ITEM 1. BUSINESS
GENERAL
Magnavision Corporation (the "Registrant" or the "Company") was incorporated under the name Yardley Ventures Inc. in Delaware on April 3, 1986 for the purpose of acquiring one or more potential businesses. Effective December 30, 1991, the Registrant acquired all of the issued and outstanding capital stock of Magnavision Corporation, a New Jersey corporation ("Magnavision - - N.J."), in a tax-free, stock-for-stock acquisition. The shareholders of Magnavision - N.J. received newly issued shares of common stock in the Registrant for their Magnavision - N.J. shares. The newly issued shares constituted approximately 98% of the Registrant's outstanding common stock. In connection with the acquisition, the Registrant effected a one-for-400 reverse split of its common stock and changed its name to Magnavision Corporation. In addition, the board of directors of Magnavision - N.J. became the board of directors of the Registrant and Magnavision - N.J. became a wholly-owned subsidiary of the Registrant.
The Registrant does no business and has no significant assets other than its stock in Magnavision - N.J. Unless otherwise specified herein, the terms "Magnavision" and the "Company" shall be deemed to refer to the Registrant and/or Magnavision - N.J.
DEVELOPMENT OF BUSINESS
The Company was initially formed for the purpose of owning and operating a multi-channel, wireless, cable television system in the New York market. In August 1990, the Company entered into an agreement to lease channel capacity (the "Channel Lease Agreement") from the Department of Education of the Archdiocese of New York (the "Department"). The Channel Lease Agreement (subsequently amended in January 1994) grants the Company a lease through January 2004 (with a right to extend for an additional five years, and a right of first refusal for subsequent renewals), which entitles the Company to use twenty-eight (28) wireless cable licenses (168 MHZ of spectrum), located on seven different transmitting towers (24 MHZ per tower) in New York State. Eight (8) of these channels (48 MHZ of spectrum) are located in New York City.
Since entering into the Channel Lease Agreement, the Company has conducted various marketing and engineering activities to facilitate the planned operation of a wireless system and, pursuant to the requirements of the Channel Lease Agreement, made an escrow deposit of approximately $900,000 to the Department in September 1995 which is to be utilized for system reconstruction. However, as of the date hereof, the Company has not commenced operation of a wireless system, and will require substantial additional funding in order to do so. Since there is no assurance that such funding will be available, the Company retained Allen & Company Incorporated to assist in 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 the Channel Lease Agreement. To date, no such transactions have been consummated or are pending. However, the Company has recently begun, in conjunction with and at the request of a potential joint venture
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partner, testing the spectrum for uses other than television. These tests relate to one-way data transmission and the continuation thereof is dependent upon receipt from the Federal Communications Commission ("FCC") of its authorization to permit same, application for which has recently been filed. There is no assurance that such tests will be permitted or successful, or if successful that an agreement will materialize in the near term, upon conditions acceptable to the Company, or at all, with this or any other potential joint venture partner that will prove profitable to the Company.
Apart from development of its wireless television system, the Company has been engaged, since 1992, in the business of offering a private cable television service to colleges, universities, nursing homes and hospitals throughout the East Coast. As of March 31, 1997, the Company had long term (generally 5-10 years) agreements with a total of 27 institutions located in New York, New Jersey, Pennsylvania, Massachusetts, West Virginia and North Carolina to offer such services. For the year ended December 31, 1996, the Company generated approximately $1,285,442 of revenues from this business (which constituted 100% of the Company's total revenues for the year). For the year ended December 31, 1996, revenues from three institutions which utilize the Company's private cable television service, Montclair State University, Seton Hall University, and Kean College, constituted approximately 23%, 15% and 12% of the Company's revenues, respectively.
In August 1995, the Company obtained a $5,000,000 lending facility from IBJ Schroder Bank & Trust Co., IBJS Capital Corporation (collectively "IBJS") and KOCO Capital Company, L.P. ("KOCO"). Approximately $2,637,000 of that amount was furnished to the Company at the time the lending facility was entered into, and the remainder was to be advanced based on the present value of projected cash flow from new contracts with purchasers of the Company's private cable television service, with the funds advanced to be used for equipment and construction costs incurred in connection with installation of the service at the new locations and for working capital. The proceeds furnished at the time the lending facility was entered into were utilized to fund an escrow deposit of $900,000 for system configuration required under the Channel Lease Agreement (as noted above), to repurchase approximately 18% of the Company's issued and outstanding capital stock and to provide working capital. In connection with obtaining the lending facility the Company issued to the lenders warrants to purchase approximately 27% of the Company's Common Stock on a fully diluted basis at exercise prices of $.38 and $.27 per share. On June 3, 1996, the terms of the lending facility were amended. Pursuant to the amendment, the lenders agreed to waive existing defaults and provide up to the sum of $1,200,000 toward the Company's working capital requirements without regard to the present value formula referred to above. In exchange therefor, the Company agreed to issue warrants to purchase an additional 12% of the Company's Common Stock on a fully diluted basis at an exercise price of $.27 per share. In connection therewith the Company's rights under the Channel Lease Agreement have been transferred to a subsidiary whose stock has been pledged to the lenders as security for amounts advanced under the lending facility. Subsequent thereto, and on April 3, 1997, the Company reached an agreement in principle with its lenders to convert their existing senior subordinated note financing into redeemable preferred stock. Under the proposed terms thereof, the Registrant's outstanding subordinated notes, aggregating approximately four million dollars, together with accrued interest and detachable warrants, will be exchanged for $5,000,000 of 8% redeemable preferred stock due December 31, 2002 together with the cash balance of the existing line, approximately $750,000. IBJS and Koco will receive warrants to purchase up to
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58% of the common stock on a fully diluted basis at an exercise price of $2.00 per share after the Company effectuates a 20-for-1 reverse stock split, and will have the right to elect four of the seven members of the Board of Directors. See "Item 13 - Certain Relationships and Related Transactions" for further information regarding the transactions with the lenders.
WIRELESS CABLE TELEVISION BUSINESS
Wireless Technology
The wireless cable industry was made commercially possible in 1983 when the Federal Communications Commission ("FCC") reallocated a portion of the electromagnetic radio spectrum located between 2500 and 2700 MHZ and permitted this spectrum to be used for commercial purposes. Today, there are a maximum of thirty-three microwave channels used for wireless cable in each market. These include thirteen Multipoint/Multichannel Distribution Service ("MMDS") channels (Channels 1, 2 or 2A, E1-E4,-F4 and H1-H3) and the excess capacity on up to 20 additional ("ITFS") channels (Channels A1-A4, B1-B4, C1-C4, D1-D4 and G1-G4). Grandfathered ITFS stations on the eight E and F channels also lease excess capacity to wireless cable operators. In each geographic service area of the 50 largest markets, thirty three 6 MHz channels (198 MHZ) are available for wireless cable. Except in limited circumstances, the 20 ITFS channels (120 MHZ) in each market can generally be licensed only to qualified non-profit educational organizations and, in general, each of these channels must be used a minimum of 20 hours per week for instructional programming. The remaining "excess air time" on an ITFS Channel may be leased to wireless cable operators for commercial use. In addition, the 13 MMDS channels (78 MHZ) are made available by the FCC for full time usage without programming restrictions.
According to industry experts, wireless cable can provide customers with the same or superior video television, data, and Internet access services as that of traditional hardwire cable. A typical wireless cable system consists of head-end equipment (satellite signal reception equipment, transmitters and other broadcast equipment, and a transmission antenna), and reception equipment at each subscriber location (antenna, frequency conversion device and set-top converter). Like a traditional hardwire cable system, wireless cable receives programming by satellite transmission. Unlike hardwire cable systems, however, the programming is then retransmitted over the air from one or more transmit sites to the subscriber's location. At the subscriber's location, these wireless signals are received by a small antenna and then converted to frequencies that can pass through conventional coaxial cable to a descrambling converter located on top of a television set. When a system is offering data and Internet access services, additional equipment is needed. At the head-end, wide band access lines to the Internet backbone, wireless modems, and point of presence (POPs) must be installed. At the subscribers location a wireless modem must also be in place.
Wireless systems currently transmit analog signals over distances of approximately 25 to 35 miles from their central transmission point. The transmission of wireless frequencies requires clear "line-of-sight" between the transmitter and the receiving antenna. Dense foliage, hilly terrain or tall buildings can cause signal interference which can diminish or block signals. Certain line-of-sight constraints can be ameliorated by changing transmission power levels and using engineering techniques, pre-amplifiers, beambenders and signal repeaters.
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Like traditional franchise cable systems, wireless cable systems are capable of employing "addressable" subscriber authorization technology which enables the cable operator to centrally control the content available to each subscriber without the need for a service call to the subscriber's home or business. By eliminating service calls, addressable systems should reduce certain operating costs of a system.
The Company believes that wireless cable is the most economical technology currently available for delivering video, and data services. Wireless cable systems do not require an extensive network of cable and amplifiers; therefore, the capital cost per subscriber could be substantially lower than traditional franchise cable. In addition, since wireless signals are transmitted over the air rather than through underground or aerial networks, wireless systems are less susceptible to outages and are less expensive to operate and maintain than traditional franchise cable systems. Most service problems experienced by wireless cable subscribers are confined to their location rather than system-wide or neighborhood-wide, as is often the case with traditional franchise cable systems. As a consequence of the foregoing, the rates charged to subscribers of wireless cable operators are generally lower than hard wire cable systems.
Currently, wireless cable companies are transmitting programming by utilizing analog technology. Analog technology permits a standard 6 MHZ wireless cable television channel to carry one full motion audio/video programming service (such as ESPN or HBO) at a time. However, it is anticipated that in the near or immediate future wireless operators will be able to implement digital video compression technology, which is expected to increase the capacity of each 6 MHZ wireless cable channel by four to ten times. As a consequence of this technology, wireless cable companies are expected to be able to offer up to ten channels of video programming services on each 6 MHZ channel. When digital compression technology is implemented, wireless cable operators are also expected to be able to offer high speed Internet access and other data services, such as stock quotes, electronic mail and news, and to provide services such as home shopping and home banking.
