<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 March 31, 1998
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: (732) 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 [ ] No [X]
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 May 20, 1998
was 1,154,390.
Documents Incorporated by Reference: None.
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1998 and December 31, 1997
Consolidated Statement of Operations for the first quarters
ended March 31, 1998 and March 31, 1997.
Consolidated Statements of Stockholders' Deficiency For The
Period December 31, 1997 to March 31, 1998.
Consolidated Statements of Cash Flows for the first quarters
ended March 31, 1998 and March 31, 1997.
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. Other Information
<PAGE>
ITEM 1. FINANCIAL INFORMATION
MAGNAVISION CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1998 1997
- ------ ---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash 100,064 141,546
Trade Accounts and Other Receivables 241,023 236,375
Prepaid Expenses 8,516 8,516
-------------------------------
Total Current Assets 349,603 386,437
-------------------------------
PROPERTY AND EQUIPMENT
Property and Equipment at Cost 2,005,759 1,944,558
Less: Accumulated Depreciation (840,675) (748,375)
-------------------------------
Net Property and Equipment 1,165,084 1,196,183
OTHER ASSETS
Shareholder Loans Receivable 43,810 43,810
Prepaid lease expense 623,942 650,684
Deferred financing cost, net of accumulated amortization 127,575 145,496
Deposits 21,970 4,553
-------------------------------
TOTAL ASSETS 2,331,984 2,427,163
===============================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
- -------------------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses 438,857 443,717
Deferred Revenues 221,154 214,490
Current Portion of Long-Term Debt 4,225 4,225
Income Taxes Payable 741 741
Line of Credit 485,005 405,295
-------------------------------
Total Current Liabilities 1,149,982 1,068,468
LONG-TERM LIABILITIES
Term Loan 105,468 105,468
Security Deposits Payable 152,065 152,065
Long-Term Debt 5,769 6,041
Commitments and contingencies
Series A Preferred Stock 9,850,000
shares authorized; issued and outstanding, 5,000,000 4,521,605 4,498,456
shares
SHAREHOLDERS' DEFICIENCY
Series B Preferred Stock, 150,000 shares 131,889 131,889
authorized; issued and outstanding, 131,889 shares
Common Stock, $0.08 par value - 10,000,000 shares
authorized; issued and outstanding, 1,154,390 shares
in March 31,1998 and 1,152,510 shares December 31, 1997 92,350 92,200
Additional Paid-In Capital 3,880,601 3,876,991
Accumulated Deficit (7,707,745) (7,504,415)
-------------------------------
Total Shareholder's Deficiency (3,602,905) (3,403,335)
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 2,331,984 2,427,163
===============================
</TABLE>
See accompanying notes to unaudited consolidated financial statements. F-2
<PAGE>
MAGNAVISION CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31
1998 1997
---- ----
<S> <C> <C>
REVENUES
Gross Revenues 534,090 406,658
Cost of Sales 219,740 129,118
-------- --------
GROSS PROFIT 314,350 277,540
OPERATING EXPENSES
Salaries 139,375 157,172
Depreciation 92,300 45,173
General and Administrative Expenses 227,460 181,328
-------- --------
TOTAL OPERATING EXPENSES 459,135 383,673
OPERATING LOSS (144,785) (106,133)
OTHER INCOME (expense)
Interest expense (38,763) (139,944)
Interest Income 7,532 7,614
-------- --------
Total other income (expense) (31,231) (132,330)
LOSS BEFORE PROVISION FOR INCOME TAXES (176,016) (238,463)
PROVISION FOR INCOME TAX 4,166 3,889
-------- --------
NET LOSS (180,182) (242,352)
-------- --------
Preferred Stockholders Dividend Requirement 100,000 --
-------- --------
Net loss to Common Stockholders (280,182) (242,352)
-------- --------
Net Loss per Common Share Basic:
Loss before extraordinary item (0.24) (0.21)
Net loss (0.24) (0.21)
Weighted Average Shares used to Compute net loss per share:
Basic 1,154,244 1,152,387
</TABLE>
See accompanying notes to unaudited consolidated financial statements. F-3
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the period December 31, 1997 to March 31,1998
<TABLE>
<CAPTION>
Series B Common Common Additional
Preferred Stock Stock Stock Paid in Accumulated Treasury Total
Shares Amount Shares(1) Amount Capital Deficit Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,1997 131,889 131,889 1,152,510 92,200 3,876,991 (7,504,415) -- (3,403,335)
Common Stock Issued
Jan 1,1997 to March 31,1998 -- -- 1,880 150 3,610 -- -- 3,760
