE and the schedules hereto or the documents furnished
by the SOFTWARE in connection herewith which occurs prior to the Closing. Upon
the happening of any occurrence or event prior to the Closing, which shall have
a material adverse effect upon the business or assets of the SOFTWARE, ROLINA
and SHAREHOLDER shall have the right to terminate this Agreement by written
notice to and upon such termination, no party shall have any further liability
or obligation under this agreement.
7.2 SOFTWARE shall, at or prior to the Closing Date, prepare and present
to ROLINA and SHAREHOLDER, the Consent of a majority of its Directors evidencing
the approval of this Agreement and the transactions contemplated hereby.
7.3 SOFTWARE shall use its best efforts to take or cause to be taken all
action and do or cause to be done all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement, including, without
limitation, to obtain all consents, approvals and authorizations of third
parties, to make all filings with and give all notices to third parties which
may be necessary or required in order to effectuate the transactions
contemplated hereby.
7.4 SOFTWARE shall cause PROFORMIX after the execution hereof to keep
available for issuance from PROFORMIX's authorized but unissued shares of common
stock that number of shares of common stock which are necessary to lawfully
issue shares of it's Common stock to SHAREHOLDER pursuant to Article 1 hereof.
ARTICLE 8
CONDITIONS OF CLOSING
8.1 The obligation of SOFTWARE to close hereunder shall be subject to the
fulfillment and satisfaction, prior to or at the Closing, of the following
conditions or the written waiver thereof by SOFTWARE:
(a) Pre-Closing. All of the commitments set forth in Article 5 of this
Agreement shall be consummated.
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(b) Representations and Warranties. The representation and warranties of
ROLINA and SHAREHOLDER in this Agreement shall be true and correct in all
material respects when made and shall be true and correct in all material
respects on and as of the Closing.
(c) Delivery of Officers' and SHAREHOLDER's Certificate. SOFTWARE shall
have received Certificates certifying that each of the warranties and
representations set forth in this Agreement by ROLINA and SHAREHOLDER are true
and accurate as of the date of the Closing and that no event or occurrence has
transpired as of the Closing which has or will have a material adverse effect
upon ROLINA's business or the Assets being acquired.
(d) Compliance with Agreement. ROLINA and SHAREHOLDER shall have performed
and complied with all of its covenants and obligations under this Agreement and
have delivered all Shares, securities, binding commitments and other documents
and materials required hereunder to SOFTWARE.
(e) Absence of Suit. No action, suit or proceedings before any court or
any governmental or regulatory authority shall have been commenced or threatened
and, no investigation by any governmental or regulatory authority shall have
been commenced, against ROLINA or SHAREHOLDER, seeking to restrain, prevent or
change the transactions contemplated hereby, or questioning the validity or
legality of any such transactions, or seeking damages in connection with any of
such transactions.
(f) Receipt of Approvals. Etc. All approvals, consents and/or waivers for
ROLINA and/or SHAREHOLDER that are necessary to effect the transactions
contemplated hereby shall have been received.
(g) Legal Opinion. SOFTWARE shall have received an opinion of counsel for
ROLINA and SHAREHOLDER in a form reasonably satisfactory to SOFTWARE.
(h) Proceedings and Instruments Satisfactory Certificates. All
proceedings, corporate or otherwise, to be taken in connection with the
transactions contemplated by this Agreement shall have occurred and all
appropriate documents incident thereto as SOFTWARE may reasonably request shall
have been delivered to SOFTWARE.
(i) Completion of Software. All software modules, including but not
limited to all source codes, documentation and all other appropriate and related
requirements which SOFTWARE may reasonably require of an early stage software
business shall be completed before and delivered to SOFTWARE at Closing to the
satisfaction of SOFTWARE.
8.2 The obligation of ROLINA and SHAREHOLDER to close hereunder shall be
subject to the fulfillment and satisfaction, prior to or at the Closing, of the
following conditions by SOFTWARE or the written waiver thereof by ROLINA and
SHAREHOLDER:
(a) Pre-Closing. All of the commitments set forth in Article 5 of this
Agreement shall be consummated.
(b) Representations and Warranties. The representation and warranties of
SOFTWARE in this Agreement shall be true and correct in all material respects
when made and shall be true and correct in all material respects on and as of
the Closing.
(c) Delivery of Officers' Certificate. SOFTWARE shall deliver to ROLINA
and SHAREHOLDER a certificate certifying that each of the warranties and
representations of SOFTWARE set forth in this Agreement is true and accurate as
of the date of the Closing and that no event or occurrence has transpired as of
the Closing
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which has or will have a material adverse effect upon the business or assets of
SOFTWARE.
(d) Compliance with Agreement. SOFTWARE shall have performed and complied
with all of its obligations under this Agreement and delivered all shares,
securities and binding commitments required hereunder.
(e) Absence of Suit. No action or lawsuit shall have been commenced
against SOFTWARE, seeking to restrain, prevent or change the transactions
contemplated hereby, or questioning the validity or legality of any such
transactions, or seeking damages in connection with any of such transactions.
(f) Receipt of Approvals, Etc. All approvals, consents and/or waivers for
SOFTWARE that are necessary to effect the transactions contemplated hereby shall
have been received.
(g) Legal Opinion. ROLINA and SHAREHOLDER shall have received an opinion
of counsel for SOFTWARE in a form reasonably satisfactory to them.
(h) Proceedings and Instruments Satisfactory; Certificates. All
proceedings, corporate or otherwise, to be taken in connection with the
transactions contemplated by this Agreement shall have occurred and all
appropriate documents incident thereto as `ROLINA and SHAREHOLDER may reasonably
request shall have been delivered to ROLINA and SHAREHOLDER.
ARTICLE 9
INDEMNIFICATION
9.1 By SOFTWARE . SOFTWARE shall defend and promptly indemnify ROLINA and
SHAREHOLDER and save and hold them harmless from, against, for and in respect of
and shall pay any and all damages, losses, obligations, liabilities, claims,
encumbrances, deficiencies, costs and expenses, including without limitation,
reasonable attorneys' fees and other costs and expenses incident to any suit,
action, investigation, claim or proceeding suffered, sustained, incurred or
required to be paid by them by reason of (i) any breach or failure of observance
or performance of any representation, warranty, covenant, agreement or
commitment made by SOFTWARE hereunder or relating hereto or as a result of any
such representation, warranty, covenant, agreement or commitment being untrue or
incorrect in any material respect; and/or (ii) any and all actions, suits,
investigations, proceedings, demands, assessments, audits, judgments and claims
arising out of any of the foregoing or from any material misrepresentation or
omission from any schedule to this Agreement, certificates, financial statements
or from any document furnished or required to be furnished hereunder; and
9.2 By ROLINA and SHAREHOLDER. ROLINA and SHAREHOLDER, jointly and
severally, shall defend and promptly indemnify the SOFTWARE and its respective
officers and directors, and save and hold them harmless from, against, for and
in respect of and shall pay any and all damages, losses, obligations,
liabilities, claims, encumbrances, deficiencies, costs and expenses, including
without limitation, reasonable attorneys' fees and other costs and expenses
incident to any suit, action, investigation, claim or proceeding suffered,
sustained, incurred or required to be paid by the SOFTWARE by reason of (a) any
breach or failure of observance or performance of any representation, warranty,
covenant, agreement or commitment made by ROLINA and/or SHAREHOLDER hereunder or
relating hereto or as a result of any such misrepresentation, warranty,
covenant, agreement or commitment being untrue or incorrect in any respect;
and/or (b) the existence of any obligation or liability of ROLINA which were not
disclosed to the SOFTWARE in accordance with this Agreement; and/or (c) any and
all actions, suits, investigations, proceedings, demands, assessments, audits,
judgments and claims arising out of any of the foregoing or from any
misrepresentation or omission from any
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schedule to this Agreement, certificates, financial statements or from any
document furnished or required to be furnished hereunder. Notwithstanding
anything contained in any agreement to the contrary, SHAREHOLDER hereby
specifically represents and agrees that SOFTWARE shall have assignable rights of
"set-off" against SHAREHOLDER in any contemporaneous or subsequent agreement
entered into by and between SHAREHOLDER, SOFTWARE and/or PROFORMIX to the extent
of any breach hereof in which case any amounts otherwise due SHAREHOLDER under
any such agreements may be reduced by the amounts hereinabove indemnified
against.
ARTICLE 10
BROKERAGE EXPENSES
10.1 Brokers. The parties covenant and represent to each other that they
had no dealings with any broker or finder in connection with this Agreement or
the transactions contemplated hereby.
10.2 Expenses. Except as otherwise provided herein, the parties agree to
bear their expenses individually, each in respect of all expenses of any
character incurred by it in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE 11
SECURITIES ACT PROVISION
11.1 Restrictions on Disposition of Shares. SHAREHOLDER covenants that the
shares of PROFORMIX common stock to be received in accordance with the
provisions of Article 1 hereof will not be disposed of except (i) pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "Act"), or (ii) in any other transaction which, in the opinion of PROFORMIX
counsel, is exempt from registration under the Act or the rules and regulations
of the Securities and Exchange Commission ("SEC") thereunder. In order to
effectuate the covenants of this sub-section 11.1, an appropriate legend will be
placed upon each of the certificates of stock at the time of distribution of
such shares pursuant to this Agreement, and stop transfer instructions shall be
placed with the transfer agent for such shares.
11.2 Notice of Limitation Upon Disposition. SHAREHOLDER is aware that the
shares of PROFORMIX common stock distributed to him pursuant to this Agreement
will not have been registered under the Act and, therefore, under current
interpretations and applicable rules, unless an exception from the registration
provisions of the Act is legally available to the holder thereof, such shares
must be retained for a period of at least one year, and at the expiration of
such period, sales of such shares may be confined to brokerage transactions of
limited amounts requiring certain notification filings with the SEC and such
disposition may be available only if PROFORMIX is current in its filings with
the SEC under the Act, or other public disclosure requirements, and other
limitations imposed by the Act.
11.3 Evidence of Compliance with Private Offering Exemption. SHAREHOLDER
will agree to provide such reasonable evidence as counsel for PROFORMIX may
request in order to evidence the private offering nature of the distribution of
the shares of PROFORMIX stock received pursuant to this Agreement.
