<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACTS OF 1934
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 [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 April 20, 1999
was 1,154,390.
Documents Incorporated by Reference: None.
<PAGE>
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - Three months ended March 31,
1999 and March 31, 1998.
Condensed Consolidated Statements of Stockholders' Deficiency - Period December
31, 1998 to March 31, 1999.
Condensed Consolidated Statements of Cash Flows - Three months ended March 31,
1999 and March 31, 1998.
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. Other Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
None
<PAGE>
ITEM 1. FINANCIAL INFORMATION
MAGNAVISION CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash 162,894 227,091
Trade Accounts and Other Receivables 313,401 276,203
Notes receivable from customer 467,000 467,000
Shareholder Loans Receivable 38,707 38,707
Prepaid Expenses 1,986 1,986
---------- ----------
Total Current Assets 983,988 1,010,987
PROPERTY AND EQUIPMENT
Property and Equipment at Cost 3,111,960 3,077,185
Less: Accumulated Depreciation (1,254,047) (1,122,022)
---------- ----------
Net Property and Equipment 1,857,913 1,955,163
OTHER ASSETS
Notes receivable from customer, net of current portion 441,271 441,271
Prepaid lease expense 516,974 543,716
Other assets 30,978 --
Deposits 2,340 2,339
---------- ----------
TOTAL ASSETS 3,833,464 3,953,476
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts Payable 172,665 212,390
Accrued Expenses 130,855 169,384
Deferred Revenues 369,691 354,596
Current Portion of Long-Term Debt 762,367 640,642
---------- ----------
Total Current Liabilities 1,435,578 1,377,012
Security Deposits 172,303 172,303
Long-Term Debt, net of current portion 1,704,000 1,899,468
Commitments and contingencies
Series A Preferred Stock, $1 par value, 9,850,000
shares authorized; issued and outstanding, 5,000,000
shares, net of unamortized discount 4,614,198 4,591,049
SHAREHOLDERS' DEFICIENCY
Series B Preferred Stock, $1 par value , 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
at March 31,1999 and December 31, 1998 92,350 92,350
Additional Paid-In Capital 3,880,601 3,880,601
Accumulated Deficit (8,197,455) (8,191,196)
---------- ----------
Total Shareholder's Deficiency (4,092,615) (4,086,356)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 3,833,464 3,953,476
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-2
<PAGE>
MAGNAVISION CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31
1999 1998
---- ----
<S> <C> <C>
REVENUES
Gross Revenues 875,955 534,090
Cost of Sales 285,718 219,740
---------- ----------
GROSS PROFIT 590,237 314,350
OPERATING EXPENSES
Salaries 193,873 139,375
Depreciation 132,026 92,300
General and Administrative Expenses 185,522 227,460
---------- ----------
TOTAL OPERATING EXPENSES 511,421 459,135
OPERATING INCOME (LOSS) 78,816 (144,785)
OTHER INCOME (expense)
Interest expense (60,957) (38,763)
Interest Income 4,000 7,533
---------- ----------
Total other income (expense) (56,957) (31,230)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 21,859 (176,015)
PROVISION FOR INCOME TAXES 4,969 4,166
---------- ----------
NET INCOME (LOSS) 16,890 (180,181)
---------- ----------
Preferred Stockholders Dividend Requirement 100,000 100,000
Accretion of preferred stock 23,149 23,149
---------- ----------
Net loss to Common Stockholders (106,259) (303,330)
---------- ----------
Net Loss per Common Share Basic: ($0.09) ($0.26)
Weighted Average Shares use to Computing net loss per share:
Basic 1,154,390 1,154,244
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-3
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the period December 31, 1998 to March 31,1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Common Common Additional
Preferred Stock Stock Stock Paid in Accumulated Total
Shares Amount Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,1998 131,889 131,889 1,154,390 92,350 3,880,601 (8,191,196) (4,086,356)
Accretion of Preferred Stock (23,149) (23,149)
Net Income 16,890 16,890
------- ------- --------- ------ --------- ---------- ----------
Balance, March 31, 1999 131,889 131,889 1,154,390 92,350 3,880,601 (8,197,455) (4,092,615)
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-4
<PAGE>
MAGNAVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) 16,890 (180,182)
Adjustments to Reconcile Net Income (Loss) to Net Cash provided by (used in) operating activities
Depreciation 132,026 92,300
Amortization of deferred financing cost -- 17,921
Amortization of channel lease prepayments 26,742 26,742
Changes in Assets and Liabilities:
Increase in Trade Accounts and
Other Receivables (37,198) (4,648)
Increase in Deposits (1) (17,417)
Decrease in Accounts Payable (39,725) (4,859)
Decrease in Accrued expenses (38,530) --
Increase in other assets (30,978) --
Increase in Deferred Charges -- --
Increase in Deferred Revenues 15,095 6,664
------- -------
Net cash provided by (used in) operating activities 44,321 (63,479)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (34,775) (61,201)
------- -------
Net cash used in investing activities (34,775) (61,201)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of Notes payable - Senior Debt -- --
Payments of Long term debt (73,743) (272)
Decrease in Due to Shareholders -- --
Proceeds from Issuance of Common Stock -- 3,760
Proceeds from Issuance Access Capital Line of Credit -- 79,710
------- -------
Net cash (used in)provided by financing activities (73,743) 83,198
Net decrease in cash (64,197) (41,482)
------- -------
Cash beginning of period 227,091 141,546
Cash end of period 162,894 100,064
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-5
<PAGE>
NOTES TO MARCH 31, 1999 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
1. Summary of Significant Accounting Policies:
- -----------------------------------------------
The accompanying condensed 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 recurring items. The condensed
consolidated financial statements for the quarters ending March 31, 1999 and
March 31, 1998 are unaudited and should be read in conjunction with the
Company's consolidated annual financial statements and notes thereto for the
year ending December 31, 1998.
