EXHIBIT INDEX APPEARS ON PAGE
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
Commission File Number: 0-17170
TELVUE CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE 51-0299879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16000 Horizon Way, Suite 500
Mt. Laurel, New Jersey 08054
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code:(609) 273-8888
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the issuer was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
Number of shares of registrant's common stock outstanding as of October 26,
1997: 23,794,500 shares.
Transitional Small Business Disclosure Form: Yes No X
------ ------
This report includes a total of 16 pages.
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TELVUE CORPORATION
INDEX
PAGE
NO.
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1997
(unaudited) and as of December 31, 1996
Statements of Operations for the three
months ended September 30, 1997 (unaudited)
and September 30, 1996 (unaudited)
Statements of Operations for the nine
months ended September 30, 1997 (unaudited)
and September 30, 1996 (unaudited)
Statements of Cash Flows for the nine
months ended September 30, 1997 (unaudited)
and September 30, 1996 (unaudited)
Notes to Financial Statements (unaudited)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<PAGE>
<TABLE>
PART I. Financial Information
ITEM I. Financial Statements
TELVUE CORPORATION
BALANCE SHEETS
September 30, December 31,
1997 1996
------------- -----------
<S> <C> <C>
ASSETS (Unaudited) *
CURRENT ASSETS
Cash and cash equivalents $ 550,331 $ 668,367
Accounts receivable - trade 939,983 913,106
Other receivables 4,648 289,342
Other current assets 12,684 12,964
----------- -----------
TOTAL CURRENT ASSETS 1,507,646 1,883,779
PROPERTY AND EQUIPMENT
Machinery and equipment 4,459,406 4,111,240
Less accumulated depreciation 2,487,640 1,872,504
----------- -----------
1,971,766 2,238,736
DEFERRED TAXES, net 2,620,000 -
SECURITY DEPOSITS 9,300 8,800
----------- -----------
$ 6,108,712 $ 4,131,315
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable-majority stockholder-current $ 700,000 $ 1,000,000
Accounts payable - trade 327,552 220,415
Accounts payable - equipment 16,196 98,559
Accrued expenses 177,864 164,876
Accrued dividends 268,707 -
Deferred trunk credit 195,850 190,800
----------- -----------
TOTAL CURRENT LIABILITIES 1,686,169 1,674,650
NOTES PAYABLE - MAJORITY STOCKHOLDER 4,119,712 5,369,712
ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,262,791 1,902,964
REDEEMABLE CONVERTIBLE PREFERRED STOCK, $1 par
value, 6,900,000 shares authorized,
2,985,636 shares issued and outstanding 2,985,636 2,985,636
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 100,000,000
shares authorized, 23,794,500 shares
issued and outstanding 237,945 237,945
Additional paid-in capital 1,515,535 1,515,535
Accumulated deficit (6,699,076) (9,555,127)
----------- -----------
(4,945,596) (7,801,647)
----------- -----------
$ 6,108,712 $ 4,131,315
=========== ===========
* Derived from audited financial statements.
The accompanying unaudited notes are an integral part of these statements.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
1997 1996
---- ----
REVENUES $ 1,548,768 $ 1,403,410
OPERATING EXPENSES
Service 733,618 769,196
Selling and marketing 147,265 138,011
General and administrative 153,856 146,679
Depreciation 212,037 225,280
----------- -----------
1,246,776 1,279,166
----------- -----------
OPERATING INCOME 301,992 124,244
OTHER INCOME (EXPENSE)
Interest income 11,515 2,712
Interest expense (111,121) (145,479)
Gain (loss) on disposal of property and equipment - 200
----------- -----------
(99,606) (142,567)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 202,386 (18,323)
INCOME TAX BENEFIT 800,000 -
--------- -----------
NET INCOME (LOSS) 1,002,386 (18,323)
DIVIDENDS ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK (89,569) (78,745)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 912,817 $ (97,068)
============ ============
NET INCOME (LOSS) PER COMMON SHARE $.04 $(.004)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 23,794,500 23,794,500
=========== ===========
The accompanying unaudited notes are an integral part of these statements.