11.4 Inclusion in Registration of other Securities. If after Closing
PROFORMIX shall determine to register on an appropriate form under the
Securities Act of 1933, as amended (the "Act") (other than Form S-4 or S-8 or
other form dealing with comparable types of transactions) any shares of common
stock of PROFORMIX, SOFTWARE shall, at least 45 days prior to the filing of each
such registration statement, give SHAREHOLDER written notice of such proposed
registration and upon written notice given by
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SHAREHOLDER shall include or cause to be included in each such registration
statement such shares of PROFORMIX common stock issued to SHAREHOLDER as part of
the within merger as SHAREHOLDER may request. Should the percentage of holdings
permitted to be registered by or for other selling shareholders be less than
twenty percent, then SHARHOLDER'S percentage for inclusion shall be likewise so
limited. Notwithstanding anything contained elsewhere herein to the contrary,
SHAREHOLDER agrees that in all event said shares shall despite any registration
thereof, be restricted from any sale or disposition for a period of twenty-four
(24) months from the date of closing and acknowledges that appropriate legends
will be placed upon such shares reflecting the foregoing restrictions.
(a) PROFORMIX's Obligations in Registration. In the event SHAREHOLDER
elects to participate in an offering by including his shares in a registration
statement, PROFORMIX shall:
(i) Notify SHAREHOLDER as to the filing thereof and of all amendments or
supplements thereto filed prior to the effective date thereof;
(ii) Comply with all applicable rules and regulations of the Securities
and Exchange Commission (the "Commission") and, use its best efforts to cause
such registration statement to become effective at the earliest possible date
after the filing thereof;
(iii) Notify SHAREHOLDER immediately, and confirm in writing, (1) when the
registration statement becomes effective, (2) of the issuance by the Commission
of any stop order or of the initiation, or the threatening, of any proceedings
for that purpose, (3) of the receipt by PROFORMIX. of any notification with
respect to the suspension of qualification of SHAREHOLDER's Common Stock for
sale in any jurisdiction or of the initiation, or the threatening, of any
proceedings for that purpose and (4) of the receipt of any comments, or requests
of additional information, from the Commission or any state regulatory
authority. If the Commission or any state regulatory authority shall enter such
a stop order or order suspending qualification at any' time, PROFORMIX will make
every reasonable effort to obtain the lifting of such order as promptly as
practicable;
(iv) During the time when a prospectus is required to be delivered under
the Act, use its best efforts to comply with all requirements imposed upon it by
the Act, as hereafter amended, and by the rules and regulations promulgated
thereunder, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in SHAREHOLDER'S Stock, If at any time when
a prospectus relating to the SHAREHOLDER'S Stock is required to be delivered
under the Act any event shall have occurred as a result of which, in the opinion
of counsel for PROFORMIX or SHAREHOLDER'S counsel, the prospectus relating to
PROFORMIX's Stock as then amended or supplemented includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend such prospectus to comply with the Act, PROFORMIX will
promptly notify SHAREHOLDER in writing of such fact and promptly prepare and
file with the Commission, at its expense, an appropriate amendment or
supplement;
(v) Endeavor in good faith, in cooperation with SHAREHOLDER, at or prior
to the time the registration statement becomes effective, to qualify the
SHAREHOLDER'S stock for offering and sale under the securities laws relating to
the offering or sale of SHAREHOLDER'S Stock in such jurisdictions as SHAREHOLDER
may reasonably designate and to continue the qualifications in effect so long as
required for purposes of the sale of the SHAREHOLDER'S Stock; provided that no
such qualification shall be required in any jurisdiction where, as a result
thereof, PROFORMIX would be subject to service of general process. In each
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jurisdiction where such qualification shall be effected, PROFORMIX will, unless
SHAREHOLDER agrees that such action is not at the time necessary or advisable,
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction. For the purposes of this paragraph, "good
faith" is defined as the same standard of care and degree of effort as PROFORMIX
will use to qualify its securities other than the Shareholders's Stock;
(vi) Furnish to SHAREHOLDER as soon as available, copies of any such
registration statement and each preliminary or final prospectus, or supplement
or amendment prepared pursuant thereto):
(vii) Make such representations and warranties to any underwriter of
SHAREHOLDER'S Stock, and use its best efforts to cause PROFORMIX's counsel to
render such opinions to such underwriter as such underwriter may reasonably
request; and
(viii) Pay all costs and expenses incident to the performance of
PROFORMIX's obligations under this Agreement, including, without limitation, the
fees and disbursements of PROFORMIX's auditors, engineers and legal counsel, and
of legal counsel responsible for qualifying the SHAREHOLDER 's stock under blue
sky laws, all filing fees and printing expenses, all expenses in connection with
the transfer and delivery of the SHAREHOLDER's Stock, and all expenses in
connection with the qualification of the SHAREHOLDER 's Stock under blue sky
laws.
(b) Agreement by SHAREHOLDER. In connection with the filing of a
registration statement pursuant to this Agreement, if SHAREHOLDER participates
in the offering by including SHAREHOLDER 's shares, SHAREHOLDER agrees:
(i) To furnish PROFORMIX all material information requested by PROFORMIX
concerning SHAREHOLDER and SHAREHOLDER's holdings of securities of PROFORMIX and
the proposed method of sale or other disposition of SHAREHOLDER's Stock and such
other information and undertakings as shall be reasonably required in connection
with the preparation and filing of any such registration statement covering all
or a part of SHAREHOLDER's Stock and in order to ensure full compliance with the
Act; and
11.4 (ii) To cooperate in good faith with PROFORMIX and its underwriters,
if any, in connection with such registration, including placing the shares of
SHAREHOLDER'S Stock to be included in such registration statement in escrow or
custody to facilitate the sale and distribution thereof.
ARTICLE 12
MISCELLANEOUS PROVISIONS
12.1 Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof. The representations,
warranties, covenants and agreements set forth in this Agreement and in any
financial statements, schedules or exhibits delivered pursuant hereto constitute
all the representations, warranties, covenants and agreements of the parties
hereto and upon which the parties have relied. Except as may be specifically
provided herein, no change, modification, amendment, addition or termination of
this Agreement or any part thereof shall be valid unless in writing and signed
by or on behalf of the party to he charged therewith.
12.2 Survival of Covenants. etc. All warranties, representations,
covenants and indemnifications set forth herein shall survive the Closing of
this Agreement.
20
<PAGE>
12.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be given or made pursuant to any of the provisions of
this Agreement shall be deemed to have been duly given or made for all purposes
if sent by Federal Express delivery or by certified or registered mail, return
receipt requested and postage prepaid or hand delivered to the respective
parties at the addresses hereinbefore given or such other addresses as shall be
provided hereafter by a party hereto to the other in accordance with the notice
provisions hereof.
12.4 Waiver. No waiver of the provisions hereof shall be effective unless
in writing and signed by the party to be charged with such waiver. No waiver
shall be deemed a continuing waiver or waiver in respect of any subsequent
breach or default, either of a similar or different nature, unless expressly so
stated in writing.
12.5 Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New Jersey applicable to
contracts to be performed entirely within that State. Should any clause, section
or part of this Agreement be held or declared to be void or illegal for any
reason, all other clauses, sections or parts of this Agreement which can be
affected without such illegal clause, section or part shall nevertheless
continue in full force and effect.
12.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns or heirs and personal representatives.
12.7 Captions. The headings, captions or titles of paragraphs under
sections or subsections of this Agreement are for convenience and reference only
and do not in any way modify, interpret or construe the intent of the parties or
effect any of the provisions of this Agreement.
12.8 Time Periods. Any time period provided for herein which shall end or
expire on a Saturday, Sunday. or legal holiday shall be deemed extended to the
next full business day thereafter.
12.9 Counterparts. This Agreement may be executed in one or more
counterparts and/or facsimile copies hereof, each of which shall be deemed to be
an original, but all of which shall constitute one and the same Agreement.
12.10 Confidentiality. Neither this Agreement nor any memorandum of this
Agreement shall be recorded amongst the Public Records of any State or County.
The parties hereto agree to keep this Agreement confidential, as well as any
information or document obtained by either party in connection with this
transaction, except to the extent disclosure is required to or by any government
agency or regulatory or quasi-regulatory body.
12.11 Joint Draftsmanship. The preparation of this Agreement has been a
joint effort of the parties and this Agreement shall not, solely as a matter of
judicial construction, be construed more severely against one of the parties
than the other.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed on the date and year first above written.
PROFORMIX SOFTWARE, INC.
(SEAL)
ATTEST:
By: /s/ Michael G. Martin
--------------------------------
/s/ Joerg Klaube Michael G. Martin, Chairman
- -----------------------
Joerg Klaube, Secretary
21
<PAGE>
ROLINA CORPORATION
(SEAL)
ATTEST: By: /s/ Steven D. Rudnik
-------------------------------
Steven D. Rudnik, President
/s/ Kathleen A. Rudnik
- -----------------------------
Kathleen A. Rudnik, Secretary
ADOPTION AND APPROVAL OF THIS
MERGER AGREEMENT ONLY AS THE
SOLE SHAREHOLDER OF
PROFORMIX SOFTWARE, INC.
BY:PROFORMIX SYSTEMS, INC.
(SEAL)
ATTEST: By: /s/ Michael G. Martin
-------------------------------
Michael G. Martin, Chairman
/s/ Joerg Klaube
- -----------------------
Joerg Klaube, Secretary
SHAREHOLDER:
/s/ Steven D. Rudnik
- -----------------------------
Steven D. Rudnik
22
ASSET PURCHASE AGREEMENT
BETWEEN
PROFORMIX SYSTEMS, INC.