2. Long-Term Debt:
- -------------------
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. Interest was payable currently under the line of credit at prime
rate plus five and one-half percent (the contract rate) and all outstanding
amounts were 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. The agreement with Access Capital,
Inc. has been terminated, however the warrant and their related terms remain
outstanding.
Subsequent to 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. The lender had continued to lend funds under the
Agreement. The Company requested a waiver thereof together with a separate
working capital advance.
On July 3, 1998 the Company and BSB Bank and Trust Company entered into an
agreement to refinance the Company's existing credit line and supply working
capital. Magnavision borrowed the sum of $2.5 million dollars, which bears
interest at a fixed rate of 10% per annum and has a 5-year term. For the next 12
months, monthly installments of interest, plus 9 consecutive monthly payments of
$24,000 of principal, payable in arrears, will be made in accordance with the
agreed upon schedule starting October 1998 and one principal payment of $400,000
due June 15, 1999.
<PAGE>
The loan was utilized to refinance existing debt and the remaining approximately
$1.9 million will be used to finance the completion of outstanding contracts for
private cable television service at various locations and to complete the
Fordham University Internet distribution system currently under contract. BSB
Bank & Trust Company also granted the Company a $500,000 line of credit, to be
used for future installations of private cable systems and general corporate
purposes. This line of credit will be at an interest rate of prime plus 1.5%
payable monthly and will mature in 2 years. In connection with the above
transaction BSB Bank & Trust Company received 146,176 warrants to purchase
approximately 4% of Magnavision's issued and outstanding capital stock on a
fully diluted basis at an exercise price of $2.00 per share.
3. NON-QUALIFIED STOCK OPTION PLAN:
- ------------------------------------
During the first quarter of 1999 Magnavision adopted a non-qualified stock
option plan (the "Plan"). Under the Plan options to purchase an aggregate of not
more than 349,986 shares of common stock may be granted from time to time to key
employees, including officers, advisors, and independent consultants or to any
other persons. Under the Exchange Agreement and when the plan was complete
options were also to be granted to employees under the Plan. Also under a letter
agreement the President and C.E.O. was to receive 150,000 options at an exercise
price of $1.00. As of January 19, 1999, the compensation committee awarded or
caused to be issued 223,974 options including, 150,000 options to Robert
Hoffman, President and C.E.O., 43,974 options issued pursuant to the Company's
obligation at an exercise price of $2.00 per share and awarded 30,000 options to
various employees at an exercise price of $2.00 per option.
The Company accounts for stock options issued to employees under A.P.B. No. 25
"Accounting for Stock Issued to Employee," and permitted by FAS# 123 under which
no compensation cost has been recognized for the options granted as they were
issued above market value.
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, which now includes a service contract for other services. 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,
1999, the Company has long-term agreements with 41 facilities under which it is
currently providing service to students and patients through outlets in rooms
and common areas at such institutional facilities.
<PAGE>
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.
In May 1998, the Company entered into an Agreement with Fordham University
pursuant to which the Company agreed to service over 3,000 students with a data
delivery system using the existing cable television distribution system located
at certain facilities. The system was completed in the fall of 1998.
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 1999 Compared to First Quarter 1998
- -------------------------------------------------
For the first quarter 1999, gross profits increased $275,887 over the first
quarter of 1998. The increase was primarily a result of revenue from the Fordham
University service contract and the new television outlets that went on line in
September 1998.
Total operating expenses increased $52,286 in the first quarter of 1999 when
compared to the first quarter 1998, salaries and depreciation accounted for the
increase, which was somewhat, offset by General and Administrative Expense
reduction due to reduced consulting fees. Depreciation represents the
depreciation for increased property, equipment and the salaries represents the
addition of the president's salary.
Interest expense increased $22,194 in the first quarter of 1999 when compared to
the first quarter of 1998. This increase is due to the increase of long-term
debt for the BSB Bank and Trust Company's loan.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the quarter ending March 31, 1999, total cash decreased by $64,197. The cash
provided by operating activities was $44,321 due to operating income offset by
increased trade accounts, other receivables, and other assets.
Cash investing activities was $34,775 and was used to purchase cable television
equipment and other equipment.
Cash flows used in financing activities was $73,743 representing the payments on
the long-term debt.
<PAGE>
For the quarter ending March 31, 1998 total cash decreased by $41,482. The cash
used in operating activities was $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 provided by financing activities was $83,198 substantially
representing the proceeds of the line of credit.