<PAGE>
<PAGE>
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30,
--------------------------------
1997 1996
---- ----
REVENUES $ 4,708,153 $ 3,987,525
OPERATING EXPENSES
Service 2,347,507 2,206,052
Selling and marketing 431,233 465,902
General and administrative 481,191 448,640
Depreciation 615,153 678,553
----------- -----------
3,875,084 3,799,147
----------- -----------
OPERATING INCOME 833,069 188,378
OTHER INCOME (EXPENSE)
Interest income 32,654 2,712
Interest expense (360,965) (437,347)
Loss on disposal of property and equipment - (9,440)
----------- -----------
(328,311) (444,075)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 504,758 (255,697)
INCOME TAX BENEFIT 2,620,000 -
----------- -----------
NET INCOME (LOSS) 3,124,758 (255,697)
DIVIDENDS ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK (268,707) (230,719)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 2,856,051 $ (486,416)
============ ============
NET INCOME (LOSS) PER COMMON SHARE $.12 $(.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 23,794,500 23,794,500
=========== ===========
The accompanying unaudited notes are an integral part of these statements.
<PAGE>
<PAGE>
TELVUE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 3,124,758 $ (255,697)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 615,153 678,553
Loss on disposal of property and equipment - 9,440
Provision for deferred taxes, net (2,620,000) -
Changes in assets and liabilities:
Decrease (increase) in -
Accounts receivable - trade (26,877) (94,540)
Other receivable 284,694 10,858
Other current assets 280 (16,257)
Security deposits (500) -
Increase (decrease) in -
Accounts payable - trade 107,137 (150,724)
Accounts payable - equipment (82,363) (22,054)
Accrued expenses 12,988 (91,938)
Deferred trunk credit 5,050 222,450
Accrued interest - majority stockholder 359,827 437,347
----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,780,147 727,438
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (348,183) (441,328)
Proceeds from sale of property and equipment - 200
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (348,183) (441,128)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - majority stockholder - 143,000
Debt reduction:
Notes payable - majority stockholder (1,550,000) (150,000)
----------- -----------
NET CASH PROVIDED BY (USED BY)
FINANCING ACTIVITIES (1,550,000) (7,000)
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS (118,036) 279,310
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 668,367 216,409
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 550,331 $ 495,719
=========== ===========
The accompanying unaudited notes are an integral part of these statements.<PAGE>
<PAGE>
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
----------------------
Summary Financial Information and Results of Operations
- --------------------------------------------------------
In the opinion of management, the accompanying unaudited financial
statements have been prepared in conformance with generally accepted
accounting principles and with the regulations of the Securities and Exchange
Commission and contain all adjustments (consisting of only normal recurring
adjustments) necessary to make the financial statements not misleading and to
present fairly the financial condition as of September 30, 1997, the results
of operations for the three and nine months ended September 30, 1997 and 1996
and cash flows for the nine months ended September 30, 1997 and 1996.
Interim Financial Information
- -----------------------------
While management believes that the disclosures presented are adequate to
prevent misleading information, these unaudited financial statements must be
read in conjunction with the audited financial statements and notes included
in the Company's Form 10-KSB report for the fiscal year ended December 31,
1996, as filed with the Securities and Exchange Commission.
Prior period financial statements have been reclassified to conform with
current quarter presentation.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
For purposes of Statements of Cash Flows, the Company considers investment
instruments with an original maturity of three months or less to be cash
equivalents.
Supplemental disclosures of cash paid during the period-
1997 1996
---- ----
Income taxes $ 0 $ 0
Interest $ 0 $ 0
Non-cash Investing and Financing Transactions
- ---------------------------------------------
The Company accrued dividends on its redeemable convertible preferred stock
of 268,707 and 230,719 during the nine months ended September 30, 1997 and
1996, respectively. During the nine months ended September 30, 1997 and
1996, no shares of preferred stock were issued in payment of preferred stock
dividends.
3. NET INCOME (LOSS) PER COMMON SHARE:
-----------------------------------
The net income (loss) per Common Share is based on the weighted average
number of shares of Common Stock outstanding during each period.
4. DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK:
----------------------------------------------------
As of September 30, 1997, undeclared dividends on outstanding preferred stock
amounted to $268,707.
