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, 1999
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
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, 1999, were $263,553.
Common stock, par value $.0001 per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on March 28, 2000. Based on the
closing price of the Common Stock on the OTC Electronic Bulletin Board as
reported on March 28, 2000, ($2.44), the aggregate market value of the
approximately 10,460,000 shares of the Common Stock held by persons other than
officers, directors and persons known to the Registrant to be the beneficial
owners (as the term is defined under the rules of the Securities and Exchange
Commission) of more than five percent of the Common Stock on March 28, 2000, was
approximately $25,500,000. 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 March 28, 2000, 14,391,980 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 ............................................ 11
Item 3. Legal Proceedings ..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ... 11
PART II.
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters ............................12
Item 6. Management's' Discussion and Analysis of
Financial Condition and Results of Operations ..........14
Item 7. Financial Statements and Supplementary Data ............18
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ........... 18
PART III.
Item 9. Directors and Executive Officers of the Registrant .... 19
Item 10. Executive Compensation ................................ 22
Item 11. Security Ownership of Certain Beneficial Owners
and Management ........................................ 24
Item 12. Certain Relationships and Related Transactions ........ 25
Item 13. Exhibits and Reports on Form 8-K ...................... 26
Signatures ............................................ 27
Exhibit Index ......................................... 28
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PART I
ITEM 1: BUSINESS
Background
Magnitude Information Systems, Inc. (the "Company") 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, extended a stock exchange offer to the
shareholders of Proformix, Inc., a Delaware corporation and manufacturer of
ergonomic keyboarding systems. Proformix, Inc. in November 1998 changed its name
to Magnitude, Inc. and is now referred to as Magnitude, Inc.. At the time of
this submission, holders of 98.5% 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 ErgoManager(TM) 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, 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 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, and Three Million (3,000,000) Preferred Shares, par value
$.01, of which at December 31, 1999, Two Thousand Five Hundred (2,500) were
designated as Cumulative Preferred Shares, par value $.001 . On January 31,
2000, the Company filed amendments to its Certificate of Incorporation,
designating from its "blank check" preferred stock pool 200,000 shares as Series
A Senior Convertible Preferred Stock, par value $0.001; 350,000 shares as Series
B Senior Convertible Preferred Stock, par value $0.001; and 120,000 shares as
Series C Senior Convertible Preferred Stock, par value $0.001.
As of December 31, 1999, there were outstanding 10,340,261 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, manufacture,
and marketing of 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 and prevent repetitive stress injury in the computer-related work
environment which include the before mentioned "ErgoSentry" and "ErgoBreak"
products. These efforts resulted, in November 1998, in the completion of the
initial release of the proprietary ErgoManager(TM) software system. The
Company's business is now focused exclusively on the further development and
promotion of these and other software products. The Company has applied for
several patents for its products, and has recently received a Notice of
Allowance from the U.S. Patent and Trademark Office on its application relative
to certain core inventions within its ErgoManager(TM) system. The Company has
not yet realized material revenues from licensing its software. With new
products targeted at relatively new markets the Company currently must be
considered an enterprise in transition.
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 sub-classification 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
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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. Increased awareness of the health risks and associated costs led
the State of California to pass OSHA Title 8 which directs qualifying employers
to establish and implement a program designed to minimize RSI's. Such program
shall include work-site evaluation, control of exposures which have caused
RSI's, and training of employees. The Company's proprietary software products
deliver a comprehensive compliance tool. In a similar pursuit, the Clinton
Administration, in January 2000, proposed that on a federal level, preventive
guidelines be established, and the Occupational Safety and Health Administration
plans to issue pertinent regulations this year. The RSI issues in the United
States are mirrored in the rest 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 risk aversion and productivity enhancement software
products for the computerized workplace environment. More specifically, the
Company licenses highly sophisticated and proprietary software that provides
computer based training, work pacing and monitoring tools, as well as a computer
workstation assessment tool.
Potential customers for the Company's products are businesses of all
sizes, as well as organizations and government departments and agencies that
employ many staff in computer-related functions. The software industry in
general is comprised of a remarkable variety of providers, ranging from small
boutique-type designers to large international corporations. The industry is
characterized by great dynamics, patterns of rapid growth and well-known success
stories, but also by a high degree of volatility and risk. 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 introduced a Portuguese language version of its software products
for the Brazilian market, and is preparing other language versions. The Company
has not yet derived any material revenues from the licensing or sale of its
software products, either domestically or in foreign markets.
Products, Patents, Trademarks
The Company's current primary product is a suite of seven proprietary
software modules marketed under the name ErgoManager(TM) 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.
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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 ErgoManager(TM) suite employs the International RULA
(Rapid Upper Limb Assessment) standard for compliance with California OSHA Title
8. The seven modules are described as follows:
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.
ErgoManager(TM) 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 US Patent Application for certain design
principles underlying several of its proprietary software products, including a
patent application for its newest product, a new class of usage tracking and
data collection software that is directed towards e-commerce and a wide range of
other Internet related applications. There can be no assurance, however, that
such patents will be granted or, if granted, that a third party will not design
products which perform the same or similar functions as the Company's products,
using technology other than that covered by the Company's patents.
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Patents and New Products
ErgoSentry - Patent Allowed:
A Notice of Allowance was received by the company on January 3, 2000.
The patent will cover various innovations including a proven approach that helps
computer users manage their activity to improve productivity and reduce the risk
of repetitive motion injuries
ErgoPal Introduced, Patent Pending:
New patent-pending ErgoPal software -- a work pacing tool that helps
users mitigate health risks and improve their productivity by gently alerting
them to increases in stress and fatigue which are occurring before they realize
it.
eFuel Announced, Patent Pending:
New patent-pending technology powering consumable software, web-sites
and deliverable content. eFuel can be used as an e-Commerce currency provided in
exchange for user information on their computer usage both online and offline.
Users build up rewards to apply towards product and service purchases.
SmartErgonomics.Com Initiative:
A new initiative by the company providing a new and complete,
community-based ergonomics web-site portal for parents, individuals and EH&S
professionals. The advanced underlying eFuel powered portal technology will be
resold to others.
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 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 ErgoManager(TM) software suite have been previously marketed as
individual modules, the release to the market, in November 1998, of an overall
integrated solution in form of the ErgoManager(TM) 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
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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 that 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
ErgoManager(TM) system. This agreement was renewed and expanded in July 1999. In
January 2000, Anderson Consulting LLP and the Company entered into an agreement
whereby Anderson will include the Company's products in their prestigious "Ideas
Exchange" showcase. This agreement is of special significance because it will
introduce the Company to a potentially large audience of key corporate clients.
The Company intends to continue developing strategic marketing
relationships with leading business consultants, to broaden its distribution
channels to include tiered marketing arrangements, and to strengthen its direct
sales force and support organization, thereby focusing on a marketing approach
which emphasizes the advantages that accrue to a business from the unique
combination of risk management and productivity enhancement tools provided by
ErgoManager(TM).
Research and Development
Since early 1998 the Company has invested considerable resources in the
further development of the overall ErgoManager(TM) 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
ErgoManager(TM), Version 1.78, was released, followed in October 1998 by Version
2.12., and in April 1999 by Version 3.05.
The Company has scheduled Version 4.0 for release in April this year.
The Company has expensed all expenditures related to the above efforts.
Such expenses totaled $162,600 for the year ended December 31, 1999, and
$130,460 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, 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 work-site evaluation,
employee training and work pacing.
The Company is not aware of any products that directly compete with its
integrated software product suite that is marketed by the Company under the
trade name ErgoManager(TM). 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.
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Seasonality and Dependency
The industry segment in which the Company does business is not
seasonal. The Company's software related revenues until now have consisted
primarily of smaller orders for pilot projects and field tests. The Company's
future success is dependent upon its ability to follow up on such initial orders
with enterprise-wide contracts where corporate clients introduce the Company's
software products across the entire spectrum of computer workplaces throughout
their company or certain divisions. There can be no assurance that the Company
will succeed in doing so, or if it does succeed, 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.
On January 15, 2000, the Company acquired full title and ownership to that
product.
Employees
As of December 31, 1999, the Company employed 13 persons, of whom four
were primarily engaged in research and development and software support
activities, five were primarily engaged in sales and marketing, and four 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 $3,250 plus certain expenses. On March 15, 2000, the Company entered
a five year lease for approximately 6,000 square feet of office space at 401
Route 24, Chester, New Jersey, to which address it will relocate its operations
during April 2000. This lease agreement calls for monthly rental payments of
$6,500 with nominal increases after years No. 2, 3, and 4.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party in any legal proceedings.
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 for the last two years, the high and
low sales prices for the Company's Common Stock:
OTC-BB
High/Ask Low/Bid
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
1999
First Quarter..................... $ 1.37 $0.41
Second Quarter.................... 0.81 0.53
Third Quarter .................... 1.09 0.55
Fourth Quarter ................... 0.76 0.42
As of March 28, 2000, there were approximately 225 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 1999 the Company issued the following
unregistered securities:
(i) 1,250,332 shares of Common Stock to seven individual foreign
investors pursuant to private placement subscriptions under Section 4(2) of the
Securities Act, which resulted in the receipt by the Company of $625,000 in
cash;
(ii) 60,000 shares of Common Stock to an investor who had previously
subscribed for certain convertible debt, pursuant to the terms of the pertinent
subscription agreement, issued in reliance upon exemptions provided under
Section 4(2) of the Securities Act.
During the first quarter of 2000 and through March 28, 2000, the
Company issued the following unregistered securities:
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(i) 118,000 shares of Common Stock in connection with the acquisition
by the Company of certain software products, issued in reliance upon exemptions
provided under Section 4(2) of the Securities Act.(see "License Agreements" in
Part I, Item 1);
(ii) 77,976 shares of Common Stock to three outside consultants and
suppliers for services rendered;
(iii) 14,445 shares of Common Stock to a director and shareholder of
the Company pursuant to a 1997 transaction approved by the Board of Directors of
the Company;
(iv) 16,854 shares of Common Stock to an employee in lieu of salary,
for services rendered;
(v) 2,120,000 shares of Common Stock pursuant to the conversion of an
aggregate $1,060,000 in convertible promissory notes, issued in reliance upon
exemptions provided under Section 4(2) of the Securities Act;
(vi) 160,000 shares of Common Stock to seven private investors who had
previously subscribed for certain convertible debt, such shares issued pursuant
to the terms of the pertinent subscription agreement, and in reliance upon
exemptions provided under Section 4(2) of the Securities Act;
(vii) 400,000 shares of Common Stock to two individual investors
pursuant to private placement subscriptions under Section 4 (2) of the
Securities Act, which resulted in the receipt by the Company of $200,000 in
cash;
(viii) 500,000 shares of Common Stock to three individual foreign
investors pursuant to private placement subscriptions under Section 4 (2) of the
Securities Act, which resulted in the receipt by the Company of $250,000 in
cash;
(ix) 194,440 shares of Series B Senior Convertible Preferred Stock to
five individual foreign investors pursuant to private placement subscriptions
under Section 4 (2) of the Securities Act, which resulted in the receipt by the
Company of $1,750,000 in cash, whereby such shares, among other things, have the
following rights and privileges: (i) 7% annual preferential dividend, payable
semi-annually, (ii) conversion at the holders' option into shares of Common
Stock at a conversion rate equivalent to $0.90 per share, and (iii) callable by
the Company under certain terms and conditions (see "Exhibit 4.2" attached
hereto);
(x) 100,000 shares of Series C Senior Convertible Preferred Stock to
the former chairman of the Company pursuant to the terms of a Resignation
Agreement entered into between the Company and this individual, whereby such
shares, among other things, have the following rights and privileges: (i) 7%
annual preferential dividend, payable monthly, (ii) conversion at the holders'
option into 1,000,000 shares of Common, and (iii) callable by the Company under
certain terms and conditions (see "Exhibits 4.3 and 10.2" attached hereto).