AND
VANITY SOFTWARE PUBLISHING CORPORATION
MADE AS OF
APRIL 30, 1998
<PAGE>
TABLE OF CONTENTS
SHARE PURCHASE AGREEMENT
ARTICLE 1 - INTERPRETATION
1.01 Definitions...................................................... 1
1.02 Headings......................................................... 4
1.03 Extended Meanings................................................ 4
1.04 Statutory References............................................. 4
1.05 Accounting Principles............................................ 4
1.06 Currency......................................................... 4
1.07 Schedules........................................................ 5
ARTICLE 2 - SALE AND PURCHASE
2.01 Purchased Assets to be Sold and Purchased........................ 6
2.02 Purchase Price................................................... 7
2.03 Allocation of Purchase Price..................................... 8
2.04 Tax Returns...................................................... 8
2.05 Assumption of Obligations and Liabilities........................ 8
2.06 Obligations and Liabilities Not Assumed.......................... 8
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
3.01 Vendor's Representations and Warranties.......................... 9
3.02 Survival of Vendor's Representations, Warranties and Covenants... 16
3.03 Purchaser's Representations and Warranties....................... 16
3.04 Survival of Purchaser's Representations, Warranties and
Covenants........................................................ 18
ARTICLE 4 - COVENANTS
4.01 Covenants of the Vendor.......................................... 19
4.02 Covenants of the Purchaser....................................... 21
<PAGE>
Table Of Contents(cont'd)
ARTICLE 5 - CONDITIONS
5.01 Conditions for the Benefit of the Purchaser...................... 22
5.02 Conditions for the Benefit of the Vendor......................... 24
ARTICLE 6 - CLOSING ARRANGEMENTS
6.01 Closing.......................................................... 26
6.02 Examination of Records and Purchased Assets by Purchaser......... 26
6.03 Examination of Records by Vendor................................. 27
6.04 Risk of Loss..................................................... 27
6.05 Delivery of Purchased Assets..................................... 28
ARTICLE 7 - RISK FACTORS OF ACQUIRED SECURITIES
7.01 Acknowledgement by Vendor........................................ 28
ARTICLE 8 - GENERAL
8.01 Indemnification.................................................. 30
8.02 Further Assurances............................................... 30
8.03 Fees and Commissions............................................. 30
8.04 Public Announcements............................................. 30
8.05 Benefit of the Agreement......................................... 31
8.06 Entire Agreement................................................. 31
8.07 Amendments and Waivers........................................... 31
8.08 Assignment....................................................... 31
8.09 Notices.......................................................... 31
8.10 Remedies Cumulative.............................................. 32
8.11 Governing Law.................................................... 33
8.12 Attornment....................................................... 33
8.13 Counterparts..................................................... 33
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT is made as of April 30, 1998
BETWEEN:
PROFORMIX SYSTEMS, INC., a corporation
incorporated under the laws of the State of Delaware
(the "Purchaser"),
- and -
VANITY SOFTWARE PUBLISHING
CORPORATION, a corporation incorporated under the
laws of the Province of Ontario (the "Vendor"),
WHEREAS the Vendor carries on the business of, inter alia, creating,
manufacturing, selling and retailing ergonomic software;
AND WHEREAS the Vendor desires to sell and the Purchaser desires to
purchase certain of the assets of the Vendor pertaining to the said business
upon and subject to the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the covenants
and agreements herein contained, the parties hereto agree as follows:
ARTICLE 1 - INTERPRETATION
1.01 Definitions
In this Agreement, unless something in the subject matter or context
is inconsistent therewith:
"Affiliate" has the meaning attributed thereto in the Business Corporations Act
(Ontario).
"Agreement" means this agreement, including its recitals and schedules, as
amended from time to time.
"Applicable Law" means:
(i) any applicable domestic or foreign law including any statute,
subordinate legislation or treaty, and
<PAGE>
-2-
(ii) any applicable guideline, directive, rule, standard, requirement,
policy, order, judgment, injunction, award or decree of a
Governmental Authority.
"Balance Sheet" means the balance sheet of the Corporation as at the Balance
Sheet Date.
"Balance Sheet Date" means March 31, 1998.
"Business" means the business of, inter alia, creating, manufacturing, selling
and retailing ergonomic software at present and heretofore carried on by the
Vendor in Toronto, Ontario.
"Business Day" means a day other than a Saturday, Sunday or statutory holiday in
Ontario.
"Claims" means all losses, damages, expenses, liabilities (whether accrued,
actual, contingent, latent or otherwise), claims and demands of whatever nature
or kind including all legal fees and costs on a solicitor and client basis.
"Closing Date" means April 30, 1998 or such other date as may be agreed to in
writing between the Vendor and the Purchaser.
"Developers" has the meaning set out in Section 5.01(1)(j).
"Environmental Law" means any Applicable Law relating to the environment
including those pertaining to:
(i) reporting, licensing, permitting, investigating, remediating and
cleaning up in connection with any presence or release, or the
threat of the same, of Hazardous Substances, and
(ii) the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, handling and the like of Hazardous Substances,
including those pertaining to occupational health and safety.
"Exercise Period" has the meaning set out in Section 2.02(1)(b).
"Financial Statements" has the meaning set out in Section 3.01(g).
"Governmental Authority" means any domestic or foreign legislative, executive,
judicial or administrative body or person having or purporting to have
jurisdiction in the relevant circumstances.
<PAGE>
-3-
"Hazardous Substance" means any substance or material that is prohibited,
controlled or regulated by any Governmental Authority pursuant to Environmental
Laws.
"Indemnitee" has the meaning set out in Section 8.01.
"Indemnitor" has the meaning set out in Section 8.01.
"Intellectual Property" means intellectual property of whatever nature and kind
including all domestic and foreign trade-marks, business names, trade names,
domain names, trading styles, patents, trade secrets, Software, industrial
designs and copyrights, whether registered or unregistered, and all applications
for registration thereof, and inventions, formulae, product formulations,
technology and techniques, know-how and manuals.
"Inventories" means all inventories of the Business which are of merchantable
quality and reasonably fit for the purpose intended including all Ergo Break
software, finished goods, work in progress and raw materials.
"Owned Intellectual Property" has the meaning set out in Section 2.01(e).
"Permits" means all permits, consents, waivers, licences, certificates,
approvals, authorizations, registrations, franchises, rights, privileges and
exemptions, or any item with a similar effect, issued or granted by any person.
"Proceeds" has the meaning set out in Section 6.04(1)(a).
"Proformix Shares" has the meaning set out in Section 2.02(1)(a).
"Purchased Assets" means the Purchased Assets referred to or described in
Section 2.01.
"Purchase Price" has the meaning set out in Section 2.02(1).
"Software" means all software relating to the Business including the computer
programs known by the names as set out in Schedule 2.01(e), including all
versions thereof, and all related documentation, manuals, source code and object
code, program files, data files, computer related data, field and data
definitions and relationships, data definition specifications, data models,
program and system logic, interfaces, program modules, routines, sub-routines,
algorithms, program architecture, design concepts, system designs, program
structure, sequence and organization, screen displays and report layouts, and
all other material related to such software.
"Subsidiary" has the meaning attributed thereto in the Business Corporations Act
(Ontario).
<PAGE>
-4-
"Time of Closing" means 9:00 a.m. (Toronto Time) on the Closing Date.
"Third Party Programs" has the meaning set out in Section 3.01(aa).
1.02 Headings
The division of this Agreement into Articles and Sections and the
insertion of a table of contents and headings are for convenience of reference
only and do not affect the construction or interpretation of this Agreement. The
terms "hereof", "hereunder" and similar expressions refer to this Agreement and
not to any particular Article, Section or other portion hereof. Unless something
in the subject matter or context is inconsistent therewith, references herein to
Articles, Sections and Schedules are to Articles and Sections of and Schedules
to this Agreement.
1.03 Extended Meanings
In this Agreement words importing the singular number only include
the plural and vice versa, words importing any gender include all genders and
words importing persons include individuals, partnerships, associations, trusts,
unincorporated organizations and corporations. The term "including" means
"including without limiting the generality of the foregoing".
1.04 Statutory References
In this Agreement, unless something in the subject matter or context
is inconsistent therewith or unless otherwise herein provided, a reference to
any statute is to that statute as now enacted or as the same may from time to
time be amended, re-enacted or replaced and includes any regulations made
thereunder.
1.05 Accounting Principles
Wherever in this Agreement reference is made to a calculation to be
made or an action to be taken in accordance with generally accepted accounting
principles, such reference will be deemed to be to the generally accepted
accounting principles from time to time approved by the Canadian Institute of
Chartered Accountants, or any successor institute, applicable as at the date on
which such calculation or action is made or taken or required to be made or
taken.
1.06 Currency
All references to currency herein are to lawful money of Canada.
<PAGE>
-5-
1.07 Schedules
The following are the Schedules to this Agreement:
Schedule 2.01(a) - Specified Machinery and Equipment
Schedule 2.01(d) - Royalty, Franchise, Licence and Management
Agreements; Other Contracts or Commitments
Schedule 2.01(e) - Owned Intellectual Property
Schedule 2.01(f) - Corporate Names and Trademarks
Schedule 2.05 - Assumed Contracts and Commitments
Schedule 3.01(b) - Permitted Encumbrances
Schedule 3.01(g) - Financial Statements of Vendor
Schedule 3.01(x) - Consents Required re Intellectual Property
Schedule 3.01(aa) - Third Party Programs
Schedule 3.01(dd) - Deliverees of Source Code
Schedule 3.01(ee) - Distributors, Agents, Representatives
Schedule 3.01(ff) - Licences, Maintenance and Support Agreements
Schedule 3.01(gg) - Known Problems or Defects in Software
Schedule 3.01(hh) - Current State of Software
Schedule 3.01(kk) - Pending or Threatened Proceedings
Schedule 3.01(pp) - Former Employees
Schedule 3.01(qq) - Employment and Consulting Contracts
Schedule 5.01(1)(i) - Non-Competition Agreement between Vendor and
Purchaser
<PAGE>
-6-
Schedule 5.01(1)(j) - Non-Competition Agreement between Purchaser and
Developers
Schedule 5.01(1)(k) - Legal Opinion of Vendor's Counsel
Schedule 5.02(1)(d) - Legal Opinion of Purchaser's U.S. Counsel
Schedule 5.02(1)(e) - Legal Opinion of Purchaser's Canadian Counsel
ARTICLE 2 - SALE AND PURCHASE
2.01 Purchased Assets to be Sold and Purchased
Upon and subject to the terms and conditions hereof, the Vendor will
sell to the Purchaser and the Purchaser will purchase from the Vendor all of the
right, title, benefit and interest of the Vendor in and to the following assets
(the "Purchased Assets"):
(a) all machinery and equipment and all computer hardware and peripheral
equipment, supplies and accessories of the Business, including the
machinery and equipment described in Schedule 2.01(a);
(b) all Inventories;
(c) all of the accounts receivable of the Business, including but not
limited to all income tax and National Research Council of Canada
refunds applicable to the Business, as permitted by law;
(d) all royalty, franchise, licence or management agreements and all
other contracts or commitments described in Schedule 2.01(d)
relating to the Purchased Assets including but not limited to,
(i) all unfilled orders received by the Vendor in connection with
the Purchased Assets; and
(ii) all current distribution contracts listed in Schedule 2.01(d);
(e) all Intellectual Property owned by the Vendor and belonging to or
used in the Business (the "Owned Intellectual Property"), including
the Intellectual Property listed in Schedule 2.01(e);
(f) the goodwill of the Business, including:
<PAGE>
-7-
(i) the exclusive right to the Purchaser to the use, to the extent
permitted by law, of the corporate names and trademarks listed
in Schedule 2.01(f); and
(ii) all records of sales, customer lists and supplier lists of or
used in connection with the Business;
(g) all inspection records and other records, books, documents and data
bases recorded or stored by means of any device, including in
electronic form, relating to the Purchased Assets as are in the
possession or under the control of the Vendor, and all other
documents referred to in Section 6.02(1) as shall be requested by
the Purchase save and except the Vendor's payroll records and
financial statements; and
(h) any and all U.S. government standing offer listings which have been
obtained or are in the process of being obtained by the Vendor in
connection with the Purchased Assets.
