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, 1998
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 November 1,
1998: 24,194,500 shares.
Transitional Small Business Disclosure Form: Yes No X
---- ----
This report includes a total of 15 pages.
<PAGE>
TELVUE CORPORATION
INDEX
PAGE
NO.
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1998
(unaudited) and as of December 31, 1997
Statements of Operations for the three
months ended September 30, 1998 (unaudited)
and September 30, 1997 (unaudited)
Statements of Operations for the nine
months ended September 30, 1998 (unaudited)
and September 30, 1997 (unaudited)
Statements of Cash Flows for the nine
months ended September 30, 1998 (unaudited)
and September 30, 1997 (unaudited)
Notes to Financial Statements (unaudited)
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
PART I. Financial Information
ITEM I. Financial Statements
TELVUE CORPORATION
BALANCE SHEETS
September 30, December 31,
1998 1997
------------- -----------
<S> <C> <C>
ASSETS (Unaudited) *
CURRENT ASSETS
Cash and cash equivalents $ 380,302 $ 445,368
Accounts receivable - trade 785,376 922,737
Other receivables 4,783 5,281
Prepaid income taxes 1,000 -
Deferred tax asset 416,987 477,987
Other current assets 42,803 10,898
----------- ----------
TOTAL CURRENT ASSETS 1,631,251 1,862,271
PROPERTY AND EQUIPMENT
Machinery and equipment 4,732,269 4,534,168
Less accumulated depreciation 3,299,482 2,639,651
----------- ----------
1,432,787 1,894,517
DEFERRED TAXES, net 1,910,450 2,027,450
SECURITY DEPOSITS 9,300 9,300
----------- ----------
$4,983,788 $5,793,538
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable-majority stockholder-current $ 1,800,000 $ 1,800,000
Accounts payable - trade 274,434 422,527
Accounts payable - equipment 26,150 1,324
Accrued expenses 264,690 192,305
Accrued dividends 316,683 -
Income taxes payable - 12,000
Deferred trunk credit 169,250 164,200
----------- ----------
TOTAL CURRENT LIABILITIES 2,851,207 2,592,356
NOTES PAYABLE - MAJORITY STOCKHOLDER 1,069,712 2,519,712
ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,585,707 2,187,721
REDEEMABLE CONVERTIBLE PREFERRED STOCK, $1 par
value, 6,900,000 shares authorized,
3,518,694 shares issued and outstanding 3,518,694 3,518,694
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 100,000,000
shares authorized, 24,194,500 and 23,814,500
shares issued and outstanding at September
30, 1998 and December 31, 1997, respectively 241,945 238,145
Additional paid-in capital 1,550,535 1,516,335
Accumulated deficit (6,834,012) (6,779,425)
----------- -----------
(5,041,532) (5,024,945)
----------- -----------
$4,983,788 $5,793,538
=========== ===========
* 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,
----------------------------
1998 1997
---- ----
REVENUES $ 1,515,761 $ 1,548,768
OPERATING EXPENSES
Service 743,320 733,618
Selling and marketing 129,932 147,265
General and administrative 148,395 153,856
Depreciation 223,383 212,037
----------- -----------
1,245,030 1,246,776
----------- -----------
OPERATING INCOME 270,731 301,992
OTHER INCOME (EXPENSE)
Interest income 5,961 11,515
Interest expense (125,726) (111,121)
Litigation settlement, net 7,033 -
----------- -----------
(112,732) (99,606)
----------- -----------
INCOME BEFORE INCOME TAXES 157,999 202,386
(INCOME TAX) INCOME TAX BENEFIT (53,000) 800,000
------------ -----------
NET INCOME 104,999 1,002,386
DIVIDENDS ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK (105,561) (89,569)
----------- ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (562) $ 912,817
=========== ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC ($.00) $.04
============ ===========
DILUTED ($.00) $.01
============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC 24,194,500 23,794,500
========== ==========
DILUTED 80,866,511 76,909,746
========== ==========
The accompanying unaudited notes are an integral part of these statements.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine months Ended
September 30,
--------------------
1998 1997
---- ----
REVENUES $ 4,706,869 $ 4,708,153
OPERATING EXPENSES
Service 2,239,638 2,347,507
Selling and marketing 446,926 431,233
General and administrative 495,027 481,191
Depreciation 659,831 615,153
----------- -----------
3,841,422 3,875,084
----------- -----------
OPERATING INCOME 865,447 833,069
OTHER INCOME (EXPENSE)
Interest income 18,066 32,654
Interest expense (397,986) (360,965)
Litigation settlement, net (33,430) -
----------- -----------
(413,350) (328,311)
----------- -----------
INCOME BEFORE INCOME TAXES 452,097 504,758
(INCOME TAX) INCOME TAX BENEFIT (190,000) 2,620,000
