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FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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
Mount Laurel, New Jersey 08054
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 609-273-8888
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Title of Each Class
Common, $0.01 per share par value
Indicate by check mark whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Issuer was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X
-----
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. X
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The Issuer's revenue for the fiscal year ended December 31, 1997 was
$6,330,675.
The Market Value of voting stock held by non-affiliates of the Issuer at
February 9, 1998, based on a per share average bid and asked price of
$.0775 was $708,896.
Number of shares of Issuer's common stock outstanding as of
February 9, 1998: 23,814,500 shares.
Transitional Small Business Disclosure Format: Yes No X
_____ _____
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ITEM 1. BUSINESS
GENERAL
TelVue Corporation, a Delaware corporation (the "Company"), was
incorporated on November 26, 1986. Until December 30, 1988, the Company
was a wholly-owned subsidiary of Science Dynamics Corporation ("Science").
On that date, the Company's shares of Common Stock were distributed to
Science's shareholders of record as of December 30, 1988, on the basis of
three shares of the Company's Common Stock for each share of Science's
Common Stock then outstanding. The Company is a marketing and operating
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").
ANI permits cable television companies to process special ordering
services without the attendant high-manpower requirements or extensive
physical plant and facilities that are otherwise required. ANI systems
provide an electronic means of recording a subscriber's telephone number
together with information as to what program or service was ordered and by
whom, permitting cable television companies to then unscramble appropriate
signals for viewing by the ordering subscriber, all without any interactive
cable system and without any form of operator intervention. At the time of
dialing the order, the recognition of the subscriber's telephone number is
automatically recorded by the Company's ANI unit, presenting the subscriber
with both a confirmation and acknowledgment of receipt of his order. In
turn, the automatically recorded information regarding placement of an
order can be utilized by cable television companies for purposes of billing
for such specialized services.
Since May 1992, the Company has had a point of presence ("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 equipment located at the National POP is owned and installed by
the Company. As of December 31, 1997, the Company had contracts to provide
service to 658 cable television systems, serving approximately 10 million
full-time subscribers and 1.5 million 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.
The Company's contracts with cable television system operators cover
the provision of ANI order entry services at a specified rate per
subscriber order. Cable television systems using the National POP are
charged, in addition to their per order fee, installation and setup fees,
monthly data circuit fees, enhanced feature fees and PPV+ promotion fees.
Monthly charges are due and payable to the Company within twenty days of
the end of each month. Generally, the contracts carry an initial term of
three years with automatic renewal unless a party gives notice of
non-renewal prior to the renewal date. Generally, the contracts are
terminable at will upon ninety days prior notice (subject to applicable
cancellation fees). Each contract is also terminable upon default by a
party or upon sale or transfer of the business or assets of the cable
operator. In addition, the contract is also assignable upon the sale or
transfer of the business or assets of the cable operator.
The Company's business is oriented principally to the provision of
services, and it does not engage in the manufacture of equipment required
to provide its services. During 1997, the Company has purchased its
required ANI equipment and software for the National POP from Telco
Solutions, Inc.
For information regarding the Company's revenue, operations and
assets, please refer to the Company's financial statements included at Item
7 of this Report and Management's Discussion and Analysis or Plan of
Operation.
LICENSES
The Company has purchased Switched-access Audio Response Units
("SARUs") and one communication subsystem ("HP") from Atlas Telecom
(formerly Syntellect, see above). The Company possesses a perpetual, no
charge license for the pay-per-view application software residing on the
SARUs it currently owns and for any future SARUs purchased.
The Company believes it received a perpetual no charge license for
the pay-per-view application software residing on the SARUs and HP because
the Company committed to and did purchase ten (10) SARUs during 1994. The
Company purchased no SARUs from Atlas Telecom during 1997. There is no
affiliation between the Company and Atlas Telecom other than a customer and
supplier relationship.
The Company pays Telco Solutions, Inc. a monthly licensing fee for an
exclusive license, within the United States, for use of pay-per-view
application software which resides on two (2) communication subsystems
("HPs") that the Company owns. During 1996, the Company began purchasing
Link On equipment ("LINK ONs") from Telco Solutions, Inc. The LINK ONs are
used to expand call capacity on the National POP to accommodate new
customers. The LINK ONs work in conjunction with the SARUs. The Company
is purchasing LINK ONs in place of SARUs because the LINK ONs are more cost
effective. The Company pays Telco Solutions, Inc. a monthly licensing fee
for an exclusive license, within the United States, for use of the pay-per-
view application software residing on the LINK ONs. The Company purchased
three (3) LINK ONs during 1997.
The Company also uses equipment purchased from Science. Science holds
United States Patent No. 4,797,913 (issued January 10, 1989), encompassing
ANI ordering equipment and services employing the use of Feature Group D
services (the "Science Patent"). The Company holds a nonexclusive license
to use the Science Patent. The Company believes that all of its pay-per-
view ordering services are performed in accordance with the procedures set
forth in the Science Patent. As a result of the potential claims described
below under "Legal Proceedings", the Company believes the Science Patent
may be material to its ability to continue operations or to continue
operations without incurring significant license fees which may have a
material and adverse affect on the Company's financial condition. (See
"Legal Proceedings", below.)
MARKETING OF SERVICES
Sales of the Company's services to date have been made to operating
cable television companies with a broad geographical distribution.
Relations with all customers are good.
The Company's business is not seasonal in any material respect.
Ordering problems common to all providers of pay-per-view services are the
geographically dispersed points of sale, the high concentration of orders
around the start time of a pay-per-view event and the need to make the
ordering mechanism sufficiently easy to accommodate the impulsive
purchasing patterns of ordering subscribers. The Company believes its
services resolve these pay-per-view ordering problems. As of December 31,
1997, there are four (4) Multi System Operators ("MSOs") who individually
comprise greater than 10% of the Company's annual service revenue. These
percentages may vary as contracts with additional cable companies are
concluded and the pay-per-view service is expanded by existing customers of
the Company.