Since the inception of its cable service in 1992, the Company has experienced
operating losses and negative cash flows. In addition, at March 31, 1999 the
Company had a shareholder deficit and a working capital deficiency.
The Company's capital commitments at March 31, 1999 include capital to construct
Facilities at the Department of Education of the Archdiocese of New York (the
"Archdiocese") and capital to place private cable systems on line at
institutions the company has contracts with. The Company has not commenced
operation of a wireless system, and will require substantial additional funding
to do so.
The Company will use its term loan with BSB Bank & Trust Company to meet its
short-term capital requirements. The Company has a loan payment due in the
second quarter of 1999, which it plans to payoff with a note receivable from
customer.
The Company is exploring various strategic alternatives relating to its 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 successfully
accomplish any strategic alternative related to the Channel Lease Agreement, or
expand the private cable operations to produce positive cash flows, on a timely
basis or at all.
NON-QUALIFIED STOCK OPTION PLAN
- -------------------------------
During the first quarter of 1999 Magnavision adopted a non-qualified stock
option plan (the "Plan"). Under the Plan options to purchase an aggregate of not
more than 349,986 shares of common stock may be granted from time to time to key
employees, including officers, advisors, and independent consultants or to any
other persons. Under the Exchange Agreement and when the plan was complete
options were also to be granted to employees under the Plan. Also under a letter
agreement the President and C.E.O. was to receive 150,000 options at an exercise
price of $1.00. As of January 19, 1999, the compensation committee awarded or
caused to be issued 223,974 options including, 150,000 options to Robert
Hoffman, President and C.E.O., 43,974 options issued pursuant to the Company's
obligation at an exercise price of $2.00 per share and awarded 30,000 options to
various employees at an exercise price of $2.00 per option.
<PAGE>
The Company accounts for stock options issued to employees under A.P.B. No. 25
"Accounting for Stock Issued to Employee," and permitted by FAS #123 under which
no compensation cost has been recognized for the options granted as they were
issued above market value.
YEAR 2000
- ---------
The Year 2000 issue concerns the potential inability of information systems and
technology based operating systems to properly recognize and process
date-sensitive information beyond December 31, 1999. Systems that do not
properly recognize such information could generate erroneous data or fail.
The Company has begun to implement steps in an attempt to ensure its Year 2000
readiness. The Company created awareness of the Year 2000 problem by developing
an overall strategy. The Company then assessed the Year 2000 impact on the
Company, identifying core business areas, processes and systems, ("systems"),
identifying the systems that are not Year 2000 compliant. This also includes
developing contingency plans for all critical systems. The final step involves
converted or replaced platforms, applications, databases, utilities, and
contingency plans if necessary.
Based on the review to date, the Company estimates the cost to resolve the Year
2000 issue are minimal. In the event that the renovation, validation or
implementation phases require expenditures not currently foreseen or
anticipated, the costs to resolve the Year 2000 issues will increase.
The Company intends to develop contingency plans for its worst case scenarios as
part of the validation phase. At this time, the Company believes that the most
critical systems are its signal delivery and reception systems. The Company
believes that the failure of these critical systems because of Year 2000 issues
is unknown. The Company also believes that a failure of its important, but less
critical, environmental controls system, sales and marketing support system and
internal information system, is remote. However, if such a failure were to occur
in the case of the signal delivery and reception system; the Company does not
anticipate that it will be able to provide timely alternative or replacement
systems for these critical systems. This is primarily due to the reliance by the
Company on third party vendors for providing key components of such systems. The
Company has sought assurances from its vendors that their products and services
will be Year 2000 compliant, and has not received such assurances from all of
its vendors. However, if such vendors are not Year 2000 compliant, the Company's
business, financial condition and results of operations may be adversely
impacted.
INFLATION
- ---------
Management believes that inflation and changing prices will have a minimal
effect on operations.
<PAGE>
The above should be read in conjunction with the Company's unaudited condensed
consolidated 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.
PART II OTHER INFORMATION
Item 1. Litigation
On or about May 13, 1999 the Company received a copy of a complaint filed in the
Court of Chancery of the State of Delaware in an action entitled Cacomm, Inc.
vs. Magnavision Corporation et.al. This litigation relates to the non-election
of a director nominated by Cacomm. The Company is reviewing this action.
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, 1999
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: May 16, 1999 /s/ Robert Hoffman
-------------------------
Robert Hoffman
President and C.E.O.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 162,894
<SECURITIES> 0
<RECEIVABLES> 780,401
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 983,988
<PP&E> 3,111,960
<DEPRECIATION> 1,254,047
<TOTAL-ASSETS> 3,833,464
<CURRENT-LIABILITIES> 1,435,578
<BONDS> 0
4,614,198
131,889
<COMMON> (8,197,455)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,833,464
<SALES> 875,955
<TOTAL-REVENUES> 875,955
<CGS> 285,718
<TOTAL-COSTS> 285,718
<OTHER-EXPENSES> 511,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,957
<INCOME-PRETAX> 21,859
<INCOME-TAX> 4,969
<INCOME-CONTINUING> 16,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,890
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