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ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1999 and 1998 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.
The financial data are those of Magnitude Information Systems,
Inc.including the operations of Magnitude, Inc. and its wholly owned
subsidiary Corporate Ergonomic Solutions, Inc.. All inter-company accounts and
transactions have been eliminated in consolidation.
SELECTED FINANCIAL DATA
Balance Sheet December 31,
1999 1998
----------- -----------
Total assets .......................$ 2,220,223 $ 2,098,207
Current liabilities ................ 4,465,413 2,718,240
Long-term debt ..................... 35,755 1,441,839
Working capital (deficit) .......... (3,541,257) (2,145,611)
Shareholders' Equity (deficit) .....$ (2,280,945) $ (2,061,872)
Statement of Operations For The Year Ended December 31,
1999 1998
------------- -----------
Hardware revenues ............... $ 2,850 $ 2,853,969
Software revenues ............... 260,703 72,486
Total revenues .................. $ 263,553 $ 2,926,455
Operating loss .................. (2,642,989) (2,588,762
Loss before extraordinary items . (2,882,322) (3,130,621
Net loss ........................ (2,391,948) (2,530,909)
Net loss per common share ........ $ (0.28) $ (0.58)
Number of shares used in computing
per share data ................... 8,486,443 4,324,292
Summary
Fiscal Year 1999 was a pivotal year of transition - the Company
focussed its efforts and resources on several key areas which management
considers crucial with respect to the strategic positioning of Magnitude for
future growth: (i) the further expansion and completion of its core software
product, the ErgoManager(TM) software system, (ii) the development of strategic
partnerships with several potential resellers and influencers, (iii) the
introduction of key prospective clients to the ErgoManager(TM) product, (iv) the
urgently required restructuring of the Company's balance sheet and addition of a
substantial amount of new equity capital to finance ongoing and future
development and marketing efforts, and (v) the conceptualization and initial
design of new software products related to Internet and e-Commerce usage - two
important growth markets. Management believes that it has succeeded in making
significant progress in all five areas.
14
<PAGE>
The ErgoManager(TM) System:
During the year, Version 3.05 was released and Version 4.0, to be
released in April this year, was nearing completion. Numerous important feature
enhancements and a new report writer module were finalized. The system as a
whole has been extensively field tested during several dozen pilot programs at
prospective customers' sites, and several customers have substantially expanded
their usage of the software.
Key Strategic Partnerships:
During the year, the Company negotiated several joint venture-, joint
marketing-, and distribution agreements with, among others, AON Ergonomic
Services (a division of insurance industry leader AON Corporation), The Speech
Centre Training Group (U.K.) , CapitalReps (organization specializing in sales
of computer products to the federal government). In January 2000, Anderson
Consulting LLP and the Company entered into an agreement whereby Anderson will
include the Company's products in their prestigious "Ideas Exchange" showcase.
This agreement is of special significance because it will introduce the Company
to a potentially large audience of key corporate clients.
These partners specialize in or have established business connections
to companies in certain industry segments which are deemed most receptive to the
Company's products, or cover certain geographical areas of importance to the
Company. As the legislative environment changes in favor of a pro-active stance
by industry, whether on a voluntary or on a compliance-enforced basis, these
relationships will gain critical momentum. This very significant trend which
started several years ago with pioneering ergonomic legislation in the State of
California, has accelerated with the recently proposed Federal OSHA initiative.
With respect to the Government area, a GSA contract award completed in March
2000 is expected to facilitate entry into a market segment that by its very
nature should be receptive to the Company's products.
Key Prospective Clients:
At this time the Company focuses on introducing its ergonomic software
products to the market. The most promising clients are medium size to large
companies or organizations that (a) employ a large staff in the data entry or
general computer related work environment, (b) are cognizant of the potential
gains in productivity associated with preventive action and sensitive to the
health risks and liability potential arising out of unattended workplace
deficiencies, and (c) are prepared to make the necessary investments in a
remedial and preventive solution such as offered by the ErgoManager(TM) System.
During the second half of 1999, the Company succeeded in gaining acceptance for
larger pilot programs, and in some cases the actual deployment of the software
across entire departments, at several large corporate clients, among them
well-known Fortune 500 companies.
Recapitalization and Debt Restructuring:
As explained in more detail below, during the latter part of 1999 and,
especially, during the first Quarter 2000, management's efforts to retain
investor's confidence in the Company's future has resulted in a significant
improvement of the balance sheet of the Company. Since January 2000 the Company
has received new equity capital in excess of $2 Million and commitments for a
further $1.2 Million, and is in the process of converting debt exceeding $2
Million in the aggregate, into equity capital.
15
<PAGE>
New Products:
Several new product initiatives started in 1999 and are expected to
link the Company's future to the Internet and e-Commerce marketplace. Among
these are ErgoPal, eFuel(TM), and SmartErgonomics.com. Recently obtained new
equity capital will fund initial development efforts, however, management plans
to attract additional funding dedicated specifically towards development and
marketing efforts in these new areas.
Results of Operations for the Year Ended December 31, 1999
For the year ended December 31, 1999, the Company had gross revenues of
$263,553 . While modest, this figure represents a significant increase in
software-derived revenues (prior year $72,486), all of which was generated by
the Company's wholly owned subsidiary Magnitude, Inc. These revenues are
primarily composed of smaller orders for initial pilot projects. Conversion to
enterprise-wide contracts is expected for several of these pilots. The sales
cycle for larger projects involving software related products is relatively
long, and the Company does not expect to realize significant new revenues before
the second quarter of fiscal year 2000.
Gross profits amounted to $92,732 for a 35% gross margin. Gross profits
are burdened with a fixed charge for amortization of software investments.
Software assets underlying the Company's products are being amortized on a
straight line over 10 years, resulting in a level charge of approximately
$12,000 per month to cost-of-goods-sold. Owing to the fact that variable
cost-of-goods-sold expenses are in the vicinity of only 5%, the gross margin
will sharply increase when revenues grow. After deducting selling expenses and
general and administrative expenses of $2,735,721 the Company realized an
operating loss of $2,642,989 (compared to an operating loss of $2,588,762 in
1998). Non-operating expenses totaled $239,333 and include $293,553 net interest
expense and non-operating income of approximately $133,520 for royalties from
the 1998 sale of the Company's hardware product line. A large extraordinary gain
of $490,374 from the sale of net loss carry-forward tax credits pursuant to the
new New Jersey Emerging Technology and Biotechnology Financial Assistance Act
more than offset the interest expense, and the year concluded with a net loss of
$2,391,948 or $0.28 per share, compared to a loss of $2,530,909 or $0.58 per
share ($3,130,621 or $0.72 per share before an extraordinary gain from the sale
of the Company's hardware product line) for the previous year.
The fiscal year's results must be interpreted from the viewpoint of a
young company that pioneers new products for emerging markets. These markets are
now evolving and management believes that its "First to Market" approach will
lead to a strong competitive advantage and a sizable market share during the
months and years to come.
To some extent, a severe capital shortage during the first nine months
of the fiscal year affected the extent and pace at which the new software
products could be introduced to the market. The working capital shortage in
particular prohibited a more comprehensive marketing campaign which would have
accelerated the education of potential clients. Education is of critical
importance. This task will become easier for the Company as the general public
becomes aware of the risks associated with poor posture and work habits in the
computer work-place environment, and as the burden of informing the public is
taken up by certain State and Federal agencies. In addition, as described below,
the Company during the first quarter in 2000 has secured new capital investments
that will provide for the funding of a comprehensive marketing plan.
16
<PAGE>
The Software Business
(a) Target Clientele: 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.
Liquidity and Capital Resources
At December 31, 1999, the working capital deficit amounted to
$3,541,257 as compared to a deficit of $2,227,516 at December 31, 1998. Current
liabilities included approximately $3.7 Million short-term debt, the majority
maturing during the second and third quarter of 2000. During the year and as a
consequence of the absence of revenues, operations consumed $1,955,000 cash
flow, financed primarily by the issuance of convertible debt with maturities
averaging 14 months, and short-term loans, and to the extent of $525,000 by
direct equity investments, all of these under private placement arrangements
with accredited investors. The Company has no bank debt.
Beginning in the fourth quarter of 1999 and during the first quarter in
2000, management has taken measures to redress the balance sheet and put the
Company on a more solid financial footing. Since January 1, 2000, and until the
date of this submission, new net equity investments in the form of cash under
private placement arrangements totaled $2,125,000. In addition, the Company has
received a firm commitment for another $1,000,000 to be invested before the end
of the second quarter. Parallel to attracting new capital in the form of equity
investments, the Company since January 1, 2000, has converted an aggregate of
$1,410,795 short-term debt into equity and restructured $374,890 short-term
liabilities into long-term convertible debt. Of the remaining short-term debt,
holders of $711,750 current obligations have agreed to be convert their position
into equity during the second quarter 2000.
At time of this submission, these financing transactions in the
aggregate have added $3,635,000 to equity and $3,235,000 to working capital,
thereby significantly improving liquidity and providing for a positive
shareholders' equity position. During the second quarter of 2000, present
commitments are expected to add another $2.2 Million to equity and working
capital.
Management believes that these capital transactions provide for
adequate liquidity and financial resources sufficient to fund current and
anticipated future operations during the current fiscal year.
17
<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
There have been no changes in or disagreements with the Registrant's
independent auditors during the last two years.
18
<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 President, Chief Executive Jan.8, 1999, until present
Officer, Director
Steven D. Rudnik Chairman of the Board Feb.11, 2000, until present
Michael G. Martin Chairman of the Board Jul.31, 1997, until Jan.28, 2000
Jerry Swon President, Chief Executive Jan.15, 1998, until Dec,23, 1998
Officer
Jerry Swon Director Jan.15, 1998, until Jul.21, 1999
Joerg H. Klaube Vice President, Secretary, Jul.31, 1997, until present
Chief Financial Officer
John C. Duncan Executive Vice President, May 4, 1999, until present
Director
Peter J. Buscetto Director Oct. 7, 1997, until present
Paul Chernis Director Jul.31, 1997, until present
Bruce L. Deichl Director Jan.8, 1999, until Jul.21, 1999
Seymour Kroll Director May 4, 1999 until present
Joseph J. Tomasek Director Feb.11, 2000 until present
There are no family relationships among the Company's Officers and
Directors.
