<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 June 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 July 22, 1997
was 1,152,575.
Documents Incorporated by Reference: None.
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1997 and December 31,
1996
Consolidated Statement of Income for the six months ended June
30, 1997 and June 30, 1996 and three months then ended.
Consolidated Statements of Stockholders' Equity (Deficiency)
For The Period December 31, 1996 to June 30, 1997.
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and June 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>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
MAGNAVISION CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1997 1996
--------------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $508,023 $164,296
Trade Accounts and Other Receivables, Net of Allowance for doubtful accounts 125,800 156,252
Prepaid Expenses 7,059 8,059
Shareholder Loans Receivable 43,678 44,161
---------- ----------
Total Current Assets 684,560 372,768
---------- ----------
PROPERTY AND EQUIPMENT
Property and Equipment at Cost 1,532,705 1,269,887
Less: Accumulated Depreciation (596,180) (501,178)
---------- ----------
Net Property and Equipment 936,525 768,709
OTHER ASSETS
Prepaid lease expense 704,168 757,652
Deferred financing cost, Net of Accumulated Amortization -- 293,445
Deposits 4,420 4,420
---------- ----------
TOTAL ASSETS 2,329,673 2,196,994
========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses 323,777 284,094
Due to Shareholders -- 139,889
Deferred Revenues 83,192 175,348
Current Portion of Long-Term Debt 3,686 3,686
Income Taxes Payable 742 741
Term Loan 105,468 --
Notes Payable - Senior Debt -- 4,062,932
---------- ----------
Total Current Liabilities 516,865 4,666,690
LONG-TERM LIABILITIES
Accounts Payable and Accrued Expenses -- 2,000
Security Deposits Payable 140,015 126,386
Long-Term Debt (Note 5) 8,821 10,563
---------- ----------
Total Long - Term Liabilities 148,836 138,949
---------- ----------
Total Liabilities 665,701 4,805,639
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) EQUITY
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;
issued and outstanding, 1,152,575 shares
in June 30,1997 and 1,152,222 shares December 31, 1996 92,206 92,178
Additional Paid-In Capital 3,321,886 3,321,207
Accumulated Deficit (6,882,009) (6,022,030)
---------- ----------
Total Shareholder's Equity (Deficiency) (3,336,028) (2,608,645)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY $2,329,673 $2,196,994
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MAGNAVISION CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ending June 30 Three months ending June 30
------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Gross Revenues $ 727,461 $ 473,639 $ 320,803 $ 210,769
Cost of Sales 248,804 153,959 119,686 69,585
----------- ----------- ----------- ---------
GROSS PROFIT 478,657 319,680 201,117 141,184
OPERATING EXPENSES
Salaries 308,774 290,788 151,602 149,390
Depreciation and Amortization Expense 112,604 107,309 49,830 53,665
General and Administrative Expenses 471,070 600,923 289,742 364,129
----------- ----------- ----------- ---------
TOTAL OPERATING EXPENSES, BEFORE EXTRAORDINARY ITEM 892,448 999,020 491,174 567,184
OPERATING LOSS (413,791) (679,340) (290,057) (426,000)
OTHER INCOME (expense)
Interest expense (181,846) (172,957) (59,503) (86,951)
Interest Income 15,392 18,523 7,778 6,522
----------- ----------- ----------- ---------
Total other income (expense) (166,454) (154,434) (51,725) (80,429)
LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (580,245) (833,774) (341,782) (506,429)
PROVISION FOR INCOME TAX 3,890 714 0 0
----------- ----------- ----------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (584,135) (834,488) (341,782) (506,429)
----------- ----------- ----------- ---------
EXTRAORDINARY ITEM - EXINGUISHMENT OF DEBT 275,844 -- 275,844 --
----------- ----------- ----------- ---------
