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, 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
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
-----
The Issuer's revenue for the fiscal year ended December 31, 1998 was
$6,122,249.
The Market Value of voting stock held by non-affiliates of the Issuer March
1, 1999, based on a per share average bid and asked price of $.1138 was
$1,040,729.
Number of shares of Issuer's common stock outstanding as of
March 1, 1999: 24,194,500 shares.
Transitional Small Business Disclosure Format: Yes No X
_____ _____
<PAGE>
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 is utilized by cable television companies for purposes of billing for
such specialized services.
The Company's equipment for providing the Service nationwide is located
at the Company's home office in Mt. Laurel, New Jersey. The equipment
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 equipment 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 Company serves cable television systems across the United
States via trunk lines and data circuits that it currently leases from
MCIWorldcom. The Company believes it receives a favorable trunk usage rate
from MCIWorldcom.
The equipment used to provide the Service is owned and installed by
the Company. As of December 31, 1998, the Company had contracts to provide
service to 693 cable television systems, serving approximately 11.4 million
full-time subscribers and 1.3 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 cable television systems on a part-
time basis because it wants cable television systems who are using
alternate pay-per-view ordering services to become familiar and comfortable
with the Company's ANI service in anticipation that these cable television
systems 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 are charged, in addition to
their per order fee, installation and setup fees, monthly data circuit
fees, enhanced feature fees and PPV+ service 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. 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 1998, the Company purchased its required
ANI equipment and software 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 previously purchased Switched-access Audio Response
Units ("SARUs") and one communication subsystem ("HP") from Atlas Telecom
(formerly Syntellect). 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 purchased no
SARUs from Atlas Telecom during 1998. 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. The Company purchases Link On equipment
("LINK ONs") from Telco Solutions, Inc. The LINK ONs are used to expand
call capacity 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 two (2) LINK ONs during
1998.
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.
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,
1998, 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 competitor, 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 14% to approximately 11.4
million full-time addressable homes in 1998, which makes it the largest
service provider of ANI pay-per-view ordering service to the cable
industry. The Company plans to continue its marketing approach during 1999
and believes that strategy will provide continued growth in numbers of
subscribers.
EMPLOYEES
At December 31, 1998, the Company had 17 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 Company intends to renew its lease. The office
space is used to house the equipment used to provide the Service 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 "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.
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 terms and the alleged infringement. The Company is unable at
this time to determine the amount or extent of liability, if any, to the
cable operator.
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 1998 HIGH LOW
First $.09 $.06
Second $.23 $.08
Third $.10 $.06
Fourth $.11 $.03
QUARTER 1997
First $.03 $.03
Second $.03 $.03
Third $.03 $.02
Fourth $.06 $.03
As of March 1, 1999, there were 394 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, 1998, 18,083,512 shares of the Company's
Common Stock were entitled to 10 votes per share. The remaining 6,110,988
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
Net income before income taxes was $781,158 for the year ended December
31, 1998, compared $642,197 for the year ended December 31, 1997. The
Company experienced a decrease in the average monthly buy rate from 21.7%
for the year ended December 31, 1997, to 17.2% for the year ended December
31, 1998. The drop in the buy rate caused the pay-per-view buy revenue to
decrease approximately $361,000. The Company believes the decrease in the
buy rates for the year ended December 31, 1998, is attributable to a
somewhat weak movie product and a lack of major special events. Although the
pay-per-view buy revenue decreased, the Company had an increase in feature
revenue of $251,011 as a result of the Company serving approximately
1,400,000 more full-time subscribers at December 31, 1998. PPV+ service
revenue decreased $119,136 for the year ended December 31, 1998. PPV+
service revenue decreased as a result of the buy rate decrease (see above)
and fewer major boxing events being broadcast.
The Company had net income of $472,773 for the year ended December 31,
1998 compared to $3,135,634 for the year ended December 31, 1997. Included
in net income is income tax expense of $308,385 for the year ended December
31, 1998 compared to an income tax benefit of $2,493,437 for the year ended
December 31, 1997. The Company's income before income taxes is $781,158 for
the year ended December 31, 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 was no further reduction of the valuation allowance in 1998 and
no further resulting tax benefit. As of December 31, 1998, the Company's
net operating loss carryforward is approximately $3,600,000 on a tax
reporting basis (see Note 7 to the Company's financial statements).