5. CORPORATE INCOME TAXES:
-----------------------
The Company uses the asset and liability method of accounting for income
taxes in accordance with Financial Accounting Standards Board Statement
(SFAS) No. 109, "Accounting for Income Taxes". SFAS 109 requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Differences between financial reporting and tax bases arise most frequently
from differences in timing of income and expense recognition. Deferred
income tax expense is measured by the change in the net deferred income tax
asset or liability during the year.
The provisions for income tax benefit consist of the following components:
1997 1996
----------- ----------
Current $ - $ -
Deferred
Federal (200,000) -
State (55,000) -
Decrease in valuation allowance 2,875,000 -
----------- ----------
2,620,000 -
=========== ==========
The Company has a net operating loss ("NOL") carryforward of approximately
$6,124,000 on a tax reporting basis. The carryforward will begin to expire
in 2004, if not utilized. Prior to 1997, the Company believed it was more
likely than not that the NOL would expire unused and, therefore, recorded a
100% valuation allowance against the net deferred tax asset. However, as a
result of pre-tax income of $504,758 for the nine months ended September 30,
1997, the Company has reassessed the likelihood that it may utilize the NOL
to offset corporate taxable income.
As a result, the Company has recorded a net deferred tax asset of $2,620,000
at September 30, 1997, by reducing the valuation allowance it had previously
provided to offset the income tax benefit of the NOL. At September 30, 1996,
any tax benefit of the loss carryforward and of other cumulative temporary
differences were offset by a valuation allowance of the same amount.
Differences between the actual income tax rate and the statutory federal
income tax rate were primarily the result of the valuation allowance decrease
in 1997 and the valuation allowance increase in 1996.
6. NOTES PAYABLE AND ACCRUED INTEREST - MAJORITY STOCKHOLDER:
----------------------------------------------------------
As of September 30, 1997, the Company had various outstanding notes due to
the majority stockholder in the aggregate principal amount of $4,819,712 and
accrued interest due on these notes in the aggregate amount of $2,262,791.
Effective as of March 31, 1997, the Company obtained from the majority
stockholder an extension to January 1, 1999, of his prior agreement not to
demand repayment of his loans or the accrued interest on the loans. The
Company has decided to voluntarily make, and the majority stockholder has
agreed to accept, monthly payments against loan principal in the amount of
$50,000 through December 31, 1997. The Company may make monthly principal
payments in excess of $50,000 when, in the opinion of management, the Company
has excess cash that is not needed to fund operations. The Company made
principal payments of $1,550,000 during the nine months ended September 30,
1997. During October 1997, the Company made a principal payment to the
majority stockholder of $150,000. The Company has therefore classified
$700,000 of the notes payable to the majority stockholder as a short-term
liability and has classified the remaining balance on the notes payable and
the accrued interest as long-term liabilities.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
A former employee ("the Plaintiff") of the Company has filed suit against the
Company and its majority stockholder. The Plaintiff alleges breach of
contract, breach of implied covenant of good faith and fair dealing,
detrimental reliance and unjust enrichment. The suit seeks damages in an
unspecified amount for compensation and compensatory and punitive damages.
Based upon correspondence from plaintiff's counsel prior to filing the suit,
the Company's counsel believes that the plaintiff is seeking actual damages
of approximately $400,000 for commissions, unpaid salary, stock options and
other benefits. The Company believes that the Plaintiff's claims are without
merit and intends to vigorously defend the suit brought against it. The
Company believes that the likelihood of an unfavorable outcome is low.
The Company has received notice from a cable operating company customer
asserting its right to be indemnified against claims of patent infringement
made to the cable operator by a third party. The third party has alleged to
the cable operator that portions of the cable operator's pay-per-view
operations infringe one or more patents held by such party. No notice of
alleged infringement has been received by the Company from such third party.
The Company provides the Service pursuant to a patent (the "Science Patent")
licensed to it by Science Dynamics Corporation. The Company has retained
independent patent counsel to review the terms and validity of the third
party patents and the terms and validity of the Science Patent. The Company
is unable at this time to determine if it has liability under the indemnity
provisions of the contracts with the cable operator or the amount of such
liability if it exists.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
TelVue Corporation (the "Company") is a marketing and service company
primarily selling automatic number identification ("ANI") telecommunications
services to the cable television industry for the automated ordering of
pay-per-view features and events (the "Service"). The Company provides the
Service through equipment it purchases. The Company also leases trunk
telephone lines from local and long distance telephone companies to connect
cable television subscribers to the Company's Points of Presence ("POPs") for
ordering the Service from their local cable television systems. The Company
also leases data circuits from local and long distance telephone companies to
link the POPS to the cable systems' billing vendors.