The ability to apply compression technology is dependent on the availability of digital equipment which is expected to be commercially available in sufficient production in 1997. There is no assurance, however, that the equipment necessary will be available or can be successfully or profitably deployed. Approval from the FCC is also required. The FCC has issued an Interim Declaratory Ruling and Order which establishes interim rules to govern this transition from analog to digital technology. There is no assurance as to when or what permanent rules will be adopted by the FCC, if the Company will be able to comply with such rules or policies or whether the Company can operate a profitable business in compliance with such rules or policies.
Recent developments in technology and regulatory changes now allow ITFS spectrum to be used for high speed Internet access. The modem used at a receive sight can receive data at speeds up to 27 Mbps, almost 1000 times faster than the typical modem used today (28.8 Kbps). Several operators have tested one-way Internet over their spectrum using the phone lines for the less demanding return path. The Company believes there is a market for businesses which require high speed Internet access and is in the process of developing a business plan to offer such services in the New York market. However, Internet service is a newly developed business, the Company does not currently have the funds to implement such
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service, there is no assurance that the proposed service by the Company, if such funds were available, could be deployed in a commercially successful manner or that the Company could obtain the required licenses in a meaningful time frame, or at all.
Channel Lease Agreement
On August 20, 1990, the Company entered into the Channel Lease Agreement to lease from the Department the use of three (6 MHZ) ITFS channels (a total of 18 MHZ) located on seven different tower locations (a total of 126 MHZ), with an option to utilize one additional 6 MHZ ITFS channel also located on each of the seven tower locations when the Department obtains the necessary FCC approvals for such channels. Under the Channel Lease Agreement, the Company also leases three operationally-fixed microwave service ("OFS") channels (to serve as links between the ITFS tower sites), with an option for one additional OFS channel. The Channel Lease Agreement expires in January, 2004, although the Company has an option to extend the lease for five years if the FCC renews the Department's license. Following expiration of the option term (if extended) in 2009, the Company has a right of first refusal covering the leased channels. Extension and/or renewal of the Channel Lease Agreement is contingent upon (as with all broadcast licenses) FCC renewal of the Department's license for the channels, of which there can be no assurance.
The Company also paid a total of $144,000 in monthly royalties to the Department during 1996 and will be required to pay additional monthly royalties during 1997 through the expiration of the Channel Lease Agreement, equal to the greater of $12,000 ($16,000 under certain conditions) plus five cents ($.05) per subscriber or five (5) percent of the gross receipts per month, whichever is higher.
The Channel Lease Agreement includes the Company's right to use space leased to the Department at the seven transmission sites, including the Empire State Building, Staten Island, NY, Yonkers, NY, Loomis, NY, Rhinecliff, NY, Haverstraw, NY and Beacon, NY. Additional space is also available at all other locations owned or leased by the Department and can be made available to the Company by the Department for use in providing the Company's service. The Agreement precludes the Company from transmitting movies rated "R", "NC-17" or "X" over the Department's channels. The agreement further precludes the Company from transmitting movies Rated "X" or "NC-17" in the New York service area as defined over all channels controlled by the Company or its affiliates. The Company may, however, transmit "R" rated movies over non-Department channels that may be either controlled by the Company, or the Company's affiliates.
Available Market
According to latest available data, there are approximately seven million households located in the New York Area of Dominant Interest ("ADI") market. The Company estimates that approximately 70% of these households can receive wireless cable transmission. (Approximately 51% of such households subscribe to cable.) The Company believes that approximately 70% of all businesses in the New York metropolitan area are capable of receiving wireless cable. The Company also believes that transmission capacity in the New York area can be expanded significantly by activating the additional transmission sites for which it has rights in areas north of New York City.
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Competition
The television industry is highly competitive. Wireless cable television operators face competition from a number of sources, including other wireless cable services operating in their areas, hardwire cable systems and satellite broadcast companies. In addition, several technologies are under development and a new regulatory environment may significantly affect the pay television industry and result in new competitors, such as telephone companies, entering the market. At this time, the Company cannot predict the competitive impact of these new technologies, new regulations and competitors to the wireless cable industry. However, the Company expects that wireless cable operators will be able to expand their programming capacity and introduce new services through the use of digital technology when developed, while continuing to maintain a cost advantage over other providers of pay television service. There is no assurance, however, that this will be the case.
In the New York metropolitan area there is currently one other wireless cable operator utilizing MMDS and ITFS frequencies and one operator using local multi-band distribution service ("LMDS") frequencies for pay television. The MMDS operator has also recently announced that it is pursuing alternative uses of its spectrum in this market and has begun trial marketing for Internet access service to up to 1,000 subscribers.
The traditional franchise cable system operators historically have been the principal providers of pay television services. Traditional franchise cable operators have constructed their networks using coaxial cable to deliver service to customers and typically offer a greater number of channels at higher prices than wireless systems. In the New York metropolitan market, the percentage of television households served by traditional cable is estimated at 51% (based on latest figures available from trade services deemed reliable). In New York, the principal providers of hardwire cable providers include Time Warner Cable, Cablevision Systems Corp. and Cox Cable Communications.
The Company believes that several traditional franchise cable companies are experimenting with interactive technology that permits a subscriber to transmit data from the subscriber's television set back to the operator's transmission facility. Although wireless cable systems are today technically capable of offering selected interactive services by transmitting data from the subscriber's location back to the head-end facility using "response channels", licensing of such use to wireless operators by the FCC has not been granted and there is no assurance that such applications will be granted or that if granted the technology can be deployed in a commercially feasible manner. Potential applications for interactive technology include, for example, automated pay-per-view service and home shopping activities. However, the introduction of expanded channel capacity and interactive services by traditional franchise cable systems will require substantial new investment. The demand for more expensive, expanded channel offerings and new services is uncertain, and the Company believes that the customer base of the hard-wire cable systems may not be willing to pay substantially higher prices for these expanded channel offerings and new services.
Wireless cable operators also compete against satellite systems, which include "backyard dish" services and direct broadcast satellite ("DBS") providers. The satellite systems involve the transmission of an encoded signal direct from a satellite to the customer's home. Because the DBS systems transmit a signal at a higher power level and frequency than
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most satellite-transmitted signals, its reception can be accomplished with a relatively small (18-inch) dish mounted on a rooftop or in the yard. According to trade publications, Satellite TV has approximately 4.7 million customers as of December 31, 1996. Due to the cost of DBS satellites and receiving equipment and lack of local programming and interactivity, the Company believes that wireless cable systems could enjoy a comparative advantage over these satellite systems.
It is also anticipated that wireless cable operators will be competing with telephone companies. Under the Communications Act of 1934, as amended (the "Communications Act"), local exchange carriers ("LECs"), including the Regional Bell Operating Companies, were prohibited from providing video programming directly to customers in their respective telephone service areas. The FCC has ruled, however, that LECs may acquire wireless cable operations without violating the prohibition. The FCC also permitted LECs to provide "video dialtone" service, allowing LECs to make available to multiple service providers, on a nondiscriminatory common carrier basis, a basic platform that will permit end users to access video program services provided by others. The Telecommunications Act of 1996, however, repealed the FCC's video dialtone regulations, except that existing systems may continue to operate. Some LECs have indicated that they intend to construct or acquire separate hard-wire cable systems within their telephone service areas if authorized. In addition, Bell Atlantic, NYNEX, Pacific Telesis and Bell South have all made acquisitions of and investments in wireless cable television systems.
The FCC has also proposed to redesignate the 28 GHz band to create a new video programming delivery service referred to as LMDS. On March 13, 1997 the FCC adopted service and auction rules for the LMDS licenses. There will not be an auction in the New York market since one of the Company's competitors, Cellular Vision USA Inc., is currently the license holder.
Government Regulation
General. The wireless cable industry is subject to regulation by the FCC pursuant to the Communications Act. The Communications Act empowers the FCC, among other things, to issue, revoke, modify and renew licenses within the spectrum available to wireless cable; to approve the assignment and/or transfer of control of such licenses; to approve the location of wireless cable systems; to regulate the kind, configuration and operation of equipment used by wireless cable systems; and to impose certain equal employment opportunity and other reporting requirements on wireless cable operators.
The FCC has determined that wireless cable systems are not "cable systems" for purposes of the Communications Act. Accordingly, a wireless cable system does not require a local franchise and is subject to fewer local regulations than a hardwire cable system. Moreover, all transmission and reception equipment for a wireless cable system can be located on private property; hence, there is no need to make use of utility poles or dedicated easements or other public rights of way. Although wireless cable operators typically have to lease the right to use wireless cable channels from the holders of channel licenses, unlike hardwire cable operators they do not have to pay local franchise fees. Recently, legislation has been introduced in some states to authorize state and local authorities to impose on all video program distributors (including wireless cable distributors) a tax on the distributor's gross
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receipts comparable to the franchise fees cable operators pay. While the proposals vary among states, the bills all would require, if passed, as much as 5% percent of gross receipts to be paid by wireless distributors to local authorities.
Wireless cable transmissions are governed by FCC regulations governing interference and reception quality. These regulations specify important signal characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or digital). Current FCC regulations require wireless cable systems to transmit only analog signals and those regulations will have to be modified, either by rule making or by individual application, to permit the use of digital transmission. The Company believes that the necessary FCC approvals will be obtained to permit use of digital compression when digital compression technology becomes commercially available; however, there can be no assurance that these approvals will be forthcoming or timely or that interim relief will be provided by the FCC. The FCC also regulates transmitter locations and signal strength.
Under current FCC regulations, a wireless cable operator generally may broadcast anywhere within the line-of-sight of its transmission facility, provided that its signal does not violate interference standards in the FCC-protected area of another wireless license holder. Existing wireless license holders generally are protected from interference within 35 miles of the transmission site; however, if that site is moved, the protection remains only within the original 35 mile zone and approval from the FCC is required before a transmission site may be moved.