Service expenses decreased $474,686 for the year ended December 31,
1998. This is primarily a result of a decrease in trunk expense of $437,087
due to the buy rate decrease (see above) and a reduction in the telephone
rates charged by MCIWorldcom.
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 Legal
Proceedings).
As of December 31, 1998, the Company was serving approximately
11,400,000 full-time cable subscribers and 1,300,000 part-time subscribers,
compared to approximately 10,000,000 full-time cable subscribers and
1,500,000 part-time subscribers served as of December 31, 1997. The part-
time subscribers did not significantly contribute to the revenue or service
expenses for the year ended December 31, 1998 and 1997. However, during the
year ended December 31, 1998, 211,000 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 year ended December 31, 1998, the
Company purchased $303,996 of equipment compared to $513,676 purchased
during the year ended December 31, 1997. Depreciation accounted for 18% of
total operating expenses for the year ended December 31, 1998, compared to
16% for the year ended December 31, 1997. For the year ended December 31,
1998, both selling and marketing expenses and general and administrative
expenses marginally increased approximately 1% each.
The Company's software for its pay-per-view ANI ordering is "Year 2000
Compliant". The Company' 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 MCIWorldcom 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 due to 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 has verified,
through testing, that one billing vendor is Year 2000 compliant with regard
to processing the pay-per-view ordering information transmitted by the
Company. The Company plans to test the remaining billing vendors during
the second quarter of 1999. 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 that 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 $1,069,449 and total assets decreased
$980,920 for the year ended December 31, 1998. The decrease in total
liabilities was primarily a result of a decrease in notes payable - majority
stockholder of $1,900,000 due to debt repayment. Partially offsetting the
debt repayment is an increase in accrued interest of $507,116 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 $422,244. The decrease in assets is
partially attributable to a decrease in deferred tax asset of $286,724 (see
above and Note 7 to the financial statements), and an increase in
accumulated depreciation of $823,172. The Company's days for sales in
accounts receivable is 51 days for the year ended December 31, 1998 compared
to 53 days for the year ended December 31, 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 $2,212,197
during the year ended December 31, 1998. Ignoring changes in operating
assets and liabilities that result from timing issues, and considering only
adjustments to reconcile net income to net cash provided by operating
activities, the Company would have positive cash flow from operating
activities of $1,667,593 for the year ended December 31, 1998, compared to
positive cash flow from operating activities of $1,487,687 for the year
ended December 31, 1997. Cash flow for the year ended December 31, 1998,
increased mainly as a result of a reduction in trunk expense due to a
decrease in the MCIWorldcom rates during 1998 (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 $6,128,712 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 December 31, 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 prior to
1998, in the amount of $473,682 has been paid with 473,682 shares of
Preferred Stock. No Preferred Stock has been issued for 1998 accrued
interest. 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 $507,116 for the year ended
December 31, 1998, compared to $457,883 for the year ended December 31,
1997. During 1998, the Company had been making monthly principal payments
of $150,000 to Mr. Lenfest and, at management's discretion, the Company made
monthly principal payments in excess of $150,000 when the Company had cash
not needed to fund operations. In addition, at the direction of the Board,
without the participation of Mr. Lenfest, effective January 1, 1998, the
Company began accruing interest on all unpaid interest on all outstanding
loan balances due to Mr. Lenfest. During 1998, the Company made principal
payments of $1,900,000 to Mr. Lenfest. The aggregate outstanding loan
balances due to Mr. Lenfest as of December 31, 1998 are $2,419,712 in
principal and $2,694,837 in accrued interest. Beginning January 1, 1999, the
Company will voluntarily begin to pay current monthly interest payments to
Mr. Lenfest from the $150,000 payment. The balance of the payment will be
applied to loan principal
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
a lump sum 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 21.7% for the year ended December 31, 1997 to 17.2% for the year ended
December 31, 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 and current month interest 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, 1999.
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 financial
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,
1998 with respect to each of the Company's directors and officers.
