10-Q 1 b313269_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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.) 141 South Ave. Office# 4, Fanwood, NJ 07023 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 490-9910 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 on August 14, 2001 was $538,996.56. The number of shares of Registrant's Common Stock outstanding on July 13, 2001 was 1,185,792. Documents Incorporated by Reference: None. PART I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets -June 30, 2001 and December 31, 2000 Condensed Consolidated Statements of Operations - Three and six months ended June 30, 2001 and June 30, 2000 Condensed Consolidated Statements of Shareholders' Deficiency - Period December 31, 2000 to June 30, 2001 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and June 30, 2000 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk None PART II. Other Information ITEM 1. FINANCIAL INFORMATION MAGNAVISION CORPORATION & SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

~~March~~June 3130 December 31 ASSETS 2001 2000 -----~~------~~ ----~~-------~~ (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 1,~~976~~714,~~807~~439 $ 2,262,522 Trade accounts and other receivables 12,~~767~~261 2,775 Escrow account ~~222,418~~0 222,418 Prepaid expenses and other current assets 462,~~480~~709 17,919 ------------------------------------ Total Current Assets 21,~~205~~779,~~472~~409 2,505,634 PROPERTY AND EQUIPMENT Property and equipment, at cost 3,528 3,528 Less: accumulated depreciation (1,~~417~~622) (1,212) ------------------------------------ Net property and equipment 21,~~111~~906 2,316 OTHER ASSETS Prepaid lease expense ~~303~~276,~~038~~296 329,780 Deposits 750 750 ------------------------------------ TOTAL ASSETS $ 2,~~511~~058,~~371~~361 $ 2,838,480 ==================================== LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable $ 0 $ 13,373 Accrued expenses ~~211~~183,~~601~~732 233,103 State income taxes payable ~~209,797~~0 310,000 ------------------------------------ Total Current Liabilities ~~421~~183,~~398~~732 556,476 Commitments and contingencies Series A Preferred Stock, $1 par value, 9,850,000 shares authorized; issued and outstanding, 3,643,392 shares at ~~March~~June 3130, 2001 and at December 31, 2000, net of unamortized discount and excluding accumulated dividend 3,~~497~~514,~~492~~360 3,480,624 Series A Preferred Stock accumulated dividend 1,~~134~~207,~~610~~484 1,061,737 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, 1,185,792 shares at ~~March~~June 3130,2001 and December 31, 2000 94,862 94,862 Additional paid-in capital 3,963,990 3,963,990 Accumulated deficit (67,~~732~~037,~~870~~956) (6,451,098) ------------------------------------ Total Shareholders' Deficiency (2,~~542~~847,~~129~~215) (2,260,357) ------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 2,~~511~~058,~~371~~361 $ 2,838,480 ====================================

See accompanying notes to unaudited condensed consolidated financial statements. F-2 MAGNAVISION CORPORATION & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Six months ended June 30 Three months ended ~~March~~June 3130 2001 2000 2001 2000 ----- ----- ----- ---- REVENUES Gross revenues $ -- $677,795 ~~597~~$ -- $80,~~165~~630 Cost of sales -- ~~236~~279,~~390~~729 -- 43,339 ------------------------------------ --------------------------------------- GROSS PROFIT -- ~~360~~398,~~775~~066 -- 37,291 OPERATING EXPENSES Salaries 60130,000 ~~146~~290,~~367~~992 70,000 144,626 Depreciation 410 96,017 205 941,~~807~~210 General and administrative expenses ~~167~~353,~~820~~831 ~~192~~411,~~928~~264 186,011 218,336 ------------------------------------ --------------------------------------- TOTAL OPERATING EXPENSES ~~228~~484,~~025~~241 ~~434~~798,~~102~~273 256,216 364,172 ------------------------------------ --------------------------------------- OPERATING LOSS (~~228~~484,~~025~~241) (73400,~~327~~207) (256,216) (326,881) ------------------------------------ --------------------------------------- OTHER INCOME (EXPENSE) Gain on the sale of the Private Cable assets, net of related expenses -- 5,~~103~~126,~~486~~748 -- 23,262 Interest expense -- (50,441) -- -- Interest income 3566,~~994~~893 546,~~000~~292 30,899 41,292 ------------------------------------ --------------------------------------- Total other income ~~(expense) 35~~66,~~994~~893 5,~~058~~122,~~045~~599 30,899 64,554 INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (~~192~~417,~~031~~348) 4,~~984~~722,~~718~~392 (225,317) (262,327) ------------------------------------ --------------------------------------- PROVISION (BENEFIT) FOR INCOME TAXES --(9,973) 703,864 (9,973) -- ------------------------------------ --------------------------------------- NET INCOME (LOSS) (~~192~~407,~~031~~375) 4,~~280~~018,~~854~~528 (215,344) (262,327) ------------------------------------ --------------------------------------- Preferred Shareholders dividend requirement 145,747 172,874 72,~~873~~874 ~~100~~72,~~000~~874 Accretion of Preferred Stock 33,736 119,554 16,868 ~~102~~16,~~685~~869 ------------------------------------ --------------------------------------- Net income (loss) to Common Shareholders ($ ~~281~~586,~~772~~858) $3,726,100 4($305,~~078~~086) ($352,~~169~~070) ==================================== ======================================= Basic net income (loss) to Common Shareholders ($0.2449) $3.4918 ($0.26) ($0.30) Diluted net income (loss) to Common Shareholders ($0.2449) $1.4953 ($0.26) ($0.30) Weighted average common shares: Basic 1,185,792 1,~~168~~172,~~931~~745 1,185,792 1,176,559 Diluted 1,185,792 2,~~739~~441,~~514~~324 1,185,792 1,176,559