1996 Telecommunications Act. In February 1996, Congress passed and the President signed into law the Telecommunications Act of 1996 (the "1996 Act"). Some of the provisions of the 1996 Act that directly affect wireless cable television operators are discussed below. Beyond those specific provisions, the 1996 Act contains provisions intended to increase competition in the telephone, radio, broadcast television, and hardwire and wireless cable television businesses. The long term effect of the 1996 Act cannot be determined at this time, although competition in the video programming delivery industry is likely to increase as a result of the adoption of the 1996 Act.
Recent Legislation. The 1996 Act may change the competitive environment of the wireless cable business. The 1996 Act changes the definition of cable television system so that the definition excludes any systems that serve customers without using any public right of way. This change will allow wireless cable system operators to wire together apartment complexes and other similar properties, as long as the wiring system does not cross a public right-of-way, without the need to apply for a local cable television franchise. The 1996 Act will also reduce the regulatory authority over cable company rates, allow telephone companies, under certain conditions to distribute video and afford relief to DBS providers by exempting them from local restrictions on antennas. The Company cannot predict the rules and policies which will be implemented by the FCC under this 1996 Act.
Other Regulations. Wireless cable license holders are subject to regulation by the Federal Aviation Administration with respect to the construction of transmission towers and to certain local zoning regulations affecting construction of towers and other facilities. There may also be restrictions imposed by local authorities. There can be no assurance that
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the Company will not be required to incur additional costs in complying with such regulations and restrictions.
Under the retransmission consent provisions of the 1992 Cable Act, wireless and hardwire cable operators seeking to retransmit certain commercial television broadcast signals must first obtain the permission of the broadcast station in order to retransmit the station's signal. However, wireless cable and private cable systems, unlike hardwire cable systems, are not required under the FCC's "must carry" rules to retransmit a specified number of local commercial television or qualified low power television signals.
Due to the regulated nature of the cable industry, the Company's growth and operations may be adversely impacted by the adoption of new, or changes to existing, laws or regulations or the interpretations thereof.
Copyright. Under the federal copyright laws, permission from the copyright holder generally must be secured before a video program may be retransmitted. Under Section 111 of the Copyright Act, certain "cable systems" are entitled to engage in the secondary transmission of programming without the prior permission of the holders of copyrights in the programming. In order to do so, a cable system must secure a compulsory copyright license. Such a license may be obtained upon the filing of certain reports with the payment of certain fees to the U.S. Copyright Office. In 1994, Congress enacted the Satellite Home Viewer Act of 1994 which enables operators of wireless cable television systems to rely on the cable compulsory license under Section 111 of the Copyright Act.
PRIVATE CABLE BUSINESS
General
Private cable television service is a multi-channel subscription television service where the programming is received at a facility by satellite receiver and then transmitted via coaxial cable throughout private property, often multiple dwelling units ("MDUs"), without crossing public rights of way. Private cable companies operate under agreements with private landowners to service a specific MDU, institution, or commercial establishment.
Since 1992, the Company has offered private cable television services to various colleges, universities and nursing home facilities, primarily in the northeastern United States. To date, the Company has entered into or been awarded contracts with 27 facilities, of which 23 are currently receiving programming from the Company. The Company believes that it has developed the necessary skills and "know-how" over time to deliver a quality product and that it has achieved a favorable reputation with its existing customer base. It also believes that this business can be expanded on a national basis with appropriate funding.
Agreements with Institutions
The Company has long-term agreements to provide service to 27 facilities (23 of which are currently operational) for students and patients, with approximately 8,450 outlets, at the following locations:
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1. Seton Hall University, South Orange, NJ - on line since 1992
2. Fairleigh Dickinson University, Teaneck, NJ - on line since 1992
3. Manhattanville College, Purchase, NY - on line since 1992
4. Greenhill Retirement Community, West Orange, NJ - on line since 1992
5. Maritime College, SUNY, Bronx, NY - on line since 1993
6. Wagner College, SUNY, Bronx, NY - on line since 1993
7. Sarah Frances Nursing Home, Boonton, NJ - on line since 1994
8. Immaculata College, Immaculata, PA - on line since 1994
9. Georgian Court College, Lakewood, NJ - on line since 1994
10. Montclair State College, Montclair, NJ - Phase I on line since 1995
11. Fordham University, Manhattan, NY - on line since 1995
12. Jesuits of Fordham, Inc., Bronx, NY - on line since 1995
13. Kean College, Union, NJ - on line since 1995
14. Curry College, Milton, MA - on line since 1995
15. Mount Olive College, Mount Olive, NC - on line since 1995
16. V.A. Medical Center, East Orange, NJ - on line since 1996
17. Montclair State University, Montclair, NJ - Phase II on line since 1996
18. North Carolina A&T State University, Greensboro, NC - on line since 1996
19. Ohio Valley College, Parkersburg, WV - on line since 1996
20. Iona College, New Rochelle, NY - on line since 1996
21. College of Mount St. Vincent, Riverdale, NY - on line since 1996
22. Terrence Cardinal Cooke, New York, NY - on line since 1997
23. Ambler Rest Home, Ambler, PA - on line since 1997
24. Continental Wingate, Poughkeepsie, NY - projected on line 1997
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25. Beachview Care Center, Keansburg, NJ - projected on line 1997
26. Keswick Multicare Center, Baltimore, MD - projected on line 1997
27. Cardinal Stritch College, Fox Point, WI - projected on line 1997
From the date a contract is signed, it generally takes approximately three months to complete an installation and to make a site operational or place it "on line". Except for Manhattanville College, where the Company bills students directly, the Company receives its fees on a monthly basis (nine (9) months a year for colleges and universities) from these institutions, which include such charges in the tuition or other fees to students or residents of the subject facilities. The Company believes that the potential market for this segment of its business is, in the near term, located in the Eastern portion of the United States and is represented by hundreds of thousands of potential viewers. The Company has the ability under its standard form of agreement to create its own form of "TV Guide" for distribution to students and patients, as the case may be. None of the Company's revenues to date include fees from advertisers. However, at such time as the Company's subscriber base achieves "critical mass", estimated at 15,000 outlets, the Company believes that it will have the ability to obtain revenues from regional or local advertisers seeking to reach the Company's subscribers who the Company believes are a favored category of consumer for many product manufacturers and service providers.
Sales and Marketing
The Company's sales and marketing efforts in the private cable business have and will continue to focus primarily upon institutions with concentrated populations, such as colleges and universities with dormitories, nursing homes and other MDUs. The Company also believes that it will be able to expand its subscriber base by offering service to commercial businesses such as office buildings, but it has no present intention nor does it have the resources to do so. Institutional subscribers are asked to commit to long-term agreements. Some state institutions are prohibited from entering into long term agreements, but the Company believes that once it has wired the subject facility and provided private cable television service the relationship will become one of long term duration.
Competition
The Company's competition in the residential private cable business consists of numerous private cable operators located throughout the United States, none of which is deemed to be a dominant factor. The Company considers this business to be fragmented and subject to consolidation. Numerous companies, including local cable operators, across the country have begun to pursue institutional business in direct competition with the Company. In addition to this competition, any conventional cable operator as well as any other cable television programming distributor can service these institutions in direct competition with the Company. Many of these competitors are larger, have greater financial resources and more personnel to devote to this business than does the Company. The Company believes, however, that its experience and "know-how" in this field and customer endorsements to potential clients will greatly assist the Company when competing for this business.
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Regulation
The 1996 Act changed the rules with respect to the 1992 Cable Act's uniform rate requirement and MDUs. Prior to the adoption of the 1996 Act, franchised cable operators were required to offer uniform rates within franchise areas and with respect to bulk service contracts for MDUs. Now franchised cable operators may establish different rates across franchise areas in which they are subject to effective competition and may offer bulk service contracts to MDUs without any uniform pricing requirement, except that the franchised cable operator may not engage in predatory pricing, which concept is undefined in the 1996 Act. This may result in the Company experiencing more significant price competition in its private cable business in the future.
TRADEMARKS, COPYRIGHTS, PATENTS
The Company holds no copyrights or patents but has received a federal service mark registration for the name Magnavision. The Company does not believe that these proprietary rights are material to its business.
PERSONNEL
The Company currently has a staff of 11 full time and one part time employee (6 in sales, installation, customer service and marketing, 3 in administration, and 2 in management) and various part time consultants, advisors and subcontractors, none of whom is a member of a union. The Company does not plan to expand its staff until it begins to generate sufficient revenue or receives funding to support expansion. The Company considers its relationship with its employees to be excellent.
CACOMM, INC.
Cacomm, Inc., a New Jersey corporation ("Cacomm"), is the majority shareholder of the Registrant. As of the date of this Form 10-K, Cacomm owns approximately 79.9% of the Registrant's outstanding common stock. All of the directors of the Registrant are also directors of Cacomm. Nicholas Mastrorilli, Sr., holder of approximately 31% of the capital stock of Cacomm, is Chairman of the Board and President of the Registrant, and certain other officers and directors of Cacomm are also directors and officers of the Registrant.
Cacomm is a 25% partner in a general partnership known as The Grand MMDS Alliance (the "Alliance"), a designated selectee of the FCC for four MMDS channels in the New York metropolitan market. The possibility exists that the Alliance could commence business in direct competition with the Registrant. However, the Alliance has not commenced operations as of the date of this report. The Company continues discussions with the Alliance (the other partners of which are unaffiliated with the Registrant) for the purpose of exploring various alternatives relating to the MMDS channels held by the Alliance. However, such discussions have not proven fruitful in the past, and there is no assurance that such discussions will be productive in the future.
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ITEM 2.
ITEM 2. PROPERTIES
The Registrant's principal offices are located at 1725 Highway 35, The Wedgewood Building, Wall, New Jersey, where it occupies approximately 1200 square feet under a lease agreement which expires in August, 1997.