POSITION(S) WITH DIRECTOR
NAME AGE THE COMPANY SINCE
H.F. (Gerry) Lenfest 68 Chairman of the 1989
Board and Director
Frank J. Carcione 58 President, 1990
Chief Executive
Officer, and Director
Donald L. Heller 53 Director 1993
Joseph M. Murphy 45 Executive Vice 1997
President of Sales
& Operations, and
Director
Joseph DiJulio 44 Director 1998
Irene A. DeZwaan 35 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 1998, Messers Heller and DiJulio, were entitled to
receive 5,000 shares of common stock each.
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.
Joseph A. DiJulio has been the Vice President of Network Services
since January 1995 and General Manager since July 1988 of Suburban Cable TV
Company, Inc. ("Suburban"), a subsidiary of Lenfest Communications, Inc.
From January 1993 through December 1995, Mr. DiJulio was a regional Manager
of Suburban. Mr. DiJulio has held various positions of increasing
responsibility with Suburban since joining the company in June 1984.
Irene A. DeZwaan, CPA, has been the Secretary and Treasurer of the
Company since in July 1993. Prior to this appointment, Ms. DeZwaan had
been the Manager of Finance and Administration of the Company since
November 1990.
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 alleged 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. During October
1998, the case was dismissed by the trial judge.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER RESTRICTED
NAME AND ANNUAL STOCK
PRINCIPAL POSITION YEAR SALARY COMMISSIONS COMPENSATION AWARDS
Frank J. Carcione 1998 $135,000 - $3,375 (1) $9,219(2)
CEO 1997 124,950 - 3,124 (1) -
1996 119,000 - 2,761 (1) -
Joseph Murphy 1998 $93,767 $21,448 $2,344 (1) $7,375(3)
Executive Vice 1997 89,302 44,155 2,233 (1) -
President of Sales 1996 85,362 53,710 2,134 (1) -
& Operations
(1) Company funded contributions to the Company's Simplified Pension Plan
(SEP).
(2) Includes 125,000 shares of common stock awarded to Frank J. Carcione at
a value of $.07375 per share.
(3) Includes 100,000 shares of common stock awarded to Joseph Murphy at a
value of $.07375 per share.
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 $1,725 (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 March 1, 1999, 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) 87.6% (2)
200 Cresson Blvd.
Oaks, PA 19456-0989
Chairman of the Board and Director
(1) As of March 1, 1999, 24,194,500 shares of Common Stock were
outstanding.
(2) Includes 26,274,234 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
undeclared and unpaid dividends on the Preferred Stock for the period
ended December 31, 1998, which may be converted into 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 March 1, 1999, 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) 87.6% (2)
Chairman of the Board
and Director
Frank Carcione 125,000 .5%
Chief Executive Officer,
President and Director
Joseph M. Murphy 190,000 (3) .8%
Executive Vice President
of Sales and Operations and
Director
Donald L. Heller 15,000 .1%
Director
Joseph DiJulio 5,000 .0%
Director
All Directors and 68,446,546(2)(3)(4) 88.2%
Officers as a Group
(7 Persons)
(1) As of March 1, 1999, 24,194,500 shares of Common Stock were
outstanding.
(2) Includes 26,274,234 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
undeclared and unpaid dividends on the Preferred Stock for the period
ended December 31, 1998, which may be converted into 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 Murphy upon exercise of
currently exercisable stock options held by Mr. Murphy.
(4) Includes 3,000 shares issuable to Randy Gilson upon exercise of
currently exercisable stock options held by Mr. Gilson.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998, the Company was indebted to Mr. Lenfest in the
principal amount of $2,419,712. Mr. Lenfest has agreed to accept payments
at the rate of $150,000 per month. (See Management's Discussion and
Analysis or Plan of Operation and Note 4 of the 1998 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 $400,000 from
LCI subsidiaries during 1998. (See Note 9 of the 1998 financial statements
of the Company).
In 1998, the Company issued 375,000 shares of its common stock to four
of its executives as a discretionary bonus. All of these shares are fully
vested (See Note 2 to the 1998 financial statements).
Other related transactions are described in Notes 4, 6 and 9 of the
1998 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
2, 1999.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for the years ended December 31, 1998 and
1997.
Statements of Stockholders' Deficit for the years ended December 31,
1998 and 1997.
Statements of Cash Flows for the years ended December 31, 1998 and
1997.
