<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File No. 33-9030
MAGNAVISION CORPORATION
-----------------------
(exact name of registrant as specified in its charter)
DELAWARE 22-2741313
- -------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1725 ROUTE 35, WALL, NEW JERSEY 07719
-------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (908) 449-1200
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the 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 [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant is not available due to the unavailability of price quotations for
the Registrant's securities.
The number of shares of Registrant's Common Stock outstanding on November 22,
1997 was 1,152,513.
Documents Incorporated by Reference: None.
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1997 and December 31,
1996
Consolidated Statement of Operations for the nine months
ended September 30, 1997 and September 30, 1996 and
three months then ended.
Consolidated Statements of Stockholders' Equity (Deficiency)
For The Period December 31, 1996 to September 30, 1997.
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996.
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
PART II. Other Information
<PAGE>
MAGNAVISION CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31
1997 1996
---------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $188,799 $164,296
Trade Accounts and Other Receivables 279,248 156,252
Prepaid Expenses 9,013 8,059
Shareholder Loans Receivable 43,811 44,161
---------- ----------
Total Current Assets 520,871 372,768
---------- ----------
PROPERTY AND EQUIPMENT
Property and Equipment at Cost 1,841,434 1,269,887
Less: Accumulated Depreciation (658,402) (501,178)
---------- ----------
Net Property and Equipment 1,183,032 768,709
OTHER ASSETS
Prepaid lease expense 677,426 757,652
Deferred financing cost, Net of Accumulated Amortization 93,160 293,445
Deposits 7,730 4,420
---------- ----------
TOTAL ASSETS $2,482,219 $2,196,994
========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $267,732 $284,094
Due to Shareholders -- 139,889
Deferred Revenues 219,171 175,348
Current Portion of Long-Term Debt 3,686 3,686
Income Taxes Payable 741 741
Term Loan 105,468 --
Notes Payable - Senior Debt -- 4,062,932
---------- ----------
Total Current Liabilities 596,798 4,666,690
LONG-TERM LIABILITIES
Accounts Payable and Accrued Expenses 9,450 2,000
Security Deposits Payable 165,017 126,386
Long-Term Debt Revolving Credit Line 207,995 --
Long-Term Debt 8,135 10,563
---------- ----------
Total Long - Term Liabilities 390,597 138,949
Commitments and contingencies
Series A Preferred Stock and Warrants, 10,000,000
shares authorized; issued and outstanding, 5,000,000
shares 5,000,000 --
SHAREHOLDERS' DEFICIENCY
Series B Preferred Stock, 150,000 shares
authorized; issued and outstanding, 131,889 shares 131,889 --
Common Stock, $0.08 par value - 10,000,000 shares
authorized; 1,152,576 shares issued and outstanding 92,206 92,178
Additional Paid-In Capital 3,321,886 3,321,207
Accumulated Deficit (7,054,457) (6,022,030)
---------- ----------
Total Shareholder's Deficiency (3,508,476) (2,608,645)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $2,478,919 $2,196,994
========== ==========
</TABLE>
<PAGE>
MAGNAVISION CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ending September 30 Three months ending September 30
------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Gross Revenues $1,078,901 $840,478 $351,440 $366,839
Cost of Sales 362,619 364,037 113,815 210,078
----------- ----------- --------- ---------
Gross Profit 716,282 476,441 237,625 156,761
OPERATING EXPENSES
Salaries 464,401 439,055 155,627 148,267
Depreciation and Amortization Expense 176,875 166,167 64,271 58,858
General and Administrative Expenses 667,729 803,883 196,659 202,960
----------- ----------- --------- ---------
TOTAL OPERATING EXPENSES, BEFORE EXTRAORDINARY ITEM 1,309,005 1,409,105 416,557 410,085
OPERATING LOSS (592,723) (932,664) (178,932) (253,324)
OTHER INCOME (expense)
Interest expense (184,953) (282,288) (3,107) (109,331)
Interest Income 25,082 27,925 9,690 9,402
----------- ----------- --------- ---------
Total other income (expense) (159,871) (254,363) 6,583 (99,929)
LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (752,594) (1,187,027) (172,349) (353,253)
PROVISION FOR INCOME TAX 3,989 708 100 --
----------- ----------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (756,583) (1,187,735) (172,248) (353,253)
----------- ----------- --------- ---------
EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT (275,844) -- -- --
----------- ----------- --------- ---------
NET LOSS (1,032,427) (1,187,735) (172,448) (353,253)