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, New York and on Staten Island, New York. The Company pays no additional consideration for this space beyond the fees due to the Department under the Channel Leasing Agreement.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART I I
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Registrant's Common Stock is traded in the over-the-counter market. There is no established public trading market. The range of high and low bid and ask quotations for the Registrant's common stock through the quarter ended December 31, 1996 is as follows:
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Note: The information set forth above has been provided by the National Quotation Bureau, Inc.. The Registrant believes that the information is accurate but cannot guarantee its accuracy. The above quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not represent actual transactions.
(b) As of December 31, 1996, according to the Registrant's transfer agent, the approximate number of holders of record of the Registrant's common stock was 557.
(c) The Registrant has never paid any cash dividends on its Common Stock and none are presently anticipated. Under the Company's agreements with its lenders, the Company is prohibited, without the consent of the lenders, from declaring or paying any dividends on its Common Stock until the loans made by the lenders have been repaid in full. It is expected that such restriction will remain in place after the conversion by the lenders of their senior subordinated note financing into redeemable preferred stock. It is anticipated that the redeemable preferred stock will have a preference over the common stock as to any dividends that may be legally available for declaration and payment.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data. This data should be read in conjunction with "Item 7
ITEM 7. 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 began service in February 1992 to various colleges, nursing home, and hospital 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. The Company has long-term agreements with 27 facilities (23 currently built) under which it is currently providing service to students and patients through approximately 8,450 outlets in rooms and common areas at such institutional facilities. The Company expects additional contracts to be signed in the near future and with the signed unbuilt facilities the Company intends to have these facilities on line in 1997. The majority of the facilities using the Company's private cable service are in New Jersey and New York, but the market area currently reaches from North Carolina to Massachusetts.
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 feels that this trend, coupled with the fact that the Company can offer cable services normally not provided by traditional wired cable companies, should permit 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 hospital are on a 12 month billing cycle.
1996 vs. 1995
The net loss for 1996 was $1,411,509, compared to $844,493 for 1995. The net loss from the private cable operation was $443,940 in 1996, compared to $245,111 for 1995. The loss from the Company's wireless cable business for 1996 was $967,569 compared to $599,382 for 1995, which related to expenses such as professional fees, engineering fees, salaries and channel lease expenses.
Revenues in 1996 increased by 93% to $1,285,442 from $666,366 in 1995. The increase was due to the addition of approximately 3,400 outlets in 1996 and the inclusion of a full year's income for the outlets added in 1995.
Cost of sales increased by 48% to $526,654 from $355,001 reflecting the increase in outlets in 1996 and a full years' programming expense from the outlets added in 1995.
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Operating expenses primarily consist of salaries, depreciation and amortization and general and administrative expenses. General and administrative expenses primarily consist of salary payroll taxes, insurance, professional expenses and channel lease costs. Operating expenses increased 62% to $1,817,737 in 1996 from $1,122,167 in 1995.
The increase was attributable to, among other things; higher salaries due to increased staffing and increases in wages to bring staff up to market rate; depreciation and amortization which was increased due to amortization of the capitalized debt acquisition costs and the increased depreciation due to increased outlets. Of such operating expenses, general and administrative expenses accounted for an increase of $387,576 due to, among other things, increased professional fees for consulting concerning the performance of a strategic analysis of the Company's businesses, legal and accounting fees related to the amended lending facility, and increased channel lease costs.
Interest expense increased to $395,938 in 1996 from $125,805 in 1995. This increase is attributable to the senior debt for a full year in 1996.
1995 vs. 1994
The net loss for 1995 was $844,493 compared to $531,863 for 1994. The net loss from the private cable operation was $245,111 as compared to $111,341 for 1994. The loss from the Company's wireless channels for 1995 was $599,382 which related to expenses such as professional fees, engineering fees, salaries and channel lease expenses compared to $420,522 for 1994.
Revenues in 1995 increased by 29% to $666,366 from $516,053 in 1994. The increase was due to the addition of 1,561 outlets in 1995 and the inclusion of a full year's income for the outlets added in 1994.
Operating expenses are primarily salaries, depreciation and amortization, and general and administrative expenses. General and administrative expenses primarily consist of installation expenses, programming cost, payroll taxes, insurance, professional expenses and channel lease costs. Operating expenses increased 38% to $1,122,167 in 1995 from $810,361 in 1994. The major increases in general and administrative expenses included, professional fees increases of $138,637 over 1994 and channel lease expense increases of $107,656 over 1994. Salary increased $64,127 over 1994 to $383,884 primarily due to raises and increase of staff over 1994.
LIQUIDITY AND CAPITAL RESOURCES
For the year ending December 31, 1996, the total cash decreased by $71,031. The net cash used in operating activities increased from $589,685 in 1995 to $1,036,351 in 1996, primarily due to increased losses in operations.
The cash used in investing activities decreased from $1,176,683 in 1995 to $503,408 in 1996. The funds for 1996 were used primarily to purchase equipment used to increase the outlet count.
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Cash flow provided by financing activities decreased from $1,758,664 in 1995 to $1,468,728 in 1996. Cash flow provided by financing activities was principally from the proceeds of senior indebtedness.
For the year ending December 31, 1995, the total cash decreased by $7,704. The net cash used in the operating activities increased from $374,168 in 1994 to $589,685 in 1995, primarily due to increased losses in operations.
The cash used in investing activities increased by $1,102,539 to $1,176,683. The increase relates primarily to the investment in the channel lease of $900,277, coupled with the $202,887 increase in purchases of property and equipment.
Cash flow provided by financing activities increased by $1,184,585 to $1,758,664 in 1995. Cash flow from financing activities principally came from the proceeds of senior indebtedness.
Since the inception of service in 1992, the Company has experienced operating losses, was in default of certain provisions of its senior debt, and has negative cash flow. At December 31, 1996, the Company had a working capital deficiency and shareholder deficit.
The Company's capital commitments at December 31, 1996 include additional 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. However, as of the date hereof, 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 term liquidity requirements with the funds available under the agreement converting its senior debt to redeemable preferred stock described below. On a long term basis and based upon the conversion of debt to redeemable preferred stock and the elimination of related interest payments, the Company believes it will have the ability to create liquidity by borrowing, using the private cable contracts as security therefore. 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. Allen & Company Incorporated has been retained to assist the Company in these endeavors. 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 convert its debt to redeemable preferred stock, borrow any such funds or 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 the lenders and as of the year ended December 31, 1996, the Company had
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borrowed $4,062,932 under this agreement. See "Item 13 - Certain Relationships and Related Transactions" for further information with regard to the transactions described above.
As of December 31, 1996 the Company had not met several covenants under its senior debt agreement and as of March 31, 1997 the Company did not make its quarterly interest payment of $122,095. On April 3, 1997 the Company and its lenders agreed in principle to convert the entire amount of the lending facility to redeemable preferred stock. The current loan balance, along with the balance of the line will be converted to redeemable preferred stock. The Company will have cash available to it of approximately $750,000 in connection with the conversion of the debt. In exchange therefore, the Company has agreed to issue redeemable preferred stock in the amount of $5 million, with an 8% preferred dividend, and to issue additional warrants (New Warrants) to purchase additional shares of common stock, representing approximately 20% of the common stock at $2.00 per share after a 20-for-1 reverse stock split. The exercise price of the current warrants, of $.27 and $.38 per share is being reduced to $.10 per share prior to such reverse stock split. At the conclusion of this conversion the preferred shareholders will have warrants to purchase 58% of the Company's common stock and will have the right to elect the majority of the Board of Directors. However, no assurance can be given that the Company and its lenders will be able to successfully complete the conversion to preferred stock.
If the conversion described above is not effectuated management intends to sell or otherwise dispose of certain company assets. However, no assurance can be given that the Company can sell its asset or if sold is sufficient capital can be raised.
Management feels 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 captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this Form 10-K 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 referenced in the Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See pages through.
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ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None. See Form 10-K for the fiscal year ended December 31, 1995.
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PART I I I
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the directors and officers of the Registrant. These individuals serve in the same capacities with Magnavision - N.J.
The above directors and officers will hold office until the next annual meeting of shareholders or until their successors are duly elected and qualified. Nicholas Mastrorilli, Jr., Patrick Mastrorilli and Brian Mastrorilli are brothers. Their father, Nicholas Mastrorilli, Sr. is a Director, Chairman and President of the Registrant. Arnold Dauer, an advisor to the Registrant (see below) performs services that would otherwise be performed by a senior officer of the Registrant.
Nicholas Mastrorilli, Sr., Chairman of the Board and President of the Registrant from the Company's inception in June 1989 to the present; Chairman and President of Cacomm, Inc., a company organized to produce television programming and video commercials, since April 1991 and Executive Vice President from 1981 to 1991. Mr. Mastrorilli, as Executive Vice President of Cacomm, Inc. from 1981 to 1989, directed all of such company's video production and distribution business as well as its research and development activities in wireless communications. As a result, Mr. Mastrorilli has extensive experience in cable network broadcasting and information and communication systems. During his tenure at Cacomm, Inc. Mr. Mastrorilli introduced many original concepts to cable systems including, in 1981, television home shopping, "The Franchise Show", a concept created to introduce franchises and business opportunities to the general public transmitted via
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satellite nationwide on the Financial News Network, "Racing From Monmouth Park", a first time thoroughbred racing show, and "Nightlife" a show produced on location at various casinos in Atlantic City, which won the Cape Award from the Cable Television Network Awards Committee for programming excellence.
Mr. Mastrorilli, while Executive Vice President of Cacomm, Inc., one of the first cable programming production companies, was one of the original creators of advertiser supported programming for the cable industry in New Jersey. Mr. Mastrorilli also established the first regional cable television advertising interconnect in New Jersey in 1981. Infomercials, as they are called today, are believed to be a creation of Mr. Mastrorilli who, in 1981, called them 30 minute sellathons.