See accompanying notes to unaudited condensed consolidated financial statements. F-3 MAGNAVISION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY For the period December 31, 2000 to June 30, 2001 (UNAUDITED)

Series B Common Additional Total Preferred Stock Stock Paid in Accumulated Shareholders' Shares Amount Shares Amount Capital Deficit Deficiency ------------------------------------------------------------------------------------- Balance, December 31, 2000 131,889 $131,889 1,185,792 $94,862 $3,963,990 ($6,451,098) ($2,260,357) Series A Preferred Stock accumulated dividend (72145,~~873~~747) (72145,~~873~~747) Net loss (~~192~~407,~~031~~375) (~~192~~407,~~031~~375) Accretion of Preferred Stock (1633,~~868~~736) (1633,~~868~~736) ------------------------------------------------------------------------------------- Balance, ~~March~~June 3130, 2001 131,889 $131,889 1,185,792 $94,862 $3,963,990 ($67,~~732~~037,~~870~~956) ($2,~~542~~847,~~129~~215) =====================================================================================

See accompanying notes to unaudited condensed consolidated financial statements. F-4 MAGNAVISION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended ~~March~~June 3130 2001 2000 ----- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ($ ~~192~~407,~~031~~375) $ 4,~~280~~018,~~854~~528 Adjustments to reconcile net income (loss) to net cash used in operating activities Gain on sale of ~~privale~~private cable assets -- (5,~~103~~126,~~486~~748) Depreciation ~~205~~410 9496,~~807~~017 Deferred Compensation 20,000 Amortization of channel lease prepayments 2653,~~742~~484 2653,~~742~~484 Changes in Assets and Liabilities: Decrease in trade accounts and other receivables ~~1,008~~514 ~~293~~290,~~247~~600 ~~Decrease~~Increase in prepaid expenses and other current assets 13(44,~~439~~790) --(47,818) Increase in other assets and deposits (559) Decrease in accounts payable (13,373) (5064,~~212~~386) Decrease in accrued expenses (2149,~~502~~371) (~~121~~113,~~800~~646) Increase (decrease) in state income taxes payable (~~100~~310,~~203~~000) 1818,~~029,000~~800 Decrease in deferred revenues -- (~~300~~369,~~205~~765) Decrease in security deposits payable -- (~~161~~176,~~778~~692) ------------------------------------ Net cash used in operating activities (~~285~~770,~~715~~501) (12602,~~831~~185) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the Private Cable sale, net of related expenses -- 6,~~447~~513,~~053~~878 Receit (Establishment) of an escrow account --2,775 (222,418) Proceeds from the sale of equipment -- 33,651 ------------------------------------ Net cash provided by investing activities --2,775 6,~~224~~325,~~635~~111 CASH FLOWS FROM FINANCING ACTIVITIES Repayment of share holder loan receivable 20,000 Repayment of line of credit -- (250,000) Repayment of long term debt -- (1,794,000) Repayment of loans due to shareholders -- (105,468) Proceeds from issuance of common stock from the exercise of options 33,722 Redemption of Series A Preferred Stock -- (1,356,~~308~~608) Payment of accumulated dividends -- (314,663) ------------------------------------ Net cash used in financing activities -- (3,~~820~~767,~~439~~017) Net increase (decrease) in cash (~~285~~767,~~715~~726) 21,~~391~~955,~~365~~909 --------- ---------~~--------~~ Cash and cash equivalents beginning of period 2,262,522 230,017 Cash and cash equivalents end of period $ 1,~~976~~494,~~807~~796 $ 2,~~621~~185,~~382~~926 ~~(0)~~ Non cash items: Series A Preferred Stock Accumulated dividend $ 72145,~~873~~747 $ ~~100~~172,~~000~~874 Accretion of Preferred Stock $ 1633,~~868~~736 $ ~~102~~119,~~685~~554