2.02 Purchase Price
(1) The consideration payable to the Vendor for the Purchased Assets (such
amount being hereinafter referred to as the "Purchase Price") will be as
follows:
(a) 224,000 common shares in the capital stock of the Purchaser
("Proformix Shares") to be issued in the name of and delivered to
the Vendor on the Closing Date; and
(b) a warrant (the "Warrant") to purchase at an exercise price of $5.00
(U.S.) per share an additional 224,000 Proformix Shares which
Warrant may be exercised by the Vendor at any time after one year
from the Closing Date and up to five years after the Closing Date
(the "Exercise Period"). Any exercise of the right to purchase
additional Proformix Shares by the Vendor shall be accompanied by a
written notice of exercise delivered by the Vendor to the Purchaser
during the Exercise Period stating the number of Proformix Shares
which the Vendor elects to so purchase. Upon timely receipt of such
notice accompanied by appropriate payment for the Proformix Shares,
as set forth above, the Purchaser shall cause the appropriate number
of Proformix Shares to be issued to the Vendor in accordance with
the then applicable securities laws.
(2) The Vendor acknowledges that Proformix Shares issued pursuant to
Section 2.02(1) shall be restricted as to any sale, transfer or other
disposition in Canada pursuant to subsection 72(4) of the Securities Act
(Ontario), as amended.
<PAGE>
-8-
(3) The Vendor acknowledges that Proformix Shares issued pursuant to
Section 2.02(1) shall be restricted as to any sale, transfer or other
disposition for a period of one (1) year from the Closing Date and shall
thereafter continue to be so restricted unless said shares have been registered
with the United States Securities and Exchange Commission or an exemption from
such registration is applicable.
(4) The Vendor acknowledges that Proformix Shares issued pursuant to this
Agreement have not been registered under the United States Securities Act of
1933 (the "United States Securities Act"), as amended, or with any state,
provincial or federal agency, including the United States Securities and
Exchange Commission, and may not be resold in the United States unless first
registered or exempted from registration. The Purchaser or its transfer agent
may require an opinion of counsel in support of any claim of exemption from
registration.
(5) For the purposes of Section 2.02(1)(b), a notice of exercise shall be
validly made if delivered to the Purchaser in writing, together with a certified
cheque in the appropriate U.S. dollar amount, by pre-paid registered mail to the
address of the Purchaser specified in Section 8.09.
2.03 Allocation of Purchase Price
The Purchase Price shall be allocated as follows:
(a) Tangible Purchased Assets as per the Balance Sheet; and
(b) Any remaining amount to intangible Purchased Assets, including
but not limited to the Software.
2.04 Tax Returns
The Vendor and the Purchaser, in filing their respective income tax
returns, will use the allocations of the Purchase Price as set forth in Section
2.03.
2.05 Assumption of Obligations and Liabilities
The Purchaser will assume, fulfil and perform the obligations and
liabilities of the Vendor accruing after the close of business on the day before
the Closing Date under the contracts and other commitments specifically
described in Schedule 2.05 only.
2.06 Obligations and Liabilities Not Assumed
Except as specifically provided in this Agreement, the Purchaser
does not assume and will not be liable for any obligations or liabilities of the
Vendor whatsoever
<PAGE>
-9-
including any taxes under the Income Tax Act (Canada) or any other taxes
whatsoever that may be or become payable by the Vendor including any income or
corporation taxes resulting from or arising as a consequence of the sale by the
Vendor to the Purchaser of the Purchased Assets hereunder.
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
3.01 Vendor's Representations and Warranties
The Vendor represents and warrants to the Purchaser that:
Corporate
(a) The Vendor is a corporation duly incorporated, organized and
subsisting under the laws of the Province of Ontario with the
corporate power to own its Purchased Assets and to carry on its
business and has made all necessary filings under all applicable
corporate, securities and taxation laws or any other laws to which
the Vendor is subject.
(b) The Vendor has the power, authority and right to enter into and
deliver this Agreement, having obtained all necessary director and
shareholder approvals prior to the Closing Date, and to transfer the
legal and beneficial title and ownership of the Purchased Assets to
the Purchaser free and clear of all liens, charges, encumbrances and
any other rights of others, except as disclosed in Schedule 3.01(b).
(c) This Agreement constitutes a valid and legally binding obligation of
the Vendor, enforceable against the Vendor in accordance with its
terms subject to applicable bankruptcy, insolvency, reorganization
and other laws of general application limiting the enforcement of
creditors' rights generally and to the fact that specific
performance is an equitable remedy available only in the discretion
of the court.
(d) There is no contract, option or any other right of another binding
upon or which at any time in the future may become binding upon the
Vendor to sell, transfer, assign, pledge, charge, mortgage or in any
other way dispose of or encumber any of the Purchased Assets other
than pursuant to the provisions of this Agreement or pursuant to
purchase orders accepted by the Vendor in the usual and ordinary
course of the Business.
<PAGE>
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(e) Neither the entering into nor the delivery of this Agreement nor the
completion of the transactions contemplated hereby by the Vendor
will result in the violation of:
(i) any of the provisions of the constating documents or by-laws
of the Vendor,
(ii) any agreement or other instrument to which the Vendor is a
party or by which the Vendor is bound, or
(iii) any Applicable Law.
Financial
(f) The books and records of the Vendor relating to the Business are
true and correct and present fairly and disclose in all material
respects the financial position of the Business and all material
financial transactions of the Vendor relating to the Business have
been accurately recorded in such books and records and, to the
extent possible, such books and records have been prepared in
accordance with generally accepted accounting principles
consistently applied.
(g) The financial statements of the Vendor, consisting of the Balance
Sheet and statements of income, retained earnings and changes in
financial position for the period ended on the Balance Sheet Date,
(collectively, the "Financial Statements"), a copy of which is
attached hereto as Schedule 3.01(g):
(i) are in accordance with the books and accounts of the Vendor as
at the Balance Sheet Date,
(ii) are true and correct and present fairly the financial position
of the Vendor as at the Balance Sheet Date,
(iii) have been prepared in accordance with generally accepted
accounting principles consistently applied, and
(iv) present fairly all of the Purchased Assets and liabilities of
the Vendor as at the Balance Sheet Date including all
contingent liabilities of the Vendor as at the Balance Sheet
Date.
(h) The financial position of the Vendor is at least as good as the
financial position of the Vendor as at the Balance Sheet Date.
<PAGE>
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(i) Since the Balance Sheet Date the Business has been carried on in its
usual and ordinary course and the Vendor has not entered into any
transaction out of the usual and ordinary course of the Business.
(j) Since the Balance Sheet Date there has been no change in the
affairs, business, prospects, operations or condition of the
Business, financial or otherwise, whether arising as a result of any
legislative or regulatory change, revocation of any licence or right
to do business, fire, explosion, accident, casualty, labour dispute,
flood, drought, riot, storm, condemnation, act of God, public force
or otherwise, except changes occurring in the usual and ordinary
course of business that have not adversely affected the affairs,
business, prospects, operations or condition of the Business,
financial or otherwise.
(k) No current or former director, officer, shareholder or employee of
the Vendor or any person not dealing at arm's length within the
meaning of the Income Tax Act (Canada) with any such person or with
the Vendor is indebted to the Vendor.
Condition of Purchased Assets
(l) The Vendor is the owner of the Purchased Assets with good and
marketable title to the Purchased Assets, free and clear of all
liens, charges, encumbrances and any other rights of others, except
as disclosed in Schedule 3.01(b).
(m) The accounts receivable of the Business are good accounts receivable
collectible within 90 days and, to the knowledge of the Vendor, are
not subject to any defence, counterclaim or set-off.
(n) All machinery and equipment owned or used by the Vendor in the
Business have been properly maintained and are in good working order
for the purposes of on-going operation, subject to ordinary wear and
tear for machinery and equipment of comparable age.
(o) All of the Inventories are of merchantable quality and reasonably
fit for their usual purpose.
Contracts and Commitments
(p) The Vendor is not a party to any contract or commitment relating to
the Purchased Assets outside the usual and ordinary course of the
Business and is not a party to any contract or commitment relating
to the Purchased
<PAGE>
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Assets, except such contracts or commitments as are disclosed in
Schedule 2.01(d).
(q) The Vendor is not in default or breach of any contract or commitment
referred to in Section 2.01(d) and there exists no condition, event
or act that, with the giving of notice or lapse of time or both,
would constitute such a default or breach, and all such contracts
and commitments are in good standing and in full force and effect
without amendment thereto and the Vendor is entitled to all benefits
thereunder.
(r) The Vendor is not a party to or bound by any guarantee,
indemnification, surety or similar obligation pertaining to the
Purchased Assets.
(s) There are no outstanding orders, notices or similar requirements
relating to the Purchased Assets issued by any Governmental
Authority and there are no matters under discussion with any
Governmental Authority relating to orders, notices or similar
requirements.
Intellectual Property
(t) The Vendor has the exclusive right to use the Owned Intellectual
Property except to the extent the Vendor has licensed others to use
the Owned Intellectual Property, which licences are listed in
Schedule 2.01(d).
(u) The Owned Intellectual Property is in good standing and has been
duly registered or applications to register the same have been filed
in all appropriate offices in Canada to preserve the rights therein
and of the Vendor thereto.
(v) The Intellectual Property listed on Schedule 2.01(e) includes all of
the Intellectual Property used in or required for the proper
carrying on of the Business.
(w) The Vendor is not a party to any contract or commitment to pay any
royalty, licence or other fee with respect to the use of the Owned
Intellectual Property except as set out in Schedule 2.01(d).
(x) No consents are required in order for the Intellectual Property to
be licensed or sub-licensed to any third party except as set out in
Schedule 3.01(x).
(y) The conduct of the Business does not involve any infringement,
misuse or misappropriation of any Intellectual Property rights of
third parties.
<PAGE>
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(z) The Owned Intellectual Property is not invalid or unenforceable. No
infringement, misuse or misappropriation of the Owned Intellectual
Property has occurred.
(aa) Except for the third party software ("Third Party Programs") listed
in Schedule 3.01(aa), the Software neither contains nor embodies nor
uses nor requires any third party software, including development
tools and utilities, and the Software, together with the Third Party
Programs, contains all material necessary for the continued
maintenance and development of the Software.
(bb) Copies of all licence and maintenance agreements for the Third Party
Programs have been made available by the Vendor to the Purchaser,
except in respect of Third Party Programs that are shrink wrapped
software and that are purchased off-the-shelf by the Vendor in order
to be passed through to the Vendor's customers.