COMPETITION
The Company uses state-of-the-art, feature laden equipment for its
automated pay-per-view order processing service. The Company has a strong
reputation for offering customer friendly features and excellent customer
service. In addition, the Company offers 24 hour customer service and
reliability with near zero down time, particularly under heavy load during
major special events. Although competition is strong from the Company's
major competitors the Company is attracting significant numbers of new
customers. The Company's aggressive marketing strategies and reputation
allowed it to grow its full-time customer base by 19% to approximately 10.0
million full-time addressable homes and an additional 1.0 million part-time
addressable homes in 1997, representing an increase of 2.6 million
addressable homes. The Company plans to continue its marketing approach
during 1998 and believes that strategy will provide continued growth in
numbers of subscribers.
EMPLOYEES
At December 31, 1997, the Company had 18 full-time employees.
Additional personnel may be added as the Company's business develops and as
circumstances require.
BACKLOG
The Company's revenues are computed and assessed on the basis of a
fixed charge for every order placed with a subscribing customer for
specialized cable programming service or for other services transmitted
through its equipment. As a result, no form of backlog exists, other than
as represented by accumulated service charge income which has yet to be
paid to the Company.
RESEARCH AND DEVELOPMENT
The Company is principally a sales and marketing company. Therefore, the
Company does not anticipate that it will perform any significant or
material research and development.
ITEM 2. PROPERTIES
The Company leases office space of approximately 8,700 square feet in
the Mt. Laurel, New Jersey, Horizon Way Corporate Center. The lease
expires May 31, 1999. The office space is used to house the National POP
equipment as well as the Company's present executive, sales, secretarial
and technical support personnel.
ITEM 3. LEGAL PROCEEDINGS
In April 1996, a former employee filed suit against the Company and
its majority stockholder, James T. Shelley vs. TelVue Corporation and H.F.
Lenfest, with the Superior Court of Burlington County, New Jersey, Civil
Action Number 01368-96. The complaint alleges breach of contract, breach
of implied covenant of good faith and fair dealing detrimental reliance and
unjust enrichment. The suit seeks damages for an unspecified amount for
compensation and compensatory damages. Based upon correspondence from Mr.
Shelley's attorneys prior to filing the suit, the Company's legal counsel
believes that Mr. Shelley is seeking actual damages of approximately
$400,000 for commissions, unpaid salary, stock options and other benefits.
The Company believes the employee's claims are without merit and continues
to vigorously defend the suit brought against the Company.
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 has retained independent patent counsel
to review the third party patents and the alleged infringement. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitation
of proxies or otherwise.
ITEM 5. MARKET FOR THE ISSUER'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Issuer's Common Stock is traded in the Over-the-Counter Market.
Over-the-Counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions. The range of high and low bid prices for the Company's
common stock for the two most recent fiscal years, as reported by The
Nasdaq Stock Market, Inc. is as follows:
QUARTER 1997 HIGH LOW
First $.03 $.03
Second $.03 $.03
Third $.03 $.02
Fourth $.06 $.03
QUARTER 1996
First $.03 $.03
Second $.03 $.03
Third $.03 $.02
Fourth $.03 $.03
As of February 9, 1998, there were 401 holders of record of the
Common Stock of the Company.
The Company has paid no cash dividends since its incorporation. The
Company intends to retain any future earnings for use in its business and
has no present intention to pay cash dividends on its Common Stock in the
foreseeable future. Holders of the Common Stock are entitled to share
ratably in dividends when and as declared by the Board of Directors out of
funds legally available therefore.
Shares of Common Stock which have had the same beneficial owner since
April 21, 1988, or which 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 10 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 December 31, 1997, 18,299,037 shares of the Company's
Common Stock were entitled to 10 votes per share. The remaining 5,515,463
shares of Common Stock were entitled to one vote per share. Mr. Lenfest
owns 14,557,453 shares of Common Stock which are entitled to ten votes per
share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company had net income before income taxes of $642,197 for the
year ended December 31, 1997, compared to a net loss before income taxes of
$184,129 for the year ended December 31, 1996. The Company experienced a
decrease in the average monthly buyrate from 24.8% for the year ended
December 31, 1996 to 21.7% for the year ended December 31, 1997. This is a
result of a cable industry wide drop in pay-per-view buy rates. Although
the buyrates decreased the Company still had an increase in service revenue
of $872,065 over the comparable 1996 period. The growth in service revenue
is partially attributable to the Company serving approximately 1,600,000
more full-time cable subscribers during the year ended December 31, 1997,
compared to December 31, 1996. The service revenue increase is also a
result of an increase in National POP feature revenue of $470,163, as a
result of both new and existing customers using more optional features.
The Company had PPV+ revenue of $785,924 for the year ended December 31,
1997, compared to $395,582 for the year ended December 31, 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 $3,135,634 for the year ended December
31, 1997. Included in the net income is $2,493,437 in income tax benefits
as a result of the recognition of net deferred tax assets for the year
ended December 31, 1997. The Company's income before income taxes is
$642,197 for the year ended December 31, 1997. Because of such pre-tax
income, the Company reduced its deferred tax asset valuation allowance
since the Company now believes that it will benefit from the utilization of
its net operating losses. As of December 31, 1997, the Company's net
operating loss carryforward is approximately $5,000,000 on a tax reporting
basis (see Note 8 to the financial statements).
Service expenses for the year ended December 31, 1997, increased
$235,142 from the comparable 1996 period. The increase in service expenses
is primarily attributable to an increase in trunk usage expense of $366,814
as a result of an increase in full-time subscribers, PPV+ usage and feature
usage. This increase has been partially offset by a decrease in 800 number
database expenses of $99,359 as a result of an FCC rate restructuring.
As of December 31, 1997, the Company was serving approximately
10,000,000 full-time cable subscribers and 1,500,000 part-time subscribers
on the National POP compared to approximately 8,400,000 full-time cable
subscribers and 500,000 part-time subscribers served as of December 31,
1996. The part-time subscribers did not significantly contribute to the
revenue or service expense increases for the year ended December 31, 1997.
Approximately 192,000 part-time subscribers converted to using the
Company's Service on a full-time basis during 1997.