All Directors of the Company hold office until the next annual meeting
of the shareholders and until successors have been elected and qualified.
Executive Officers of the Company are appointed by the Board of Directors at
meetings of the Company 's Directors and hold office until they resign or are
removed from office.
19
<PAGE>
Resumes:
Steven D. Rudnik , Age 40 - 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
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 Executive VP Development and
Partner at the time Randall-Helms was sold in 1995.
Joerg H. Klaube , Age 58 - Chief Financial Officer. Joined Magnitude,
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 publicly traded software design and computer marketing
firm. Prior to that, Mr.Klaube was employed for 16 years with Siemens Corp., the
US subsidiary of Siemens AG, where he served most recently as Director of
Business Administration for its Telecommunications Division. He graduated from
the Banking School in Berlin, Germany, and holds an MBA degree from Rutgers
University.
John C. Duncan , Age 42 - Executive Vice President. Until January 1999,
Mr. Duncan was the Director of the Department of Industrial Relations (DIR) of
the State of California. In that capacity, he was the principal advisor to
Governor Pete Wilson on labor and employment issues and served in his cabinet.
Mr. Duncan was instrumental in California becoming the first state to enact
ergonomic regulations to help protect workers from repetitive stress injuries.
As Director of the California DIR, Mr. Duncan supervised the Cal/OSHA program
and eleven other divisions of the State government, including the Labor
Commissioner's Office and the Division of Workers Compensation. He was
responsible for the supervision of 3,000 State employees and an annual budget of
$220 Million.
Peter J. Buscetto , Age 52 - 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 , Age 65 - 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.
20
<PAGE>
Seymour Kroll , Age 73 - Director. Mr. Kroll was appointed a director
in May 1999. His wide-ranging business expertise covered several turn-around
situations, primarily in the Construction industry. Recently he served as CEO of
Grossman's, a major retail building material firm, and as President of SNE, a
large millwork company. He also was President of Acorn Window Systems and
Sugarcreek Window & Door, and was retained to reorganize Wickes Lumber, the
large building materials chain. Prior to these offices, Mr. Kroll founded and
headed Seymour Kroll & Associates, Inc., at that time the largest management
consulting firm for the construction industry in the country. Mr. Kroll received
his BBA degree from the University of Michigan and his MS from Columbia
University.
Joseph J. Tomasek , Age 53 - Director. Mr. Tomasek was appointed a director
in February 2000. He has been engaged in the private practice of corporate and
securities law in his own law firm for the last ten years. Mr. Tomasek was
appointed to serve as general counsel for the Company in 1999. In addition to
his work with the Company, Mr. Tomasek represents several other clients in the
United States and Europe in corporate finance matters.
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.
21
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth the cash compensation and executive
capacities for the fiscal year ended December 31, 1999, for each executive
officer whose aggregate cash remuneration exceeded $100,000, and for all
executive officers as a group:
Restricted Securities
Stock Underlying
Name Salary (1) Awards (FMV) Options
- - ---- ---------- ------------- -------
Capacity in which served
Steven D. Rudnik $ 44,144 $66,667 (4) (2) (3)
President and CEO
Joerg H. Klaube $ 100,025
Vice President, CFO
Michael G. Martin $ 46,382 $66,667 (4)
Chairman
All executive officers
as a group (4 persons) $ 279,051
- - -----------------------
(1) The value of other non-cash compensation, except for the items listed under
(2) and (4), 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) See table for "Stock Options" below.
(3) During 1999, the Board of Directors approved a reduction in the exercise
price of options previously granted to S.Rudnik, from $5.25 per share
(95,235 shares) and $4.0385 per share (154,765 shares) to $1.00 per share.
(4) The Board of Directors of the Company awarded several stock grants as
additional compensation for services during 1999, as follows:
Beneficiary Position No. of Shares )*
- - ----------- -------- ----------------
Michael G. Martin Chairman 150,000
Steven D. Rudnik President, CEO 150,000
Jerry Swon Director 150,000
Bruce L. Deichl Director 100,000
All such shares, with the exception of the shares granted to Steven D. Rudnik,
were registered under the Securities Act on Form S-8. The shares for Mr. Rudnik
have not yet been issued. The Company has recognized a liability in its books of
$66,667 for future issuance of such shares.
)* the closing price for the Company's common stock at the time of the grants
was approximately $0.70 per share.
22
<PAGE>
Stock Options:
The following table sets forth stock options granted during 1999
pursuant to the Company's 1997 Stock Option Plan, to executive officers,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
- - -------------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlyin Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
- - -------------------------------------------------------------------------------
J. Duncan 100,000 13.4% 1.00 7/1/04
J. Klaube 50,000 6.7% 1.00 12/22/04
The following table sets forth stock options granted during 1999
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:
- - -------------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
- - -------------------------------------------------------------------------------
S. Rudnik )* 200,000 26.8% 1.00 11/19/08
J. Duncan 40,000 5.4% 1.00 4/23/06
S. Kroll 40,000 n/a 1.00 5/4/06
)* does not include options for 125,000 shares issued pursuant to an
anti-dilution clause in the Agreement and Plan of Merger for the acquisition of
Rolina Corporation dated February 2, 1998.
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. Outside
directors are awarded stock options for 40,000 shares each.
23
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 28, 2000, 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 Steven D. Rudnik 2, 302,778 (2) 13.98%
Stock John C. Duncan 110,000 (3) **
Joerg H. Klaube 100,100 (4) **
Peter J. Buscetto 56,667 (5) **
Paul Chernis 30,000 (3) **
Seymour Kroll 618,792 (6) 4.17%
Howard G. Siegel 831,000 (7) 5.61%
Joseph J. Tomasek 50,000 (3) **
Address of all persons above: c/o the Company.
All Directors and Officers 3,774,411 21.78%
as a Group (8 persons)
Michael G. Martin 1,750,000 (8) 10.91%
12 Tillman Ct.
Bridgewater, New Jersey
Schuerch Asset Management 1,533,900 (9) 10.06%
Tellstrasse 21, St.Gallen,
Switzerland
Viviana Partners, L.P. 1,260,000 (10) 8.40%
1 Sansome Str.,
San Francisco, CA
** less than 1%
- - ----------------------------
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of Common Stock which such person has
the right to acquire within 60 days of March 28, 2000. 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 deferred compensation of 150,000 shares, options to acquire
1,325,000 shares and conversion rights for appr.750,000 shares.
(3) Represents options to acquire the same number of shares.
(4) Includes options to acquire 100,000 shares.
(5) Includes 22,222 shares held by an affiliate and options to acquire
20,000 shares.
(6) Includes options to acquire 129,866 shares and conversion rights for
approx. 325,000 shares.
(7) Includes warrants for 424,000 shares.
(8) Includes options for 750,000 shares and preferred stock convertible
into 1,000,000 shares.
(9) Includes options and warrants for 1,023,900 shares.
(10) Includes warrants for 600,000 shares.
24
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2000 the former Chairman and the Company entered into an
agreement pursuant to which he resigned as a director and officer. The agreement
provided, among other things, for (i) the termination of his employment
agreement; (ii) the conversion of cumulative preferred stock with a face value
of $900,000 and a convertible promissory note in the amount of $351,060 into (a)
900,000 shares of common stock of the Company and (b) 100,000 shares of Series C
Senior Convertible Preferred Stock with a face value of $900,000; (iii) a
restrictive covenant for which the Company will pay a monthly fee in the amount
of $5,555 over a 36-months term; and (iv) certain redemption privileges relating
to the Series C Senior Convertible Preferred Stock (see Exhibit 10.2).
In February 2000, the President and Chief Executive Officer exercised a
put option for 155,556 shares of common stock issued in connection with the 1998
acquisition by the Company of Rolina Corporation which exercise resulted in a
$375,000 current liability to the Company. Subsequently, such liability was
converted into convertible long-term debt.
Between July and November 1999, an individual who in January 2000
joined the Company in the capacity of Vice President for Shareholder Relations,
invested an aggregate $450,000 in the Company against issuance of convertible
promissory notes and warrants for the purchase of 900,000 common shares. In
February 2000, these promissory notes were converted into 900,000 common shares.
25
<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, 1999.
26
<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: March 30, 2000
Steven D. Rudnik
President, Chief Executive Officer
(Principal Executive Officer),
Chairman of the Board
By: /s/ Joerg H. Klaube Date: March 30, 2000
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/ Peter J. Buscetto March 30, 2000
---------------------
Peter J. Buscetto, Director
March __, 2000
----------------
Paul Chernis, Director
/s/ John C. Duncan March 30, 2000
------------------
John C. Duncan, Director
/s/ Seymour Kroll March 30, 2000
-----------------
Seymour Kroll, Director
/s/ Joseph J. Tomasek March 30, 2000
---------------------
Joseph J. Tomasek, Director
27
<PAGE>
EXHIBIT INDEX
(A) Financial Statements and Notes to Financial Statements
(2.2) Agreement and Plan of Merger with Rolina Corporation and Steven D.
Rudnik, and Employment Agreement with Steven D. Rudnik, both of the
date February 2 , 1998, as filed as Exhibit to the Company's report on
Form 10-KSB for the year ended December 31, 1998. Incorporated herein
by reference.
(3) (i) Articles of Incorporation and Amendments thereto, incorporated
herein by reference to Exhibits of previous filings with the
Commission.
(3) (ii) Bylaws of the Company, incorporated herein by reference to
Exhibits of previous filings with the Commission.
(4.1) Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series A Senior Convertible Preferred
Stock.
(4.2) Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series B Senior Convertible Preferred
Stock.
(4.3) Amendment to the Company's Certificate of Incorporation as filed with
the State of Delaware on January 31, 2000, and amended on March 20,
2000, designating a new class of Series C Senior Convertible Preferred
Stock.
(10.1) Resignation Agreement dated July 21, 1999, between J. Swon and
B. Deichl and the Company, incorporated herein by reference to the
Exhibit of Form S-8 filed with the Commission on August 3, 1999.
(10.2) Resignation Agreement dated January 28, 2000, between M. Martin and the
Company, incorporated herein by reference to the Exhibit of Form S-8
filed with the Commission on January 31, 2000.
(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.
28
<PAGE>
OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE
(a) The Company's Quarterly Reports on Form 10-QSB for the periods ended
March 31, 1999, June 30, 1999, and September 30, 1999.
(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, 1998.