Mr. Mastrorilli was also responsible for the successful acquisition of wireless cable channel capacity for the Registrant from the New York Catholic Archdiocese. This cooperative business opportunity established the Registrant as the first company to ever sign an agreement with the New York Catholic Archdiocese for multiple-channel leasing. Mr. Mastrorilli is listed in the Who's Who Registry, Worldwide Platinum Edition.
Nicholas Mastrorilli, Jr., Vice President of administration since April of 1991. Mr. Mastrorilli, Jr. has also served as Vice President of Cacomm, Inc. from April 1991 to the present. He also served as director of administration of Cacomm, Inc. from January 1986 to April of 1991. He is responsible for the administrative functions of the Registrant. Until December 31, 1995 Mr. Mastrorilli, Jr. was the Registrant's Chief Financial Officer. Mr. Mastrorilli, Jr., now oversees all day-to-day functions of an administrative nature, has recently assumed responsibility for marketing and sales to nursing homes with respect to the Registrant's private cable television business (approximately 230 nursing home outlets have been signed to date) and assists the Registrant's new Chief Financial Officer with various financial matters, including accounts receivable, accounts payable, payroll, and working capital accounts. He has eight years of experience in the wireless cable industry serving as Director of Administration of Cacomm, Inc. Cacomm is also a partner in the Grand Alliance, a wireless cable television company. Mr. Mastrorilli, Jr. is currently serving as Vice President of Administration for Magnavision Corporation and has been directly involved with the business since its inception.
Patrick F. Mastrorilli, Vice President of Marketing since April 1991. He has also served as Vice President of Cacomm, Inc. from April 1991 to the present. He also served as Director of Sales and Marketing of Cacomm, Inc. from January 1986 to April of 1991. He is responsible for all sales and marketing to colleges and other institutions. He institutes and implements advertising campaigns designed to attract additional subscribers to Magnavision's services, as well as overseeing all right-of-entry negotiations with building owners, management companies, colleges, and nursing homes. Mr. Mastrorilli has eight years of experience in the wireless cable field serving as Director of Sales and Marketing of Cacomm, Inc. Mr. Mastrorilli, currently serving as Magnavision's Vice President of Marketing, has worked for the Company since its inception. He has successfully negotiated and signed agreements with 22 institutions on behalf of the Company. Non-profit volunteer work is also of interest to Mr. Patrick Mastrorilli who has organized and promoted fund-raising events for Muscular Dystrophy, the Arthritis Foundation, the Foodbank of New Jersey, and the American Cancer Society, just to name a few.
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Keith M. Heilos, Vice President, Customer Relations at Magnavision since April 1991. Prior to 1991, Mr. Heilos served as Director of Video Production for Cacomm, Inc. from July of 1987 to April 1991. He has co-produced and co-directed a number of productions for Cacomm, Inc. including "The Franchise Show", aired on "Financial News Network" nationwide, directed and co-produced "The United States Shopping Network", a nationwide home shopping network, and has been directly involved in numerous other video productions. Mr. Heilos is directly responsible for customer relations and is the liaison between Magnavision and its client base. Mr. Heilos has served actively in numerous community affairs. He has been a member of the local volunteer fire company for the past ten years, presently serving as Chief. He devotes additional free time to such fund raisers as the New Jersey Burn Center and drug and alcohol awareness programs.
Brian J. Mastrorilli, Vice President, Technical Operations since April 1991. Prior to 1991, Mr. Mastrorilli served as Director of Technical Operations for Cacomm, Inc. from May of 1988 to April 1991 and Vice President of Cacomm, Inc. from April 1991 to the present. He previously served as Technical Director for Video and Audio operations for Cacomm, Inc. His accomplishments have included the design and construction of a complete three camera studio facility with editing suites. Mr. Mastrorilli is presently responsible for all the company's technical projects. He has co-produced and co-directed "The Franchise Show" aired on the "Financial News Network" nationwide via satellite and the "United States Shopping Network" a shop-at-home satellite delivered home shopping network. Mr. Mastrorilli is currently the company's system designer and construction coordinator. He is responsible for all job site equipment requisitions. Mr. Mastrorilli is also responsible for the design and construction of all the company's TVRO earth stations and distribution systems. He has currently designed CATV systems supplying over 22 systems in New Jersey, New York, Pennsylvania, North Carolina, West Virginia and Massachusetts. Mr. Mastrorilli is also responsible for all of the company's "point to point" 18 GHz microwave paths. This includes all FCC licensing, design, purchase and construction.
Jeffrey Haertlein, was elected as the Company's Chief Financial Officer effective as of January 1, 1996 with responsibility for all of the Registrant's financial matters. Mr. Haertlein was previously Assistant Vice President of Midlantic Corporation from 1978 to 1995 with responsibility for day-to-day financial functions including internal reporting, special projects and financial planning for such bank holding company and its various subsidiaries. Prior thereto and from 1977 to 1978 Mr. Haertlein was employed by Chase Manhattan Bank in the capacity of Internal Auditor. Mr. Haertlein received a B.A. degree from Monmouth College in accounting/marketing and is currently attending such institution in pursuit of a Masters in Business Administration.
Arnold Dauer, age 60, is an advisor to the President of Magnavision regarding all aspects of the Registrant's business, has performed such function from June 1989 to the present, and has provided general business consulting services to Cacomm, Inc. (the major shareholder of Magnavision Corporation) from 1985 to the present. In the summer of 1996, Mr. Dauer was appointed to the position of Manager of Strategic Planning. Mr. Dauer was creator and founder of various businesses including Allaire State Bank, where he also served on the Board of Directors from 1971 until the bank merged into The National Community Bank in December of 1982. Mr. Dauer served as Vice President in charge of operations and was co-founder of "Cathy Arnold", a small chain of retail apparel stores, and also served as
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Vice President of Reid Manufacturing, Inc., a manufacturer of apparel, from 1959 until the businesses were sold in 1980. Mr. Dauer was president and founder of Professional Auto Leasing ("PAL"), one of the largest auto and equipment leasing companies operating in the tri-state area from 1976 to 1989. During the recession in the late 1980's, a large number of auto leasing defaults occurred, resulting in various corporate loans being called by the financial institution which financed PAL. Mr. Dauer, having personally guaranteed such loans, was forced to file for relief with the U.S. Federal Bankruptcy Court. Mr. Dauer, active in local community affairs, has served as President for both the Jaycees and Kiwanis.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is the aggregate remuneration paid or accrued by the Registrant during the years ended December 31, 1996, 1995 and 1994 to the Company's Chief Executive Officer. No other executive officer of the Company received salary and bonus aggregating in excess of $100,000 in any of those years.
At present, none of the current officers have employment agreements with the Registrant. Messrs. Nicholas Mastrorilli, Sr., Nicholas Mastrorilli, Jr. and Patrick Mastrorilli are expected to enter into employment agreements, under terms not yet negotiated, upon the conversion of the Company's senior subordinated note financing into redeemable preferred stock. See "Item 13 - Certain Relationships and Related Transactions".
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SUMMARY COMPENSATION TABLE
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners:
The following table contains information as of December 31, 1996 as to the beneficial ownership of shares of Common Stock of the Registrant of each person who, to the knowledge of the Registrant at that date, was the beneficial owner of 5% or more of its outstanding shares.
Name and Address Amount and Nature of Beneficial Owner of Beneficial Ownership % of Class - ------------------- ----------------------- ---------- Cacomm, Inc. 18,417,782 79.9 1725 Route 35 Wall, NJ 07719
KOCO Capital Company 6,835,364 (1) 30 111 Radio Circle Mt. Kisco, NY 10549
IBJ Schroder Bank & 10,253,046 (2) 44 Trust Company One State Street New York, NY 10004
- ---------- (1) Constitutes shares subject to currently exercisable warrants issued to KOCO Capital Company. (2) Constitutes the aggregate number of shares subject to currently exercisable warrants issued to IBJ Schroder Bank & Trust Company (6,835,364) and its affiliate, IBJS Capital Corporation (3,417,682).
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(b) Security Ownership of Management:
Set forth below is certain information, as of December 31, 1996, concerning the number and percentage of shares of Common Stock of the Registrant owned of record and beneficially by each officer and director of the Registrant and by all officers and directors as a group.
Name of Amount and Nature of Beneficial Owner Beneficial Ownership % of Class - ---------------- -------------------- ---------- Nicholas Mastrorilli, Sr. 995,460 (1) 4.3 Nicholas Mastrorilli, Jr. 295,000 (2) 1.3 Patrick Mastrorilli 331,220 (3) 1.4 All Officers and Directors as a Group (6 persons) 2,739,682 (4) 11.9
- ---------- (1) Includes 987,000 shares subject to currently exercisable warrants held by Mr. Mastrorilli, Sr., but does not include 18,417,782 shares held by Cacomm, Inc., of which Mr. Mastrorilli, Sr. owns approximately 31% of the outstanding shares (and, with members of his family, has the right to acquire an additional 19% on a fully diluted basis) and is the president and a director. Nicholas Mastrorilli, Jr. and Patrick Mastrorilli are also directors and own an insignificant amount of Cacomm, Inc. stock. Mr. Mastrorilli, Sr. disclaims any beneficial ownership of the shares of the Company owned by Cacomm, Inc.
(2) Constitutes shares subject to currently exercisable warrants held by Mr. Mastrorilli, Jr.
(3) Includes 296,579 shares subject to currently exercisable warrants held by Mr. Mastrorilli.
(4) Includes 2,453,297 shares subject to currently exercisable warrants held by all officers and directors.