The Company's operations had required a substantial purchase of
equipment by the Company. During the year ended December 31, 1997, the
Company purchased $513,676 of equipment compared to $609,608 purchased
during the year ended December 31, 1996. Depreciation accounted for 16% of
total operating expenses for the year ended December 31, 1997, compared to
17% for the year ended December 31, 1996. For the year ended December 31,
1997, selling and marketing expenses decreased 3% primarily as a result of
a decrease of approximately $14,000 in advertising expense. General and
administrative expenses increased 3% during the year ended December 31,
1997, primarily as a result of an increase in legal expense of
approximately $37,000 related to the suit filed by a former employee (see
Note 12 to the financial statements).
For the year ended December 31, 1997, the Company recorded a loss on
the disposal of property and equipment of $24,881. This loss was primarily
a result of the write off of obsolete software. In addition, the Company
wrote off fully depreciated excess equipment inventory made available by
the retirement of one remaining Regional POP.
The Company's software is "Year 2000 Compliant" for its pay-per-view
ANI ordering as well as software used for administrative purposes. As a
result, the Company does not anticipate any material effect on its
operating results or financial condition.
Total liabilities decreased $1,114,479 and total assets increased
$1,662,223 for the year ended December 31, 1997. The decrease in total
liabilities was primarily a result of a decrease in notes payable -
majority stockholder of $2,050,000 due to debt repayment. Partially
offsetting the debt repayment is an increase in accrued interest of
$284,757 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 accounts payable - trade of $202,112.
Accounts payable increased as a result of a timing issue in paying the
trunk usage bills. The increase in assets is attributable to an increase
in deferred taxes of $2,505,437 as a result of generating net income before
income taxes during the year ended December 31, 1997 (see above and Note 8
to the financial statements). The Company's days for sales in accounts
receivable is 53 days for the year ended December 31, 1997, compared to 57
days for the year ended December 31, 1996. The Company believes the
decrease of 4 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 had positive cash flow from operations of $2,339,272
during the year ended December 31, 1997. Ignoring changes in operating
assets and liabilities that result from timing issues, and considering only
adjustments to reconcile net loss to net cash provided by operating
activities, the Company would have positive cash flow from operating
activities of $1,487,687 for the year ended December 31, 1997, compared to
positive cash flow from operating activities of $762,944 for the year ended
December 31, 1996. The increase in cash flow for the year ended December
31, 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. From November 1989 to February 1996, the
Company borrowed an aggregate of $6,369,712 from Mr. Lenfest. The interest
rates on the loans ranges from a floating rate based on the prime rate of
PNC Bank to a fixed rate of 12% (see Note 5 to the Financial Statements
included herein). Interest on one of the loans in the principal amount of
$1,471,272 as of December 31, 1997, is payable quarterly and, at the option
of the Company 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. Interest due on this loan through December 31,
1997, in the amount of $473,692 has been paid with 473,692 shares of
Preferred Stock. In addition, during January 1995, Mr. Lenfest purchased
from Science the Company's non-interest bearing note in the amount of
$541,000 (the "Prior Science Note").
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 interest payments along with the increase in revenue has
enabled the Company to accumulate cash. Interest payments would have
amounted to $457,883 for the year ended December 31, 1997, compared to
$578,734 for the year ended December 31, 1996. During the fourth quarter
of 1997, the Board of Directors of the Company (with Mr. Lenfest not
participating) authorized the Company to make monthly principal payments of
$150,000 to Mr. Lenfest. In addition, the Board also authorized the
Company to begin accruing interest on all unpaid interest on all
outstanding loans balances due to Mr. Lenfest effective January 1, 1998.
Mr. Lenfest has agreed to accept payments of principal through December 31,
1998. During 1997, the Company made principal payments of $2,050,000 to
Mr. Lenfest. The aggregate outstanding loan balances due to Mr. Lenfest as
of December 31, 1997 are $4,319,712. In addition, the Board of Directors
of the Company (with Mr. Lenfest not participating) authorized that at
management's discretion, the Company may make monthly principal payments in
excess of $150,000 when the Company has excess cash not needed to fund
operations. As of March 2, 1998, the Company made total principal payments
of $400,000 to Mr. Lenfest.
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 or that it will retain its
current 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 prior to 1997, the
Company experienced a decrease in the average monthly buy rate from 24.8%
for the year ended December 31, 1996 to 21.7% for the year ended December
31, 1997. 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, 1998.
ITEM 7. FINANCIAL STATEMENTS
See Item 13 for a list of financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements of any nature at any time with the
Company's auditors with regard to any aspect of the Company's statements,
its financial disclosure or its accounting practices.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF ISSUER
The following table sets forth certain information as of December 31,
1997 with respect to each of the Company's directors and officers.
POSITION(S) WITH DIRECTOR
NAME AGE THE COMPANY SINCE
H.F. (Gerry) Lenfest 67 Chairman of the 1989
Board and Director
Frank J. Carcione 57 President, 1990
Chief Executive
Officer, and Director
Donald L. Heller 52 Director 1993
Joseph M. Murphy 44 Executive Vice 1997
President of Sales
& Operations, and
Director
Jeffrey J. DiFrancesco 34 Director 1997
Irene A. DeZwaan 34 Secretary & Treasurer
The employee directors of the Company receive no compensation. Non-
employee directors (other than Mr. Lenfest) receive $500 paid in shares of
common stock of the Company for each meeting of the Board attended. The
shares are priced at the higher of $.05/share or the ask price on the date
of grant. During 1997, Messrs Heller and DiFrancesco each received 10,000
shares of common stock.
All directors serve until the next annual meeting of shareholders and
until their successors have been elected and have qualified. All officers
serve at the discretion of the Board of Directors.
BUSINESS EXPERIENCE
H. F. Lenfest has been a director of the Company since 1989. He is
the President, CEO and a director of Lenfest Communications, Inc. and each
of its subsidiaries (the "Lenfest Group"). The Lenfest Group of companies
are engaged in operating cable television systems, providing cable
advertising and programming. Mr. Lenfest's principal occupation since 1974
has been President and CEO of Lenfest Communications, Inc. and The Lenfest
Group of companies.