----------- ----------- --------- ---------
PREFERRED STOCK DIVIDEND REQUIREMENT 156,667 -- 100,000 --
----------- ----------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCK HOLDERS ($1,189,094) ($1,187,735) ($272,448) ($353,253)
=========== =========== ========= =========
Primary earns per share:
Loss before extraordinary item ($0.79) ($1.04) ($0.24) ($0.31)
Extraordinary item ($0.24) $0.00 $0.00 $0.00
Net loss ($1.03) ($1.04) ($0.24) ($0.31)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,152,513 1,147,156 1,152,576 1,149,584
</TABLE>
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ending September 30
-------------------------------
1997 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($1,032,427) ($1,187,735)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities
Extraordinary item 275,844 --
Depreciation and Amortization 176,875 166,167
Amortization of channel lease prepayments 80,226 80,227
Changes in Assets and Liabilities:
Increase in Trade Accounts and
Other Receivables (122,996) (248,942)
Increase in deposits (10) (6,934)
Increase in prepaid expenses (954) (10,109)
(Decrease) Increase in Accounts Payable and
Accrued Expenses (8,912) 187,720
Increase in Security Deposits Payable 38,631 85,632
Decrease Income Taxes Payable -- (150)
Increase in Deferred Revenues 43,823 79,712
----------- -----------
Net cash used in operating activitie (549,900) (854,412)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) loan to shareholders 350 (167)
Purchase property and equipment (571,547) (445,791)
----------- -----------
Net cash used in investing activities (571,197) (445,958)
CASH FLOW FROM FINANCING ACTIVITIES
Payment of - Senior Debt (4,062,932) 1,104,865
Payments of Long-Term Debt (2,428) (23,411)
Payment of obligations under capital leases 26,136
Increase in Deferred financing cost (95,210) --
Proceeds from Issuance Access Capital Inc. Line Of Credit 207,995 --
Proceeds from Issuance Term loan 105,468 --
Decrease in Due to Shareholders (139,889) (5,000)
Proceeds from Issuance of Preferred Stock 5,131,889 --
Proceeds from Issuance of Common Stock 707 --
----------- -----------
Net cash used in provided by financing
activities 1,145,600 1,102,590
Net increase (decrease) in cash
and cash equivalents $24,503 ($197,780)
=========== ===========
Cash and cash equivalents beginning of period $164,296 $235,327
Cash and cash equivalents end of period $188,799 $37,547
</TABLE>
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS DEFICIENCY
For the period December 31, 1996 to September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Series B Common Common
Preferred Stock Stock Stock
Shares Amount Shares (1) Amount
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 -- -- 1,152,222 $92,178
Net loss for the nine months
ended September 30, 1997 -- -- -- --
Common Stock Issued
Jan. 1, 1997 to September 30, 1997 -- -- 354 $28
Conversion of Shareholder loan to Series B Preferred Stock 131,889 $131,889 -- --
-------------------------------------------------------------
Balance, September 30, 1997 131,889 $131,889 1,152,576 $92,206
=== ==== ======= ======== ========= =======
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Additional
Paid in Accumulated Total
Capital Deficit Equity
---------------------------------------------------
<S> <C> <C>
Balances, December 31, 1996 3,321,207 (6,022,030) ($2,608,645)
Net loss for the nine months
ended September 30, 1997 -- (1,032,427) ($1,032,427)
Issued Common Stock
Jan. 1, 1997 to September 30, 1997 679 -- $707
Conversion of Shareholder loan to Series B Preferred Stock -- -- $131,889
---------------------------------------------------
Balance, September 30, 1997 3,321,886 (7,054,457) ($3,508,476)
=== ==== ========= ========== ===========
</TABLE>
(1) Restated for the 20-for-1 reverse stock split of May 8, 1997
<PAGE>
Note to Consolidated Financials
1. Summary of Significant Accounting Policies:
The accompanying Consolidated Financial Statements include the accounts of
Magnavision Corporation ("the Parent") and its wholly owned subsidiaries,
(collectively the "Company"), the most significant of which are Magnavision
Corporation (New Jersey), Magnavision Private Cable, Inc. and Magnavision
Wireless Cable, Inc. In the opinion of management, all adjustments necessary
for a fair presentation of financial statements have been included. Such
adjustments consisted only of normal reoccurring items. The consolidated
financial statements for the nine months ending September 30, 1997 and September
30, 1996 are unaudited and should be read in conjunction with the consolidated
annual financial statements and notes thereto for the year ending December 31,
1996.