See accompanying notes to unaudited condensed consolidated financial statements. F-5 NOTES TO JUNE 30, 2001 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 June 30, 2001 and June 30, 2000 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, 2000. 2. Announcement of Agreement to Merge On September 12, 2000, MagnaVision Corporation and Blue Acquisition Corp., a wholly owned subsidiary of IPWireless, Inc. based in San Bruno, CA, signed a definitive agreement for Blue Acquisition Corp. to merge with and into MagnaVision Corporation. All outstanding common and preferred stock of MagnaVision shall be exchanged in the transaction for cash and/or securities as described below. This agreement has been approved by the majority stockholders of MagnaVision and by the Board of Directors of MagnaVision, Blue Acquisition Corp. and IPWireless. The agreement is contingent upon MagnaVision meeting certain conditions at closing, some of which are not within the control of the Company. The Company is attempting to satisfy these conditions. According to the agreement, each share of MagnaVision Class A and Class B Preferred Stock outstanding at the time of closing will receive $1.00 plus any accumulated dividends then due. The merger agreement expires on September 12, 2001. Recent Merger Developments Due to a variety of factors, the Board of Directors is exploring the possibility of restructuring the merger and/or the payment of the merger consideration in a manner which will enhance the Company's ability to fulfill certain conditions to the merger prior to the termination date of the agreement. The Company believes that, as a result of any such restructuring, the price per share payable to holders of Common Stock may be substantially reduced from the previously anticipated price of $5.78 per share. F-6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this report on Form 10-Q relating to MagnaVision's future operations may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results of the Company may differ materially from those in the forward-looking statements and may be affected by a number of factors including the Company's ability to satisfy the various conditions contained in the Agreement and Plan of Merger dated September 12, 2000 (the Merger Agreement) among the Company, Blue Acquisition Corp. and IPWireless, the receipt of approvals necessary to deploy alternative uses of its ITFS spectrum, the assumptions, risks and uncertainties set forth in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere herein, as well as other factors contained herein and in the Company's other securities filings. There can be no assurance that the transactions contemplated by the Agreement and Plan of Merger will be consummated on a timely basis, if at all. Furthermore, there can be no assurance that the financing obtained by Company to date will enable it to meet its future cash needs. The above should be read in conjunction with the Company's unaudited condensed consolidated financial statements included elsewhere herein. RESULTS OF OPERATIONS The Company had no revenues for the six months ended June 30, 2001 since its private cable operations and related revenue stream were sold as of February 29, 2000. 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 center facilities in the New York/New Jersey area utilizing direct satellite technology. These assets were sold as of February 29, 2000. Six Months Ending June 30, 2001 compared to Six Months Ending June 30, 2000 For the first six months ending June 30, 2001, gross profit decreased $398,066 from the first six months ending June 30, 2000. The decrease in gross profit was primarily the result of reflecting two months of operations in the year 2000 versus no operations in 2001 due to the sale of the Private Cable assets as of February 29, 2000. F-7 The total operating expenses decreased $314,032 in the first six months ending June 30, 2001 when compared to the first six months ending June 30, 2000. Salaries accounted for $160,992 of the decrease representing the reduction of the work force in the second quarter of 2000. Depreciation was $95,607 less than the first six months ending June 30, 2000 as the six months ended June 30, 2000 in included two months of depreciation expenses related to the Private Cable assets that were sold as of February 29, 2000. General and administrative expenses decreased $57,433 when compared to the first six months ending June 30, 2000. For the six months ending June 30, 2001 other income, net decreased $5,055,706 over the six months ending June 30, 2000. The gain on the sale of the Private Cable assets in 2000 represented $5,126,748 of the decrease. Interest expense decreased $50,441 in the six months ending June 30, 2001 when compared to the six months ending June 30, 2000 due to the payoff of the Company's debt in 2000. Interest income increased $20,601 in the six months ending June 30, 2001 compared to the six months ending June 30, 2000 because of increased investment of the cash from the Private Cable sale in the first quarter of 2000. Second Quarter 2001 Compared to Second Quarter 2000 For the second quarter 2001, gross profits decreased $37,291 from the second quarter 2000. Income and related expenses primarily recognized during the second quarter of 2000 related to the sale of cable equipment to a customer. The Company did not have any income or related expenses dunning the second quarter of 2001. Total operating expenses decreased $107,956 in the second quarter 2001 when compared to the second quarter 2000. Salaries decreased $74,626 that is