(c) Changes in Control:
On April 3, 1997, the Registrant reached an agreement in principle with its lenders to convert their existing senior subordinated note financing into redeemable preferred stock. Under the proposed terms thereof the lenders will receive warrants (60% to IBJS Capital Corporation, 40% to KOCO Capital Company, L.P.) to purchase up to 58% of the Registrant's common stock on a fully diluted basis and will have the right to elect the majority of the Board of Directors. See "Item 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in Part I of this Form 10-K, in August 1995, the Company obtained a $5,000,000 lending facility from IBJ Schroder Bank & Trust Co., IBJS Capital Corporation and KOCO Capital Company, L.P. (the "Lenders"). Approximately $2,637,000 of that amount was furnished to the Company at the time the facility was entered into, and the remainder was to be advanced based on the present value of the projected cash flow from new contracts with purchasers of the Company's private cable television service, with the funds advanced to be used for equipment and construction costs incurred in connection with installation of the new outlets and for working capital. In connection therewith the Company executed 12% interest-only promissory notes, the principal of which is due on February 26, 2001. The proceeds furnished at the time the lending facility was entered into were utilized to fund an escrow deposit for system configuration required under the Channel Lease Agreement, to repurchase approximately 18% of the Company's issued and outstanding capital stock and to provide working capital. In connection with obtaining the lending facility, the Company issued to the Lenders warrants expiring on August 27, 2003 to purchase approximately 27% of the Company's Common Stock on a fully diluted basis at exercise prices of $.38 and $.27 per share. Under the terms of the lending facility, the Lenders also have the right to designate two of the Company's five directors and the Company has agreed to various covenants. In connection therewith the Company is also required to issue additional warrants to purchase 360,000 shares of its Common Stock at an exercise price of $.38 in satisfaction of certain investment banking and finder fees.
On June 3, 1996 the Company and its Lenders amended the terms of the lending facility. Pursuant thereto, the Lenders agreed to continue to waive existing defaults and provide up to $1,200,000 toward the Company's working capital requirements (of which approximately $1,000,000 had been advanced to the Company by December 31, 1996) without regard to the present value formula referred to above. In exchange therefor, the Company agreed to issue warrants ("New Warrants") to purchase additional shares of Common Stock, representing approximately 12% of the Company's Common Stock on a fully diluted basis, at an exercise price of $.27 per share. The New Warrants expire on June 4, 2004. The amended agreements require the Lenders to surrender to the Company warrants representing the right to purchase 6,884,890 shares if, as and when the Company complies with certain conditions outlined in the amended agreements. In addition, the Lenders each have the right to require the Company to repurchase certain, and the Company has the right to repurchase all, of the warrants held by the Lenders under certain conditions. The Lenders also have the option to designate three out of the five directors of a subsidiary which owns the Company's rights under the Channel Lease Agreement and under such circumstances, will receive a proxy to vote the shares thereof.
On April 3, 1997 the Company and its lenders reached an agreement in principle to convert their existing senior subordinated note financing into redeemable preferred stock ("Redeemable Preferred Stock"). Under the proposed terms thereof, the Registrant's outstanding subordinated notes, approximately four million dollars, together with accrued interest and detachable warrants, will be exchanged for $5,000,000 of 8% Redeemable Preferred Stock due December 31, 2002 together with the cash balance of the remaining line of credit (approximately $750,000). The Redeemable Preferred Stock can be redeemed at the Company's option and has a mandatory redemption feature upon the occurrence of certain
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liquidity events. The Lenders will receive 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 effectuates a 20-for-1 reverse stock split. The proposed agreement requires the warrant holders to surrender up to 10% of the 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 certain of the warrants under certain conditions. In connection with the agreement, the warrant holders have the right to designate the majority of the directors of the Company, which if exercised would result in a change of control. The agreement stipulates that, as a condition subsequent to the conversion, an affiliate of one of the warrant holders, will enter into a management services agreement with the Company upon mutually satisfactory terms, the substance of which has not been negotiated. This transaction is subject to documentation which includes employment contracts for members of the existing Board of Directors who are also members of the Registrant's management team, the terms of which have yet to be negotiated and to the absence of any material adverse change in the liabilities, condition, projections, prospects or operations of the Company. The commitment of the Lenders to proceed with the conversion as outlined will automatically expire if the conversion has not been consummated prior to April 30, 1997.
The description of the terms and conditions of the 1995 and 1996 agreements with the Lenders is qualified in its entirety by reference to the entire agreements, copies of which have been filed as exhibits to Form 10-K dated July 19, 1996 and is incorporated herein in full by reference thereto. The description of the April 3, 1997 agreement in principle is embodied in a letter agreement attached as an exhibit to this Form 10-K dated April 14, 1997.
During the fiscal year ended December 31, 1996 the Registrant paid the sum of $479,915, to the lenders of which $395,938 represented interest expense for the year ended December 31, 1996 and the balance represented interest expense for the year ended December 31, 1995 under the line of credit.
In February of 1997 the Registrant's Board of Directors approved a reduction in the exercise price of warrants to purchase 2,469,289 shares of its common stock held by officers and Directors of the Registrant, and by persons functioning in such capacity, from $.25 per share to $.10 per share. Such reduction was effected to more accurately reflect the market value of the underlying shares.
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PART I V
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1)Financial Statements. The following financial statements are included in Part II, Item 8:
Page ---- Reports of Independent Auditors' . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . .
Consolidated Statements of Operations for years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity as of December 31, 1996, 1995 and 1994 . . . . . . . . . . .
Consolidated Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . .
(a) (2) Schedules. All schedules are omitted since the required information is either not applicable or not present in amounts sufficient to require submission of the schedule.
(a) (3) Exhibits
Page or Document Item Incorporated No. Description of Document by Reference --- ----------------------- ------------
(2) Merger Agreement dated September 13, Form 8-K 1991 between Yardley Ventures, Inc. dated 9/17/91 and Magnavision Corporation
(3) (a) Articles of Incorporation and By Laws Form S-1 dated 12/29/86
(3) (b) Amendment to Certificate of Incorporation Form 8-K dated 9/17/91
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(10) (a) License Agreement dated August 20, 1990 Form 10-K between Magnavision Corporation and dated 12/31/91 Department of Education, Archdiocese of New York
(b) Amended License Agreement dated January Form 10-K 6, 1994 between Magnavision Corporation dated 12/31/93 and Department of Education, Archdiocese of New York
(c) Microcell Systems Corporation Agreement Form 10-K dated December 15, 1993 dated 12/31/93
(d) Securities Purchase Agreement dated as of Form 10-K August 25, 1995 among the Registrant, Magnavision dated 7/19/96 Corporation (N.J.), IBJS Capital Corporation, IBJ Schroder Bank & Trust Company and Koco Capital Company, L.P.
(e) Form of Senior Subordinated Note of the Form 10-K Registrant and Magnavision Corporation (N.J.) dated 7/19/96 due February 26, 2001
(f) Form of Warrant to Purchase Shares of Registrant's Form 10-K Common Stock expiring on August 26, 2003 dated 7/19/96
(g) Security Agreement and Collateral Assignment dated Form 10-K as of August 25, 1995 among Magnavision Corporation dated 7/19/96 (N.J.), University Connection, Inc. and IBJS Capital Corporation as agent
(h) Registration Rights Agreement dated as of Form 10-K August 25, 1995 among the Registrant and the dated 7/19/96 investors listed therein
(i) Stockholders' Agreement dated as of August 25, 1995 Form 10-K among the Registrant, the investors and the other dated 7/19/96 parties listed therein
(j) Non-Competition Agreement dated as of August 25, 1995 Form 10-K between Magnavision Corporation (N.J.) and dated 7/19/96 Nicholas Mastrorilli, Sr.
(k) Indemnification Agreement dated as of August 25, 1995 Form 10-K between the Registrant, Cacomm, Inc., and the dated 7/19/96 investors listed therein
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(l) Lockbox Service Agreement dated as of August 25, 1995 Form 10-K among Magnavision Corporation (N.J.), University dated 7/19/96 Connection, Inc., IBJS Capital Corporation and IBJ Schroder Bank & Trust Company
(m) Amendment No. 1 dated as of June 3, 1996 to Form 10-K Securities Purchase Agreement dated as of August dated 7/19/96 25, 1995 among the Registrant, Magnavision Corporation (N.J.), Magnavision Wireless Cable, Inc., IBJS Capital Corporation, IBJ Schroder Bank & Trust Company and Koco Capital Company, L.P.
(n) Amended and Restated Stockholders' Agreement dated Form 10-K as of June 3, 1996 among the Registrant, dated 7/19/96 Magnavision Corporation (N.J), Magnavision Wireless Cable, Inc. and the investors and other parties listed therein
(o) Amendment No. 1 dated as of June 3, 1996 Form 10-K to the Registration Rights Agreement dated as dated 7/19/96 of August 25, 1995 among the Registrant and the investors listed therein
(p) Amendment No. 1 dated as of June 3, 1996 to Form 10-K the Security Agreement and Collateral Assignment dated 7/19/96 dated as of August 25, 1995 among Magnavision Corporation (N.J.) Magnavision Wireless Cable, Inc., Magnavision Private Cable, Inc., University Connection, Inc. and IBJS Capital Corporation, as agent
(q) Amended and Restated Lockbox Service Agreement Form 10-K dated as of June 3, 1996 among Magnavision dated 7/19/96 Corporation (N.J.), University Connection, Inc., Magnavision Private Cable, Inc., IBJS Capital Corporation and IBJ Schroder Bank & Trust Company
(r) Pledge Agreement dated as of June 3, 1996 between Form 10-K Magnavision Corporation (N.J.) and IBJS Capital dated 7/19/96 Corporation as agent
(s) Pledge Agreement dated as of June 3, 1996 between Form 10-K Magnavision Corporation (N.J.) and IBJS Capital dated 7/19/96 Corporation as agent
(t) General Indenture of Conveyance, Assignment and Form 10-K Transfer dated as of June 3, 1996 from Magnavision dated 7/19/96 Corporation (N.J.) and University Connection, Inc. to Magnavision Private Cable, Inc.
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(u) General Indenture of Conveyance, Assignment and Form 10-K Transfer dated as of June 3, 1996 from Magnavision dated 7/19/96 Corporation (N.J.) to Magnavision Wireless Cable, Inc.