NET LOSS ($ 859,979) ($ 834,488) ($ 617,626) ($ 506,429)
----------- ----------- ----------- ---------
Primary earns per share:
Loss before extraordinary item ($0.56) ($0.73) ($0.35) ($0.44)
Extraordinary item ($0.24) -- ($0.24) --
Net loss ($0.80) ($0.73) ($0.59) ($0.44)
=========== =========== =========== =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,152,482 1,143,144 1,152,575 1,147,155
=========== =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ending June 30
-------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES (unaudited) (unaudited)
<S> <C> <C>
Net Loss ($ 859,979) ($ 834,488)
Adjustments to Reconcile Net Loss to Net Cash
Extraordinary item 275,844
Depreciation and Amortization 112,604 107,309
Amortization of channel lease prepayments 53,484 53,488
Changes in Assets and Liabilities:
(Increase) Decrease in Trade Accounts and
Other Receivables 30,452 (615)
Decrease in prepaid expenses 1,000 7,262
(Decrease) Increase in Accounts Payable and
Accrued Expenses 37,683 25,354
Increase (Decrease) in Security Deposits Payable 13,629 68,443
Decrease Income Taxes Payable -- 23
Increase (Decrease) in Deferred Revenues (92,156) 39,160
----------- -----------
Net cash used in operating activities (427,439) (534,064)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) loan to shareholders 483 52
Purchase property and equipment (262,818) (127,239)
----------- -----------
Net cash used in investing actvities (262,335) (127,187)
CASH FLOW FROM FINANCING ACTIVITIES
Notes Payable - Senior Debt (4,062,932) 500,103
Payments of Long-Term Debt (1,742) (18,853)
Proceeds from Issuance Term loan 105,468 --
Decrease in Due to Shareholders (139,889) (5,000)
Proceeds from Issuance of Prefered Stock 5,131,889 --
Proceeds from Issuance of Common Stock 707 800
----------- -----------
Net cash used in provided by financing activities 1,033,501 477,050
Net increase (decrease) in cash and cash equivalents 343,727 (184,201)
----------- -----------
Cash and cash equivalents beginning of period 164,296 235,327
Cash and cash equivalents end of period 508,023 51,126
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS EQUITY
For the period December 31, 1996 to June 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 three months
ended June 30,1997
Issued Common Stock
Jan 1,1997 to June 30,1997 354.00 $28
Conversion of Shareholder loan to Series B Preferred Stock 131,889 $131,889
--------------------------------------------------------
Balance, June 30, 1997 131,889 131,889 1,152,576 $92,206
(1)Restated for the 1 for 20 reverse stock split of May 9, 1997
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Additional
Paid in Accumulated Total
Capital Deficit Equity
<S> <C> <C> <C> <C>
Balances, December 31,1996 3,321,207 (6,022,030) ($2,608,645)
Net loss for the three months
ended June 30,1997 (859,979) ($859,979)
Issued Common Stock
Jan 1,1997 to June 30,1997 679 $707
Conversion of Shareholder loan to Series B Preferred Stock $131,889
--------------------------------------------------------
Balance, June 30, 1997 3,321,886 (6,882,009) ($3,336,028)
</TABLE>
(1)Restated for the 1 for 20 reverse stock split of May 9, 1997
See accompanying notes to consolidated financial statements.
<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 quarters ending June 30, 1997 and June 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
At December 31, 1996, the Company was in default of certain provisions of
certain covenants of its senior debt agreement, and at the end of the first
quarter of 1997, had not made its required interest payment on such debt.
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 the remaining
balance on the existing line. 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, as 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. Equity Transaction
During the first quarter of 1997 a management warrant holder exercised warrants
to purchase 679 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
$56,667 at June 30, 1997.