Frank J. Carcione has been a director of the Company since 1990. He
became the Executive Vice President in May 1990, and was elected President
and Chief Executive Officer in May 1991. From August 1989 to May 1990, he
held the position of Vice President (marketing, sales, pay-per-view and
franchise relations) with Garden State Cablevision, L.P., a New Jersey
cable television operator and an affiliate of The Lenfest Group of
companies. From November 1980 until August 1989, he held the same position
with New York Times Cable TV, the predecessor to Garden State Cablevision,
L.P.
Donald L. Heller has been a director of the Company since 1993. He
has been a Vice President of Lenfest Communications, Inc. since March 1993.
Prior to assuming his current position, Mr. Heller was, from June 1984 to
January 1993, the Vice President and General Manager of Sports Channel
Prism Associates, a regional cable television service that provides movies
and professional sports.
Joseph M. Murphy has been a director of the Company since 1997. He is
the Executive Vice President of Sales and Operations of the Company. Mr.
Murphy was appointed to this position in September 1994. Prior to this
appointment, Mr. Murphy had been Vice President of Sales since joining the
Company in 1986.
Jeffrey J. DiFrancesco has been a director of the Company since 1997.
He has been the Vice President of Strategic Planning and Business
Development for Lenfest Communications, Inc. since January 1996. Prior to
assuming his current position, Mr. DiFrancesco was, from February 1995
through January 1996, an Industry and Strategic Specialist for Price
Waterhouse's Entertainment, Media and Communications Group, a management
consulting group for media communications. From October 1993 to February
1995, Mr. DiFrancesco held the positions of Director of Product
Management/Marketing, Financial and Business Analysis, and Product
Development of Electronic Commerce for Tele-TV and Bell Atlantic Video
Services, a provider of interactive telecommunications to consumers. From
March 1991 to October 1993, Mr. DiFrancesco was a management consultant of
technology management and business process re-engineering.
Irene A. DeZwaan, CPA, became the Manager of Finance and
Administration of the Company in November 1990, and was elected Secretary
and Treasurer in July 1993. From September 1988 through November 1990, Ms.
DeZwaan was self-employed as an accountant. Ms. DeZwaan was employed by
Shotz, Miller & Glusman, P.C., a certified public accounting firm, from
September 1986 through 1988.
On December 6, 1995, the Securities and Exchange Commission (the
"SEC") sued H.F. Lenfest and his wife, in the United States District Court
for the Eastern District of Pennsylvania. The SEC alleges that, in October
1993, Mr. Lenfest, while in possession of non-public information,
recommended to one of his sons that he purchase Tele-Communications, Inc.
("TCI") stock and that his wife traded in TCI stock in October 1993 on the
basis of information she misappropriated from her husband. H.F. Lenfest
and his wife have categorically denied that they engaged in any improper
conduct and are defending this action vigorously.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY COMMISSIONS COMPENSATION
Frank J. Carcione 1997 $124,950 - $3,124 (1)
CEO 1996 119,000 - 2,761 (1)
1995 108,000 - 997 (1)
Joseph Murphy 1997 $89,302 $44,155 $2,233 (1)
Executive Vice President 1996 85,362 53,710 2,134 (1)
of Sales & Operations 1995 81,623 30,461 1,869 (1)
(1) Company funded contributions to the Company's Simplified Pension Plan
(SEP).
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FY-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
NAME ACQUIRED OPTIONS OPTIONS
ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
Frank J. Carcione
CEO - - - -
Joseph M. Murphy - - 15,000 $1,050 (1)
(1) Value calculated based upon the average of the bid and ask price on
such dates.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of February 9, 1998, certain
information with respect to each person who was known to the Company to be
a beneficial owner of more than five percent (5%) of the Company's Common
Stock.
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS (1)
H.F (Gerry) Lenfest 67,931,746 (2) 88.0% (2)
200 Cresson Blvd.
Oaks, PA 19456-0989
Chairman of the Board and Director
(1) As of February 9, 1998, 23,814,500 shares of Common Stock were
outstanding.
(2) Includes 23,459,133 shares of Common Stock issuable upon conversion
of Preferred Stock owned by Mr. Lenfest. Includes Warrants to
acquire up to 29,915,160 additional shares of Common Stock. Does not
include accrued but unpaid interest on the subordinated $500,000 Note
which may be converted into shares of Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 9, 1998, certain
information with respect to the Common Stock beneficially owned by the
directors and executive officers of the Company and by all directors and
executive officers as a group. The address of all directors and executive
officers is c/o TelVue Corporation, 16000 Horizon Way, Suite 500, Mt.
Laurel, NJ 08054.
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS (1)
H.F. (Gerry) Lenfest 67,931,746 (2) 88.0% (2)
Chairman of the Board
and Director
Joseph M. Murphy 90,000 (3) .4%
Executive Vice President
of Sales and Operations
Donald L. Heller 10,000 .0%
Director
Jeffrey J. DiFrancesco 10,000 .0%
Director
All Directors and 68,021,746(2) (3) 88.1%
Officers as a Group
(7 Persons)
(1) As of February 9, 1998, 23,814,500 shares of Common Stock were
outstanding.
(2) Includes 23,459,133 shares of Common Stock issuable upon conversion
of Preferred owned by Mr. Lenfest. Includes Warrants to acquire up
to 29,915,160 additional shares of Common Stock. Does not include
accrued but unpaid interest on the subordinated $500,000 Note which
may be converted into shares of Common Stock.
(3) Includes 15,000 shares issuable to Joseph M. Murphy upon exercise of
currently exercisable stock options held by Mr. Murphy.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1997, the Company was indebted to Mr. Lenfest in the
principal amount of $4,319,712. Mr. Lenfest has agreed to accept payments
of principal at the rate of $150,000 per month. (See Management's
Discussion and Analysis or Plan of Operation and Note 5 of the 1997
financial statements of the Company).
The Company provided its ANI services to subsidiaries of Lenfest
Communications, Inc. ("LCI"), a company operating under the control of Mr.
Lenfest. The Company recognized revenues of approximately $470,000 from
LCI subsidiaries during 1997. (See Note 10 of the 1997 financial
statements of the Company).