2. Conversion of Debt to Redeemable Preferred Stock
On May 8, 1997, the Company agreed with its lenders to convert its senior
subordinated notes into redeemable preferred stock. Under terms thereof, the
Company's outstanding subordinated notes, aggregating approximately $4.1
million, together with accrued interest and detachable warrants, were
exchanged for $5 million of 8% redeemable preferred stock due December 31,
2002. In connection with the exchange, the lenders also funded the Company
$850,000. In addition, the note holders received warrants to purchase up to
58% of the common stock on a fully diluted basis at an exercise price of $2.00
per share after the Company effected a 1-for-20 reverse stock split, and have
the right, which they have exercised, to elect the majority of the Board of
Directors. This resulted in a change in control of the Company. The agreement
also requires the warrant holders to surrender up to 10% of their stock on a
fully diluted basis if, and when certain liquidity events occur. In addition,
the warrant holders have the right to require the Company to repurchase the
warrants under certain conditions. This option can only be exercised upon the
sale of an asset of the company. The cost of the put can not be determined at
this time since it is based upon the value of a sale of a significant asset
which cannot be assured. Also, one of the warrant holders has entered into a
management service agreement with the Company. Employment contracts were given
to members of the existing Board of Directors who are also members of the
Company's management team and will remain on the Board of Directors. Effective
May 9,1997 the Company effectuated a 1-for-20 reverse stock split and the
Company has agreed to purchase all fractional shares for cash. The outstanding
stock after the split was 1,152,575 shares. All prior periods have been
restated to give effect for the 1-for-20 reverse stock split.
3. Line of Credit
In September 1997 the Company and Access Capital, Inc. agreed to a $1,250,000
three year revolving line of credit to be used to expand the Company's private
cable business. As of the end of September the Company had borrowed $207,995
under the line of credit. Interest is payable current under the line of credit
and all outstandings are payable in September 2000. The line is secured with
the lender by a pledge of private cable contracts and other Company assets. In
addition the lender received warrants at an exercise price of $2.00 per share
to purchase approximately 4% of the Company's stock.
4. Equity Transaction
During the first quarter of 1997 a management warrant holder exercised
warrants to purchase 354 shares of common stock at $2.00 per share.
During the second quarter of 1997 the Company authorized 10,000,000 shares of
Preferred Stock. The Company also designated 5,000,000 shares of the
authorized amount as Series A Preferred Stock and 150,000 shares as Series B
Preferred Stock concurrent with the designation of the Preferred Stock. The
then senior debt loan balance along with the balance of the line was converted
to cumulative redeemable preferred stock. At closing, the Company received
cash of approximately $800,000 after expenses.
The Company also converted a shareholder loan into shares of Series B
Preferred Stock.
Holders of Series A Preferred Stock are entitled to receive, when and as
declared by the Company's Board of Directors, cash dividends cumulative at the
rate of 8% per share. Cumulative and unpaid dividends amounted to
approximately $156,667 at September 30, 1997.