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 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
1998 Financial Statements 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: 3/26/99 By: /s/Frank J. Carcione
----------------------------------
Frank J. Carcione
President (Chief Executive Officer)
DATED: 3/26/99 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
- -------------------------------- Chairman of the
H.F. Lenfest Board and Director
/s/Frank J. Carcione Director 3/26/99
- --------------------------------
Frank J. Carcione
/s/Donald Heller Director 3/26/99
- --------------------------------
Donald Heller
/s/Joseph M. Murphy Director 3/26/99
- --------------------------------
Joseph Murphy
/s/J.A. DiJulio Director 3/26/99
- --------------------------------
Joseph A. DiJulio
<PAGE>
TELVUE CORPORATION
FINANCIAL STATEMENTS
Years Ended December 31, 1998 and 1997
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
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, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
February 2, 1999
<PAGE>
TELVUE CORPORATION
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
------------- -----------
[S] [C] [C]
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 453,569 $ 445,368
Accounts receivable - trade 786,083 922,737
Other receivables 4,910 5,281
Deferred tax asset 285,935 477,987
Other current assets 11,626 10,898
----------- ----------
TOTAL CURRENT ASSETS 1,542,123 1,862,271
PROPERTY AND EQUIPMENT 4,791,240 4,534,168
Less accumulated depreciation 3,462,823 2,639,651
----------- ----------
1,328,417 1,894,517
OTHER ASSETS
Deferred tax asset 1,932,778 2,027,450
Deposits 9,300 9,300
----------- ----------
1,942,078 2,036,750
----------- ----------
$4,812,618 $5,793,538
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable-majority stockholder-current $ 1,380,000 $ 1,800,000
Accounts payable 512,047 423,851
Accrued expenses 172,839 192,305
Accrued dividends payable 422,244 -
Income taxes payable 8,661 12,000
Deferred trunk credit - 164,200
----------- ----------
TOTAL CURRENT LIABILITIES 2,495,791 2,592,356
NOTES PAYABLE - MAJORITY STOCKHOLDER, net
of current portion 1,039,712 2,519,712
ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,694,837 2,187,721
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$1 par value, 6,900,000 shares authorized,
3,518,694 shares issued and outstanding at
December 31, 1998 and 1997, (liquidation value
$3,940,938 and $3,518,694, respectively) 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 December
31, 1998 and 1997, respectively 241,945 238,145
Additional paid-in capital 1,550,535 1,516,335
Accumulated deficit (6,728,896) (6,779,425)
----------- -----------
(4,936,416) (5,024,945)
----------- -----------
$4,812,618 $5,793,538
=========== ===========
See accompanying notes
<PAGE>
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
1998 1997
---- ----
REVENUES $ 6,122,249 $ 6,330,675
OPERATING EXPENSES
Service 2,711,860 3,186,546
Selling and marketing 593,862 585,544
General and administrative 648,893 642,767
Depreciation 870,095 831,609
----------- -----------
4,824,710 5,246,466
----------- -----------
OPERATING INCOME 1,297,539 1,084,209
OTHER INCOME (EXPENSE)
Interest income, net of reimbursement (507,116) (459,352)
Interest income 24,165 42,221
Other income (expense) (33,430) (24,881)
----------- -----------
(516,381) (442,012)
----------- -----------
INCOME BEFORE INCOME TAXES 781,158 642,197
INCOME TAX BENEFIT (EXPENSE) (308,385) 2,493,437
------------ -----------
NET INCOME 472,773 3,135,634
DIVIDENDS ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK (422,244) (359,932)
----------- ------------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 50,529 $ 2,775,702
=========== ============
EARNINGS (LOSS) PER COMMON SHARE
BASIC $ - $ .12
============ ============
DILUTED $ .01 $ .04
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 24,036,167 23,795,102
========== ==========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1998 and 1997
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Deficit
------- ---------- ----------- -------------
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)
Accrued dividends on
redeemable convertible
preferred stock - - (422,244) (422,244)
Issuance of 380,000 shares
of common stock 3,800 34,200 - 38,000
Net income - - 472,773 472,773
-------- ---------- ----------- -----------
BALANCE,
DECEMBER 31, 1998 $241,945 $1,550,535 $(6,728,896) $(4,936,416)
======== ========== =========== ===========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 472,773 $ 3,135,634
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation 870,095 831,609
Loss on sales or disposal of property and
equipment - 24,881
Deferred tax (benefit) expense 286,725 (2,505,437)
Issuance of common stock 38,000 1,000
Changes in assets and liabilities:
Accounts receivable - trade and other 137,025 274,430
Other current assets (728) 2,066
Deposits - (500)
Accounts payable - trade and other 88,196 104,877
Accrued expenses (19,466) 27,429
Income taxes payable (3,339) 12,000
Deferred trunk credit (164,200) (26,600)
Accrued interest - majority stockholder 507,116 457,883
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,212,197 2,339,272
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (303,996) (513,676)
Proceeds from sales or disposal of
property and equipment - 1,405
----------- -----------
NET CASH (USED IN)INVESTING ACTIVITIES (303,996) (512,271)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt reduction:
Notes payable - majority stockholder (1,900,000) (2,050,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,201 (222,999)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 445,368 668,367
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 453,569 $ 445,368
=========== ===========
See accompanying notes.