29
<PAGE>
EXHIBIT A
----------
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 1999
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 1999
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.............. 8-17
<PAGE>
[Letterhead of
Rosenberg Rich Baker Berman & Company ]
Independent Auditors' Report
To the Board of Directors and Stockholders of
Magnitude Information Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 1999 and 1998. 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, 1999 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
/s/Rosenberg Rich Baker Berman & Company
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 24, 2000
1
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 249,569
Accounts receivable net of allowance for doubtful accounts of $78,301 58,724
Inventories 8,885
Miscellaneous receivables 16,627
Deferred tax asset 201,470
Prepaid expenses 388,881
--------------
Total Current Assets 924,156
Property, plant and equipment, net of accumulated depreciation of $145,579 99,880
Software, net of accumulated amortization of $261,662 1,193,728
Other assets 2,459
==============
Total Assets 2,220,223
==============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 806,265
Accrued contingent liability 374,890
Dividends payable 9,000
Loans payable 754,541
Notes payable 1,475,000
Current maturities of long-term debt 1,038,779
Current maturities of capitalized lease obligations 6,938
--------------
Total Current Liabilities 4,465,413
Long term debt, less current portion 22,750
Obligations under capital leases, excluding current maturities 13,005
--------------
Total Liabilities 4,501,168
--------------
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; 10,340,261 shares issued
and outstanding 1,034
Contributed capital 81,000
Additional paid in capital 8,935,034
Accumulated deficit (11,298,013)
--------------
Total Stockholders' Equity (Deficit) (2,280,945)
--------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,220,223
==============
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998
--------------- --------------
Net Sales
<S> <C> <C>
Hardware Products $ 2,850 $ 2,853,969
Software 260,703 72,486
--------------- --------------
Total Net Sales 263,553 2,926,455
--------------- --------------
Cost of Good Sold
Hardware Products 2,850 1,450,367
Software 167,971 140,073
--------------- --------------
Total Cost of Goods Sold 170,821 1,590,440
Gross Profit 92,732 1,336,015
Selling, general and administrative expenses 2,735,721 3,924,777
--------------- --------------
(Loss) From Operations (2,642,989) (2,588,762)
--------------- --------------
Other Income (Expense)
Miscellaneous income 133,520 86,872
Interest income - 1,384
Miscellaneous expense (40,542) (182,385)
Interest expense (293,553) (343,394)
Loss on disposition of assets (38,758) (104,336)
--------------- --------------
Total Other (Expense) (239,333) (541,859)
--------------- --------------
(Loss) From Continuing Operations Before Provision for Income Taxes (2,882,322) (3,130,621)
Provision for (Benefit from) Income Taxes 490,374 -
--------------- --------------
(Loss) From Continuing Operations (2,391,948) (3,130,621)
Discontinued Operations
Gain on disposal of hardware line of business (net of $0 income tax
effect) - 599,712
=============== ==============
Net (Loss) $ (2,391,948) $ (2,530,909)
=============== ==============
Net (Loss) Per Common Share:
(Loss) From Continuing Operations $ (.28) $ (.72)
Discontinued Operations - .14
Net (Loss) $ (.28) $ (.58)
--------------- --------------
Weighted Average of Common Shares Outstanding 8,486,443 4,324,292
=============== ==============
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
<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, 1999 - $ - 10 $ - 6,431,113 $ 643
Issuances of common stock granted for
services performed - - - - 1,404,328 140
Issuances of common stock pursuant to stock option
exercise loan agreement - - - - 535,000 53
Issuance of common stock for conversion of loans
and accrued interest - - - - 767,332 77
Issuance of common stock pursuant to note penalty
clause - - - - 60,000 6
Contingent liability pursuant to put option
agreement - - - - - -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - - - - 7,210 1
Issuance of common shares pursuant to private
equity placements - - - - 1,050,000 105
Cancellation of previously issued common stock - - - - (7,500) (1)
Issuance of common stock pursuant to anti-dilution
clause - - - - 77,778 8
Issuance of common stock to suppliers pursuant to
grant - - - - 15,000 2
Issuance of convertible debt with attached warrants - - - - - -
Net loss, year ended December 31, 1999 - - - - - -
---- ------- ----- -------- ---------- ------
Balances, December 31, 1999 - $ - 10 $ - 10,340,261 $1,034
==== ======= ===== ======== ========== ======
</TABLE>
See notes to the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Total
Contributed Additional Accumulated Stockholder
Capital Paid in Deficit Equity
----------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1999 $ 81,000 $ 6,832,728 $(8,906,065) $ (1,991,694)
Issuances of common stock granted for
services performed - 1,224,030 - 1,224,170
Issuances of common stock pursuant to stock option
exercise loan agreement - 267,446 - 267,499
Issuance of common stock for conversion of loans
and accrued interest - 383,590 - 383,667
Issuance of common stock pursuant to note penalty
clause - (6) - -
Contingent liability pursuant to put option
agreement - (374,890) - (374,890)
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - (1) - -
Issuance of common shares pursuant to private
equity placements - 524,895 - 525,000
Cancellation of previously issued common stock - 1 - -
Issuance of common stock pursuant to anti-dilution
clause - (8) - -
Issuance of common stock to suppliers pursuant to
grant - 5,249 - 5,251
Issuance of convertible debt with attached warrants - 72,000 - 72,000
Net loss, year ended December 31, 1999 - - (2,391,948) (2,391,948)
-------- ---------- -------------- --------------
Balances, December 31, 1999 $ 81,000 $8,935,034 $(11,298,013) $2,280,945)
========= =========== ============== ==============
</TABLE>
See notes to the consolidated financial statements
4A
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ------------- --------
<S> <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 - - - - 79,722 8
506
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 - - - - 22,061 2
Magnitude, Inc.
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
======== ========= ======== ========= ============= ========
</TABLE>
See notes to the consolidated financial statement
5
<PAGE>
<TABLE>
<CAPTION>
Total
Contributed Additional Accumulated Stockholders
Capital Paid in Deficit Equity
Capital (Deficit)
------------ ------------ --------------- ---------------
<S> <C> <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 - 199,992 - 200,000
506
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 - (2) - -
Magnitude, Inc.
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 statement
5A
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
----------------------------------
1999 1998
--------------- ---------------
Cash Flows From Operating Activities
<S> <C> <C>
Net Income (Loss) $ (2,391,948) $ (2,530,909)
Adjustments to Reconcile Net (Loss) to Net Cash (Used) by Operating
Activities
Depreciation and amortization 183,053 266,589
Common stock issued for various expenses 474,119 -
Loss on disposition of assets 38,758 112,112
Bad debt provision 4,109 94,287
Forgiveness of debt - (32,893)
New debt issued for interest expense 5,400 -
Deferred tax (benefit) (201,470) -
Inventory variance - 132,890
Inventory writeoff 16,770 -
Return reserve provision - 30,000
Decreases (Increases) in Assets
Accounts receivable 46,416 50,956
Miscellaneous receivables 58,951 (54,743)
Inventories 1,134 (317,650)
Prepaid expenses (3,273) 36,996
Other assets 2,652 414
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses (189,975) 403,405
Trade acceptance payable - (44,860)
--------------- ---------------
Net Cash (Used) by Operating Activities (1,955,304) (1,853,406)
--------------- ---------------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (6,486) (569,857)
Sales of property and equipment 250 716,926
--------------- ---------------
Net Cash Provided (Used) by Investing Activities (6,236) 147,069
--------------- ---------------
Cash Flows From Financing Activities
Repayment of notes payable - (25,000)
Proceeds from long-term debt 300,000 342,000
Proceeds from long-term debt with detachable warrants 800,000 -
Repayment of long-term debt (50,474) (750,577)
Repayment of capital lease obligations (7,747) (7,229)
Repayment of officer loans payable - (85,000)
Proceeds from loans payable 726,181 -
Repayment of loans payable (91,254) (275,000)
Proceeds from issuance of common stock 525,000 2,512,000
--------------- ---------------
Net Cash Provided by Financing Activities 2,201,706 1,711,194
--------------- ---------------
Net increase in Cash 240,166 4,857
Cash at beginning of period 9,403 4,546
=============== ===============
Cash at end of period $ 249,569 $ 9,403
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 153,313 $ 245,916
=============== ===============
Taxes Paid $ 6,600 $ 4,320
=============== ===============
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998
-------------- ---------------
Schedule of non-cash investing and financing activities
In connection with the retirement of $36,102 of accrued interest on a promissory
<S> <C>
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 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
===============
In connection with the disposition of a 20% equity interest in Input
Technologies LLC, $20,392 of accounts payable and accrued expenses were <C>
written off $ 20,392
==============
In connection with the trade-in of capitalized lease equipment for
operating lease equipment, $17,975 of capitalized lease obligations
were written off $ 17,975
==============
In connection with the Rolina Corporation merger agreement, a put option on
155,556 shares at $2.41 was set up as an accrued contingent liability $ 374,890
==============
In connection with the retirement of a $100,000 promissory note and accrued
interest thereon, 202,332 common shares were issued $ 101,166
==============
In connection with a stock option exercise, 535,000 common shares were issued
against the cancellation of loans and notes totaling $261,604 along with
accrued interest thereon. $ 267,500
==============
In connection with the retirement of promissory notes totaling $256,959 plus
accrued interest thereon, 565,000 common shares were issued $ 282,500
==============
In connection with the issuance of a promissory note totaling $119,735 , $29,735
of accrued interest on various notes was incorporated into a new note. $ 29,735
==============
In connection with the issuance of common stock, 1,419,328 common shares were
issued for past services $ 721,619
==============
In connection with the issuance of 1,000,000 common shares during the year ended
December 31, 1998, $276,230 for past services was relieved; notes totaling
$134,295 with accrued interest of $19,692 were retired, and loans and
advances of $77,585 were retired during the year ended December 31, 1999. $ 507,802
==============
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company") was incorporated as
a Delaware corporation on April 19, 1988 under the name Fortunistics
Inc. On March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to
Proformix Systems, Inc., and on November 18, 1998, the Company changed
its name to Magnitude Information Systems, Inc.
The Company 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.
The remaining 1% of Magnitude, Inc. stockholders hold a minority
interest which is valued at $0.
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
the 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 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 on ongoing contingent stream of royalty
payments on OS' sales of the Magnitude hardware products. 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 "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.
8
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continuted)
Nature of Organization - (continued)
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. It's operations during 1998 and
1999 have not been significant.
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 related to the Company's former
hardware product line 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 in 1998.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is
computed on the straight line method over the estimated useful lives of
such assets between 5-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets acquired pursuant to the Rolina
and Vanity agreements are amortized on the straight line method over 10
years. Repairs and maintenance which do not extend the useful lives of
the related assets are expensed as incurred.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. 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 services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted
by the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and
tax-reporting purposes. Accordingly, for Federal income tax purposes,
the benefit for income taxes has been offset entirely by a valuation
allowance against the related federal deferred tax asset for the year
ended December 31, 1999. For state income tax purposes, a partial
valuation allowance has been offset against the related state deferred
tax asset for the year ended December 31, 1999.
9
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continuted)
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.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. The Company performs ongoing credit evaluations
of its customers and maintains allowances for doubtful accounts based on
factors surrounding the credit risk of specific customers, historical
trends, and other information.
INVENTORIES
Inventories consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Finished goods $ 8,885
---------------
$ 8,885
===============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1999:
Equipment $ 134,619
Furniture and fixtures 65,070
Leasehold improvements 45,770
----------------
245,459
Less accumulated depreciation 145,579
----------------
$ 99,880
================
</TABLE>
Depreciation expense charged to operations was $37,514 and $107,928 in 1999
and 1998, respectively.