---------- -----------
NET INCOME 262,097 3,124,758
DIVIDENDS ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK (316,683) (268,707)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (54,586) $ 2,856,051
=========== ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC ($.00) $.12
=========== ===========
DILUTED ($.00) $.04
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC 23,981,533 23,794,500
=========== ===========
DILUTED 80,653,544 76,909,746
=========== ===========
The accompanying unaudited notes are an integral part of these statements.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 262,097 $ 3,124,758
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 659,831 615,153
Deferred taxes 178,000 (2,620,000)
Issuance of common stock 38,000 -
Changes in assets and liabilities:
Decrease (increase) in -
Accounts receivable - trade 137,361 (26,877)
Other receivables 498 284,694
Prepaid income taxes (1,000) -
Other current assets (31,906) 280
Security deposits - (500)
Increase (decrease) in -
Accounts payable - trade (148,093) 107,137
Accounts payable - equipment 24,826 (82,363)
Accrued expenses 72,385 12,988
Income taxes payable (12,000) -
Deferred trunk credit 5,050 5,050
Accrued interest - majority stockholder 397,986 359,827
----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,583,035 1,780,147
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (198,101) (348,183)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt reduction:
Notes payable - majority stockholder (1,450,000) (1,550,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (65,066) (118,036)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 445,368 668,367
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 380,302 $ 550,331
=========== ============
The accompanying unaudited notes are an integral part of these statements.
<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, 1998, the results of
operations for the three and nine months ended September 30, 1998 and 1997
and cash flows for the nine months ended September 30, 1998 and 1997.
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,
1997, 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:
-----------------------------------
Supplemental disclosures of cash paid during the period-
1998 1997
---- ----
Income taxes $ 25,000 $ 0
Interest $ 0 $ 0
Non-cash Investing and Financing Transactions
- ---------------------------------------------
The Company accrued dividends on its redeemable convertible preferred stock of
$316,683 and $268,707 during the nine months ended September 30, 1998 and
1997, respectively. During the nine months ended September 30, 1998 and 1997,
no shares of preferred stock were issued in payment of preferred stock
dividends.
In June 1998, the Company issued 380,000 shares of common stock to certain key
executives of the Company and one non-employee board member.
3. 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.
The following is reconciliation from basic earnings per share to diluted
earnings per share for the nine months ended September 30, 1997. Because of
the net loss available to common stockholders for the nine months ended
September 30, 1998, no potential common shares are included in the computation
of a diluted per share amount since such potential common shares would not
have a dilutive effect.
Net Income
(Loss)
Available Average
to Common Shares Earnings
Stockholders Outstanding Per Share
------------ ----------- ---------
1998 $ (54,586) 23,981,533 $ .00
=========== ========== ========
1997 $2,856,051 23,794,500 $ .12
Effect of dilution
Warrants 29,915,160
Convertible preferred stock 268,707 19,905,235
Convertible accrued interest 105,860 3,294,851
----------- ---------- --------
Diluted $3,230,618 76,909,746 $ .04
=========== ========== ========
4. DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK:
----------------------------------------------------
As of September 30, 1998, undeclared dividends on outstanding preferred stock
amounted to $316,683.
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 (expense) consist of the following
components:
1998 1997
----------- ----------
Current
Federal $ (18,000) $ -
State - -
----------- ----------
(18,000) -
Deferred
Federal (149,000) (200,000)
State (23,000) (55,000)
----------- ----------
(172,000) (255,000)
Valuation allowance decrease - 2,875,000
----------- ----------
(172,000) 2,620,000
----------- ----------
$ (190,000) $2,620,000
=========== ==========
The Company has a net operating loss carryforward of approximately $4,200,000
on a tax-reporting basis. The carryforward will begin to expire in 2004, if
not utilized.