(v) Indenture of Assumption of Liabilities dated Form 10-K as of June 3, 1996 from Magnavision Private dated 7/19/96 Cable, Inc. to Magnavision Corporation (N.J.) and University Connection, Inc.
(w) Indenture of Assumption of Liabilities dated Form 10-K as of June 3, 1996 from Magnavision Wireless dated 7/19/96 Cable, Inc. to Magnavision Corporation (N.J.)
(x) Irrevocable Proxy dated June 3, 1996 issued by Form 10-K Magnavision Corporation (N.J.) to IBJS Capital dated 7/19/96 Corporation as agent
(y) Form of Amended and Restated Senior Subordinated Form 10-K Notes dated June 3, 1996 dated 7/19/96
(z) Form of Warrant to Purchase Shares of Registrant's Form 10-K Common Stock expiring on June 4, 2004 dated 7/19/96
(aa) Letter Agreement dated July 11, 1995 between the Form 10-K Registrant, Cacomm, Inc. and George S. Callas dated 7/19/96
(bb) Letter Agreement dated August 25, 1995 among the Form 10-K Registrant, Midlantic Bank, N.A. and George S. Callas dated 7/19/96
(cc) Letter Agreement dated April 3, 1997 between the Registrant, KOCO Capital Company, L.P. and IBJS Capital Corporation
(11) Statement re: Computation of per share earnings
(16) Letter re: change in certifying accountant Form 10-K dated 7/19/96
(21) Subsidiaries of Registrant
(27) Financial Data Schedule
(b) Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on the Company's behalf by the undersigned, thereunto duly authorized.
MAGNAVISION CORPORATION
DATE: April 14, 1997 By: /s/ Nicholas Mastrorilli, Sr. ----------------------------- NICHOLAS MASTRORILLI, SR. Principal Executive Officer
By: /s/ Jeffrey Haertlein ----------------------------- JEFFREY HAERTLEIN Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Supplemental Information to be Furnished with Reports filed pursuant to Section 15(d) of the Act by Registrants which have not registered securities pursuant to Section 12 of the Act.
As of the date hereof, the Registrant has never sent any annual report or proxy material to its security holders. If and when such annual report or proxy material is furnished to its stockholders, the Registrant shall furnish to the Commission for its information copies of such material. Such material, when furnished, shall not be deemed to be "filed" with the Commission or otherwise subject to liabilities of Section 18 of the Act (except to the extent that the Registrant specifically incorporates such material by reference in its Form 10-K).
- 35 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on the Company's behalf by the undersigned, thereunto duly authorized.
MAGNAVISION CORPORATION
DATE: April 14, 1997 By: ----------------------------- NICHOLAS MASTRORILLI, SR. Principal Executive Officer
By: ----------------------------- JEFFREY HAERTLEIN Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Page ----
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Independent Auditors' Report
To the Board of Directors and Shareholders of: Magnavision Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Magnavision Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express and opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Magnavision Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, is in default of certain provisions of its senior debt, and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
New York, New York April 11, 1997
Independent Auditors' Report
To the Board of Directors and Stockholders of: Magnavision Corporation and Subsidiaries Wall, New Jersey
We have audited the accompanying consolidated balance sheet of Magnavision Corporation and Subsidiaries as of December 31, 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above the present fairly, in all material respects, the financial position of Magnavision Corporation and Subsidiaries as of December 31, 1994, and the results of their operations and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
Lawson, Rescinio, Schibell & Assoc., P.C.
Oakhurst, New Jersey January 30, 1995
MAGNAVISION CORPORATION AND SUBSIDIARIES BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
See notes to consolidated financial statements
. MAGNAVISION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements.
MAGNAVISION CORPORATION AND SUBSIDIARIES STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996,1995 AND 1994
See notes to consolidated financial statements.
MAGNAVISION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDING DECEMBER 31, 1996, 1995 AND 1994
See notes to consolidated financial statements.
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
1 - OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
a. Consolidated Financial Statements - The accompanying financial statements present the consolidated accounts of Magnavision Corporation, a Delaware corporation (formerly Yardley Ventures, Inc.), and its wholly owned subsidiary Magnavision Corporation, a New Jersey corporation, and its wholly owned subsidiaries, University Connection, Inc., a New Jersey corporation, Accu-Trek, Inc., a New Jersey corporation and Magnavision Laboratories, Inc., a Delaware Corporation ("the Company"). As required by the amended senior debt agreement of June 4, 1996, Magnavision Corporation, a New Jersey corporation, formed two additional wholly owned subsidiaries, Magnavision Private Cable, Inc., established to hold the private cable contracts and Magnavision Wireless Cable, Inc., established to hold the wireless lease. The consolidated financial statements include all of the assets, liabilities, income, expenses and cash flows for these companies. All significant intercompany transactions and balances have been eliminated.
b. Organization, Operations and Liquidity (See Note 9) - Magnavision Corporation (formerly Yardley Ventures, Inc.) was incorporated in Delaware on April 3, 1986, to seek to acquire one or more potential businesses. Magnavision Corporation and its subsidiaries were established to conduct the business of providing wireless and private cable television, which is now the business purpose of the Company, to segments where cable television is not available and as an alternative to cable television. Magnavision Corporation of New Jersey was formed on June 15, 1989, pursuant to the laws of the State of New Jersey. As a result of the amended lending agreement, the Company created two new subsidiaries, Magnavision Private Cable and Magnavision Wireless Cable.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company has suffered recurring losses from operations, is in default of certain provisions of its senior debt, and has a net capital deficiency at December 31, 1996. In the absence of alternative financing, sales of assets, or restructuring of its existing debt, the Company will have insufficient liquidity to pay principal and interest on its existing senior debt and may experience liquidity shortfalls in meeting its ongoing obligations.
The Company plans to meet short term liquidity requirements with funds that will be available under the agreement converting debt to redeemable preferred stock described below. On a long term basis and based upon the elimination of all debt on its balance sheet, the Company intends to create liquidity by borrowing senior secured debt utilizing its wireless assets and/or its private cable contracts as security therefore. In addition, the Company plans to take advantage of the current marketplace interest in wireless spectrum that it controls by 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. Allen & Company Incorporated has been retained to assist the Company in these endeavors. Also, management believes that the continued expansion of the Company's private cable operations should produce positive cash flows in the future.
There can, however, be no assurance that the Company will be successful in the conversion of existing debt, obtaining additional financing, or in exploring various strategic alternatives for its channel lease, which will be sufficient to meet all projected and/or unforseen cash needs.
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
c. Cash and Cash Equivalents - For purposes of the statement of cash flows, the Company considers cash in banks and certificates of deposit maturing within thirty days as cash and cash equivalents.
d. Property and Equipment - Property and equipment are stated at cost. Depreciation, for financial reporting purposes, is provided on the straight-line method over the estimated useful lives of the related assets, which are:
Office Equipment 5 years Furniture and Fixtures 10 years Transportation Equipment 5 years Machinery and Equipment 5 to 10 years Leasehold Improvements 7 years
The Company uses accelerated methods and lives, as allowed by the Internal Revenue Code, to calculate depreciation for income tax purposes.
e. Deferred Revenues - The Company records subscriptions received in advance of the service being provided as a current liability.
f. Income Taxes - Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
g. Use of Estimates- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenue and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.
h. Fair Value of Financial Instruments - Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (Statement 107), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In many cases, fair value estimates cannot be substantiated by comparison to independent market information and could not be realized in immediate settlement of the instrument. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
In management's opinion, cash and cash equivalents, trade accounts and other receivables, shareholder loans at receivable, deposits, accounts payable and accrued expenses, due to shareholders, long-term debt and notes payable equal or approximate fair value.
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
i. Impairment of Long-Lived Assets - The Company adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
j. Prepaid Lease Expense - Prepaid lease expense represents the Company's deposit relating to the Channel Lease Agreement (see note 7). The amount is being amortized over the term of the lease agreement.
k. Deferred Financing Costs - Deferred financing costs represent expenditures relating to the Senior Debt financing (see note 7). The amount is being amortized over the term of the senior debt financing lease agreement.
l. Earnings Per Share of Common Stock - Primary earnings per share are computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares include shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method when dilutive.
m. Accounting for Stock Issued to Employees - Prior to January 1, 1996, the Company accounted for its warrants in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income disclosure for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to account for stock options granted under the provisions of APB 25 and to provide the pro forma disclosures required by SFAS 123. The pro forma disclosures required by SFAS 123 for 1996 and 1995 have not been presented on the basis of materiality.
NOTE 2 - RELATED PARTY TRANSACTIONS-CONFLICTS OF INTEREST
The following transactions occurred between the Company and related parties:
a. Shareholder loans receivable of $44,161 and $43,861 at December 31, 1996 and December 31, 1995 are payable on demand and are interest free.
b. At December 31, 1996 and 1995, current liabilities include $139,889 and $144,889, respectively, payable to the Company's majority shareholder in connection with expenses paid by this shareholder on behalf of the Company in prior years.
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
c. Cacomm, Inc., the Company's majority shareholder, is a partner in a general partnership known as the Grand MMDS Alliance. The Grand MMDS Alliance holds rights to certain MMDS channels, as a designated selectee of the FCC. These channels cover similar broadcast areas as Magnavision, and the possibility exists that The Grand MMDS Alliance could commence business in direct competition with Magnavision, but has not commenced business operations as of the date of this report. Certain officers and directors of Magnavision are also officers and directors of Cacomm, Inc.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 are summarized by major classification as follows:
1996 1995 ----------- ----------- Office Furniture and Equipment $ 55,505 $ 49,246 Transportation Equipment 46,224 51,559 Machinery and Equipment 1,168,158 665,974 ----------- ----------- 1,269,887 766,779 Less: Accumulated Depreciation (501,178) (333,870) ----------- -----------
$ 768,709 $ 432,909 =========== ===========
Machinery and equipment relate principally to assets owned by the Company located at the various college and nursing home sites serviced by the Company.