10
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $ 154,103
Accrued interest 342,994
Accrued commissions 43,222
Accrued returns 35,718
Accrued legal settlement 20,000
Accrued professional fees 72,698
Accrued taxes 4,300
Accrued payroll 98,268
Miscellaneous accruals 14,962
Accrued warranties 20,000
--------------------
$ 806,265
====================
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan agreements with the following terms and
conditions at December 31, 1999:
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. In
July, 1999 these obligations and accrued interest thereon totaling $29,735 were converted
into a new promissory note for $119,735 dated August 9, 1999 payable upon 30 days written
notice not to begin before January 2, 2000 of which $60,000 has been repaid. The note has
been subsequently converted into common shares. $ 59,735
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,
1999 and no demand for payment has been made through the date of our report. 75,000
Note dated February 11, 1999 issued to the board chairman, principal due May 31, 2000, accruing
interest at a rate of 10% per annum resulting from advances totaling $351,060 during February
and March 1999. This note is secured by all of Magnitude Inc.'s assets and property and is
guaranteed by the Company. The note has been subsequently converted into common shares. 351,060
Pursuant to a promissory note dated April 26, 1999, a member of the Board of Directors of the
Company advanced the sum of $200,000 which is due June 26, 2000 and accruing interest at the
rate of 12% per annum, convertible at the holders option into shares of the common stock of
the Company at the rate of .50(cent)per share. Repayments of $31,254 have been made on the note. 168,746
Pursuant to the Rolina Corporation Agreement & Plan of Merger dated February 2, 1998 the Company
was to deliver to its current Chairman and CEO of the Company, $100,000 eight months from
the closing date. This indebtedness has been recast as a promissory note maturing October
1, 1999 and accruing interest at 10% per annum. In consideration of the indebtedness, the
current Chairman and CEO has a lien on certain software products owned by the Company. The
note has been subsequently repaid by the Company in full. 100,000
---------------
Total $ 754,541
===============
</TABLE>
11
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTES PAYABLE
Private Placement Offering
A 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 current notes outstanding at December 31, 1999 was
$1,475,000. The Company has subsequently extended an offer to convert
such notes into a portion of common shares or convertible preferred
shares. As of March 24, 2000, the holders of $1,050,000 worth of notes
have agreed to accept partial repayment of approximately 30% of the
note balance on April 30, 2000 and convert the remaining balance into
common shares or convertible preferred shares.
LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt as of December 31, 1999 is comprised of the following:
Convertible promissory notes issued to seven individual private accredited investors
accruing interest at 7% and maturing from June 23, 2000 through January 20, 2001. The notes
<S> <C>
provide the holders with the option to convert part or all of the outstanding principal $ 1,028,000
amounts into shares of the common stock of the Company at the rate of $0.50 per share.
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
--------------
1,061,529
Total
Less current maturities 1,038,779
--------------
Long-term debt, net of current maturities $ 22,750
==============
Total maturities of long-term debt are as follows:
Year Ending December 31,
2000 $ 1,038,779
2001 22,750
---------------
$ 1,061,529
===============
</TABLE>
ACCRUED CONTINGENT LIABILITY
Pursuant to the February 2, 1998, Agreement and Plan of Merger with
Rolina Corporation (see "Nature of Organization), the Company has issued
155,556 shares of its common stock to the principal of Rolina
Corporation who currently serves as the Company's President and Chief
Executive Officer, and has issued a put option for such shares at a
price of $2.41 per share in accordance with the provisions contained
therein, with notice for exercise eligible to be given at any time after
February 1, 2000, and before 5:00 p.m. on the 90th day thereafter. In
view of the relative proximity of the exercise period of the option and
the fact that the market price for the Company's shares currently is
significantly lower than the option put price, the entire amount has
been recognized as an accrued contingent liability.
12
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under non-cancelable capital lease
agreements expiring between October 26, 2002 and October 27, 2002. The
capital lease obligations have been recorded at the present value of
future minimum lease payments, discounted at an interest rate of 7.00%.
The capitalized cost of equipment at December 31, 1999 amounted to
$18,023 net of accumulated depreciation of $8,353.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1999:
Year Ending December 31,
2000 $ 8,211
2001 7,579
2002 6,316
---------------
Total minimum capital lease payments 22,106
Less amounts representing interest 2,163
---------------
Present value of net minimum capital lease payments 19,943
Less current maturities of capital lease obligations 6,938
---------------
Obligations under capital leases, excluding current
maturities $ 13,005
===============
INCOME TAXES
The income tax provision is comprised of the following:
Year Ended December 31,
-----------------------------------
1999 1998
--------------- ---------------
State current provision $ 490,374 $ -
State deferred provision - -
--------------- ---------------
$ 490,374 $ -
=============== ===============
In 1998, the State of New Jersey enacted legislation allowing emerging
technology and/or biotechnology companies to sell their unused New Jersey
Net Operating Loss ("NOL") Carryover and Research and Development Tax
Credits ("R&D Credits) to corporate taxpayers in New Jersey. During 1999,
the Company entered into an agreement under which it retained a third
party broker to identify a buyer for its NOL Carryover. The total
anticipated net proceeds of this transaction ($497,238) were recorded as
a current deferred tax asset ($201,470) and a tax benefit of $295,768 in
the accompanying financial statements.
Due to limitations placed by the State of New Jersey on the total amount
of NOL Carryover and R&D Credits eligible to be sold in any one year, the
sale of only a portion of the Company's NOL Carryover ($295,768 was
completed in 1999). The receipt of these funds was recorded as a
reduction to the non-current deferred tax asset in the accompanying
financial statements. The sale of the remaining balance of the Company's
NOL Carryover is anticipated by the end of the third quarter of 2000.
The Company's total deferred tax asset and valuation allowance are as follows:
December 31,
---------------------------------
1999 1998
---------------- -------------
Total deferred tax asset, noncurrent $ 4,240,000 $ (3,560,000)
Less valuation allowance (4,240,000) (3,560,000)
---------------- -------------
Net deferred tax asset, noncurrent $ - $ -
-----------------------------------------================ -------------
13
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES - (Continued)
The differences between income tax benefits in the financial statements
and the tax benefit computed at the combined state and U.S. Federal
statutory rate of 40% are as follows:
Year Ended December 31,
------------------------------------
1999 1998
---------------- ----------------
Tax benefit (40%) (40%)
Valuation allowance 40% 40%
---------------- ----------------
Effective tax rate - -
================ ----------------
At December 31, 1999, the Company has available approximately $10,600,000
of net operating losses to carryforward and which may be used to reduce
future federal taxable income and expire between December 31, 2007 and
2019.
At December 31, 1999, the Company has available approximately $2,800,000
of net operating losses to carryforward and which may be used to reduce
future state taxable income which begin to expire through December 31,
2006.
401(k) PLAN
The Company adopted the qualified Magnitude, Inc. sponsored 401(k) plan
covering substantially all full time employees under which eligible
employees may elect to contribute, within statutory limits, a percentage
of their annual compensation. The Company matches up to 50% of the
employee's contribution of which the match may not exceed 3% of the
employee's total compensation for the plan year. Contributions to the
plan were $9,592 and $16,095 for the years ended December 31, 1999 and
1998, 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.
14
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
STOCK OPTION PLANS - (Continued)
Qualified and Non-Qualified
Shares Under Option December 31,
----------------------------------
---------------
1999 1998
--------------- ---------------
<S> <C> <C>
Outstanding, beginning of year 981,468 586,144
Granted during the year 605,000 501,162
Forfeited during the year (791,468) (105,838)
=============== ===============
Outstanding, end of year (at prices ranging from $1.00 to $4.50 795,000 981,468
per share)
=============== ===============
Eligible, end of year for exercise (at prices ranging from $1.00 to 470,000 292,597
$4.50 per share)
=============== ===============
</TABLE>
At December 31, 1999 and 1998, the weighted average exercise price and
weighted average remaining contractual life is $1.13 and $2.56 per share
and 4 years 9 months and 5 years 4 months, respectively.
At December 31, 1999, there were 343,424 shares reserved for future grants.
WARRANTS
The Company issued common stock purchase warrants as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
Exercise
Date of Grant No. of Price Per Exercise Term Vesting Rights
Shares Share
Start Expiration
<S> <C> <C> <C> <C> <C> <C>
May 1, 1997 10,000 $ 5.00 May 1, 1997 April 30, 2000 Upon Issue
May 1, 1998 224,000 5.00 May 1, 1998 April 30, 2003 Upon Issue
June 10, 1999 200,000 1.00 June 10, 1999 June 10, 2003 Upon Issue
June 21, 1999 200,000 1.00 June 21, 1999 June 21, 2003 Upon Issue
June 23, 1999 300,000 1.00 June 23, 1999 June 23, 2003 Upon Issue
June 25, 1999 200,000 1.00 June 25, 1999 June 25, 2003 Upon Issue
July 13, 1999 100,000 1.00 July 13, 1999 July 13, 2003 Upon Issue
July 20, 1999 100,000 1.00 July 20, 1999 July 20, 2003 Upon Issue
July 22, 1999 150,000 1.00 July 22, 1999 July 22, 2002 Upon Issue
July 28, 1999 150,000 1.00 July 28, 1999 July 28, 2006 Upon Issue
August 19, 1999 100,000 1.00 August 19, 1999 October 4, 2003 Upon Issue
August 30, 1999 100,000 1.00 August 30, 1999 October 4, 2003 Upon Issue
September 7, 1999 100,000 1.00 September 7, 1999 October 4, 2003 Upon Issue
September 21, 1999 50,000 1.00 September 21, 1999 October 4, 2003 Upon Issue
October 4, 1999 50,000 1.00 October 4, 1999 October 4, 2003 Upon Issue
October 8, 1999 400,000 1.00 October 8, 1999 October 8, 2004 Upon Issue
November 8, 1999 50,000 1.00 November 8, 1999 November 8, 2003 Upon Issue
November 16, 1999 100,000 1.00 November 16, 1999 November 16, 2003 Upon Issue
November 20, 1999 100,000 1.00 November 20, 1999 November 20, 2003 Upon Issue
December 28, 1999 100,000 1.00 December 28, 1999 December 28, 2004 Upon Issue
December 30, 1999 602,332 1.00 December 30, 1999 December 30, 2004 Upon Issue
</TABLE>
At December 31, 1999, there were 3,386,332 shares eligible for exercise at
prices ranging from $1.00 to $5.00 per share, of which 1,600,000 eligible
shares are callable at $2.00 per share.
15
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commenced 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, 2001. Under the lease agreement,
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,
2000 $ 39,000
2001 39,000
---------------
Total $ 78,000
===============
In March 2000, the Company entered into a five year lease agreement and
will be relocating its administrative offices. The Company is
attempting to identify a subtenant with respect to its existing lease
obligation. The new lease payment will be $6,500 payable monthly with
nominal increases to the base rent in years three through five.
Included in general and administrative expenses is rent expense which
amounted to $64,125 and $103,580 for the years ended December 31, 1999
and 1998, respectively.