(cc) Except as disclosed in Schedule 3.01(dd), the source code for the
Software has not been delivered or made available to any person and
the Vendor has not agreed to or undertaken to or in any other way
promised to provide such source code to any person other than the
Purchaser.
(dd) Except as listed in Schedule 3.01(ee), there are no, and have never
been any, distributors, sales agents, representatives or other
persons, including VARs, OEMs or resellers, who have or had rights
to market or license the Software.
(ee) Schedule 3.01(ff) lists all the other licences, maintenance or
support agreements, development contracts and all other agreements
(other than requests for proposals and proposals which are referred
to in such agreements) between the Vendor and users of the Software,
copies of each of which have been made available to the Purchaser.
(ff) Except as listed in Schedule 3.01(gg), there are no known problems
or defects in the Software including bugs, logic errors or failures
of the Software to operate as described in the related
documentation.
(gg) Schedule 3.01(hh) accurately describes the current state of the
Software, together with all current development plans for the
Software, including design problems, remedial plans, requests for
new features from customers and enhancement plans.
<PAGE>
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Environmental
(hh) The Business, as carried on by the Vendor, and the Purchased Assets
are in compliance in all material respects with all Environmental
Laws and there are no facts that could give rise to a notice of
non-compliance with any Environmental Law.
Taxes
(ii) The Vendor is not a non-resident person within the meaning of
section 116 of the Income Tax Act (Canada).
General
(jj) There are no actions, suits or proceedings pending or threatened
against or adversely affecting, or which could adversely affect the
Purchased Assets, except such actions, suits or proceedings as are
disclosed in Schedule 3.01(kk).
(kk) The Vendor is conducting the Business in compliance with all
Applicable Laws of Canada and of the Province of Ontario and all
municipalities thereof in which the Business is carried on, is not
in breach of any such Applicable Laws and is duly licensed,
registered or qualified in the Province of Ontario and all
municipalities thereof in which the Vendor carries on the Business
to enable the Business to be carried on as now conducted and the
Purchased Assets to be owned, leased and operated, and all such
licences, registrations and qualifications are valid and subsisting
and in good standing and none of the same contains any term,
provision, condition or limitation which has or may have an adverse
effect on the operation of the Business or which may be affected by
the completion of the transactions contemplated hereby.
(ll) The Purchased Assets are validly insured and there are no pending
insurance claims in respect thereto.
(mm) The Vendor has provided to the Purchaser all information that it is
aware of relating to the Purchased Assets that would likely be
material to a purchaser of the Purchased Assets. To the Vendor's
knowledge, all such information is true and correct and no material
facts have been omitted therefrom that would make such information
misleading.
<PAGE>
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Acquired Securities
(nn) The Vendor is not:
(i) a natural person resident of the United States;
(ii) a partnership or corporation organized or incorporated under
the laws of the United States;
(iii) an estate of which any executor or administrator is a U.S.
person;
(iv) a trust of which any trustee is a U.S. person;
(v) an agency or branch of a foreign entity located in the United
States;
(vi) a non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the
benefit or account of a U.S. person;
(vii) a discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary
organized, incorporated, or (if an individual) resident in the
United States; and/or
(viii) a partnership or corporation if organized or incorporated
under the laws of any foreign jurisdiction which is formed by
a U.S. person principally for the purpose of investing in
securities not registered under the Act.
Employees
(oo) The sole employee of the Vendor is Mr. David Thomas, who is a
non-paid employee. To the best of the Vendor's knowledge after due
inquiry, attached as Schedule 3.01(pp) is a complete list of former
employees of the Vendor.
(pp) To the best of the Vendor's knowledge after due inquiry, except as
disclosed in Schedule 3.01(qq), the Vendor is not a party to any
written or other employment contract or consulting contract, whether
formal or informal, with any person whomsoever.
(qq) The Vendor is not bound by or a party to any collective bargaining
agreement.
<PAGE>
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3.02 Survival of Vendor's Representations, Warranties and Covenants
(1) The representations and warranties of the Vendor set forth in Section
3.01 will survive the completion of the sale and purchase of the Purchased
Assets herein provided for and, notwithstanding such completion, will continue
in full force and effect for the benefit of the Purchaser for a period of two
years from the Closing Date.
(2) The covenants of the Vendor set forth in this Agreement (other than
the covenant set forth in Section 4.01(2) with respect to representations and
warranties being true at the Time of Closing) will survive the completion of the
sale and purchase of the Purchased Assets herein provided for and,
notwithstanding such completion, will continue in full force and effect for the
benefit of the Purchaser in accordance with the terms thereof.
3.03 Purchaser's Representations and Warranties
The Purchaser represents and warrants to the Vendor that:
(a) the Purchaser is a corporation duly incorporated, organized and
subsisting under the laws of the State of Delaware with the
corporate power to own its assets and to carry on its business and
has made all necessary filings under all applicable corporate,
securities, and taxation laws or any other laws to which the
Purchaser is subject;
(b) the Purchaser has good and sufficient power, authority and right to
enter into and deliver this Agreement and to complete the
transactions to be completed by the Purchaser contemplated
hereunder;
(c) this Agreement constitutes a valid and legally binding obligation of
the Purchaser, enforceable against the Purchaser in accordance with
its terms subject to applicable bankruptcy, insolvency,
reorganization and other laws of general application limiting the
enforcement of creditors' rights generally and to the fact that
specific performance is an equitable remedy available only in the
discretion of the court;
(d) neither the entering into nor the delivery of this Agreement nor the
completion of the transactions contemplated hereby by the Purchaser
will result in a violation of:
(i) any of the provisions of the constating documents or by-laws
of the Purchaser;
(ii) any agreement or other instrument to which the Purchaser is a
party or by which the Purchaser is bound; or
<PAGE>
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(iii) any Applicable Law;
(e) the Proformix Shares and the Warrant have been duly authorized and
issued and all necessary corporate action has been taken to permit
the transfer of the Proformix Shares and Warrant to the Vendor
pursuant to the terms of this Agreement;
(f) the issuance and transfer of the Proformix Shares and Warrant is in
compliance with Applicable Law;
(g) between January 1, 1998, and April 15, 1998, the Purchaser received
an aggregate U.S.$2,787,000 in additional equity capital against
issuance of 790,311 common shares;
(h) as of the date of this Agreement, the issued and outstanding capital
for the Purchaser is 4,749,132 common shares and 10 cumulative
preference shares;
(i) as of the date of this Agreement, there are outstanding warrants,
options and similar instruments issued by the Purchaser which, if
exercised, would increase the outstanding capital for the Purchaser
by 1,720,621 common shares and with the resulting capital infusion
of US $6,601,165;
(j) the Purchaser is current in all of its filings with all appropriate
federal, state and administrative agencies and regulators and is in
compliance with all applicable securities laws in the United States
and Canada;
(k) within the last six months, the Purchaser has not committed any act
of bankruptcy nor have proceedings been instituted by it or against
it in respect to any bankruptcy, reorganization, arrangement,
insolvency, liquidation or any other proceeding for the relief of
debtors;
(l) in the three months prior to this Agreement, there has been no
material adverse change in the Purchaser's business or financial
affairs;
(m) there has been no cease trade order made in the last year in respect
to the trading of Proformix Shares;
(n) the shares of Proformix are listed on NASDAQ OTC Electronic Bulletin
Board and have been so listed for the 6 months prior to the date of
this Agreement, and no proceedings have been instituted and no
notices have been given in the last 6 months to delist the shares of
Proformix from such NASDAQ OTC Electronic Bulletin Board;
<PAGE>
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(o) the Purchaser is a non-resident of Canada;
(p) the Purchaser is not registered under Subdivision d of Division V of
Part IX of the Excise Tax Act (Canada);
(q) the Purchaser intends to export the Purchased Assets to a place
outside Canada as soon as practicable after receiving delivery
thereof;
(r) the Purchaser is not acquiring the Purchased Assets for consumption,
use or supply in Canada and will not process, transform or alter the
Purchased Assets while in Canada, except to the extent reasonably
necessary for, or incidental to their transportation to a place
outside Canada; and
(s) the Purchaser is acquiring the ownership, possession or use under
this Agreement of all or substantially all of the property that can
reasonably be regarded as being necessary for the Purchaser to be
capable of carrying on the Business of the Vendor as a business
within the meaning of section 167.1 of the Excise Tax Act (Canada).
3.04 Survival of Purchaser's Representations, Warranties and Covenants
(1) The representations and warranties of the Purchaser set forth in
Section 3.03 will survive the completion of the sale and purchase of the
Purchased Assets herein provided for and, notwithstanding such completion, will
continue in full force and effect for the benefit of the Vendor for a period of
two years from the Closing Date.
(2) The covenants of the Purchaser set forth in this Agreement (other than
the covenant set forth in Section 4.02(2) with respect to representations and
warranties being true at the Time of Closing) will survive the completion of the
sale and purchase of the Purchased Assets herein provided for and,
notwithstanding such completion, will continue in full force and effect for the
benefit of the Vendor in accordance with the terms thereof.
3.05 Appointment of Trustee for Rights of Dissolved Vendor
(1) Subject to subsection 3.05(2), the Purchaser appoints 1293614 Ontario
Inc. and its heirs, estate trustees, successors and assigns as trustee (the
"Trustee") of the rights of the Vendor under this Agreement for the benefit of
the shareholders of the Vendor (as last recorded in the Vendor's corporate
records), with the intent that the Trustee shall be entitled to maintain any
action against the Purchaser in the place and stead of the Vendor and as if the
Trustee were the Vendor, mutatis mutandis. The Purchaser shall bear no liability
for the fees and expenses of the Trustee.
<PAGE>
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(2) Subsection 3.05(1) shall be without effect until such time as the
Vendor has been dissolved pursuant to Part XIV of the Business Corporations Act
(Ontario), and shall be without effect unless there remain statutory rights
pursuant to that act enabling the Purchaser to maintain actions against the
Vendor, and the shareholders of the Vendor to whom property of the Vendor is
distributed upon dissolution, in form and substance similar to the rights
currently set out in sections 242 and 243 of that act. The rights of the Trustee
shall be further limited in that the amount of any judgment that the Trustee may
obtain in any action against the Purchaser shall be reduced by a percentage
equal to the percentage of the 224,000 Proformix Shares which were not, as of
the date of commencement of such action, beneficially owned by persons who were,
as at the Closing Date, registered shareholders of the Vendor, or their
respective heirs, estate trustees or successors.