NOTE 4 - INCOME TAXES
Income tax expense attributable to loss from operations consists of:
Current
Year ended December 31, 1996: Federal -- - State 710 ----
====
Year ended December 31, 1995: Federal -- State 1,452 -----
1,452 =====
Year ended December 31, 1994: Federal 7,632 ------
$7,632 ======
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
Income tax expense attributable to net loss before provision for income taxes was $710, $1,452 and $7,632 for the years ended December 31, 1996, 1995 and 1994 and differed from the amounts computed by applying the U.S. Federal income tax rate of 34 percent to pretax income from operations as a result of the following:
The temporary differences and carry forwards which give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below:
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996, the Company has net loss carry forwards for federal income tax purposes of $5,600,000 which are available to offset future taxable income. These carry forwards expire in varying amounts through 2011. The net change in the total valuation allowance for 1996, 1995 and 1994 was an increase of $563,636, $334,062 and $204,495, respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consisted of the following:
At December 31, 1996 maturities of long-term debt are as follows:
1997 3,686 1998 4,163 1999 4,703 Thereafter 2000 1,697 ------- $14,244 =======
NOTE 6 - OPERATING LEASES
The Company leases office space and automobiles for use in continuing operations for terms of 1 to 3 years. Minimum lease payments over the remaining lease terms are as follows:
1997 $ 25,343 1998 14,100 1999 586 --------- $ 40,029 =========
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT DECEMBER 31, 1996,1995 AND 1994
Expenses under operating leases amounted to $40,127, $24,468 and $32,333 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 7 - LICENSE AGREEMENT
On August 20, 1990, the Company entered into an agreement with the Department of Education, Archdiocese of New York ("the Archdiocese") which would permit the Company to use the Transmission Capacity of the Archdiocese. The agreement, which was amended in January 1994, grants the Company a lease through January 2004 with a right to extend for an additional five years and a right of first refusal for subsequent renewals. Pursuant to the agreement, the Company must also pay to the Archdiocese a royalty fee for the use of the Transmission Capacity, in accordance with the terms and amounts described in the amended agreement. In connection with the amended agreement the Company had a contingent obligation to fund the reconstruction of the Archdiocese's system. In 1995, the Company deposited $900,277 in an escrow account for the purpose of system reconstruction upgrades. The Company recorded the deposit as prepaid lease expense, and is amortizing the amount over the life of the agreement through January 2004.
At December 31, 1996, the minimum royalty payments over the remaining license term are as follows:
For the Year Ended - 1997 $ 144,000 - 1998 144,000 - 1999 144,000 - 2000 144,000 - 2001 144,000 - Thereafter 300,000 ----------- $ 1,020,000 ===========
NOTE 8 - OBLIGATIONS UNDER CAPITAL LEASES
The Company maintained capital leases on certain equipment with lease terms through June, 1996. These leases have been paid in full. The Company has retained title to this equipment. The obligations under capital leases were recorded in the accompanying financial statements at the present value of the future minimum lease payments, discounted at interest rates from 24.50% to 27.25%. At December 1996 and 1995, the assets held under the capital leases are included in property and equipment costs as follows:
1996 1995 ---- ----
Office Equipment $ 24,412 $ 24,412
Machinery and Equipment 132,914 132,914 --------- ---------
Total assets at cost $157,326 $157,326 Less accumulated depreciation (133,050) (104,025) --------- --------- $ 24,276 $ 53,301 --------- =========
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 - NOTES PAYABLE - SENIOR DEBT
In August 1995, the Company obtained a $5,000,000 lending facility from IBJ Schroder Bank & Trust Co., IBJS Capital Corporation (collectively "IBJS") and KOCO Capital Company, L.P. ("KOCO"), with interest at 12% payable quarterly on any outstanding balance. The final maturity date of any outstanding amount under the lending facility was February 2001. Approximately $2,637,000 of that amount was furnished to the Company at the time the lending facility was entered into, and the remainder was to be advanced based on the present value of the projected cash flow from new contracts with purchasers of the Company's private cable television service. Funds advanced are to be used for equipment and contract costs incurred in connection with installation of the service at the new locations and for working capital. The proceeds furnished at the time the lending facility was entered into were utilized to fund an escrow deposit of $900,000 for system configuration required under the Channel Lease Agreement, to repurchase approximately 18% of the Company's issued and outstanding capital stock and to provide working capital. In connection with obtaining the lending facility, the Company issued to its lenders 7,239,309 and 2,438,177 warrants to purchase approximately 27% of the Company's Common Stock on a fully diluted basis at exercise prices of $.38 and $.27 per share, respectively. These warrants expire on August 27, 2003.
Related to the Agreement, the Company also agreed to issue 200,000 common shares in aggregate to two individuals at par value for services provided in obtaining the above financing. Due to immateriality these additional costs were not accrued as part of debt acquisition costs.
As of December 31, 1995, the Company had not met certain covenants under the agreement, and, at the end of the first quarter of 1996, had not made its required interest payment of $82,710.
On June 3, 1996, the terms of the lending facility were amended. Pursuant to the amendment, the lenders agreed to waive existing defaults and provide up to the sum of $1,200,000 toward the Company's working capital requirements without regard to the present value formula referred to above, with the remaining balance of the $5 million to be advanced based on the present value of projected cash flow from the contracts for new outlets with institutions. In exchange therefore, the Company agreed to issue warrants to purchase an additional 7,410,930 shares, representing 12% of the Company's Common Stock on a fully diluted basis at an exercise price of $.27 per share. These warrants expire on June 4, 2004.
The amendment requires the lenders to surrender to the Company warrants for the purchase of up to 6,884,890 shares if, as and when the Company complies with certain conditions outlined in the agreement. The amendment has a put/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 which cannot be assured.
In connection with the June 3, 1996 Amendment the Company's rights under the Channel Lease Agreement have been transferred to a subsidiary whose stock has been pledged to the Lenders as security for amounts advanced under the lending facility. The agreement is secured by the License Agreement and the Company's institutional cable contracts. The Agreement contains a prepayment penalty for the first two years and places limits on stock sales and payment of dividends, and also contains several financial covenants.
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.
Subsequent thereto, and on April 3, 1997, the Company reached an agreement in principle with its lenders to convert their existing senior subordinated note financing into redeemable preferred stock. Under the proposed terms thereof, the Company's outstanding subordinated notes, aggregating approximately four million dollars, together with accrued interest and detachable warrants, will be exchanged for $5,000,000 of 8% redeemable preferred stock due December 31, 2002. In connection with the exchange, the lenders will also fund the Company the remaining balance on the existing line, which is approximately
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
$750,000. IBJS and KOCO will receive 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 effectuates a 20-for-1 reverse stock split, and will have the right to elect the majority of the Board of Directors which would result in a change in control. The proposed agreement also requires the warrant holders to surrender up to 10% of the 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 certain of the warrants under certain conditions. The agreement stipulates that one of the warrant holders will enter into a management service agreement. This transaction is subject to documentation which includes employment contracts for members of the existing Board of Directors who are also members of the Company's management team. The commitment of the Lenders to proceed with the conversion as outlined will automatically expire if the conversion has not been consummated prior to April 30, 1997.
NOTE 10- SALES TO MAJOR CUSTOMERS
For the year ending December 31, 1996 and 1995, revenue from three customers represented 50% and 62%, respectively, of total revenues.
NOTE 11 - STOCKHOLDERS' EQUITY
During the first quarter of 1996, the Company issued 200,000 shares of common stock at $.25. These shares were issued to non-management shareholders who assisted in facilitating the redemption of the 4,626,354 shares of common stock held in treasury.
During the second quarter of 1996 the Company retired the 4,626,354 shares of common stock held as treasury stock as was required by its lenders.
During the third quarter of 1996 non-management and management warrant holders exercised warrants for 101,344 shares of common stock at an exercise price of $.25 per share.
In August 1995, the Company repurchased 4,626,354 common shares, net, from a bank for $760,000. The shares purchased were net of 250,000 shares granted to the original owner of the shares for his assistance in the transaction.
During 1995, the Company issued 283,000 and 182,500 shares of common stock at a price of $.25 and $1.00 per share, respectively, for total proceeds of $253,250.
In December 1995, the Company issued 60,000 shares with a negotiated value of $1.00 per share to a vendor in lieu of a cash payment. In addition, 27,066 warrants were exercised at $.25 per share effective December 18, 1995 by various officers of the Company.
At December 31, 1995, the Company has unexercised options outstanding, held by certain former consultants, to purchase 47,000 of its common shares. The options contain exercise prices from $.004 a share to $.10 a share and expire at various dates through July 1997.
During 1996 and 1995, the Company granted 7,410,924 and 9,997,486 warrants for shares of its common stock at exercise prices ranging from $.25 to $1.00 per share. At December 31, 1996, the Company has 20,049,006 unexercised warrants outstanding to purchase 20,049,006 shares of its common stock, which expire at various dates through May 25, 2005.
Pursuant to the original Securities Purchase Agreement with its Senior Lenders, the Company required to issue additional warrants to purchase 360,000 shares of its common stock at an exercise price of $.38 in satisfaction of certain investment banker and finders fees previously agreed to.
MAGNAVISION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
In February 1997, the Company reduced the exercise price of 2,469,289 warrants held by officers and directors of the Registrant from an exercise price of $.25 to $.10. Such reduction was effected to more accurately reflect the market value of the underlying shares.
NOTE 12 - CONCENTRATION OF CREDIT RISK
The Company maintains its cash at a financial institution. The Federal Deposit Insurance Corporation only insures up to $100,000 at any one financial institution. The Company rarely if ever maintains cash of more than $100,000 in any one institution.
NOTE 13 - SUBSEQUENT EVENT
During 1997 the Company has entered into contracts with six additional institutions to provide cable television service. The Company has presently begun, in conjunction with a potential joint venture partner, testing the channel lease spectrum for uses other than television. These test relate to one-way transmission and are therefore dependent upon receipt of approval from the F.C.C. application for which has been recently filed.