<PAGE>
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of TelVue Corporation
("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.
BUSINESS ACTIVITY AND CONCENTRATION OF CREDIT RISK
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 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 1998 and 1997, four customers accounted for 50% and 51% of sales,
respectively, and 37% and 48% of receivables at December 31, 1998 and 1997,
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.
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, 1998 and 1997. Historically, the Company has
experienced virtually no bad debt.
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.
VALUATION OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets to be Disposed of",
the Company assesses, on an on-going basis, the recoverability of long-
lived assets based on estimates of future undiscounted cash flows for the
applicable business acquired compared to net book value. Long-lived assets
include property and equipment. If the future undiscounted cash flow
estimate is less than net book value, net book value is then reduced to the
fair value of the assets. The Company also evaluates the depreciation
periods of assets, to determine whether events or circumstances warrant
revised estimates of useful lives. As of December 31, 1998, management
believes that no revisions to the remaining useful lives or writedowns of
long-lived assets are required.
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.
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
Basic earnings (loss) per common share is computed using the weighted
average number of shares of outstanding. Diluted earnings (loss) per
common share is computed using the weighted average number of shares
outstanding adjusted to include incremental common shares that would have
been outstanding if potentially dilutive common shares had been issued.
Incremental shares of 57,027,826 and 53,497,636 in 1998 and 1997,
respectively, were used in the calculation of diluted earnings (loss) per
common share.
NOTE 2 - SUPPLEMENTARY DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid during the year for:
1998 1997
---- ----
Interest $ - $ -
Income taxes $ 25,000 $ -
NONCASH INVESTING AND FINANCING TRANSACTIONS
The Company accrued dividends on its redeemable convertible preferred stock
of $422,244 and $359,932 in 1998 and 1997, respectively. In 1998 and 1997,
the Company issued 5,000 and 20,000 shares of common stock valued at $500
and $1,000, respectively under the Director Compensation Plan (See Note 6).
In 1998, the Company issued 375,000 shares of common stock valued at
$37,500 to four key employees. In 1997, the Company issued 359,932 shares
of redeemable convertible preferred stock in payment of both semi-annual
1997 dividends. In 1997, the Company issued 173,126 shares, of redeemable
convertible preferred stock in payment of interest on a line of credit.
NOTE 3 - PROPERTY AND EQUIPMENT
The schedule of property and equipment at December 31, 1998 and 1997, is as
follows:
Estimated
Useful Lives
1998 1997 in Years
---- ---- ------------
Operating equipment $4,549,957 $4,250,971 5
Office furniture and equipment 201,599 243,513 5
Leasehold improvements 39,684 39,684 5
---------- ----------
$4,791,240 $4,534,168
========== ==========
NOTE 4 - NOTES PAYABLE - MAJORITY STOCKHOLDER
Notes payable to the majority stockholder consisted of the following at
December 31, 1998 and 1997:
1998 1997
---- ----
National equipment loan (a) $1,471,272 $1,471,272
Additional lines of credit (b) 407,440 2,307,440
Notes payable (SDC) (c) 541,000 541,000
---------- ----------
$2,419,712 $4,319,712
========== ==========
(a) In March 1994, the Company's majority stockholder provided a 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 6) at $1 per share. In
1997, the Company issued 173,126 shares of redeemable convertible preferred
stock in payment of interest. The effective interest rates, at December
31, 1998 and 1997, were 8.75% and 9.5%, respectively.
