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 March 31, 2001
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:(856) 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 May 3,
2001: 24,721,583 shares.
Transitional Small Business Disclosure Form: Yes No X
------ ------
This report includes a total of 15 pages.
TELVUE CORPORATION
INDEX
PAGE
NO.
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2001
(unaudited) and as of December 31, 2000
Statements of Operations for the three
months ended March 31, 2001 (unaudited)
and March 31, 2000 (unaudited)
Statements of Cash Flows for the three
months ended March 31, 2001 (unaudited)
and March 31, 2000 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis or Plan of
Operation
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
PART I. Financial Information
ITEM I. Financial Statements
TELVUE CORPORATION
BALANCE SHEETS
March 31, December 31,
2001 2000
------------- -----------
ASSETS Unaudited) *
CURRENT ASSETS
Cash and cash equivalents $ 697,068 $ 709,740
Accounts receivable - trade 891,945 781,597
Inventory 11,856 -
Deferred tax asset 410,000 300,000
Other current assets 35,950 16,974
----------- ----------
TOTAL CURRENT ASSETS 2,046,819 1,808,311
PROPERTY AND EQUIPMENT
Machinery and equipment 5,189,874 5,074,442
Less accumulated depreciation 4,587,273 4,509,063
----------- ----------
602,601 565,379
OTHER ASSETS
Deferred tax asset 923,725 1,136,320
Goodwill-net of accumulated amortization
of $4,879 in 2001 1,232,703 -
Covenant not to compete - net of
accumulated amortization of $208 in 2001 9,792 -
Other assets 9,300 109,300
---------- ----------
2,175,520 1,245,620
---------- ----------
$4,824,940 $3,619,310
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accrued interest-majority stockholder-current $ 51,600 $ 84,000
Notes payable - Ford Motor Credit Corp-current 4,118 -
Accounts payable 277,796 254,680
Accrued expenses 352,181 304,357
Accrued dividends 1,372,293 1,266,732
----------- ----------
TOTAL CURRENT LIABILITIES 2,057,988 1,909,769
NOTES PAYABLE - MAJORITY STOCKHOLDER 1,191,000 541,000
ACCRUED INTEREST - MAJORITY STOCKHOLDER - net
of current portion 2,036,032 2,023,088
NOTES PAYABLE - DACON CORPORATION 300,000 -
NOTES PAYABLE - FORD MOTOR CREDIT CORP - net
of current portion 8,882 -
REDEEMABLE CONVERTIBLE PREFERRED STOCK, $1 par
value, 6,900,000 shares authorized,
3,518,694 shares issued and outstanding
(liquidation value of $4,785,426) 3,518,694 3,518,694
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 100,000,000
shares authorized, 24,721,583 shares
issued and outstanding 247,216 247,216
Additional paid-in capital 1,582,310 1,582,310
Accumulated deficit (6,117,181) (6,202,767)
----------- -----------
(4,287,655) (4,373,241)
----------- -----------
$4,824,940 $3,619,310
=========== ===========
* Derived from audited financial statements.
The accompanying unaudited notes are an integral part of these statements.
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
REVENUES $ 1,368,720 $ 1,233,189
OPERATING EXPENSES
Service 558,770 534,321
Selling and marketing 177,236 143,101
General and administrative 209,121 156,840
Depreciation & amortization 83,297 112,499
----------- -----------
1,028,424 946,761
----------- -----------
OPERATING INCOME 340,296 286,428
OTHER INCOME (EXPENSE)
Interest income 10,500 4,112
Interest expense (57,056) (75,736)
----------- -----------
(46,556) (71,624)
----------- -----------
INCOME BEFORE INCOME TAXES 293,740 214,804
INCOME TAX (102,595) (76,939)
------------ -----------
NET INCOME 191,145 137,865
DIVIDENDS ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK (105,561) (105,561)
----------- ------------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 85,584 $ 32,304
=========== ============
NET INCOME PER COMMON SHARE
BASIC $.00 $.00
=========== ============
DILUTED $.00 $.00
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC 24,721,583 24,304,445
========== ==========
DILUTED 88,467,737 84,995,916
========== ==========
The accompanying unaudited notes are an integral part of these statements.