(3) The provisions of this section 3.05 will survive the completion of the
sale and purchase of the Purchased Assets herein provided for and
notwithstanding such completion will, subject to the conditions precedent
specified in subsection 3.05(2), continue in full force and effect until the
fifth anniversary of the date of dissolution of the Vendor.
ARTICLE 4 - COVENANTS
4.01 Covenants of the Vendor
(1) In addition to any other provision for indemnification by the Vendor
contained in this Agreement, the Vendor will indemnify and save harmless the
Purchaser and the directors, officers, employees and agents of the Purchaser
from and against:
(a) all third party claims relating to the Purchased Assets and accruing
up to the close of business on the day before the Closing Date; and
(b) all Claims incurred by the Purchaser directly or indirectly
resulting from any breach of any covenant of the Vendor contained in
this Agreement or, subject to Section 2.05, from any inaccuracy or
misrepresentation in any representation or warranty set forth in
Section 3.01.
(2) The Vendor will ensure that the representations and warranties of the
Vendor set forth in Section 3.01 are true and correct at the Time of Closing and
that the conditions of closing for the benefit of the Purchaser set forth in
Section 5.01(1) have been performed or complied with by the Time of Closing.
<PAGE>
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(3) The Vendor immediately after the Closing Date will file:
(a) articles of amendment changing its corporate name to one that does
not include any trade mark or trade name included in the Purchased
Assets, and
(b) cancellations with all applicable Governmental Authorities of the
registrations of all business names included in the Purchased
Assets.
(4) The Vendor will, from and after the Closing Date, refrain from using
or conducting business under any of the business names, trade names, trade-marks
or other Intellectual Property acquired pursuant to this Agreement, including
but not limited to the business name "Vanity" and the trade-mark "Ergo Break".
(5) The Vendor will not be responsible for Goods and Services Tax or
Retail Sales Tax payable upon and in connection with the conveyance and transfer
of the Purchased Assets by the Vendor to the Purchaser under this Agreement.
(6) The Vendor and its designees shall cooperate with the Purchaser in all
respects in connection with supplying all information reasonably requested by
the Purchaser or its counsel and executing and returning all documents
reasonably requested in connection with the claim of exemption from registration
including, but not limited to, investor suitability and accreditation
questionnaires.
(7) Notwithstanding any of the other provisions of this Agreement, the
Vendor will not be liable to the Purchaser or to the directors, officers,
employees, shareholders or agents of the Purchaser for any Claim directly or
indirectly resulting from:
(a) any inaccuracy or misrepresentation in any representation or
warranty set forth in Section 3.01 unless any claim or demand by the
Purchaser against the Vendor with respect thereto is given to the
Vendor by the Purchaser within the time period referred to in
Section 3.02(1);
(b) any matter from and against which the Purchaser and the directors,
officers, employees and agents of the Purchaser are indemnified
pursuant to Section 4.01(1) unless any claim or demand by the
Purchaser or the directors, officers, employees or agents of the
Purchaser against the Vendor with respect thereto is given to the
Vendor by the Purchaser within two years from the date hereof; or
(c) any breach of any covenant of the Vendor contained in this Agreement
or from any inaccuracy or misrepresentation in any representation or
<PAGE>
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warranty set forth in Section 3.01 or resulting from any matter from
and against which the Purchaser and the directors, officers,
employees and agents of the Purchaser are indemnified hereunder,
unless and until the aggregate of all such Claims exceeds $10,000,
and then only to the extent that such aggregate exceeds such amount,
other than, in any case, any Claim attributable to the lack of ownership of, or
title to, the Purchased Assets.
4.02 Covenants of the Purchaser
(1) In addition to any other provision for indemnification by the
Purchaser contained in this Agreement, the Purchaser will indemnify and save
harmless the Vendor and the directors, officers, employees and agents of the
Vendor from and against all Claims incurred by the Vendor directly or indirectly
resulting from any breach of any covenant of the Purchaser contained in this
Agreement or from any inaccuracy or misrepresentation in any representation or
warranty set forth in Section 3.03.
(2) The Purchaser will ensure that the representations and warranties of
the Purchaser set forth in Section 3.03 are true and correct at the Time of
Closing and that the conditions of closing for the benefit of the Vendor set
forth in Section 5.02(1) have been performed or complied with by the Time of
Closing.
(3) Notwithstanding any of the other provisions of this Agreement, the
Purchaser will not be liable to the Vendor or to the directors, officers,
employees, shareholders or agents of the Vendor for any Claim directly or
indirectly resulting from:
(a) any inaccuracy or misrepresentation in any representation or
warranty set forth in Section 3.03 unless any claim or demand by the
Vendor against the Purchaser with respect thereto is given to the
Purchaser by the Vendor within the time period referred to in
Section 3.04(1); or
(b) any breach of any covenant of the Purchaser contained in this
Agreement or from any inaccuracy or misrepresentation in any
representation or warranty set forth in Section 3.03 or resulting
from any matter from and against which the Vendor and the directors,
officers, employees and agents of the Vendor are indemnified
hereunder, unless and until the aggregate of all such Claims exceeds
$10,000, and then only to the extent that such aggregate exceeds
such amount,
other than, in either case, any Claim attributable to any misrepresentation
contained in subsections 3.03(e) or 3.03(f) of this Agreement.
<PAGE>
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(4) The Purchaser shall use its best efforts to avoid the taking of any
action a material purpose of which is to hinder or impede the efforts of the
Vendor or its shareholders (or former shareholders, as the case may be) to trade
the Proformix Shares in accordance with Applicable Law.
(5) The Purchaser shall, following the expiration of the one year hold
period applicable to the Proformix Shares, use its best efforts to assist the
holder(s) of the Proformix Shares in complying with applicable exemptions
available under United States securities laws, in order to assist such holder(s)
in the trading of the Proformix Shares.
ARTICLE 5 - CONDITIONS
5.01 Conditions for the Benefit of the Purchaser
(1) The sale by the Vendor and the purchase by the Purchaser of the
Purchased Assets is subject to the following conditions, which are for the
exclusive benefit of the Purchaser and which are to be performed or complied
with at or prior to the Time of Closing:
(a) the representations and warranties of the Vendor set forth in
Section 3.01 will be true and correct at the Time of Closing with
the same force and effect as if made at and as of such time;
(b) the Vendor will have performed or complied with all of the terms,
covenants and conditions of this Agreement to be performed or
complied with by the Vendor at or prior to the Time of Closing;
(c) the Purchaser will be furnished with such certificates or other
instruments (including instruments of conveyance with respect to the
Purchased Assets) of the Vendor or of officers of the Vendor as the
Purchaser or the Purchaser's counsel may reasonably think necessary
in order to establish that the terms, covenants and conditions
contained in this Agreement to have been performed or complied with
by the Vendor at or prior to the Time of Closing have been performed
or complied with and that the representations and warranties of the
Vendor herein given are true and correct at the Time of Closing;
(d) the transactions contemplated by this Agreement shall have been
approved by the shareholders of the Vendor by special resolution and
no shareholder of the Vendor shall have exercised a right of dissent
pursuant to Section 185 of the Business Corporations Act (Ontario)
in respect thereto;
<PAGE>
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(e) no action or proceeding in Canada will be pending or threatened by
any person, government, governmental authority, regulatory body or
agency to enjoin, restrict or prohibit the sale and purchase of the
Purchased Assets contemplated hereby;
(f) no material damage by fire or other hazard to the Purchased Assets
will have occurred from the date hereof to the Time of Closing;
(g) the Purchaser will have been furnished with evidence satisfactory to
it that the sale and purchase of the Purchased Assets is in
compliance with the provisions of the Bulk Sales Act (Ontario);
(h) all necessary steps and proceedings will have been taken to permit
the Purchased Assets to be duly and regularly transferred to and
registered in the name of the Purchaser;
(i) there will be a non-competition agreement entered into between the
Vendor and the Purchaser substantially in the form attached hereto
as Schedule 5.01(1)(i);
(j) there will be a non-competition agreement entered into between each
of Lixin Lu, Sandy Wong and Sundeep Mudarth (collectively, "the
Developers") and the Purchaser substantially in the form attached
hereto as Schedule 5.01(1)(j)
(k) the Vendor will have delivered to the Purchaser a favourable opinion
of the Vendor's counsel substantially in the form attached hereto as
Schedule 5.01(1)(k);
(l) the Vendor will have delivered to the Purchaser a certificate issued
by the Ministry of Finance of Ontario pursuant to section 6 of the
Retail Sales Tax Act (Ontario) which indicates that the Vendor has
paid all taxes collectable or payable under the said Act up to the
Closing Date or has entered into an arrangement satisfactory to the
said Minister for the payment of such taxes;
(m) the Developers shall have waived all rights and interests, moral,
proprietary or otherwise, if any, in and to the Software;
(n) the Purchaser shall have had an opportunity to inspect and test
compilable source code versions of the Software, and the results of
such inspection and testing shall be acceptable to the Purchaser in
its sole discretion, acting reasonably; and
<PAGE>
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(o) the Purchaser shall be satisfied that Goods and Services Tax and
Retail Sales Tax is not exigible in respect of the sale of the
Purchased Assets by the Vendor to the Purchaser.
(2) In case any term or covenant of the Vendor or condition to be
performed or complied with for the benefit of the Purchaser at or prior to the
Time of Closing has not been performed or complied with at or prior to the Time
of Closing, the Purchaser, without limiting any other right that the Purchaser
has, may at its sole option either:
(a) rescind this Agreement by notice to the Vendor, and in such event
the Purchaser will be released from all obligations hereunder; or
(b) waive compliance with any such term, covenant or condition in whole
or in part on such terms as may be agreed upon without prejudice to
any of its rights of rescission in the event of non-performance of
any other term, covenant or condition in whole or in part;
and, if the Purchaser rescinds this Agreement pursuant to Section 5.01(2)(a),
the Vendor will also be released from all obligations hereunder.