a result of the reduction of staff to two full time employees after the Private Cable sale. General and administrative expenses were $32,325 less in 2001 when compared to the second quarter 2000 due to the reduced expenses in 2001. Other income, net decreased $33,655 in the second quarter of 2001 when compared to the second quarter of 2000. The decrease in interest income of $10,393 was due to less cash being invested and the rate of interest paid in 2001 being lower than in 2000. Provision for income taxes decreased $9,973 due to the Company reversing the accrual for state taxes by $10,000 in 2001 after paying taxes relating to 2000. LIQUIDITY AND CAPITAL RESOURCES For the six months ending June 30, 2001, the total cash and cash equivalents decreased $548,083. At June 30, 2001, the Company had invested in Commercial Paper and held a Business Money Market Account. F-8 The cash used in operating activities was $770,501 and was a result of the payment of income taxes $310,000, payment of accrued expenses of $49,371, payment of a prepaid expenses of $44,790 and the net loss for the first six months of 2001. The cash provided by investing activities of $222,418 and was due to the recovery of the escrow fund established as part of the sale of the Private Cable assets. There was no cash used in or provided by financing activities for the six months ended June 30, 2001. Since the inception of service in 1992, the Company has experienced operating losses. At June 30, 2001, the Company had a stockholders' deficit of $2,847,215. The Company's capital commitments at June 30, 2001 include additional capital to construct facilities at the Department of Education of the Archdiocese of New York ("Department"), capital to build the Monmouth and Ocean County ITFS channel sites and the payment of the Preferred Stockholders principal and accumulated dividend due December 31, 2002. As of the date hereof, the Company has not commenced operations of a wireless system. If it is determined that such operations are to be commenced, substantial additional funding will be required. The Company plans to meet short-term liquidity requirements by using the cash received from the sale of the Private Cable system. The Company has entered into an agreement to merge with Blue Acquisition Corporation that will allow the Company to meet its long-term commitments. There is no assurance that the Company will be able to complete the terms of the merger as agreed, if at all, or before the expiration date of the agreement on September 12, 2001. If the merger is not effected, the Company plans to sell the ITFS spectrum rights or develop the ITFS spectrum with a strategic partner(s) willing to participate with the Company in the development of alternative uses of its ITFS spectrum. The Company's business plan depends on either a sale of the wireless cable asset or the Company securing a strategic partner(s) for the capital resources and the expertise required to run the Wireless business. There is no assurance that the Company will be able to secure a strategic relationship or a sale on terms or conditions satisfactory to the Company. Failure to develop the ITFS spectrum with a strategic partner(s) willing to participate with the Company in the development of alternative uses of its ITFS spectrum or to sell the ITFS spectrum lease will have a material adverse effect on the Company. Also, there can be no assurance that the Company will be able to launch its alternative use of ITFS spectrum in a commercially successful manner if a partner is found. The report of our independent auditors on our 2000 financial statements includes an explanatory paragraph, which states that our recurring losses from operations and limited liquid resources raise substantial doubt about our ability to continue as a going concern. F-9 Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. INFLATION Management believes that inflation and changing prices will have a minimal effect on operations. PART II OTHER INFORMATION PATRICK MASTRORILLI vs. MAGNAVISION CORPORATION On June 21, 1999, the Company received a complaint filed in the Superior Court of New Jersey Legal Division in an action entitled Patrick Mastrorilli vs. Magnavision Corporation. This litigation relates to a former director and officer's claim for alleged future commissions due to him on contracts and current renewals placed by him. On March 18, 2001, the Superior Court of New Jersey Legal Division ruled in favor of Mr. Mastrorilli and ordered the two parties to agree to final damages pursuant to the terms of the contracts and current renewals placed by Mr. Mastrorilli. The parties have agreed on final damages and have accrued for such damages. Item 2. Properties The Registrant's principal offices are located at 141 South Ave., Office # 4, Fanwood, NJ 07023, where it occupies approximately 500 square feet under a month-by-month lease agreement. As part of the Channel Lease Agreement with the Department, the Company acquired the right to use a portion of the Department's transmitting space at the Empire State Building, in Yonkers and in Staten Island, all in New York. The Company pays no additional consideration for this space beyond the fees due to the Department under the Channel Leasing Agreement. Item 6. Exhibits and Reports on Form 8K a) Exhibits None b) Reports on Form 8K The Company filed no Reports on Form 8K during the Quarter ending June 30, 2001 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, 2001 /S/ Jeffrey Haertlein Principal Accounting Officer

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