Since May 1992, the Company has had a POP which is located at the
Company's home office in Mt. Laurel, New Jersey (the "National POP"). The
National POP provides enhanced service features. These enhanced service
features, which identify the cable operator by name ("Custom Greeting") and,
on accepted orders, speaks the movie or event title, start-time and channel
appearance ("Title Speak"), are necessary, the Company believes, for it to
remain competitive within the pay-per-view ANI industry. The National POP
also speaks promotional messages for products and services at the time a
cable subscriber is placing an order for a pay-per-view movie or event (the
"PPV+ service"). The National POP serves cable television systems across the
United States via trunk lines and data circuits which it currently leases
from MCI Telecommunications Corporation ("MCI"). The Company's amended lease
agreement with MCI expires July 10, 2001. The Company believes it receives
a favorable trunk usage rate from MCI.
The Company had net income before income taxes of $202,386 for the
third quarter ended September 30, 1997, compared to a net loss before income
taxes of $18,323 for the third quarter ended September 30, 1996. The Company
had net income before income taxes of $504,758 for the nine months ended
September 30, 1997, compared to a net loss before income taxes of $255,697
for the nine months ended September 30, 1996. The Company experienced a
decrease in the average monthly buy rate from 24.6% and 25.1% for the third
quarter and nine months ended September 30, 1996, respectively to 20.3% and
22.2% for the third quarter and nine months ended September 30, 1997,
respectively. This is a result of a cable industry wide drop in subscriber
pay-per-view buy rates. Although the buy rates decreased the Company still
had an increase in service revenue of $145,358 and $720,628 for the third
quarter and nine months ended September 30, 1997, respectively, over the
comparable periods of 1996. The growth in service revenues is partially
attributable to the Company serving approximately 900,000 more full-time
cable subscribers during the nine months ended September 30, 1997 compared to
September 30, 1996. The service revenue increase is also a result of an
increase in National POP feature revenue of $155,465 and $363,089 for the
third quarter and nine months ended September 30, 1997, respectively.
National POP feature revenue increased as a result of both new and existing
customers using more optional features. The Company had PPV+ revenue of
$206,357 and $575,761 for the third quarter and nine months ended September
30, 1997, respectively, compared to $97,620 and $252,542 for the third
quarter and the nine months ended September 30, 1996. The PPV+ revenue
increased over 1996 as a result of customer additions and more previously
existing customers using the PPV+ Service.
The Company had net income of $1,002,386 and $3,124,758 for the third
quarter and the nine months ended September 30, 1997, respectively. Included
in the net income is $800,000 and $2,620,000 in income tax benefits as a
result of the recognition of net deferred tax assets for the third quarter
and nine months ended September 30, 1997, respectively. The Company's income
before income taxes is $202,386 and $504,758 for the third quarter and nine
months ended September 30, 1997, respectively. Because of such pre-tax
income, the Company reduced its deferred tax asset valuation allowance since
the Company now believes that it will benefit, in part, from the utilization
of its net operating losses. As of January 1, 1997, the Company's net
operating loss carryforward was approximately $6,124,000 on a tax reporting
basis (see Note 5 to the financial statements).
Service expenses for the third quarter decreased $35,578 and increased
$141,455 for the nine months ended September 30, 1997, over the comparable
1996 periods. The decrease in service expenses for the third quarter is due
to a refund received of $73,803 from the 800 number database management
company the Company uses to reserve and manage its 800 numbers. The refund
was for a reduction in 800 number database charges for the period May 1, 1993
through December 31, 1996, as a result of a FCC rate restructuring. The
increase in service expenses for the nine months ended September 30, 1997, is
primarily attributable to an increase in trunk usage expense of $250,451, as
a result of an increase in full-time subscribers, PPV+ usage and feature
usage.