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. In January 2000 the Company purchased all of the issued and
outstanding capital stock of Cornell.
Employment Agreements
The Company has entered into employment agreements with certain key
personnel which provide for a base salary, yearly bonuses in common
stock and/or options of the Company and other benefits. Termination of
the agreements may be made by either party with advance notice.
RELATED PARTY TRANSACTIONS
In 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, a director and principal
shareholder extended working capital loans aggregating $395,560 to the
Company, of which a portion of $351,060 was the subject of a promissory
note bearing interest at the rate of 10% per annum 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.
16
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to 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, the Chairman of the Board of Directors resigned. In
connection with this individual's resignation, $350,000 of the $900,000
principal amount cumulative preferred shares held by this individual
were exchanged for 700,000 shares of common stock of the Company. The
remaining principal balance of $550,000 along with a promissory note
totalling $351,060 were exchanged for a $900,000 principal amount of a
new series of convertible preferred shares which have rights of 7% per
annum dividend payments to be made monthly. In connection with a
termination agreement dated January 28, 2000 a restrictive covenant and
confidentiality agreement was executed whereby the Company agreed to
pay this individual a monthly fee in the amount of $5,555 over the 36
month term of that agreement along with this individual's health and
term life insurance for an 18 month period.
Conversion of Debt
As of March 24, 2000, the Company converted approximately $1,643,235 of
debt into 2,777,116 common shares and 90,287 preferred shares of the
Company.
Equity Placements
As of March 24, 2000, the Company had received $200,000 pursuant to
private equity placements under which 400,000 shares of common stock
was issued. In addition the Company received $1,990,900 pursuant to a
firm commitment equity financing transaction under which shares of
common stock and a new series of convertible preferred shares with
detachable common stock purchase warrants will be issued.
17
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE SHARES
OF THE PREFERRED STOCK OF
MAGNITUDE INFORMATION SYSTEMS, INC.
To Be Designated
Series A Senior Convertible Preferred Stock
Magnitude Information Systems, Inc., a Delaware corporation (the
"Corporation"), in accordance with Section 103 of the General Corporation Law of
the State of Delaware ("DGCL"), by its President, does hereby certify that
during a meeting on Jabuary 28, 2000, the Board of Directors of the Corporation
duly adopted the following resolutions providing for the issuance of a series of
Preferred Stock to be designated Series A Senior Convertible Preferred Stock,
par value $.001, and to consist of 300,000 shares:
RESOLVED, that the Corporation is hereby authorized to amend
its Certificate of Incorporation and to file a Certificate of
Designations of Preferred Stock to provide for 300,000 shares
of Series A Senior Convertible Preferred Stock, $.001 par
value ("Series A Senior Preferred"), pursuant to the terms and
conditions set forth in the Certificate of Designations;
RESOLVED, that the rights, privileges and limitations of each
share of Series A Senior Preferred shall be as follows:
1. Issuance. The series of Preferred Stock designated as
Series A Senior Preferred shall consist of 300,000 shares.
2. Dividends. The holders of said shares of Series A Senior Preferred
shall be entitled to receive cumulative dividends thereon at the rate of seven
percent (7%) per annum during the first annual period after issuance, increasing
by increments of one half of one percent for every year thereafter until the
rate reaches ten percent (10%) per annum at which time it will remain at 10%
(the "Dividend rate"), payable semi-annually when declared by the Board of
Directors, before any dividend shall be declared, set apart for, or paid upon
the Common Stock of the Corporation. The Dividend Rate shall accrue on the
Liquidation Price (as hereinafter defined) of each share of the Series A Senior
Preferred. The dividends on the Series A Senior Preferred, payable in cash,
shall be cumulative, so that if the Corporation fails in any fiscal year to pay
such dividends on all the issued and outstanding Series A Senior Preferred, such
deficiency in the dividends shall be fully paid, but without interest, before
any dividends shall be paid on or set apart for the Cumulative Preferred Stock
or the Common Stock.
3. Priority. The Series A Senior Preferred shall with respect to
dividend rights and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with the Series B
and C Senior Convertible Preferred Stock.
4. Voting. Except as required by the DGCL and as provided in Section
(7) below, the holders of said shares of Series A Senior Preferred shall not be
entitled to any voting rights.
5. Cancellation. Shares of Series A Senior Preferred which have been
issued and reacquired in any manner, including shares purchased or converted
into Common Stock, exchanged or redeemed, shall be canceled on the books of the
Corporation and shall not be considered outstanding for any purpose.
1
<PAGE>
6. Liquidation. In the event of any liquidation, dissolution, or
winding up of the affairs of the Corporation, whether voluntary or otherwise,
after payment or provision for payment of the debts and other liabilities of the
Corporation, the holders of the Series A Senior Preferred shall be entitled to
receive, out of the remaining net assets of the Corporation, the amount of Five
($5.00) Dollars for each share of Series A Senior Preferred (the "Liquidation
Price") held of record by such holder, payable in cash or in shares of stock,
securities or other consideration, the value of which stock, securities or other
consideration shall be fixed by the Board of Directors, plus the amount of all
dividends in arrears on each such share up to the date fixed for distribution,
provided, however, that such remaining net assets are sufficient to cover all
the before mentioned payments and also like payments to holders of Series B and
C Senior Preferred, before any distribution shall be made to the holders of
Common Stock or Cumulative Preferred Stock of the Corporation. In case such
remaining net assets are insufficient to cover all such payments to holders of
Series A, B and C Senior Preferred, the holders of these series shall receive
payments on a pro rata basis.
7. Cumulative Dividends. During such time as there exist unpaid
cumulative dividends due on the Series A Senior Preferred, no reclassification
of the shares of the Corporation or capital reorganization of the Corporation in
any manner provided by law shall be valid unless (a) the holders of a majority
of all the Series A Senior Preferred approve, and (b) provision is made for the
payment of the aggregate unpaid cumulative dividends then in arrears.
8. Redemption.
(i) The Corporation shall have the right to redeem pro rata any or all
of its Series A Senior Preferred issued and outstanding at any time, with the
Board of Directors of the Corporation in its sole discretion deciding how many
shares to redeem, provided, however, that any such shares called for redemption
have been issued and outstanding for a minimum of three (3) years at the time of
notice of redemption to the holders of such shares, by paying to the holders
thereof the Liquidation Price for each share of Series A Senior Preferred held
by such holder plus a "call premium" of 15% of the Liquidation Price, together
with the amount of any accrued and unpaid dividends as may have accumulated
thereon at the time of redemption (the "Redemption Price").
(ii) At least 10 days but not more than 30 days prior to the date fixed
by the Board of Directors of the Corporation for the redemption of any shares of
the Series A Senior Preferred pursuant to subsection (i) above, a written notice
shall be mailed to the holder of record of such shares of Series A Senior
Preferred to be redeemed, at the address of such holder as shown on the records
of the Corporation, notifying such holder of the election of the Corporation to
redeem such shares, stating the date fixed for redemption thereof (hereinafter
referred to as the "Redemption Date"), and calling upon such holder to surrender
to the Corporation on the Redemption Date at the place designated in such notice
such holder's certificate or certificates representing the number of shares of
Series A Senior Preferred specified in such notice of redemption. On or after
the Redemption Date, each holder of shares of Series A Senior Preferred to be
redeemed shall present and surrender such holder's certificate or certificates
for such shares to the Corporation at the place designated in such notice and
thereupon the Redemption Price of such shares shall be paid to or to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. From and after
the Redemption Date (unless default shall be made by the Corporation in payment
if the Redemption Price), all dividends on the Series A Senior Preferred shall
cease to accrue and all rights of the holders thereof as stockholders of the
Corporation, except the right to receive the Redemption Price thereof upon the
surrender of certificates representing the same, without interest thereon, shall
cease and terminate and such shares shall not thereafter be transferred (except
with the consent of the Corporation) on the books of the Corporation and such
shares shall not be deemed to be outstanding for any purpose whatsoever.
(iii) The holder of any shares of Series A Senior Preferred notified by
the Corporation of the redemption of such shares pursuant to subsection (ii)
above shall have the right to exercise his option to convert such shares of
Series A Senior Preferred into Common Stock of the Corporation pursuant to
Section (9) below, by notifying the Corporation in writing or via facsimile
prior to the Redemption Date of his election to convert, in the form prescribed
therefore. The Corporation, after receipt of such notice shall remove such
shares from the shares to be redeemed.
2
<PAGE>
9. Conversion. Each share of Series A Senior Preferred shall be
convertible at any time prior to the Redemption Date, at the holder's option,
into such number (the "Conversion Ratio") of shares of the Common Stock of the
Corporation as arrived at by dividing the Liquidation Price by one hundred fifty
(150) percent of the market price of the Common Stock of the Corporation
("Market Price") on the earlier of the dates such share of Series A Senior
Preferred is subscribed for or issued (the "Effective Date"), which Conversion
Rate shall be noted in the stock certificate for such share of Series A Senior
Preferred. "Market Price" shall mean the average daily bid and asked prices for
the Company's Common Stock as reported on the Electronic Bulletin Board, or on
the primary stock exchange on which the Common Stock is listed, during the 20
consecutive trading day period immediately preceding the Effective Date. The
holder of any shares of Series A Senior Preferred who elects to convert his or
her Series A Senior Preferred into Common Stock of the Corporation shall
surrender, at the principal office of the Corporation or at such other office or
agency maintained by the Corporation for that purpose, the certificate or
certificates representing the shares of Series A Senior Preferred to be
converted, together with a written affidavit informing the Corporation of his or
her election to convert such shares, whereby the date of receipt by the
Corporation of such certificates and affidavit shall constitute the "Conversion
Date". As promptly as practicable, and in any event within ten business days
after surrender of such certificates, the Corporation shall deliver or cause to
be delivered certificates representing the number of validly issued, fully paid
and non-assessable shares of Common Stock of the Corporation to which such
holder of Series A Senior Preferred so converted shall be entitled, with
fractional shares to be paid for in cash based on the closing price of the
Common Stock of the Corporation on the Conversion Date. Such conversion shall be
deemed to have been made at the close of business on the Conversion Date, so
that the rights of the holders of the Series A Senior Preferred shall thereafter
cease except for the right to receive Common Stock of the Corporation in
accordance herewith, and such converting holder of Series A Senior Preferred
shall be treated for all purposes as having become the record holder of such
Common Stock of the Corporation at such time.
10. Anti-Dilution. In the event that, prior to the conversion of the
Series A Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefor in the form of
cash, services or property, the conversion ratio of the Series A Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series A Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, the same number of shares of Common Stock of the
Corporation that he would have received had he converted his Series A Senior
Preferred Stock to Common Stock prior to such change in the outstanding shares
of Common Stock of the Corporation.
IN WITNESS WHEREOF, we, the undersigned, have executed and subscribed
this certificate on January 28, 2000.