The Company also authorized a 1-for-20 reverse split of the common stock such
that each outstanding share of common stock shall be 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 nursing home
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 July 15, 1997,
the Company has long-term agreements with 26 facilities under which it is
currently providing service to students and patients through approximately 9,700
outlets in rooms and common areas at such institutional facilities. The Company
recently entered into contracts with an additional seven institutions
representing approximately 2,300 outlets and expects additional contracts to be
signed in the near future. The Company intends to complete installation at the
new institutions so as to go on line before September of 1997. 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 nursing homes 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 JUNE 30, 1997 COMPARED TO QUARTER ENDING JUNE 30, 1996
For the second quarter of 1997, gross profit increased $59,933 over the second
quarter of 1996. The increase was primarily a result of an inclusion of 3,300
outlets that went on line in September of 1996.
Total operating expenses decreased $76,010 in the second quarter of
1997 when compared to same period 1996. The primary reason for the decrease was
a decrease in General and Administrative expenses of $74,366.
Interest expense decreased $27,448 for the second quarter 1997 when
compared to the second quarter 1996. This decrease is attributable to the
conversion of the Senior Debt in May, 1997, which eliminated the interest
payment.
The extraordinary item was for the write off of the deferred financing cost upon
the extinguishment of the debt.
FIRST SIX MONTHS 1997 COMPARED TO FIRST SIX MONTHS 1996
Gross profits for the first six months of 1997 increased $158,976.
This increase is related to the new outlets that went on line in September 1996.
Total operating expenses for the first six months of 1997 decreased
$106,572 when compared to the comparable period in 1996. The primary reason was
general and administrative expenses decreased $129,853 primarily due to a
reduction in consulting fees in 1997.
Total operating expense decreased $8,889 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 six months ending June 30, 1997, total cash increased by $343,727. The
net cash used in operating activities was $427,439 primarily due to operating
losses.
Cash used in investing activities in the six months ending June 30, 1997 was
$262,335, and related to the purchase of cable equipment to increase the outlet
count of the private cable business.
Cash flow provided by financing activities increased $1,033,501 with $850,000
representing the proceeds received in connection with the conversion from debt
to Redeemable Preferred Stock.
Since the inception of its cable service in 1992, the Company has experienced
operating losses and negative cash flow. In addition, at June 30, 1997 the
Company had a shareholder deficit.
The Company's capital commitments at June 30, 1997 include capital to construct
facilities at the Department of Education of the Archdiocese of New York and
capital to expand the number of institutions the Company is currently servicing
in its private cable business. The Company has not commenced operation of a
wireless system, and will require substantial additional funding in order to do
so.
The Company plans to meet short liquidity requirements with the funds available
from converting its senior debt to redeemable preferred stock described below
and a line of credit. As of August 8, 1997, the Company and a lender have agreed
in principle to a three year revolving line of credit of up to $1,250,000 to be
used to continue expanding the institutional business. The lender will require
the Company to, among other things, pledge its private cable contracts and will
receive warrants equivalent to approximately 4% of the issued and outstanding
shares of common stock of the Company on a fully diluted basis.
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 successfully
accomplish the strategic alternatives relating to the Channel Lease Agreement,
or expand the private cable operations to produce positive cash flows.
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. 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 it effectuates a 1-for-20 reverse
stock split. The exercise price of the current 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.
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,
<PAGE>
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
March 31, 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.
Date August 14, 1997 ------------------------
------------ Nicholas Mastrorilli, Sr.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 508,023
<SECURITIES> 0
<RECEIVABLES> 125,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 684,560
<PP&E> 1,532,705
<DEPRECIATION> 596,180
<TOTAL-ASSETS> 2,329,673
<CURRENT-LIABILITIES> 516,865
<BONDS> 0
5,000,000
731,889
<COMMON> 3,467,917
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,329,673
<SALES> 0
<TOTAL-REVENUES> 727,461
<CGS> 0
<TOTAL-COSTS> 248,804
<OTHER-EXPENSES> 892,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,846
<INCOME-PRETAX> 580,245
<INCOME-TAX> 3,890
<INCOME-CONTINUING> 584,135
<DISCONTINUED> 0
<EXTRAORDINARY> 275,844
<CHANGES> 0
<NET-INCOME> (859,979)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