The National POP and the Regional POPs had required a substantial
purchase of equipment by the Company. During the nine months ended September
30, 1997, the Company purchased $348,183 of equipment compared with $441,328
purchased during nine months ended September 30, 1996. Depreciation
accounted for 17% and 16% of total operating expenses for the third quarter
and nine months ended September 30, 1997, respectively, compared to 18% for
both the third quarter and nine months ended September 30, 1996. For the
nine months ended September 30, 1997, selling and marketing expenses
decreased 7% as a result of a decrease of approximately $25,000 in payroll
taxes and benefits due to having one less marketing employee. General and
administrative expenses increased 7% during the nine months ended September
30, 1997, primarily as a result of an increase in legal expense of $45,660
related to the suit filed by a former employee (see Note 7 to the financial
statements).
As of September 30, 1997, the Company was serving approximately
9,300,000 full-time cable subscribers on the National POP compared to
approximately 8,400,000 full-time cable subscribers served as of September
30, 1996. In November 1996, the Company began serving cable subscribers on
a part-time basis ("Part-time Subscribers"). Part-time Subscribers are
subscribers who only use the Company's ANI service for major special events,
such as boxing, wrestling and concerts. The Company is marketing and
providing service to subscribers on a part-time basis because it wants
customers who are using alternate pay-per-view ordering services to become
familiar and comfortable with the Company's ANI service in anticipation that
these customers may choose to use the Company's ANI service on a full-time
basis. As of September 30, 1997, the Company was serving approximately
1,700,000 Part-time Subscribers. The Part-time Subscribers did not
significantly contribute to the revenue or service expense increases for the
nine months ended September 30, 1997.
Total liabilities decreased $878,654 and total assets increased
$1,977,397 for the nine months ended September 30, 1997. The decrease in
total liabilities was primarily a result of a decrease in notes payable -
majority stockholder of $1,550,000 due to debt repayment. Partially
offsetting the debt repayment is an increase in accrued interest of $359,827
on outstanding loans from Mr. H.F. Lenfest, the majority stockholder and
Chairman of the Board of Directors of the Company ("Mr. Lenfest"), and an
increase in accrued dividends of $268,707. The increase in assets is
attributable to an increase in deferred taxes of $2,620,000 as a result of
generating net income before income taxes during the nine months ended
September 30, 1997 (see above and Note 5 to the financial statements). The
increase in deferred taxes is partially offset by a decrease in other
receivables of $284,694 as a result of the Company receiving a reimbursement
from VJN of $284,619 during January 1997 (see the Company's Form 10-KSB for
the period ended December 31, 1996 (the "Report on Form 10-KSB")). The
Company's days for sales in accounts receivable is 54 days for the nine
months ended September 30, 1997, compared to 57 days for the nine months
ended September 30, 1996. The Company believes the decrease of 3 days is not
material. The Company does not offer incentives/discounts to its customers,
nor has it changed its credit terms with its customers.
The Company has received notice from a cable operating company customer
asserting its right to be indemnified against claims of patent infringement
made to the cable operator by a third party. The third party has alleged to
the cable operator that portions of the cable operator's pay-per-view
operations infringe one or more patents held by such party. No notice of
alleged infringement has been received by the Company from such third party.
The Company provides the Service pursuant to a patent (the "Science Patent")
licensed to it by Science Dynamics Corporation. The Company has retained
independent patent counsel to review the terms and validity of the third
party patents and the terms and validity of the Science Patent. The Company
is unable at this time to determine if it has liability under the indemnity
provisions of the contracts with the cable operator or the amount of such
liability if it exists.
Shares of Common Stock that have had the same beneficial owner since
April 21, 1988, or that have had the same beneficial owner for a continuous
period in excess of two years prior to the record date of any meeting of
stockholders, are entitled to ten votes per share in any matters submitted
for vote, at a meeting of stockholders. All other stockholders have one vote
per share unless this limitation is waived by the Board of Directors. As of
September 30, 1997, 5,500,353 shares of the Company's Common Stock were
entitled to one vote per share. The remaining 18,294,147 shares of Common
Stock were entitled to ten votes per share. Mr. Lenfest owns 14,557,453
shares of Common Stock that are entitled to ten votes per share.