(b) 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, 1998 and 1997, were 8.75% and 9.5%, 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.
(c) In January 1995, the Company's majority stockholder acquired from
Science Dynamics Corporation ("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 1999. 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
$115,000. The Company, at its discretion, may make monthly principal
payments in excess of $115,000 when the Company has excess cash not needed
to fund operations. The Company has, therefore, classified $1,380,000 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 5 - 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
----------- ----------
1999 $ 49,117
Rental expense under the operating lease for office facilities amounted to
$97,798 for each of the years ended December 31, 1998 and 1997.
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.
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 1999.
NOTE 6 - CAPITAL STOCK
COMMON STOCK VOTING RIGHTS AND CONCENTRATION OF CONTROL
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.
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 December 1997, the 1997 semiannual dividends were declared
and paid with 359,932 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
balance sheets.
DIRECTOR COMPENSATION PLAN
In December 1997, the Company adopted a Director Compensation Plan. Under
this plan, each non-employee director, other than the majority stockholder,
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 1998
and 1997, the Company issued 5,000 and 20,000 shares of Common Stock under
this plan, respectively, and recognized director compensation expense of
$500 and $1,000, respectively.
COMMON STOCK WARRANTS
In connection with one of the lines of credit discussed in Note 4, 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 7 - 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 (alternative minimum tax) $(21,660) $ (12,000)
State - -
--------- -----------
(21,660) (12,000)
Deferred
Federal (264,994) (208,368)
State (73,844) (60,763)
--------- ----------
(338,838) (269,131)
Valuation allowance (increase) decrease 52,113 2,774,568
--------- ----------
(286,725) 2,505,437
--------- ----------
$(308,385) $2,493,437
========== ==========
The categories of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
Federal State
--------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Deferred Tax Assets:
Accrued interest -
stockholder $ 830,347 $ 674,092 $252,641 $205,099
---------- ---------- -------- --------
Net operating loss
carryforward 1,215,281 1,716,879 190,321 329,764
Alternative minimum tax
credit 33,000 12,000 - -
---------- ---------- -------- --------
Gross Deferred Tax Asset 2,078,628 2,402,971 442,962 534,863
Deferred Tax Liabilities:
Property and equipment,
principally due to differences
in depreciation (86,299) (145,648) (26,257) (44,315)
---------- --------- --------- --------
Net deferred tax asset before
valuation allowance 1,992,329 2,257,323 416,705 490,548
Valuation allowance - - (190,321) (242,434)
---------- ----------- -------- --------
Net Deferred Tax Asset 1,992,329 $2,257,323 $226,384 $248,114
========= ========== ======== ========
The Company has a net operating loss carryforward of approximately
$3,600,000 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 $33,000. 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 8 - 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
1998 and 1997 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 1998 and 1997 amounted to $21,223 and
$19,930, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has several notes payable to the majority stockholder. (See
Note 4).
The Company provided its automated number identification services to
subsidiaries of Lenfest Communications, Inc. ("LCI"). The Company
recognized revenues of approximately $400,000 and $470,000 from LCI
subsidiaries in 1998 and 1997, respectively and had a receivable of $59,848
and $65,916 due from LCI at December 31, 1998 and 1997, respectively.
These services were provided at normal billing rates. The Company and LCI
are under the control of the majority stockholder of the Company.
NOTE 10 - 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 11 - COMMITMENTS AND CONTINGENCIES
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.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 453,569
<SECURITIES> 0
<RECEIVABLES> 786,083
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,542,123
<PP&E> 4,791,240
<DEPRECIATION> 3,462,823
<TOTAL-ASSETS> 4,812,618
<CURRENT-LIABILITIES> 2,495,791
<BONDS> 0
<COMMON> 241,945
0
3,518,694
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,812,618
<SALES> 6,122,249
<TOTAL-REVENUES> 6,122,249
<CGS> 0
<TOTAL-COSTS> 2,711,860
<OTHER-EXPENSES> 2,112,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507,116
<INCOME-PRETAX> 781,158
<INCOME-TAX> 308,385
<INCOME-CONTINUING> 472,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472,773
<EPS-PRIMARY> 0
<EPS-DILUTED> .01
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