___/s/ Steven D. Rudnik________
Steven D. Rudnik, President
ATTEST:
__/s/ Joerg H. Klaube_______
Joerg H. Klaube, Secretary
3
<PAGE>
Amendment to
Certificate of Powers, Designations, Preferences and Rights of the Preferred
Stock of Magnitude Information Systems, Inc. in re: To Be Designated
Series A Senior Preferred Stock
As filed with the Secretary of the State of Delaware on March 20, 2000.
Section 10 "Anti-Dilution" is being replaced in its entirety, as follows:
10. Anti-Dilution. In the event that, prior to the conversion of the
Series A Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefor in the form of
cash, services or property, the conversion ratio of the Series A Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series A Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, a number of shares of Common Stock of the
Corporation representing the same percentage of common shares outstanding as
represented by the shares that he would have received had he converted his
Series A Senior Preferred Stock to Common Stock prior to such change in the
outstanding shares of Common Stock of the Corporation.
4
<PAGE>
EXHIBIT 4.2
CERTIFICATE OF POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE SHARES
OF THE PREFERRED STOCK OF
MAGNITUDE INFORMATION SYSTEMS, INC.
To Be Designated
Series B Senior Convertible Preferred Stock
Magnitude Information Systems, Inc., a Delaware corporation (the
"Corporation"), in accordance with Section 103 of the General Corporation Law of
the State of Delaware ("DGCL"), by its President, does hereby certify that
during a meeting on January 28, 2000, the Board of Directors of the Corporation
duly adopted the following resolutions providing for the issuance of a series of
Preferred Stock to be designated Series B Senior Convertible Preferred Stock,
par value $.001, and to consist of 350,000 shares:
RESOLVED, that the Corporation is hereby authorized to amend
its Certificate of Incorporation and to file a Certificate of
Designations of Preferred Stock to provide for 350,000 shares
of Series B Senior Convertible Preferred Stock, $.001 par
value ("Series B Senior Preferred"), pursuant to the terms and
conditions set forth in the Certificate of Designations;
RESOLVED, that the rights, privileges and limitations of each
share of Series B Senior Preferred shall be as follows:
1. Issuance. The series of Preferred Stock designated as
Series B Senior Preferred shall consist of 350,000 shares.
2. Dividends. The holders of said shares of Series B Senior Preferred
shall be entitled to receive cumulative dividends thereon at the rate of seven
percent (7%) per annum, payable semi-annually when declared by the Board of
Directors, before any dividend shall be declared, set apart for, or paid upon
the Common Stock of the Corporation. The Dividend Rate shall accrue on the
Liquidation Price (as hereinafter defined) of each share of the Series B Senior
Preferred. The dividends on the Series B Senior Preferred, payable in cash,
shall be cumulative, so that if the Corporation fails in any fiscal year to pay
such dividends on all the issued and outstanding Series B Senior Preferred, such
deficiency in the dividends shall be fully paid, but without interest, before
any dividends shall be paid on or set apart for the Cumulative Preferred Stock
or the Common Stock.
3. Priority. The Series B Senior Preferred shall with respect to
dividend rights and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with the Series A
and C Senior Convertible Preferred Stock.
4. Voting. Except as required by the DGCL and as provided in Section
(7) below, the holders of said shares of Series B Senior Preferred shall not be
entitled to any voting rights.
5. Cancellation. Shares of Series B Senior Preferred which have been
issued and reacquired in any manner, including shares purchased or converted
into Common Stock, exchanged or redeemed, shall be canceled on the books of the
Corporation and shall not be considered outstanding for any purpose.
6. Liquidation. In the event of any liquidation, dissolution, or
winding up of the affairs of the Corporation, whether voluntary or otherwise,
after payment or provision for payment of the debts and other liabilities of the
Corporation, the holders of the Series B Senior Preferred shall be entitled to
receive, out of the remaining net assets of the Corporation, the amount of nine
1
<PAGE>
($9.00) Dollars for each share of Series B Senior Preferred (the "Liquidation
Price") held of record by such holder, payable in cash or in shares of stock,
securities or other consideration, the value of which stock, securities or other
consideration shall be fixed by the Board of Directors, plus the amount of all
dividends in arrears on each such share up to the date fixed for distribution,
provided, however, that such remaining net assets are sufficient to cover all
the before mentioned payments and also like payments to holders of Series A and
C Senior Preferred, before any distribution shall be made to the holders of
Common Stock or Cumulative Preferred Stock of the Corporation. In case such
remaining net assets are insufficient to cover all such payments to holders of
Series A, B and C Senior Preferred, the holders of these series shall receive
payments on a pro rata basis.
7. Cumulative Dividends. During such time as there exist unpaid
cumulative dividends due on the Series B Senior Preferred, no reclassification
of the shares of the Corporation or capital reorganization of the Corporation in
any manner provided by law shall be valid unless (a) the holders of a majority
of all the Series B Senior Preferred approve, and (b) provision is made for the
payment of the aggregate unpaid cumulative dividends then in arrears.
8. Redemption.
(i) The Corporation shall have the right to redeem pro rata any or all
of its Series B Senior Preferred issued and outstanding at any time, with the
Board of Directors of the Corporation in its sole discretion deciding how many
shares to redeem, provided, however, that any such shares called for redemption
have been issued and outstanding for a minimum of three (3) years at the time of
notice of redemption to the holders of such shares, by paying to the holders
thereof the Liquidation Price for each share of Series B Senior Preferred held
by such holder plus a "call premium" of 10% of the Liquidation Price, together
with the amount of any accrued and unpaid dividends as may have accumulated
thereon at the time of redemption (the "Redemption Price").
(ii) At least 10 days but not more than 30 days prior to the date fixed
by the Board of Directors of the Corporation for the redemption of any shares of
the Series B Senior Preferred pursuant to subsection (i) above, a written notice
shall be mailed to the holder of record of such shares of Series B Senior
Preferred to be redeemed, at the address of such holder as shown on the records
of the Corporation, notifying such holder of the election of the Corporation to
redeem such shares, stating the date fixed for redemption thereof (hereinafter
referred to as the "Redemption Date"), and calling upon such holder to surrender
to the Corporation on the Redemption Date at the place designated in such notice
such holder's certificate or certificates representing the number of shares of
Series B Senior Preferred specified in such notice of redemption. On or after
the Redemption Date, each holder of shares of Series B Senior Preferred to be
redeemed shall present and surrender such holder's certificate or certificates
for such shares to the Corporation at the place designated in such notice and
thereupon the Redemption Price of such shares shall be paid to or to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. From and after
the Redemption Date (unless default shall be made by the Corporation in payment
if the Redemption Price), all dividends on the Series B Senior Preferred shall
cease to accrue and all rights of the holders thereof as stockholders of the
Corporation, except the right to receive the Redemption Price thereof upon the
surrender of certificates representing the same, without interest thereon, shall
cease and terminate and such shares shall not thereafter be transferred (except
with the consent of the Corporation) on the books of the Corporation and such
shares shall not be deemed to be outstanding for any purpose whatsoever.
(iii) The holder of any shares of Series B Senior Preferred notified by
the Corporation of the redemption of such shares pursuant to subsection (ii)
above shall have the right to exercise his option to convert such shares of
Series B Senior Preferred into Common Stock of the Corporation pursuant to
Section (9) below, by notifying the Corporation in writing or via facsimile
prior to the Redemption Date of his election to convert, in the form prescribed
therefore. The Corporation, after receipt of such notice shall remove such
shares from the shares to be redeemed.
2
<PAGE>
9. Conversion. Each share of Series B Senior Preferred shall be
convertible at any time prior to the Redemption Date, at the holder's option,
into shares of Common Stock of the Corporation on the basis of ten (10) shares
of Common Stock for 1 share of Series B Senior Preferred. The holder of any
shares of Series B Senior Preferred who elects to convert his or her Series B
Senior Preferred into Common Stock of the Corporation shall surrender, at the
principal office of the Corporation or at such other office or agency maintained
by the Corporation for that purpose, the certificate or certificates
representing the shares of Series B Senior Preferred to be converted, together
with a written affidavit informing the Corporation of his or her election to
convert such shares, whereby the date of receipt by the Corporation of such
certificates and affidavit shall constitute the "Conversion Date", and which
affidavit, in case the Conversion Date precedes the first anniversary of the
date of issue of such certificate or certificates representing the shares of
Series B Senior Preferred to be converted, includes an agreement with the
Corporation not to sell or transfer the shares of Common Stock to be issued
pursuant to this conversion, before the first anniversary of the date of issue
of the certificate or certificates representing the shares of Series B Senior
Preferred being converted. As promptly as practicable, and in any event within
ten business days after surrender of such certificates, the Corporation shall
deliver or cause to be delivered certificates representing the number of validly
issued, fully paid and non-assessable shares of Common Stock of the Corporation
to which such holder of Series B Senior Preferred so converted shall be
entitled, and where the Conversion Date precedes the first anniversary of the
date of issue of the certificates for Series B Senior Preferred to be converted,
the agreed upon restriction against sales or transfer shall be duly noted on
such certificates. Such conversion shall be deemed to have been made at the
close of business on the Conversion Date, so that the rights of the holders of
the Series B Senior Preferred shall thereafter cease except for the right to
receive Common Stock of the Corporation in accordance herewith, and such
converting holder of Series B Senior Preferred shall be treated for all purposes
as having become the record holder of such Common Stock of the Corporation at
such time.
10. Anti-Dilution. In the event that, prior to the conversion of the
Series B Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefor in the form of
cash, services or property, the conversion ratio of the Series B Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series B Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, the same number of shares of Common Stock of the
Corporation that he would have received had he converted his Series B Senior
Preferred Stock to Common Stock prior to such change in the outstanding shares
of Common Stock of the Corporation.
IN WITNESS WHEREOF, we, the undersigned, have executed and
subscribed this certificate on January 28, 2000.
___/s/ Steven D. Rudnik________
Steven D. Rudnik, President
ATTEST:
__/s/ Joerg H. Klaube_______
Joerg H. Klaube, Secretary
3
<PAGE>
Amendment to
Certificate of Powers, Designations, Preferences and Rights of the Shares of
the Preferred Stock of Magnitude Information Systems, Inc. in re:
To Be Designated Series B Senior Preferred Stock
As filed with the Secretary 4of the State of Delaware on March 20, 2000.
Section 10 "Anti-Dilution" is being replaced in its entirety, as follows:
10. Anti-Dilution. In the event that, prior to the conversion of the
Series B Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefor in the form of
cash, services or property, the conversion ratio of the Series B Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series B Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, a number of shares of Common Stock of the
Corporation representing the same percentage of common shares outstanding as
represented by the shares that he would have received had he converted his
Series B Senior Preferred Stock to Common Stock prior to such change in the
outstanding shares of Common Stock of the Corporation.
4
<PAGE>
EXHIBIT 4.3
CERTIFICATE OF POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE SHARES
OF THE PREFERRED STOCK OF
MAGNITUDE INFORMATION SYSTEMS, INC.