Accretion of redeemable preferred stock (23,148) (23,148)
Net loss (180,182) (180,182)
---------------------------------------------------------------------------------------
Balance, March 31, 1998 131,889 131,889 1,154,390 92,350 3,880,601 (7,684,597) -- (3,602,905)
</TABLE>
See accompanying notes to unaudited consolidated financial statements. F-4
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31
1998 1997
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (180,182) (242,352)
Adjustments to Reconcile Net Loss to Net Cash
Depreciation 92,300 45,173
Amortization of deferred financing cost 17,921 17,601
Amortization of channel lease prepayments 26,742 26,742
Changes in Assets and Liabilities:
(Increase) in Trade Accounts and
Other Receivables (4,648) (23,583)
Increase in Deposits (17,417) --
(Decrease) Increase in Accounts Payable and
Accrued Expenses (4,859) 125,942
Increase (Decrease) in Security Deposits Payable -- 2,289
Deferred Charges -- 15,423
Increase (Decrease) in Deferred Revenues 6,664 --
---------------------------
Net cash used in operating activities (63,479) (32,765)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) loan to shareholders -- (621)
Purchase of property and equipment (61,201) (49,238)
---------------------------
Net cash used in investing activities (61,201) (49,859)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds of notes payable - Senior Debt -- 9,141
Payments of Long term debt (272) (942)
Decrease in Due to Shareholders -- (8,000)
Proceeds from Issuance of Common Stock 3,760 707
Proceeds from Issuance Access Capital Line of Credit 79,710 --
---------------------------
Net cash (used in) provided by financing activities 83,198 906
Net increase (decrease) in cash and cash equivalents (41,482) (81,718)
------- -------
Cash and cash equivalents beginning of period 141,546 164,296
Cash and cash equivalents end of period 100,064 82,578
</TABLE>
See accompanying notes to unaudited consolidated financial statements. F-5
<PAGE>
Notes to Unaudited Consolidated Financial statements
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 March 31, 1998 and March 31, 1997 are
unaudited and should be read in conjunction with the consolidated annual
financial statements and notes thereto for the year ending December 31, 1997.
2. 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 March 31, 1998 the Company had borrowed $485,005 under the
line of credit. Interest is payable currently under the line of credit at prime
rate plus five and one-half percent (the contract rate) and all outstanding
amounts are payable in September 2000. The line is secured with the lender by a
pledge of private cable contracts and all other Company assets. In addition the
lender received 138,536 warrants at an exercise price of $2.00 per share to
purchase approximately 4% of the Company's stock on a fully diluted basis. The
warrants contain a put and call option in the event that the Company sells a
significant asset. The put option requires the Company to purchase a percentage
of the lenders' warrants as required by a formula outlined in the amended
agreement. This option can only be exercised upon the sale of a significant
asset of the Company or change of control. Conversely, the call option allows
the Company to purchase all the outstanding warrants at a price set by the
formula stated above. The cost of either the put or call option 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.
Subsequent to the fiscal year ended December 31, 1997, the Company had not met
certain non-monetary working capital covenants under the Agreement and the
lender instituted the default interest rate, such rate is two and one-half
percent over the contract rate. As a result, the outstanding balance has been
classified as a current liability in the accompanying balance sheet. The lender
has continued to lend funds under the Agreement. The Company requested a waiver
thereof together with a separate working capital advance.
By letter dated May 8, 1998 Access Capital proposed a restructuring of the
financial covenants, an increase in the line of credit to $3 million dollars and
an increase in its warrant ownership of the Company. The Company is currently
reviewing such proposal and discussions with the lender are expected to commence
shortly. There is no assurance that such restructuring will be effected on terms
satisfactory to the Company, or at all.
3. Equity Transaction
During the first quarter of 1998 warrant holders exercised warrants to purchase
1,880 shares of common stock at $2.00 per share.