5.02 Conditions for the Benefit of the Vendor
(1) The sale by the Vendor and the purchase by the Purchaser of the
Purchased Assets is subject to the following conditions, which are for the
exclusive benefit of the Vendor and which are to be performed or complied with
at or prior to the Time of Closing:
(a) the representations and warranties of the Purchaser set forth in
Section 3.03 will be true and correct at the Time of Closing with
the same force and effect as if made at and as of such time;
(b) the Purchaser will have performed or complied with all of the terms,
covenants and conditions of this Agreement to be performed or
complied with by the Purchaser at or prior to the Time of Closing;
(c) the Vendor will be furnished with such certificates or other
instruments of the Purchaser or of officers of the Purchaser as the
Vendor or the Vendor's counsel may reasonably think necessary in
order to establish that the terms, covenants and conditions
contained in this Agreement to have been performed or complied with
by the Purchaser at or prior to the Time of Closing have been
performed or complied with and that the representations and
warranties of the Purchaser herein given are true and correct at the
Time of Closing;
<PAGE>
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(d) the Purchaser will have delivered to the Vendor a favourable opinion
of the Purchaser's U.S. counsel substantially in the form attached
as Schedule 5.02(1)(d);
(e) the Purchaser will have delivered to the Vendor a favourable opinion
of the Purchaser's Canadian counsel substantially in the form
attached as Schedule 5.02(1)(e);
(f) prior to the Time of Closing, the Purchaser shall have made adequate
provision for the immediate payment in full of (i) all claims of the
unsecured creditors of the Vendor of which the Purchaser has notice
and (ii) all claims of secured creditors of the Vendor of which the
Purchaser has notice;
(g) the Purchaser shall have delivered to the Vendor an acknowledgement
that all indebtedness owed to the Purchaser in respect of demand
promissory notes dated (i) March 12, 1998, (ii) April 17, 1998, and
(iii) April 22, 1998, is no longer owing or due and the Purchaser
shall have delivered such demand promissory notes to the Vendor;
(h) the Vendor shall be satisfied that Goods and Services Tax and Retail
Sales Tax is not exigible in respect of the sale of the Purchased
Assets by the Vendor to the Purchaser; and
(i) the transactions contemplated by this Agreement shall have been
approved by the Shareholders of the Vendor by special resolution,
and no shareholder of the Vendor shall have exercised a right of
dissent pursuant to Section 185 of the Business Corporations Act
(Ontario) in respect thereto.
(2) In case any term or covenant of the Purchaser or condition to be
performed or complied with for the benefit of the Vendor at or prior to the Time
of Closing has not been performed or complied with at or prior to the Time of
Closing, the Vendor, without limiting any other right that the Vendor has, may
at its sole option either:
(a) rescind this Agreement by notice to the Purchaser, and in such event
the Vendor will be released from all obligations hereunder; or
(b) waive compliance with any such term, covenant or condition in whole
or in part on such terms as may be agreed upon without prejudice to
any of its rights of rescission in the event of non-performance of
any other term, covenant or condition in whole or in part;
<PAGE>
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and, if the Vendor rescinds this Agreement pursuant to Section 5.02(2)(a), the
Purchaser will also be released from all obligations hereunder.
ARTICLE 6 - CLOSING ARRANGEMENTS
6.01 Closing
The sale and purchase of the Purchased Assets will be completed at
the Time of Closing at the offices of McCarthy Tetrault, Suite 4800, Toronto
Dominion Bank Tower, Toronto-Dominion Centre, Toronto, Ontario.
6.02 Examination of Records and Purchased Assets by Purchaser
(1) The Vendor will forthwith make available to the Purchaser and its
authorized representatives all data bases recorded or stored by means of any
device, including in electronic form, title documents, abstracts of title,
deeds, surveys, leases, certificates of trade marks and copyrights, Software,
contracts and commitments in its possession or under its control relating to any
of the Purchased Assets or the Business; and the Vendor will forthwith make
available to the Purchaser and its authorized representatives for examination
all books of account and accounting records relating to the Business and the
Vendor will, if reasonably requested, provide copies of the following records
maintained in connection with the Business: financial statements, records of
past sales, customer lists, supplier lists, payroll records, inventory data,
inventory master records and accounts receivable data. The Vendor will give the
Purchaser and its authorized representatives every reasonable opportunity to
have access to and to inspect the Purchased Assets. The exercise of any rights
of access or inspection by or on behalf of the Purchaser under this Section
6.02(1) will not affect or mitigate the covenants, representations and
warranties of the Vendor hereunder which will continue in full force and effect.
(2) At the Time of Closing the Vendor will deliver to the Purchaser all of
the documents referred to in Section 6.02(1) as shall be requested by the
Purchaser, save and except the payroll records and the financial statements. The
Purchaser will preserve the documents so delivered for a period of six years
from the Closing Date, or for such other period as is required by any Applicable
Law, and will permit the Vendor and its authorized representatives reasonable
access thereto in connection with the affairs of the Vendor, but the Purchaser
will not be responsible or liable to the Vendor for or as a result of any loss
or destruction of or damage to any such documents.
(3) Both prior to the Closing Date and, if the sale and purchase of the
Purchased Assets hereunder fails to occur for whatever reason, thereafter the
Purchaser will not disclose to anyone or use for its own or for any purpose
other than the purpose
<PAGE>
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contemplated by this Agreement any confidential information concerning the
Vendor or the Business obtained by the Purchaser pursuant hereto, will hold all
such information in the strictest confidence and, if the sale and purchase of
the Purchased Assets hereunder fails to occur for whatever reason, will return
all documents, records and all other information or data relating to the Vendor
or to the Business which the Purchaser obtained pursuant hereto.
(4) From and after the Closing Date the Vendor will not disclose to anyone
or use for any purpose any confidential information concerning the Purchased
Assets purchased by the Purchaser pursuant hereto and will hold all such
information in the strictest confidence.
6.03 Examination of Records by Vendor
(1) The Vendor may request an opportunity to verify any of the information
relating to the Purchaser included herein and to obtain any additional
information regarding the Purchaser which is publicly available to shareholders
of the Purchaser.
6.04 Risk of Loss
(1) Until the Time of Closing the Purchased Assets will remain at the risk
of the Vendor. In the event of any loss, damage or claim in respect of any risk
for which insurance is to be carried as aforesaid arising before the Time of
Closing the Purchaser, as an additional condition of closing, will be entitled
to be satisfied that the insurers have accepted the claim of the Vendor for
payment in accordance with the terms of the policies. If any destruction or
damage occurs to the Purchased Assets on or before the Time of Closing or if any
or all of the Purchased Assets are appropriated, expropriated or seized by
governmental or other lawful authority on or before the Time of Closing, the
Vendor will forthwith give notice thereof to the Purchaser and the Purchaser
will have the option, exercisable by notice to the Vendor on or before the Time
of Closing:
(a) to reduce the Purchase Price by an amount equal to the proceeds of
insurance or compensation for destruction or damage or
appropriation, expropriation or seizure and business interruption
with respect thereto (in this Section 6.04 referred to as the
"Proceeds"), and to complete the purchase; or
(b) to complete the purchase without reduction of the Purchase Price, in
which event all Proceeds will be payable to the Purchaser and all
right and claim of the Vendor to any such amounts not paid by the
Closing Date will be assigned to the Purchaser.
<PAGE>
-28-
(2) If the cost to repair the destruction or damage referred to in Section
6.04(1) is in excess of $15,000 and if the Vendor gives notice pursuant to
Section 6.04(1) within 30 Business Days prior to Closing Date, the Closing Date
will be postponed until 5 Business Days after the giving of such notice by the
Vendor.
(3) If the Purchaser elects to reduce the Purchase Price pursuant to
Section 6.04(1)(a), the Vendor and the Purchaser will at the Time of Closing
determine the amount of the reduction to the extent that it is then determinable
and will undertake to adjust such amount after the Closing Date, if necessary.
6.05 Delivery of Purchased Assets
Immediately following closing, the Vendor shall ship the Purchased
Assets to or to the direction of the Purchaser at a location which shall be
outside of Canada, which shipment shall be made using a carrier and in the
manner approved by the Purchaser prior to the Time of Closing. The Purchaser
shall be responsible for payment of all costs of shipment in connection with
such shipment of the Purchased Assets.
ARTICLE 7 - RISK FACTORS OF ACQUIRED SECURITIES
7.01 Acknowledgement by Vendor
The Vendor acknowledges that Proformix Shares issued pursuant to
this Agreement may carry certain significant risks which include but are not
limited to the following:
(a) The Purchaser has a limited operating history and its operations are
subject to all of the risks inherent in the establishment and development of
like business enterprises. The Purchaser offers no assurances that the
Purchaser's products will be profitably produced and marketed or that it can
manage its growth effectively or that the demand for the Purchaser's products
will not decrease.
(b) Products developed for the computer workplace face intense
competition. The Purchaser will be at a competitive disadvantage in seeking to
compete with companies having more Purchased Assets, larger technical staffs,
established market shares and greater financial and operational resources than
the Purchaser. The Purchaser offers no assurances that it will be able to meet
this competition and operate profitably.
(c) Proformix Shares are highly speculative, involve a high degree of risk
and should not be purchased by any person who cannot afford the loss of his
entire investment. The acquisition of Proformix Shares would be "unsuitable" for
any person who cannot afford to sustain such a loss.
<PAGE>
-29-
(d) The Purchaser offers no assurances that an active public trading
market for Proformix Shares will continue following the execution of this
Agreement, or that there will be any market for Proformix Shares at the time
that the Proformix Shares acquired pursuant to this Agreement become freely
tradeable. Similarly, the Purchaser offers no assurances that the value of the
Proformix Shares acquired by the Vendor pursuant to this Agreement, in any
market which may develop, will equal or exceed the present value of the Shares.
(e) Proformix Shares acquired by the Vendor pursuant to this Agreement
have not been registered with the Securities and Exchange Commission under the
United States Securities Act of 1933 or under the securities laws of any state
or province. The right of any purchaser to sell, transfer, pledge or otherwise
dispose of Proformix Shares in the United States, Canada and, specifically, in
the United States over-the-counter market will be limited by the United States
securities laws, state and provincial securities laws and any regulations
promulgated thereunder; unless, in the opinion of counsel satisfactory to the
Purchaser, any such sale, transfer, assignment, pledge or hypothecation will not
violate the registration and other requirements under such laws. Consequently, a
holder of Proformix Shares may not be able to readily liquidate his investment.
(f) Holders of Proformix Shares are not entitled to accumulate their votes
for the purposes of electing directors or otherwise. Accordingly, a majority of
holders of Proformix Shares present at a meeting of shareholders will be able to
elect all of the directors of the Purchaser and any minority shareholders will
not be able to elect a representative to the Purchaser's board of directors.
(g) The Purchaser has no present intention to pay dividends to holders of
Proformix Shares and plans to retain earnings, if any, for the operation and
expansion of its business.
(h) The value of the Proformix Shares and Warrant which constitute the
Purchase Price may not bear any relationship to the Purchased Assets, book
value, earnings or net worth of the Purchaser and should not be considered an
indication of the actual value of the Purchaser's securities.