The Company had positive cash flow from operations of $1,780,147
during the nine months ended September 30, 1997. Ignoring changes in assets
and liabilities that result from timing issues, and considering only
adjustments to reconcile net income (loss) before income taxes to net cash
provided by operating activities, the Company would have positive cash flow
from operating activities of $1,119,911 for the nine months ended September
30, 1997, compared to positive cash flow from operating activities of
$432,296 for the nine months ended September 30, 1996. The increase in cash
flow for the nine months ended September 30, 1997, is primarily a result of
increased revenue (see above).
Since November 2, 1989, the Company has funded its expansion and
operating deficit from the $2,500,000 of proceeds from the sale of shares of
the Company's Common Stock and Preferred Stock to Mr. Lenfest and from
borrowings from Mr. Lenfest. Through September 30, 1997, the Company had
borrowed an aggregate of $6,128,712 from Mr. Lenfest, as previously discussed
in the Report on Form 10-KSB. Interest on $500,000 of the loans is set at
12% per annum, interest on $411,173 is set at the floating prime interest
rate of PNC Bank plus 2%, interest on $5,217,539 of the loans is set at the
floating prime interest rate of PNC Bank plus 1% and $541,000 bears no
interest. Interest on the $1,471,272 of the loans is to be paid, quarterly.
At the option of the Company, the interest may be paid by the delivery of
shares of the Company's Preferred Stock at the rate of one share of Preferred
Stock for each one dollar of accrued interest.
Effective as of March 31, 1997, the Company obtained from Mr. Lenfest a
written agreement stating he will not demand repayment of his loans or the
cash payment of accrued interest on the loans through January 1, 1999. The
deferring of the cash interest payments along with the increase in revenue
has enabled the Company to accumulate cash. Interest expense due to Mr.
Lenfest amounted to $359,827 for the nine months ended September 30, 1997,
compared to $437,347 for the nine months ended September 30, 1996. The
decrease in interest expense is a result of the Company making, and Mr.
Lenfest accepting, cash principal payments instead of cash payments of
accrued interest. During 1996, the Board of Directors of the Company (with
Mr. Lenfest not participating) authorized the Company to make monthly
principal payments of $50,000 to Mr. Lenfest. In addition, the Board of
Directors of the Company authorized that at management's discretion, the
Company may make monthly principal payments in excess of $50,000 when the
Company has excess cash not needed to fund operations. Mr. Lenfest has agreed
to accept payments of principal through December 31, 1997. During the first
nine months of 1997, the Company made principal payments of $1,550,000 to Mr.
Lenfest. The outstanding loan balance due to Mr. Lenfest as of September 30,
1997, is $4,819,712, of which $541,000 accrues no interest.
The Company believes that increases in accrued interest under the loans
from Mr. Lenfest do not have a direct material effect on operations or
continued availability of credit. Cash flow from operations is sufficient to
fund current operations but is insufficient to fund total debt repayment.
The Company believes its suppliers look primarily to the Company's timely
payment of outstanding invoices. Historically, the Company has paid all the
suppliers it deals with on a timely basis and, therefore, the cash flow from
operations has no effect on the Company's availability of credit from key
suppliers of goods and services. The payment terms of the Company's
equipment and software providers are net 30 days.
The Company's ability to fund its operating expenses primarily depends
on three factors: the continued expansion of the Company's subscriber base,
the cable industry's buy rates, and the continued deferral by Mr. Lenfest of
the cash repayment of his loans to the Company. Management believes its
present marketing strategies will further increase the customer base,
although there can be no assurances that the Company will be able to attract
any further customers. In addition, revenues are affected by the "buy rates"
of subscribers connected to the Service. The Company considers the buy rates
of its subscribers to be low compared to long term buy rates projected by
industry pay-per-view analysts. Although cable industry buy rates have
increased each year for the last four years, the Company experienced a
decrease in the average monthly buy rate from 25.1% for the nine months ended
September 30, 1996 to 22.2% for the nine months ended September 30, 1997, as
a result of a cable industry wide drop in subscriber pay-per-view buy rates.
Hence, there can be no assurance that buys rates will continue to increase or
will remain at their current level.