To Be Designated
Series C Senior Convertible Preferred Stock
Magnitude Information Systems, Inc., a Delaware corporation (the
"Corporation"), in accordance with Section 103 of the General Corporation Law of
the State of Delaware ("DGCL"), by its President, does hereby certify that
during a meeting on January 28, 2000, the Board of Directors of the Corporation
duly adopted the following resolutions providing for the issuance of a series of
Preferred Stock to be designated Series C Senior Convertible Preferred Stock,
par value $.001, and to consist of 120,000 shares:
RESOLVED, that the Corporation is hereby authorized to amend
its Certificate of Incorporation and to file a Certificate of
Designations of Preferred Stock to provide for 120,000 shares
of Series C Senior Convertible Preferred Stock, $.001 par
value ("Series C Senior Preferred"), pursuant to the terms and
conditions set forth in the Certificate of Designations;
RESOLVED, that the rights, privileges and limitations of each
share of Series C Senior Preferred shall be as follows:
1. Issuance. The series of Preferred Stock designated as
Series C Senior Preferred shall consist of 120,000 shares.
2. Dividends. The holders of said shares of Series C Senior Preferred
shall be entitled to receive cumulative dividends thereon at the rate of seven
percent (7%) per annum, payable monthly, before any dividend shall be declared,
set apart for, or paid upon the Common Stock of the Corporation. The Dividend
Rate shall accrue on the Liquidation Price (as hereinafter defined) of each
share of the Series C Senior Preferred. The dividends on the Series C Senior
Preferred, payable in cash, shall be cumulative, so that if the Corporation
fails in any fiscal year to pay such dividends on all the issued and outstanding
Series C Senior Preferred, such deficiency in the dividends shall be fully paid,
but without interest, before any dividends shall be paid on or set apart for the
Cumulative Preferred Stock or the Common Stock.
3. Priority. The Series C Senior Preferred shall with respect to
dividend rights and liquidation rights rank prior to all classes and series of
Common Stock and the Cumulative Preferred Stock, and on a par with the Series A
and B Senior Convertible Preferred Stock.
4. Voting. Except as required by the DGCL and as provided in Section
(7) below, the holders of said shares of Series C Senior Preferred shall not be
entitled to any voting rights.
5. Cancellation. Shares of Series C Senior Preferred which have been
issued and reacquired in any manner, including shares purchased or converted
into Common Stock, exchanged or redeemed, shall be canceled on the books of the
Corporation and shall not be considered outstanding for any purpose.
6. Liquidation. In the event of any liquidation, dissolution, or
winding up of the affairs of the Corporation, whether voluntary or otherwise,
after payment or provision for payment of the debts and other liabilities of the
Corporation, the holders of the Series C Senior Preferred shall be entitled to
receive, out of the remaining net assets of the Corporation, the amount of nine
1
<PAGE>
($9.00) Dollars for each share of Series C Senior Preferred (the "Liquidation
Price") held of record by such holder, payable in cash or in shares of stock,
securities or other consideration, the value of which stock, securities or other
consideration shall be fixed by the Board of Directors, plus the amount of all
dividends in arrears on each such share up to the date fixed for distribution,
provided, however, that such remaining net assets are sufficient to cover all
the before mentioned payments and also like payments to holders of Series A and
B Senior Preferred, before any distribution shall be made to the holders of
Common Stock or Cumulative Preferred Stock of the Corporation. In case such
remaining net assets are insufficient to cover all such payments to holders of
Series A, B and C Senior Preferred, the holders of these series shall receive
payments on a pro rata basis.
7. Cumulative Dividends. During such time as there exist unpaid
cumulative dividends due on the Series C Senior Preferred, no reclassification
of the shares of the Corporation or capital reorganization of the Corporation in
any manner provided by law shall be valid unless (a) the holders of a majority
of all the Series C Senior Preferred approve, and (b) provision is made for the
payment of the aggregate unpaid cumulative dividends then in arrears.
8. Redemption.
(i) The Corporation shall have the right to redeem pro rata any or all
of its Series C Senior Preferred issued and outstanding at any time, with the
Board of Directors of the Corporation in its sole discretion deciding how many
shares to redeem, provided, however, that any such shares called for redemption
have been issued and outstanding for a minimum of three (3) years at the time of
notice of redemption to the holders of such shares, by paying to the holders
thereof the Liquidation Price for each share of Series C Senior Preferred held
by such holder plus a "call premium" of 10% of the Liquidation Price, together
with the amount of any accrued and unpaid dividends as may have accumulated
thereon at the time of redemption (the "Redemption Price").
(ii) At least 10 days but not more than 30 days prior to the date fixed
by the Board of Directors of the Corporation for the redemption of any shares of
the Series C Senior Preferred pursuant to subsection (i) above, a written notice
shall be mailed to the holder of record of such shares of Series C Senior
Preferred to be redeemed, at the address of such holder as shown on the records
of the Corporation, notifying such holder of the election of the Corporation to
redeem such shares, stating the date fixed for redemption thereof (hereinafter
referred to as the "Redemption Date"), and calling upon such holder to surrender
to the Corporation on the Redemption Date at the place designated in such notice
such holder's certificate or certificates representing the number of shares of
Series C Senior Preferred specified in such notice of redemption. On or after
the Redemption Date, each holder of shares of Series C Senior Preferred to be
redeemed shall present and surrender such holder's certificate or certificates
for such shares to the Corporation at the place designated in such notice and
thereupon the Redemption Price of such shares shall be paid to or to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. From and after
the Redemption Date (unless default shall be made by the Corporation in payment
if the Redemption Price), all dividends on the Series C Senior Preferred shall
cease to accrue and all rights of the holders thereof as stockholders of the
Corporation, except the right to receive the Redemption Price thereof upon the
surrender of certificates representing the same, without interest thereon, shall
cease and terminate and such shares shall not thereafter be transferred (except
with the consent of the Corporation) on the books of the Corporation and such
shares shall not be deemed to be outstanding for any purpose whatsoever.
(iii) The holder of any shares of Series C Senior Preferred notified by
the Corporation of the redemption of such shares pursuant to subsection (ii)
above shall have the right to exercise his option to convert such shares of
Series C Senior Preferred into Common Stock of the Corporation pursuant to
Section (9) below, by notifying the Corporation in writing or via facsimile
prior to the Redemption Date of his election to convert, in the form prescribed
therefore. The Corporation, after receipt of such notice shall remove such
shares from the shares to be redeemed.
2
<PAGE>
9. Conversion. Each share of Series C Senior Preferred shall be
convertible at any time prior to the Redemption Date, at the holder's option,
into shares of Common Stock of the Corporation on the basis of ten (10) shares
of Common Stock for 1 share of Series C Senior Preferred. The holder of any
shares of Series B Senior Preferred who elects to convert his or her Series C
Senior Preferred into Common Stock of the Corporation shall surrender, at the
principal office of the Corporation or at such other office or agency maintained
by the Corporation for that purpose, the certificate or certificates
representing the shares of Series C Senior Preferred to be converted, together
with a written affidavit informing the Corporation of his or her election to
convert such shares, whereby the date of receipt by the Corporation of such
certificates and affidavit shall constitute the "Conversion Date", and which
affidavit, in case the Conversion Date precedes the first anniversary of the
date of issue of such certificate or certificates representing the shares of
Series C Senior Preferred to be converted, includes an agreement with the
Corporation not to sell or transfer the shares of Common Stock to be issued
pursuant to this conversion, before the first anniversary of the date of issue
of the certificate or certificates representing the shares of Series C Senior
Preferred being converted. As promptly as practicable, and in any event within
ten business days after surrender of such certificates, the Corporation shall
deliver or cause to be delivered certificates representing the number of validly
issued, fully paid and non-assessable shares of Common Stock of the Corporation
to which such holder of Series C Senior Preferred so converted shall be
entitled, and where the Conversion Date precedes the first anniversary of the
date of issue of the certificates for Series C Senior Preferred to be converted,
the agreed upon restriction against sales or transfer shall be duly noted on
such certificates. Such conversion shall be deemed to have been made at the
close of business on the Conversion Date, so that the rights of the holders of
the Series C Senior Preferred shall thereafter cease except for the right to
receive Common Stock of the Corporation in accordance herewith, and such
converting holder of Series C Senior Preferred shall be treated for all purposes
as having become the record holder of such Common Stock of the Corporation at
such time.
10. Anti-Dilution. In the event that, prior to the conversion of the
Series C Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefor in the form of
cash, services or property, the conversion ratio of the Series C Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series C Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, the same number of shares of Common Stock of the
Corporation that he would have received had he converted his Series C Senior
Preferred Stock to Common Stock prior to such change in the outstanding shares
of Common Stock of the Corporation.
IN WITNESS WHEREOF, we, the undersigned, have executed and
subscribed this certificate on January 28,2000 .
___/s/ Steven D. Rudnik________
Steven D. Rudnik, President
ATTEST:
__/s/ Joerg H. Klaube_______
Joerg H. Klaube, Secretary
3
<PAGE>
Amendment to
Certificate of Powers, Designations, Preferences and Rights of the Shares
of the Preferred Stock of Magnitude Information Systems, Inc.
in re: To Be Designated Series C Senior Preferred Stock
As filed with the Secretary of the State of Delaware on March 20, 2000.
Section 10 "Anti-Dilution" is being replaced in its entirety, as follows:
10. Anti-Dilution. In the event that, prior to the conversion of the
Series C Senior Preferred Stock by the holder thereof into Common Stock of the
Corporation, there shall occur any change in the outstanding shares of Common
Stock of the Corporation by reason of the declaration of stock dividends, or
through a recapitalization resulting from stock splits or combinations, without
the receipt by the Corporation of fair consideration therefor in the form of
cash, services or property, the conversion ratio of the Series C Senior
Preferred Stock into Common Stock of the Corporation provided for in Section (9)
above shall be adjusted such that any holder of Series C Senior Preferred Stock
converting such stock into Common Stock subsequent to such change in the
outstanding shares of Common Stock of the Corporation shall be entitled to
receive, upon such conversion, a number of shares of Common Stock of the
Corporation representing the same percentage of common shares outstanding as
represented by the shares that he would have received had he converted his
Series C Senior Preferred Stock to Common Stock prior to such change in the
outstanding shares of Common Stock of the Corporation.
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000838796
<NAME> Magnitude Information Systems, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Dec-31-1999
<CASH> 249,569
<SECURITIES> 0
<RECEIVABLES> 137,025
<ALLOWANCES> 78,301
<INVENTORY> 8,885
<CURRENT-ASSETS> 924,156
<PP&E> 245,459
<DEPRECIATION> 145,579
<TOTAL-ASSETS> 2,220,223
<CURRENT-LIABILITIES> 4,465,413
<BONDS> 35,755
0
0
<COMMON> 1,034
<OTHER-SE> (2,281,979)
<TOTAL-LIABILITY-AND-EQUITY> 2,220,223
<SALES> 263,553
<TOTAL-REVENUES> 263,553
<CGS> 170,821
<TOTAL-COSTS> 170,821
<OTHER-EXPENSES> 79,300
<LOSS-PROVISION> 4,109
<INTEREST-EXPENSE> 293,553
<INCOME-PRETAX> (2,882,322)
<INCOME-TAX> (490,374)
<INCOME-CONTINUING> (2,391,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,391,948)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