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.
6. NOTES PAYABLE AND ACCRUED INTEREST - MAJORITY STOCKHOLDER:
----------------------------------------------------------
As of September 30, 1998, the Company had various outstanding notes due to
the majority stockholder in the aggregate principal amount of $2,869,712 and
accrued interest due on these notes in the aggregate amount of $2,585,707.
Effective as of March 31, 1998, the Company obtained from the majority
stockholder an extension to January 1, 2000, 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
$150,000 through December 31, 1998. The Company may make monthly principal
payments in excess of $150,000 when, in the opinion of management, the
Company has excess cash that is not needed to fund operations. The Company
made principal payments of $1,450,000 during the nine months ended September
30, 1998. The Company has classified twelve payments of $150,000 each as a
current liability on the balance sheet.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
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.
8. LITIGATION SETTLEMENT
---------------------
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 "Shelley Case"). The complaint alleged breach of
contract, breach of implied covenant of good faith and fair dealing
detrimental reliance and unjust enrichment. The lawsuit sought compensation
and compensatory damages. Although the Company believed the employee's claims
were without merit, the Company settled the lawsuit in June 1998, after
considering the amount the Company's insurance carrier was willing to
reimburse the Company versus the legal fees that would be incurred if the
case went to trial. The Company has recorded $33,430 in litigation
settlement expense, net of proceeds received from the Company's insurance
carrier.
9. STOCK COMPENSATION
------------------
In June 1998, the Company issued 375,000 shares of its common stock to four
of its executives as a discretionary bonus and 5,000 shares to a non-employee
board member. The shares were issued at the fair value on the grant date of
$.10 per share. The Company recorded compensation expense of $38,000 with the
issuance of these shares. All of these shares are fully vested.
<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
present cable television subscribers to the Company's National Point of
Presence ("National POP") 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 National POP to the cable
systems' billing vendors.
The Company had income before income taxes of $157,999 for the quarter
ended September 30, 1998, compared $202,386 for the quarter ended September
30, 1997. The Company had income before income taxes of $452,097 for the nine
months ended September 30, 1998, compared $504,758 for the nine months ended
September 30, 1997.
The Company experienced a decrease in the average monthly buy rate from
20.3% and 22.2% for the quarter and nine months ended September 30, 1997,
respectively, to 17.0% and 18.2% for the third quarter and nine months ended
September 30, 1998, respectively. The drop in the buy rate caused the
pay-per-view buy revenue to decrease $36,417 and $169,296 for the quarter and
nine months ended September 30, 1998, respectively. During the third quarter
1998, a somewhat weak movie product contributed to the low buy rates. The
Company believes the decrease in the buy rates for the nine months ended
September 30, 1998, is attributable to a lack of major special events.
Although the pay-per-view buy revenue decreased, the Company still had an
increase in feature revenue of $79,705 and $228,530 for the quarter and nine
months ended September 30, 1998, respectively, when compared to the same
periods of 1997. This is a result of the Company serving approximately
1,800,000 more full-time subscribers at September 30, 1998. PPV+ revenue
decreased $88,716 and $38,853 for the quarter and nine months ended September
30, 1998, respectively. The PPV+ revenue decrease for the third quarter is
partially due to the Company writing off PPV+ revenue of $60,207 generated
from club promotions in 1998. The vendor who was responsible for the billing
and collection of the club package fees from consumers has filed for
bankruptcy. The Company intends to pursue payment of its portion of the
revenue that may be received from a bankruptcy claim. However, in an effort
to conservatively present the financial statements all unpaid club promotion
revenue has been reversed. PPV+ revenue decreased for the nine months ended
September 30, 1998, as a result of the buy rate decrease (see above) and
fewer major boxing events being broadcast.
The Company had net income of $262,097 for the nine months ended
September 30, 1998. Included in net income is income tax of $190,000 for
the nine months ended September 30, 1998 compared to an income tax benefit of
$2,620,000 for the nine months ended September 30, 1997. The Company's
income before income taxes is $452,097 for the nine months ended September 30,
1998. In 1997, the Company reduced its deferred tax asset valuation
allowance since the Company believed that it would benefit from the full
utilization of its net operating losses. As of December 31, 1997, the
valuation allowance was reduced to zero and, as a result, there will be no
further reduction of the valuation allowance in 1998 and no further resulting
tax benefit. As of September 30, 1998, the Company's net operating loss
carryforward is approximately $4,200,000 on a tax-reporting basis (see
Note 5 to the Company's financial statements).