Other related transactions are described in Notes 5, 7 and 10 of
the 1997 financial statements of the Company.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES & REPORTS ON
FORM 8-K
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants dated February 14,
1998.
Balance Sheets as of December 31, 1997 and 1996.
Statements of Operations for the years ended December 31, 1997 and
1996.
Statements of Stockholders' Deficit for the years ended December 31,
1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1997 and
1996.
Notes to Financial Statements.
REPORT ON FORM 8-K.
None.
<PAGE>
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 General Partnership Agreement of TelVue-Voice FX Joint Venture dated
October 12, 1993 (incorporated by reference to the September 30,
1993 Form 10Q-SB).
10.14 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).
10.15 Maximum Value Plan Agreement dated January 27, 1994, between Sprint
Communications Company, L.P. and the Company (incorporated by
reference to the Company's Form 10Q-SB for the period ended
September 30, 1994, (the September 30, 1994 Form 10Q-SB)).
10.16 Addendum to Clarity Maximum Value Plan Agreement dated March 3,
1994, between Sprint Communications Company, L.P. and the Company
(incorporated by reference to the September 30, 1994 Form 10Q-SB).
10.17 Service Agreement dated September 27, 1994, between Video Jukebox
Network, Inc., and the Company (incorporated by reference to the
September 30, 1994 Form 10Q-SB).
10.18 Management Agreement, dated March 10, 1995, between the Company and
Lenfest Networks, Inc., (incorporated by reference to the Company's
Form 10Q-SB for the period ended June 30, 1995 (the June 30, 1995
Form 10Q-SB)).
10.19 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
1997 Financial Statement included herein).
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 its behalf by the undersigned, thereunto duly authorized.
TELVUE CORPORATION
DATED: By: /s/Frank J. Carcione
----------------------------------
Frank J. Carcione
President (Chief Executive Officer)
DATED: By: /s/Irene A. DeZwaan
___________________________________
Irene A. DeZwaan
Treasurer (Controller)
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.
SIGNATURES TITLE DATE
/s/H.F. Lenfest
________________________________ Chairman of the
H.F. Lenfest Board and Director
/s/Frank J. Carcione Director
- --------------------------------
Frank J. Carcione
/s/Donald Heller Director
- --------------------------------
Donald Heller
/s/Joseph Murphy Director
- --------------------------------
Joseph Murphy
/s/Jeffrey J. DiFrancesco Director
- --------------------------------
Jeffrey J. DiFrancesco
<PAGE>
TELVUE CORPORATION
FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
TABLE OF CONTENTS
Page No.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations
Statements of Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders
TelVue Corporation
We have audited the balance sheets of TelVue Corporation (a
Delaware corporation) as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an 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 audit 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 consolidated 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 financial statements referred to above present
fairly, in all material respects, the financial position of TelVue
Corporation as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Hatboro, Pennsylvania
February 14, 1998
<PAGE>
TELVUE CORPORATION
BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $445,368 $668,367
Accounts receivable - trade 922,737 913,106
Other receivables 5,281 289,342
Deferred tax asset 477,987 -
Other current assets 10,898 12,964
__________ __________
TOTAL CURRENT ASSETS 1,862,271 1,883,779
PROPERTY AND EQUIPMENT 4,534,168 4,111,240
Less accumulated depreciation and
amortization 2,639,651 1,872,504
__________ __________
1,894,517 2,238,736
OTHER ASSETS
Deferred tax asset 2,027,450 -
Deposits 9,300 8,800
__________ __________
2,036,750 8,800
__________ __________
$5,793,538 $4,131,315
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable -
majority stockholder - current $1,800,000 $1,000,000
Accounts payable - trade 422,527 220,415
Accounts payable - equipment 1,324 98,559
Accrued expenses 192,305 164,876
Income taxes payable 12,000 -
Deferred trunk credit 164,200 190,800
__________ __________
TOTAL CURRENT LIABILITIES 2,592,356 1,674,650
NOTES PAYABLE - MAJORITY STOCKHOLDER, net
of current portion 2,519,712 5,369,712
ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,187,721 1,902,964
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$1 par value, 6,900,000 shares
authorized, issued and outstanding
3,518,694 and 2,985,636 shares at
December 31, 1997 and 1996,
respectively (liquidation value
$3,518,694 and $2,985,636,
respectively) 3,518,694 2,985,636
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value,
100,000,000 shares authorized,
issued and outstanding 23,814,500
and 23,794,500 shares at December
31, 1997 and 1996, respectively 238,145 237,945
Additional paid-in capital 1,516,335 1,515,535
Accumulated deficit (6,779,425) (9,555,127)
__________ __________
(5,024,945) (7,801,647)
__________ __________
$5,793,538 $4,131,315
========== ==========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
1997 1996
REVENUES $6,330,675 $5,458,610
OPERATING EXPENSES
Service 3,186,546 2,951,404
Selling and marketing 585,544 606,503
General and administrative 642,767 621,149
Depreciation 831,609 884,121
__________ __________
5,246,466 5,063,177
__________ __________
OPERATING INCOME 1,084,209 395,433
OTHER INCOME (EXPENSE)
Interest expense, net of reimbursement (459,352) (526,779)
Interest income 42,221 10,169
Loss on sales or disposal of property
and equipment (24,881) (62,952)
__________ __________
(442,012) (579,562)
__________ __________
INCOME (LOSS) BEFORE INCOME TAXES 642,197 (184,129)
INCOME TAX BENEFIT 2,493,437 -
__________ __________
NET INCOME (LOSS) 3,135,634 (184,129)
DIVIDENDS ON REDEEMABLE CONVERTIBLE
PREFERRED STOCK (359,932) (314,395)
__________ __________
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $2,775,702 $ (498,524)
========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ .12 $ (.02)
========== ==========
DILUTED $ .04 $ -
========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 23,795,102 23,794,500
========== ==========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1997 and 1996
Additional Total
Common Paid-In Accumulated Stockholder's
Stock Capital Deficit Deficit
BALANCE, DECEMBER 31, 1995 $237,945 $1,515,535 $(9,056,603) $(7,303,123)
Accrued dividends on
redeemable convertible
preferred stock - - (314,395) (314,395)
Net loss - - (184,129) (184,129)
__________ _________ __________ __________
BALANCE, DECEMBER 31, 1996 237,945 1,515,535 (9,555,127) (7,801,647)
Accrued dividends on
redeemable convertible
preferred stock - - (359,932) (359,932)