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 March 31,
1998, the Company has long-term agreements with 38 facilities under which it is
currently providing service to students and patients through outlets in rooms
and common areas at such institutional facilities. In May 1998, the Company
entered into an Agreement with Fordham University pursuant to which the Company
agreed to service approximately 3,000 students with a data delivery system using
the existing cable television distribution system located at certain facilities.
This service will commence in the fall of 1998. 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
<PAGE>
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.
First Quarter 1998 Compared to First Quarter 1997
For the first quarter 1998, gross profits increased $36,810 over the
first quarter of 1997. The increase was primarily a result of the outlets that
went on line in September of 1997.
Total operating expenses increased $75,462 in the first quarter of 1998
when compared to the first quarter 1997. General and Administrative expenses and
depreciation accounted for the increase. Depreciation represents the increased
property and equipment and the general and administrative expense represents
additional consulting fees.
Interest expense decreased $101,181 in the first quarter of 1998 when
compared to the first quarter 1997. This decrease is due to the exchange of
senior debt to redeemable preferred stock in 1997 offset slightly by the
interest for the line of credit in 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ending March 31, 1998, total cash decreased by $41,482.
The cash used in operating activities decreased by $63,479 due to operating
losses and increased required deposits.
Cash used in investing activities was $61,201 and was used to purchase
cable television equipment to increase the outlet count.
Cash flow from financing activities was $83,198 substantially
representing the proceeds of the line of credit.
For the quarter ending March 31, 1997, total cash decreased by $81,718.
The net cash used in operating activities decreased by $32,765 primarily due to
operating losses, and an increase in accounts payable and accrued expenses.
Cash used in investing activities in the quarter ended March 31, 1997
was $49,859, and related to the purchase of cable equipment to increase the
outlet count.
Cash flow provided by financing activities increased $906 for the
quarter.
Since the inception of its cable service in 1992, the Company has
experienced operating losses and negative cash flow. In addition, at March 31,
1998 the Company had a shareholder deficit.
The Company's capital commitments at March 31, 1998 include capital to
construct facilities at the Department of Education of the Archdiocese of New
York (the "Archdiocese") and capital to place on line private cable systems with
institutions it has contracts with. The Company also has signed a long term
agreement with Fordham University to supply a data system for the University. In
connection with this contract the school has issued notes for the purchase of
part of this system. The Company intends to borrow the funds under its proposed
restructured line of credit to complete the project. The Company has not
commenced operation of a wireless system, and to do so will require substantial
additional funding.
In addition, the Company is exploring various strategic alternatives
relating to it's Channel Lease Agreement with the Archdiocese 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, on a timely basis or at all.
<PAGE>
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 March 31, 1998, the Company had borrowed
approximately $485,005 under the line of credit. Interest is payable currently
at the default rate of prime plus 8% and is current. The line is secured by a
pledge of private cable contracts and all other Company assets. The lender
received warrants at an exercise price of $2.00 per share to purchase
approximately 4% of the Company's stock on a fully diluted basis.
At March 31, 1998, the Company was not in compliance with the working
capital and other covenants under the line of credit and such defaults continue
through the date hereof. In connection therewith, the Company requested a waiver
thereof together with a separate working capital advance.
By letter dated May 8, 1998 Access Capital proposed a restructuring of
the financial covenants, an increase in the line of credit to $3 million dollars
and an increase in its warrant ownership of the Company. The Company is
currently reviewing such proposal and discussions with the lender are expected
to commence shortly. There is no assurance that such restructuring will be
effected on terms satisfactory to the Company, or at all.
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,
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/ Jeffrey Haertlein
Date June 18, 1998 ------------------------
Jeffrey Haertlein
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 100,064
<SECURITIES> 0
<RECEIVABLES> 241,023
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 349,603
<PP&E> 2,005,759
<DEPRECIATION> 840,675
<TOTAL-ASSETS> 2,331,984
<CURRENT-LIABILITIES> 1,149,982
<BONDS> 0
4,521,605
131,989
<COMMON> 3,470,916
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,331,984
<SALES> 534,090
<TOTAL-REVENUES> 534,090
<CGS> 219,740
<TOTAL-COSTS> 219,740
<OTHER-EXPENSES> 459,135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,763
<INCOME-PRETAX> (176,016)
<INCOME-TAX> 4,166
<INCOME-CONTINUING> (180,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,182)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