Service expenses increased $9,702 for the third quarter and decreased
$107,869 for the nine months ended September 30, 1998. Trunk expense
decreased $34,529 and $77,594 for the third quarter and nine months ended
September 30, 1998, respectively, as a result of the buy rate decrease
(see above) and a reduction in the telephone rates charged by MCI. There was
an increase in 800 number database expenses of $79,220 and $59,834 for the
quarter and nine months ended September 30, 1998, respectively. This is a
result of the Company receiving, during August 1997, a refund of $73,803 from
its 800 number database management company. 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. Data link expense decreased
$6,966 and $42,654 for the third quarter and nine months ended September 30,
1998, respectively, primarily as a result of cable operating customers
consolidating their billing centers.
During June 1998, the Company settled a lawsuit filed by a former
employee and recorded litigation settlement expense of $33,430, net of
proceeds received from the Company's insurance carrier (see Note 8 to the
Company's financial statements). The Company decided to settle the lawsuit
after considering the amount the Company's insurance carrier was willing to
reimburse the Company versus the legal fees that would be incurred if the case
went to trial.
As of September 30, 1998, the Company was serving approximately
11,200,000 full-time cable subscribers and 1,300,000 part-time subscribers on
the National POP compared to approximately 9,300,000 full-time cable
subscribers and 1,700,000 part-time subscribers served as of September 30,
1997. The part-time subscribers did not significantly contribute to the
revenue or service expenses for the nine months ended September 30, 1998 and
1997. However, during the nine months ended September 30, 1998, 165,000
part-time subscribers converted to using the Company's service on a full-time
basis.
The Company's operations had required a substantial purchase of
equipment by the Company. During the nine months ended September 30, 1998,
the Company purchased $198,101 of equipment compared to $348,183 purchased
during the nine months ended September 30, 1997. Depreciation accounted for
17% of total operating expenses for the nine months ended September 30, 1998,
compared to 16% for the nine months ended September 30, 1997. For the nine
months ended September 30, 1998, selling and marketing expenses increased 4%
and general and administrative expenses increased 3%. This is primarily a result
of an increase in compensation expense of $10,000 and $20,500 for selling and
marketing and general and administrative expenses, respectively, due to issuing
stock grants (see Note 9 to the Company's financial statements).
The Company's software for its pay-per-view ANI ordering is "Year 2000
Compliant". The Company's long distance telecommunications provider,
MCIWorldCom, has informed the Company that they have implemented a Strategic
Year 2000 Compliance Plan in which appropriate remedial action to
non-compliant elements is being performed. Many telecommunications providers
use the same switch suppliers. Telecommunications companies, including
MCIWorldCom, will not be able to declare their systems compliant until these
switch manufacturers have completed their compliance programs. MCIWorldCom is
targeting all systems to be compliant by the second quarter 1999 to allow full
testing and monitoring. Interconnect agreements formed with other
telecommunications companies mean that some of MCIWorldCom's services are
dependent on third party carriers. All the major telecommunications
companies, including MCIWorldCom, rely to some extent on interconnect
agreements with third parties and need to validate the compliance of these
third parties. In the event that MCI is not Year 2000 compliant, there
exists the possibility that the Company would not be able to receive
telephones calls from the cable operator subscribers, and therefore,
could not process any orders. If MCIWorldCom does not become fully Year 2000
compliant during 1999, the Company will switch to another long distance
telephone service provider who is Year 2000 compliant. As a result of such
switch the Company would incur duplicate facility and data link costs for
a few months as a result of temporarily having redundant facilities in
service.
The Company has also requested Year 2000 compliance certificates from
the cable operator billing vendors to whom the Company transmits the
pay-per-view ordering data. In the event that the billing vendors do not
become Year 2000 compliant, the Company would not be able to transfer
information regarding pay-per-view orders, and therefore, no pay-per-view
orders could be fulfilled. To date, the billing vendors have indicated they
are working on being Year 2000 compliant. The Company plans to run tests
during the first quarter of 1999, to see if the billing vendors are Year 2000
compliant with regard to processing the pay-per-view ordering information
transmitted by the Company. There is presently no contingency plan in the
event of non-compliance by the billing vendors. The Company's contingency
plan would be determined by the cable operator's decision with respect to
selecting a different billing vendor.