Issuance of 20,000 shares
of common stock under director
compensation plan 200 800 - 1,000
Net income - - 3,135,634 3,135,634
__________ _________ __________ __________
BALANCE DECEMBER 31, 1997 $238,145 $1,516,335 $(6,779,425) $(5,024,945)
========== ========= ==========
==========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $3,135,634 $ (184,129)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation 831,609 884,121
Loss on sales or disposal of property
and equipment 24,881 62,952
Deferred tax benefit (2,505,437) -
Issuance of common stock 1,000 -
Changes in operating assets and
liabilities:
Accounts receivable - trade and other 274,430 (403,335)
Other current assets 2,066 (8,745)
Deposits (500) -
Accounts payable - trade and other 104,877 (52,087)
Accrued expenses 27,429 (82,593)
Income taxes payable 12,000 -
Deferred trunk credit (26,600) 190,800
Accrued interest - majority stockholder 457,883 578,734
__________ __________
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,339,272 985,718
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (513,676) (609,608)
Proceeds from sales or disposal of
property and equipment 1,405 232,848
__________ __________
NET CASH (USED BY)INVESTING ACTIVITIES (512,271) (376,760)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -
majority stockholder - 143,000
Debt reduction:
Notes payable - majority stockholder (2,050,000) (300,000)
__________ __________
NET CASH (USED BY) FINANCING ACTIVITIES (2,050,000) (157,000)
__________ __________
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (222,999) 451,958
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 668,367 216,409
__________ __________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $445,368 $668,367
=========== =========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - BACKGROUND AND BUSINESS ACTIVITY
TelVue Corporation ("the Company") primarily provides automatic telephone
number identification services to the cable television industry throughout
the United States for the automated ordering of pay-per-view features and
events. The Company was a wholly-owned subsidiary of Science Dynamics
Corporation ("SDC") until December 30, 1988, the effective date of the
spin-off of the Company's common stock to shareholders of SDC.
As indicated in the accompanying financial statements, the Company has
incurred losses since its inception and is unable to make interest payments
to the majority stockholder on a current basis. As discussed in Note 5, the
majority stockholder has agreed not to demand repayment before January 1,
1999, of principal or interest on loans made by him to the Company.
Although the deferral of repayment of principal and interest on the loans
will provide the Company with working capital in the short-term, the
continuation of the Company and the realization of the carrying value of
its assets is dependent on improving operating cash flow, achieving a
profitable level of operations on a consistent basis and obtaining
additional sources of long-term financing.
Concentrations of Credit Risk
The Company grants credit to cable television operators throughout the
nation. Consequently, the Company's ability to collect the amounts due from
customers is affected by economic fluctuations in the cable television
industry.
The Company maintains cash balances at a financial institution located in
the Philadelphia Area. Accounts at this institution are insured by the
Bank Insurance Fund up to $100,000. The Company maintains cash balances
in excess of the insured amount.
During 1997 and 1996, four customers accounted for 51% and 56% of sales,
respectively, and 48% and 50% of receivables at December 31, 1997 and 1996,
respectively.
Currently, the Company's sole source of financing is the majority
stockholder. In the past, the Company has been unable to obtain funding
from other third parties on terms that are acceptable to the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented
to assist in understanding its financial statements. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term debt securities purchased with an original maturity of three (3)
months or less to be cash equivalents.
Accounts Receivable - Trade
The Company evaluates its accounts receivable on a customer by customer
basis and has determined that no allowance for doubtful accounts is
necessary at December 31, 1997 and 1996. Historically, the Company has
experienced virtually no bad debt.
Revenue Recognition
The Company recognizes revenue in the month service is provided, net of an
estimate for programs not billable by the cable television operator.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided over five years using the straight-line method. Property and
equipment consists primarily of operating equipment. For income tax
purposes, recovery of capital costs for property and equipment is made
using accelerated methods over statutory recovery periods.
Expenditures for renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense is included in selling and
marketing expense in the accompanying statements of operations.
Earnings (Loss) Per Common Share
Earnings (loss) per common share amounts are based upon the weighted
average number of common and common equivalent shares outstanding during
the year. Common equivalent shares are excluded from the computation in
periods in which they have an antidilutive effect.
In February 1997, the Financial Accounting Standards Board issued SFAS 128
Earnings per Share (SFAS 128), which specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS). It replaces the
presentation of primary and fully diluted EPS with basic and diluted EPS.
Basic EPS excludes all dilution. It is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. The Company has adopted SFAS 128 as of the fourth quarter of 1997 and
has restated all previously reported per share amounts to conform to the new
presentation.
Reclassifications
Certain amounts have been reclassified for comparability with the 1997
presentation.
NOTE 3 - SUPPLEMENTARY DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid during the year for:
1997 1996
Interest $ - $ -
===== =====
Income taxes $ - $ -
===== =====
Noncash Investing and Financing Transactions
The Company accrued dividends on its redeemable convertible preferred
stock of $359,932 and $314,395 in 1997 and 1996, respectively. In 1997,
the Company issued 20,000 shares of common stock value at $1,000 under the
Director Compensation Plan. See Note 7. In 1997, the Company issued
359,932 shares of redeemable convertible preferred stock in payment of both
semi-annual 1997 dividends. In 1996, the Company issued 314,395 shares
of redeemable convertible preferred stock in payment of both semi-annual
1996 dividends. In 1997 and 1996, the Company issued 173,126 and 138,346
shares, respectively, of redeemable convertible preferred stock in payment
of interest on a line of credit.