<PAGE>
-30-
ARTICLE 8 - GENERAL
8.01 Indemnification
The obligations of the Vendor and the Purchaser under this Agreement
to indemnify and save harmless the other and its directors, officers, employees
and agents are, in the case of any Claim by a third party, conditional upon the
party that is otherwise entitled to be indemnified (the "Indemnitee") giving
prompt notice to the other (the "Indemnitor") of such Claim and permitting the
Indemnitor at its expense to participate in all negotiations relating thereto,
to assume the defence of any action or proceeding relating thereto and to
determine (with the Indemnitee, acting reasonably) whether any settlement should
be made with respect thereto; provided that if, in the sole opinion of the
Indemnitee, the interests of the Indemnitee are different from those of the
Indemnitor in connection with such Claim, the Indemnitee will have the right, at
the Indemnitor's expense, to defend its own interests provided that any
settlement of such Claim is on terms and conditions approved by the Indemnitor,
acting reasonably. If the Indemnitor does not defend any Claim, the Indemnitee
will have the right to do so on its own behalf and on behalf of the Indemnitor
at the expense of the Indemnitor.
8.02 Further Assurances
Each of the Vendor and the Purchaser will from time to time execute
and deliver all such further documents and instruments and do all acts and
things as the other party may, either before or after the Closing Date,
reasonably require to effectively carry out or better evidence or perfect the
full intent and meaning of this Agreement.
8.03 Fees and Commissions
Each of the Vendor and the Purchaser will pay its respective legal
and accounting costs and expenses incurred in connection with the preparation,
execution and delivery of this Agreement and all documents and instruments
executed pursuant hereto and any other costs and expenses whatsoever and
howsoever incurred, except that the Purchaser shall reimburse the Vendor for
legal expenses incurred in connection with the transaction contemplated by this
Agreement to a maximum of $25,000, of which $12,500 has been previously advanced
by the Purchaser to the Vendor.
8.04 Public Announcements
Except as required by law, no public announcement or press release
concerning the sale and purchase of the Purchased Assets may be made by the
Vendor or the Purchaser without the prior consent and joint approval of the
Vendor and the Purchaser.
8.05 Benefit of the Agreement
This Agreement will enure to the benefit of and be binding upon the
respective heirs, executors, administrators, other legal representatives,
successors and permitted assigns of the parties hereto.
8.06 Entire Agreement
This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and cancels and supersedes any
prior understandings and agreements between the parties hereto with respect
thereto. There are no representations, warranties, terms, conditions,
undertakings or collateral agreements,
<PAGE>
-31-
express, implied or statutory, between the parties other than as expressly set
forth in this Agreement.
8.07 Amendments and Waivers
No amendment to this Agreement will be valid or binding unless set
forth in writing and duly executed by both of the parties hereto. No waiver of
any breach of any provision of this Agreement will be effective or binding
unless made in writing and signed by the party purporting to give the same and,
unless otherwise provided, will be limited to the specific breach waived.
8.08 Assignment
This Agreement may not be assigned by the Vendor without the written
consent of the Purchaser but may be assigned by the Purchaser without the
consent of the Vendor to an Affiliate of the Purchaser, provided that such
Affiliate enters into a written agreement with the Vendor to be bound by the
provisions of this Agreement in all respects and to the same extent as the
Purchaser is bound and provided that the Purchaser will continue to be bound by
all the obligations hereunder as if such assignment had not occurred and perform
such obligations to the extent that such Affiliate fails to do so.
8.09 Notices
Any demand, notice or other communication to be given in connection
with this Agreement must be given in writing and will be given by personal
delivery, by registered mail or by electronic means of communication addressed
to the recipient as follows:
<PAGE>
-32-
To the Vendor: Vanity Software Publishing Corporation
119 Spadina Avenue
Suite 400
Toronto, Ontario
M5V 2L1
Fax No.: (416) 204-1760
Attention: David Thomas
President and CEO
To the Purchaser: Proformix Systems, Inc.
50 Tannery Road
Branchburg, New Jersey
08876
Fax No.: (908) 534-9161
Attention: Jerry Swon
President
or to such other address, individual or electronic communication number as may
be designated by notice given by either party to the other. Any demand, notice
or other communication given by personal delivery will be conclusively deemed to
have been given on the day of actual delivery thereof and, if given by
registered mail, on the seventh (7th) Business Day following the deposit thereof
in the mail and, if given by electronic communication, on the day of transmittal
thereof if given during the normal business hours of the recipient and on the
Business Day during which such normal business hours next occur if not given
during such hours on any day. If the party giving any demand, notice or other
communication knows or ought reasonably to know of any difficulties with the
postal system that might affect the delivery of mail, any such demand, notice or
other communication may not be mailed but must be given by personal delivery or
by electronic communication.
8.10 Remedies Cumulative
The right and remedies of the parties hereunder are cumulative and
are in addition to, and not in substitution for, any other rights and remedies
available at law or in equity or otherwise. No single or partial exercise by a
party of any right or remedy precludes or otherwise affects the exercise of any
other right or remedy to which that party may be entitled.
<PAGE>
-33-
8.11 Governing Law
This Agreement is governed by and will be construed in accordance
with the laws of the Province of Ontario and the laws of Canada applicable
therein.
8.12 Attornment
For the purpose of all legal proceedings this Agreement will be
deemed to have been performed in the Province of Ontario and the courts of the
Province of Ontario will have jurisdiction to entertain any action arising under
this Agreement. The Vendor and the Purchaser each hereby attorns to the
jurisdiction of the courts of the Province of Ontario.
8.13 Counterparts
This Agreement may be executed in any number of counterparts, each
of which will be deemed to be an original and all of which taken together will
be deemed to constitute one and the same instrument.
IN WITNESS WHEREOF the parties have executed this Agreement.
PROFORMIX SYSTEMS, INC.
Per: /s/ Jerry Swon
-------------------------------
c/s
-----------------------------------
VANITY SOFTWARE PUBLISHING
CORPORATION
Per: /s/ David Thomas
-------------------------------
c/s
-----------------------------------
EXHIBIT 11
COMPUTATION OF NET (LOSS) PER COMMON SHARE
Year Ended
December 31,
---------------------------
1998 1997
----------- ------------
Net (Loss) per common share
(Loss) from operations $(3,130,621) $(1,507,745)
(A) Dividends on preferred stock -- (90,000)
----------- ------------
(Loss) from continuing operations
applicable to common stock (3,130,621) (1,597,745)
Discontinued operations 559,712 --
----------- -----------
(Loss) applicable to common stock $(2,570,909) $(1,597,745)
=========== ===========
Shares
Weighted average of common shares
outstanding 4,324,292 2,094,724
=========== ===========
Net (Loss) per common share:
Operations $ (0.72) $ (0.76)
Discontinued operations 0.14 --
----------- -----------
Net (Loss) $ (0.58) $ (0.76)
=========== ===========
Net (Loss) per common share - assuming dilution
(see "NOTE")
(Loss) from operations $(3,130,621) $(1,507,745)
(A) Dividends on preferred stock -- (90,000)
----------- -----------
(Loss) from continuing operations
as adjusted (3,130,621) (1,597,745)
Discontinued operations 559,712 --
----------- -----------
Net (Loss) as adjusted $(2,570,909) $(1,597,745)
=========== ===========
Shares
Weighted average of common shares
outstanding 4,324,292 4,197,875
(B) Assuming exercise of stock option 1,108,615 684,378
(C) Assuming exercise of warrants -- 30,242
----------- -----------
Weighted average of common shares
outstanding, as adjusted 5,432,907 4,912,495
=========== ===========
Net (Loss) per common share -
assuming dilution
Continuing operations $ (0.58) $ (0.33)
Discontinued operations 0.10 --
----------- -----------
Net (Loss) $ (0.48) $ (0.33)
=========== ===========
NOTE: The calculation for "Net (Loss) per common share - assuming dilution" is
submitted in accordance with Securities Exchange Act of 1934 Release No.
9083 although not required by Financial Accounting Standards Board No. 128
"Earnings Per Share" (FASB 128) since the results are anti-dilutive.
(A) Convertible Preferred Stock has no shares issued and outstanding at
December 31, 1998 and December 31, 1997 and therefore is not a common
stock equivalent. Cumulative Preferred Stock is not convertible into
common stock even though 10 shares are outstanding at December 31, 1998
and December 31, 1997 and is also not considered a common stock
equivalent.
(B) The dilutive options (i.e., the average yearly market price is greater
than the exercise price) assuming that the 4,295,334 and 1,086,010 shares
exercised resulting in proceeds of $4,057,530 and $3,818,828 are
reacquired using the treasury stock method at the yearly average market
price of $3.66 and $5.58 per share, respectively. Thus, $4,057,530/$3.66 =
1,108,615 shares and $3,818,828/$5.58 = 684,378 shares are assumed to be
reacquired and are included as such in common shares outstanding at the
beginning of the year, respectively.
(C) The dilutive warrants (i.e., the average yearly market price is greater
than the exercise price) assume that in 1997 the 38,611 shares exercised
resulting in proceeds of $168,750 are reacquired using the treasury stock
method at the yearly average market price of $5.58 per share. Thus,
$168,750/$5.58 = 30,242 shares are assumed to be reacquired and are
included as such in common shares outstanding at the beginning of the
year.
In 1998, none of the warrants issued had exercise prices less than the
average yearly market price. Therefore, the warrants are not "in the
money" and, consequently, not considered common stock equivalents.
EXHIBIT 23
Consent of Independent Certified Public Accountant
We hereby consent to the incorporation by reference in the Registration
Statement of Form S-8 of our report dated April 7, 1999 of Magnitude Information
Systems, Inc. and Subsidiaries (formerly Proformix Systems, Inc. and
Subsidiaries) which appears in the annual report on Form 10-KSB for the years
ended December 31, 1998.
Bridgewater, New Jersey
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FINANCIAL STATEMENTS OF MAGNITUDE INFORMATION SYSTEMS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,403
<SECURITIES> 0
<RECEIVABLES> 218,670
<ALLOWANCES> 109,421
<INVENTORY> 26,789
<CURRENT-ASSETS> 585,792
<PP&E> 307,766
<DEPRECIATION> 159,483
<TOTAL-ASSETS> 2,138,453
<CURRENT-LIABILITIES> 2,813,308
<BONDS> 1,316,839
0
0
<COMMON> 643
<OTHER-SE> (1,992,337)
<TOTAL-LIABILITY-AND-EQUITY> 2,138,453
<SALES> 2,926,455
<TOTAL-REVENUES> 2,926,455
<CGS> 1,590,440
<TOTAL-COSTS> 1,590,440
<OTHER-EXPENSES> 286,721
<LOSS-PROVISION> 94,287
<INTEREST-EXPENSE> 343,394
<INCOME-PRETAX> (3,130,621)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,130,621)
<DISCONTINUED> 599,712
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,530,909)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.48)
</TABLE>