A majority of the Company's software that it uses for administrative
purposes is "Year 2000 Compliant". The software that creates the customer
invoices is not presently Year 2000 compliant. The vendor of such software
has made available software to upgrade to be Year 2000 compliant. The Company
is currently working on upgrading the software. In the unlikely event that
such software does not get upgraded, the Company would have to create its
invoices in another software program, which would be time consuming and involve
some manual effort.
The Company has performed its Year 2000 compliance checks internally
and therefore has not incurred any related costs. The Company expects the
fees to be nominal for converting its administrative software to be Year
2000 compliant.
Total liabilities decreased $793,163 and total assets decrease
$809,750 for the nine months ended September 30, 1998. The decrease in
total liabilities was primarily a result of a decrease in notes payable
- - majority stockholder of $1,450,000 due to debt repayment. Partially
offsetting the debt repayment is an increase in accrued interest of $397,986
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 on preferred stock of $316,683. The decrease
in assets is partially attributable to a decrease in deferred tax asset of
$178,000 (see above and Note 5 to the financial statements), and an increase
in accumulated depreciation of $659,831. The Company's days for sales in
accounts receivable is 50 days for the nine months ended September 30, 1998
compared to 54 days for the nine months ended September 30, 1997. 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 $1,583,035 during
the nine months ended September 30, 1998. 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 $1,137,928 for the nine months ended September 30, 1998,
compared to positive cash flow from operating activities of $1,119,911 for
the nine months ended September 30, 1997. Cash flow for the nine months ended
September 30, 1998, has not increased significantly as a result of the
decrease in buy rates (see above) despite more subscribers using the
Company's Service.
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 $6,128,712 from Mr. Lenfest. The
interest rates on the loans range from a floating rate based on the prime
rate of PNC Bank to a fixed rate of 12%. Interest on one of the loans in the
principal amount of $1,471,272 as of September 30, 1998, 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 $473,682 has been paid with 473,682
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, 1998, 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, 2000. The
deferring of the interest payments has enabled the Company to accumulate cash.
Interest payments would have amounted to $397,986 for the nine months ended
September 30, 1998, compared to $359,827 for the nine months ended September
30, 1997. 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 and, 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.
In addition, the Board also authorized the Company to begin accruing interest
on all unpaid interest on all outstanding loan balances due to Mr. Lenfest
effective January 1, 1998. Mr. Lenfest has agreed to accept payments of
principal through December 31, 1998. During the first nine months of 1998,
the Company made principal payments of $1,450,000 to Mr. Lenfest. The
aggregate outstanding loan balances due to Mr. Lenfest as of September 30,
1998 are $2,869,712 in principal and $2,585,707 in accrued 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 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 has no control over the buy rates.
As noted above, the Company experienced a decrease in the average monthly buy
rate from 22.2% for the nine months ended September 30, 1997 to 18.2% for the
nine months ended September 30, 1998, as a result of an industry wide drop in
buy rates. Hence, there can be no assurance that buys rates will 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, 2000. 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.
PART II. OTHER INFORMATION
ITEM 5. Other Information
At the end of October 1998, the previous disclosed insider trading suit
filed by the Securities and Exchange Commission against H.F. Lenfest and his
wife in the United States Court for the Eastern District of Pennsylvania was
dismissed by the trial judge.
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 September 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 Shareholders' 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, 1998, from H.F. Lenfest, waiving
the repayment of loans and accrued interest until January 1, 2000
(incorporated by reference to the March 31, 1998, Form 10-QSB).
11. Statement re: Computation of Per Share Earnings (see the Company's
September 30, 1998 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: 11/12/98 By: /s/Frank J. Carcione
--------------------------------------------
Frank J. Carcione, (Chief Executive Officer)
Dated: 11/12/98 By: /s/Irene A. DeZwaan
-------------------------------------------
Irene A. DeZwaan, Treasurer (Controller)
<PAGE>
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