NOTE 4 - PROPERTY AND EQUIPMENT
The schedule of property and equipment at December 31, 1997 and 1996, is as
follows:
Estimated
Useful Lives
1997 1996 in Years
Operating equipment $4,250,971 $ 3,890,116 5
Office furniture and equipment 243,513 181,440 5
Leasehold improvements 39,684 39,684 5
__________ ___________
$4,534,168 $ 4,111,240
========== ===========
NOTE 5 - NOTES PAYABLE - MAJORITY STOCKHOLDER
Notes payable to the majority stockholder consisted of the following at
December 31, 1997 and 1996:
1997 1996
Original line of credit (a) $ - $ 398,000
Line of credit (TelVue-Voice FX) (b) - 411,173
National equipment loan (c) 1,471,272 1,471,272
Additional lines of credit (d) 2,307,440 3,548,267
Notes payable (SDC) (e) 541,000 541,000
__________ __________
$4,319,712 $6,369,712
========== ==========
(a) These borrowings are pursuant to a $500,000 line of credit. The line
bore interest at 12%. Principal and accrued interest under this note are
convertible into Redeemable Convertible Preferred Stock (see Note 7) at
$1 per share at the option of the note holder.
(b) In October 1993, the Company's majority stockholder provided an
additional $650,000 line of credit to fund a now defunct joint venture.
Amounts outstanding bore interest at prime plus two percent (2%). The
effective interest rate, at December 31, 1996, was 10.25%.
(c) In March 1994, the Company's majority stockholder provided an
additional $1,500,000 line of credit for the purchase of additional
equipment to expand the National POP (Point of Presence). Amounts
outstanding bear interest at prime plus one percent (1%) and interest is
payable quarterly. At the option of the Company, interest may be paid by
the delivery of shares of Redeemable Convertible Preferred Stock (see Note
7) at $1 per share. In 1997 and 1996, the Company issued 173,126 and
138,346 shares of redeemable convertible preferred stock in payment of
interest, respectively. The effective interest rates, at December 31, 1997
and 1996, were 9.5% and 9.25%, respectively.
(d) The Company's majority stockholder has provided several additional
lines of credit. Borrowings under all of these lines of credit bear
interest at prime plus one percent (1%). The effective interest rates, at
December 31, 1997 and 1996, were 9.5% and 9.25%, respectively. The
availability of additional funding may be terminated at any time if the
majority stockholder determines that there is no reasonable prospect that
the Company will be able to achieve net income on a consistent basis.
(e) In January 1995, the Company's majority stockholder acquired from SDC a
subordinated note in the amount of $541,000. The note is noninterest-bearing
and repayment is restricted to cash not needed for operations as determined
by the Company.
The Company has obtained from the majority stockholder an extension of a
prior agreement whereby the majority stockholder has agreed not to demand
repayment of principal or interest during 1998. However, the Company has
decided to voluntarily make, and the majority stockholder has agreed to
accept, monthly payments against the loan principal in the amount of
$150,000. The Company, at its discretion, may make monthly principal
payments in excess of $150,000 when the Company has excess cash not needed
to fund operations. The Company has, therefore, classified $1,800,000 of
the notes payable to the majority stockholder as a short term liability
and has classified the balance of the notes payable and the accrued
interest as long-term liabilities.
NOTE 6 - LEASES
The Company leases office facilities and trunk lines and data circuits.
Future minimum lease payments under non-cancelable operating leases
consisted of the following:
Year Ending Operating
December 31, Lease
1998 $1,915,133
1999 1,849,113
2000 1,800,000
2001 798,387
_________
$6,362,633
=========
Rental expense under the operating lease for office facilities amounted to
$97,798 for each of the years ended December 31, 1997 and 1996.
In connection with the lease of its trunk lines, the Company received
credits of which $164,200 was not yet earned by the Company as of December
31, 1997. These unearned credits are classified as a current liability in
the accompanying balance sheet.
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum operating lease commitments will not be
less than the amount shown for 1998.
NOTE 7 - CAPITAL STOCK
Common Stock Voting Rights
Shares of Common Stock which have had the same beneficial owner since
April 21, 1988, or which have had the same beneficial owner for a
continuous period in excess of 2 years prior to the record date of any
meeting of stockholders, will be entitled to 10 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.
Concentration of Control
In November 1989, the Company issued 12,896,968 shares of Common Stock for
$1,250,000 to an individual who effectively acquired control of the
Company. In connection with this sale, the Board of Directors waived the
waiting period for these shares of Common Stock related to full voting
rights described above. In January 1995, this individual acquired an
additional 1,660,485 shares of common stock of the Company from SDC.
Redeemable Convertible Preferred Stock
In April 1990, the Company issued 1,250,000 shares of Class A Redeemable
Convertible Preferred Stock (Preferred Stock) for $1,250,000. The
Preferred Stock has a par value of $1 per share and pays a cumulative $.06
semiannual dividend. The dividend is payable in cash or additional shares
of Preferred Stock at $1 per share, at the option of the Company. Each
share of Preferred Stock is convertible into 6.667 shares of Common Stock
at any time, at the option of the holder. The Preferred Stock has a
preference of $1 per share plus unpaid dividends in the event of
liquidation. In 1997, the 1997 semiannual dividends were declared and
paid with 359,932 shares of Preferred Stock. In December 1996, the 1996
semiannual dividends were declared and paid with 314,395 shares of
Preferred Stock.
The Company may redeem the Preferred Stock at any time for $2 per share.
The stockholder of the Preferred Stock is the majority stockholder. The
majority stockholder can designate all of the Company's directors and,
therefore, could influence the Company's willingness to cause a redemption
of the Preferred Stock. As a result, the Preferred Stock has been
classified outside of the stockholders' deficit section of the accompanying
consolidated balance sheets.
Stock Options
Under the Company's 1988 Incentive Stock Option Plan, options to acquire
up to 1,400,000 shares of Common Stock may be granted to directors and
employees. Options are granted at 100% of fair market value at the grant
date and expire ten years after the date of grant. Options vest ratably
over four years beginning one year after the date of grant. As of December
31, 1997, options to purchase 18,000 shares of the Company's Common Stock
are outstanding, at an exercise price of $.05 per share. At December 31,
1997, all 18,000 options were vested and exercisable. This plan will
expire in 1998.