The Company also authorized a 1-for-20 reverse split of the common stock such
that each outstanding share of common stock was effective May 9, 1997
converted into .05 shares of post split common stock and the par value of
common stock was changed from $.004 to $.08 per share.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
All of the Company's current revenues are derived from its private
cable operations. The wireless channel capacity operations have not commenced;
therefore, no revenue has been derived from the wireless operation.
The Registrant and its wholly owned subsidiary, Magnavision Private
Cable, Inc., began service in February 1992 to various colleges and senior
living centers facilities in the New York/New Jersey area utilizing direct
satellite technology. This involves the use of antennas which are installed at
the facility and then separately wired on a room-by-room basis. As of October
31, 1997, the Company has long-term agreements with 33 facilities under which
it is currently providing service to students and patients through outlets in
rooms and common areas at such institutional facilities. The Company is also
in the process of building three facilities which will be on line shortly. The
Company expects additional contracts to be signed in the near future and is in
the process of installing additional outlets which it intends to complete by
year end. The majority of the facilities using the Company's private cable
service are in New Jersey and New York, but the Company's market area
currently reaches from North Carolina to Massachusetts and west to Wisconsin.
Many colleges and senior living centers in the United States do not
have cable television, but the current trend is for these institutions to
install cable television. Management believes that this trend, coupled with
the fact that the Company can offer cable services normally not provided by
the traditional wired cable companies, should result in significant subscriber
expansion in the future. Each installation is comprised of a number of billing
outlets. A billing outlet represents a hookup for a television. The Company
collects revenue from each television on-line. For the most part, the colleges
are on a nine month billing cycle starting in September and ending in June of
the subsequent year. The nursing homes and hospitals are on a 12 month billing
cycle.
QUARTER ENDING SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDING SEPTEMBER 30,
1996
For the third quarter of 1997, gross profits decreased $80,864
over the third quarter of 1996. The decrease was primarily a result of
reduction of cost of goods sold related to installations in 1997 being less as
compared to 1996.
Total operating expenses increased $6,472 in the third quarter of
1997 when compared to same period in 1996. The primary reason for the increase
was an increase in salaries and depreciation and amortization expense.
Interest expense decreased $106,224 for the third quarter 1997 when
compared to the third quarter 1996. This decrease is attributable to the
conversion of the Senior Debt in May, 1997, which eliminated the interest
payment.
FIRST NINE MONTHS 1997 COMPARED TO FIRST NINE MONTHS 1996
Gross profits for the first nine months of 1997 increased
$239,841 over the same period in 1996. This increase is related to the new
outlets that went on line in September 1996, the new senior living centers and
the new college outlets added in September 1997 and cost of sales not
increasing over 1996, relating to installations in 1997 being less as compared
to 1996.
Total operating expenses for the first nine months of 1997 decreased
$100,100 when compared to the comparable period in 1996. The primary reason
was general and administrative expenses decreased $136,154 primarily due to a
reduction in consulting fees in 1997 offset by an increase in salaries of
$25,346.
Interest expense decreased $97,335 due to the conversion of debt
to Redeemable Preferred Stock in May, 1997. This was slightly offset by higher
loan balance in 1997 prior to the conversion.
The Extraordinary item was for the write off of the deferred
financing cost upon the extinguishment of the debt.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ending September 30, 1997, total cash increased by
$24,503. The net cash used in operating activities was $549,900 primarily due
to operating losses.
Cash used in investing activities in the nine months ending September 30, 1997
was $571,197, and was related to the purchase of cable equipment to increase
the outlet count of the private cable business.
Cash flow provided by financing activities in the nine months ending September
30, 1997 was $1,145,600 with $850,000 representing the proceeds received in
connection with the conversion from debt to Redeemable Preferred Stock and
$207,995 proceeeds from the Access Capital line of credit.
Since the inception of its cable service in 1992, the Company has experienced
operating losses and negative cash flow. In addition, at September 30, 1997
the Company had a shareholder deficit.
The Company's capital commitments at September 30, 1997 include capital to
construct facilities at the Department of Education of the Archdiocese of New
York and capital to place on line private cable systems with institutions it
has contracts with. The Company has not commenced operation of a wireless
system, and to do so will require substantial additional funding.