The Company remains dependent upon the deferral of principal and
interest payments due to Mr. Lenfest to fund operations and capital
expenditures from operating cash flow. Mr. Lenfest has agreed not to demand
the cash repayment of principal or accrued interest on the outstanding loans
through January 1, 1999. Nevertheless, management intends to continue to
repay the outstanding principal amount of loans made by Mr. Lenfest from cash
not needed for operations. Management believes that the Company will have
sufficient funds to continue such repayments and will be able to fund its
core business from operating cash flow through December 31, 1997.
Although no equipment purchases are anticipated for the remainder of
1997 that can not be funded from cash flow generated by operations, should
the Company require additional funding, it will seek additional financing
from Mr. Lenfest and from other sources. In the event that the Company is
unable to secure additional needed funds, the Company will take actions
necessary to continue operations with the funds available, including, without
limitation, reducing or deferring capital expenditures for the National POP.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company (incorporated by
reference to the Company's Registration Statement on Form S-8, dated
March 30, 1989 (the "Registration Statement")).
3.2 Bylaws of the Company (incorporated by reference to the Company's
Registration Statement).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, dated April 11, 1990 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991, (the "1991 Form 10-K")).
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company, dated March 15, 1991 (incorporated by reference to the 1991
Form 10-K).
3.5 Form of copy of Amendment of Certificate of Incorporation of the
Company, filed September 25, 1995 (incorporated by reference to the
Company's Form 10-QSB for the period ended September 30, 1995, (the
September 30, 1995 Form 10-QSB)).
4.1 Incentive Stock Option Plan (incorporated by reference to the
Company's Registration Statement).
4.2 Form of Stock Option Agreement (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1989, (the "1989 Form 10-K")).
4.3 Warrant Agreement, dated March 15, 1991, between the Company and
H.F. Lenfest (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, (the "1990
Form 10-K")).
4.4 Certificate of Designation of Class A Preferred Stock (incorporated
by reference to the June 30, 1990 Form 10-Q).
10.1 Distributorship Agreement, dated November 2, 1989, between the
Company and Science (incorporated by reference to the 1989 Form
10-K).
10.2 Stock Purchase Agreement, dated November 2, 1989, between the
Company and H.F. Lenfest (incorporated by reference to the Company's
Report on Form 8-K, dated November 15, 1989, (the "1989 Form 8-K")).
10.3 Shareholder's Agreement, dated November 2, 1989, among the Company
and certain of its stockholders (incorporated by reference to the
Company's 1989 Form 8-K).
10.4 Option Agreement, dated November 2, 1989, among the Company and
certain of its stockholders (incorporated by reference to the 1989
Form 8-K).
10.5 Form of Credit Agreement between the Company and H.F. Lenfest
(incorporated by reference to the 1990 Form 10-K).
10.7 Form of Line of Credit Agreement between the Company and H.F.
Lenfest (incorporated by reference to the 1990 Form 10-K).
10.8 Subordinated Promissory Note, dated November 15, 1994 the principal
amount of $541,000 payable to Science Dynamics Corporation
(incorporated by reference to the 1994 Form 10-KSB).
10.10 Letter Agreement dated November 8, 1990 between Science Dynamics
Corporation and H.F. Lenfest (incorporated by reference to the
Company's Report on Form 8-K for November 16, 1990).
10.11 Loan Agreement dated December 24, 1991, between the Company and H.F.
Lenfest (incorporated by reference to the 1991 Form 10-K).
10.12 Lease Agreement for office space and the First Amendment to Lease
dated March 30, 1994, between the Company and Bloom Associates
(incorporated by reference to the 1994 Form 10-KSB).
10.13 Letter effective as of March 31, 1997, from H.F. Lenfest, waiving
the repayment of loans and accrued interest until January 1, 1999
(incorporated by reference to the Company's Form 10-QSB for the
period ended March 31, 1997).
11. Statement re: Computation of Per Share Earnings (see the Company's
September 30, 1997 Financial Statements included herein).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELVUE CORPORATION
Dated: 11/05/97 By: /s/Frank J. Carcione
--------------------------------------------
Frank J. Carcione, (Chief Executive Officer)
Dated: 11/05/97 By: /s/Irene A. DeZwaan
-------------------------------------------
Irene A. DeZwaan, Treasurer (Controller)
<PAGE>
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