In connection with the spin-off from SDC (see Note 1), the Company granted
options to purchase shares of the Company's Common Stock to certain
employees of SDC. These options have the same terms and conditions as the
1988 Incentive Stock Option Plan described above. As of December 31, 1997,
options to purchase 8,100 shares of Common Stock are outstanding. These
options are exercisable at $.05 per share. At December 31, 1997, all
8,100 of these options are vested and exercisable. During 1997, options
to purchase 3,000 shares were canceled. This plan will expire in 1998.
Director Compensation Plan
In December 1997, the Company adopted a Director Compensation Plan. Under
this plan, each non-employee director, other than Mr. Lenfest, is
compensated $500 for each meeting attended by receiving shares of Common
Stock issued at the higher of the per share fair market value of the Common
Stock as of the board of directors meeting date or $.05 per share. In
1997, the Company issued 20,000 shares of Common Stock under this plan and
recognized director compensation expense of $1,000.
Common Stock Warrants
In connection with one of the lines of credit discussed in Note 5, the
Company agreed to issue warrants to the majority stockholder to purchase
29,915,160 shares of the Company's Common Stock for $.01 per share, the
fair market value of the Common Stock on the grant date. The warrants
provide for adjustments of the exercise price and the number of shares
issuable thereunder in the event that the Company issues additional shares
of Common Stock and other events as defined in the warrant agreement.
The warrant holder is entitled, at the Company's expense, to certain
registration rights under the Securities Act of 1933 in connection with
any shares of the Company's Common Stock issued pursuant to exercise of
the warrants.
NOTE 8 - 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 an 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 (expense) consist of the following
components:
1997 1996
Current
Federal (alternative minimum tax) $(12,000) $ -
State - -
________ ________
(12,000) -
Deferred
Federal (208,368) 87,191
State (60,763) 27,771
_________ ________
(269,131) 114,962
Valuation allowance (increase) decrease 2,774,568 (114,962)
__________ _________
2,505,437 -
__________ _________
$2,493,437 $ -
========== =========
The categories of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
Federal State
1997 1996 1997 1996
____________ ____________
Deferred Tax Assets:
Accrued interest-stockholder $ 674,092 $ 586,351 $ 205,099 $ 178,403
Net operating loss carryforward 1,716,879 2,124,780 87,330 585,877
Alternative minimum tax credit 12,000 - - -
_________ __________ _________ ________
Gross Deferred Tax Asset 2,402,971 2,711,131 292,429 764,280
Deferred Tax Liabilities:
Property and equipment,
principally due to differences
in depreciation (145,648) (185,019) (44,315) (56,294)
_________ _________ ________ ________
Net deferred tax asset
before valuation allowance 2,257,323 2,526,112 248,114 707,986
Valuation allowance - (2,526,112) - (707,986)
_________ __________ _________ ________
Net Deferred Tax Asset $2,257,323 $ - $ 248,114 $ -
========== ==========
========= =========
The Company has a net operating loss carryforward of approximately
$5,000,000 on a tax reporting basis. The carryforward will begin to expire
in 2004, if not utilized. The Company also has an alternative minimum tax
credit carryforward of approximately $12,000. This carryforward has no
expiration date. Differences between the effective income tax rate and the
statutory federal income tax rate were primarily the result of the change
in the valuation allowance.
NOTE 9 - PENSION PLAN
The Company maintains a Simplified Employee Pension (SEP) plan under
section 408(k) of the Internal Revenue Code for all eligible employees.
Employees are eligible to participate if they are at least 21 years old and
have been employed by the Company for at least 90 days. Under the plan,
employees may elect to defer up to 15% of their salary, subject to Internal
Revenue Service limits. The Company may make discretionary contributions
for the participants. The Company elected to match fifty percent (50%) of
1997 and 1996 contributions by participating eligible employees up to five
percent (5%) of their salary, for a maximum contribution of 2.5% of salary.
The Company's contributions for 1997 and 1996 amounted to $19,930 and
$19,157, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company has several notes payable to the majority stockholder. (See
Note 5).
The Company provided its automated number identification services to
subsidiaries of Lenfest Communications, Inc. ("LCI"). The Company
recognized revenues of approximately $470,000 and $325,000 from LCI
subsidiaries in 1997 and 1996, respectively and had a receivable of $65,916
and $53,136 due from LCI at December 31, 1997 and 1996, respectively.
These services were provided at normal billing rates. The Company and LCI
are under the control of the majority stockholder of the Company. In
September 1994, the Company entered into a service agreement with Box
Worldwide ("Box"), formerly known as Video Jukebox Network, Inc., which
was merged with and into TCI Music, Inc., in December 1997. The
agreement provided that the Company would act as a 900 call service bureau
to facilitate the ordering by Box customers, of music videos on the cable
or home dish of the Box customer. The majority stockholder was the
chairman of the Board of Directors of Box and controlled a corporation that
was a partner in a partnership that controlled a majority of the voting
stock of Box. The Company believes that the terms of the service agreement
were at market rates. The majority stockholder had loaned the Company
$358,267 to purchase equipment and software needed to provide service to
Box. Box informed the Company that Box had developed its own voice
recognition system and intended to process its 900 number calls internally.
Box agreed to reimburse the Company $284,619 to cover costs incurred by the
Company for software development to provide service to Box, costs incurred
to convert hardware originally purchased to service Box to a configuration
the Company can use, and accrued interest up to July 31, 1996, that the
Company incurred on a loan from the majority stockholder to fund these
costs. The Company received the reimbursement of $284,619 in January 1997.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued
Expenses.
The carrying amount approximates fair market value because of the short
maturity of those instruments Long-term Debt and Accrued Interest
Due to the related party nature, it is uncertain at what rate the Company
could borrow funds from an unrelated party, if at all. Therefore, it is not
practical to estimate the fair market value of the long-term debt and
accrued interest.
NOTE 12 - 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,
promissory estoppel and unjust enrichment. The suit seeks damages for an
unspecified amount for compensation and compensatory and punitive damages.
Based upon correspondence from plaintiff's counsel, 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
alerting 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 has retained independent patent counsel to review the
third party patents and the alleged infringement. 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>
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3,518,694
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