The Company plans to meet short term liquidity requirements with the funds
available from converting its senior debt to redeemable preferred stock
described below. As of September 1997 the Company and Access Capital, Inc.
have agreed to a three year revolving line of credit of up to $1,250,000 to be
used to continue expanding the private cable business. The lender received a
pledge of the private cable contracts and other assets of the Company and
warrants to purchase approximately 4% of the Company.
In addition, the Company is exploring various strategic alternatives relating
to the Channel Lease Agreement including potential strategic alliances, joint
ventures or a sale or other disposition of the Company's rights under such
agreement. Also, management believes that the continued expansion of the
Company's private cable operations should produce positive cash flows in the
future. However, no assurances can be given that the Company will be able to
borrow any such funds under the revolving credit line to expand the private
cable business, to successfully accomplish the strategic alternatives relating
to the Channel Lease Agreement, or expand the private cable operations to
produce positive cash flows, on a timely baise or at all.
In August 1995, the Company entered into a $5 million lending facility with a
bank and two Small Business Investment companies. On June 3, 1996, the Company
amended the agreement with its lenders and at December 31, 1996, the Company,
which had borrowed $4,062,932 under this agreement, had not met several
covenants under its senior debt agreement. As of March 31, 1997 the Company
did not make its quarterly interest payment of $122,095. In May 1997 the
Company and its lenders agreed to convert the entire amount of the lending
facility to redeemable preferred stock. The current loan balance, along with
the balance of the $5 million line was converted to redeemable preferred stock
which has a five year mandatory redemption. In connection with this
transaction, all covenants and defaults have been waived. At closing, the
Company had cash available to it of approximately $800,000 after expenses. The
Company issued redeemable preferred stock in the amount of $5 million, with an
8% preferred dividend, and issued additional warrants (New Warrants) to
purchase additional shares of common stock, representing approximately 20% of
the common stock at $2.00 per share after a 1-for-20 reverse stock split. The
exercise price of the original issued warrants, $.27 and $.38 per share, was
reduced to $.10 per share prior to such reverse stock split. The preferred
shareholders have warrants to purchase 58% of the Company's common stock and
have the right to elect the majority of the Board of Directors which they have
exercised.
Management believes that inflation and changing prices will have a
minimal effect on operations.
The above should be read in conjunction with the Company's financial
statements included elsewhere herein.
<PAGE>
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward- looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements of the Company, or industry results
expressed or implied by such forward-looking statements. Such factors include
among others, general economic and business conditions, which will, among
other things, impact demand for the Company's services; changes in public
taste, trends and demographic changes; competition from other SMATV and/or
cable companies, which may affect the Company's ability to generate revenues;
political, social and economic conditions and laws, rules and regulations,
which may affect the Company's results of operations; timely completion of
construction projects for new systems; changes in business strategy or
development plans; the significant indebtedness of the Company; quality of
management; availability of qualified personnel; changes in, or the failure to
comply with, government regulations; and other factors.
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the Quarter
ending September 1, 1997
Pursuant to the Requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
/s/ Nicholas Mastrorilli, Sr.
Date October 14, 1997 -----------------------------
---------------- Nicholas Mastrorilli, Sr.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 188,799
<SECURITIES> 0
<RECEIVABLES> 279,248
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 520,871
<PP&E> 1,941,434
<DEPRECIATION> 658,402
<TOTAL-ASSETS> 2,482,219
<CURRENT-LIABILITIES> 596,798
<BONDS> 0
5,000,000
131,889
<COMMON> (3,604,365)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,478,919
<SALES> 1,078,901
<TOTAL-REVENUES> 1,078,901
<CGS> 362,619
<TOTAL-COSTS> 716,282
<OTHER-EXPENSES> 1,309,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,953
<INCOME-PRETAX> (352,594)
<INCOME-TAX> 3,989
<INCOME-CONTINUING> (756,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 275,844
<CHANGES> 0
<NET-INCOME> (1,032,427)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