TELVUE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months Ended March 31,
---------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 191,145 $ 137,865
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 83,297 112,499
Deferred taxes 102,595 76,938
Changes in assets and liabilities:
Decrease (increase) in -
Accounts receivable - trade (110,347) 6,168
Inventory (9,438) -
Other current assets (18,976) (26,277)
Increase (decrease) in -
Accounts payable 23,116 (146,962)
Accrued expenses 47,824 (18,666)
Accrued interest - majority stockholder (19,456) -
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 289,760 141,565
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (52,432) (16,059)
Other assets (deposit on Source purchase) 100,000 -
Acquisition of assets of Source (1,000,000) -
---------- ----------
NET CASH (USED) BY INVESTING ACTIVITIES (952,432) (16,059)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable-majority stockholder 650,000 -
Debt reduction:
Notes payable - majority stockholder - (299,266)
Issuance of common stock - 23,800
---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 650,000 (275,466)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (12,672) (149,960)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 709,740 325,698
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 697,068 $ 175,738
========== ==========
The accompanying unaudited notes are an integral part of these statements.
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 March 31, 2001, the results of operations
for the three months ended March 31, 2001 and 2000 and cash flows for the
three months ended March 31, 2001 and 2000.
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 year ended December 31, 2000, as
filed with the Securities and Exchange Commission.
Prior period financial statements have been reclassified to conform with
current quarter presentation.
2. NEW BUSINESS AND ACQUISITIONS:
-----------------------------
On March 9, 2001, TelVue Corporation (the "Company") acquired the assets of
J.D. Kraengel and Associates, Inc. f/k/a Dacon Corporation d/b/a Source
Communications Group ("Source"), a Delaware corporation located in Mullica
Hill, New Jersey, for $1.3 million under the terms of an Asset Purchase
Agreement which was signed on February 14, 2001. The assets, which consisted
primarily of material contracts with equipment, software and Communication
service providers, were purchased for $1,000,000 in cash and $300,000
pursuant to a promissory note. The Company funded a portion of the
acquisition by borrowing $650,000 from its majority shareholder, on
March 5, 2001, at an interest rate of prime plus one percent (1%) compounded
and due on or about January 1, 2004. Jeffrey Kraengel, former president of
Source, joined the Company as Executive Vice President with the responsibility
of integrating Source's operations into the Company, expanding existing
business with current customers and suppliers, identifying and creating
new business opportunities, supervising research and development and training
employees.
The accompanying financial statements include the operations of Source since
the date of acquisition.
The following unaudited pro forma information for the three months ended
March 31, 2001, is presented as if the acquisition of Source occurred on
January 1, 2000. This information is based on historical results of
operations, adjusted for acquisition costs, and, in the opinion of management,
is not necessarily indicative of what the results would have been had the
Company operated Source since January 1, 2000.
Three Months Ended March 31,
2001 2000
---------- --------
Revenues $1,676,937 $1,718,028
Net income 195,042 142,565
Diluted EPS $.00 $.00
3. SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
Supplemental disclosures of cash paid during the period-
2001 2000
---- ----
Income taxes $ - $ -
Interest $57,056 $75,736
Non-cash Investing and Financing Transactions
- ---------------------------------------------
The Company accrued dividends on its redeemable convertible preferred
stock of 105,561 for each of the three months ended March 31, 2001 and 2000.
The Company issued a promissory note, in the amount of $300,000, payable
to the seller in connection with the purchase of Source.
The Company purchased a van in the amount of $21,402. The Company paid
cash of $8,402 and financed the balance of $13,000.
4. EARNINGS PER COMMON SHARE:
--------------------------------
Basic earnings per common share is computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of
shares of outstanding. Diluted earnings per common share is computed by
dividing net income, after deduction of preferred stock dividends, when
applicable, by 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
63,746,154 and 60,691,471 for the three months ended March 31, 2001 and
2000, respectively, were used in the calculation of diluted earnings per
common share.
The following is reconciliation from basic earnings per share to diluted
earnings per share for the three months ended March 31, 2001 and 2000.
Net Income
Available Average
to Common Shares Earnings
Stockholders Outstanding Per Share
------------ ----------- --------
2001 $ 85,584 24,721,583 $ .00
Effect of dilution
Warrants 29,915,160
Convertible preferred stock 105,561 32,608,210
Convertible accrued interest - 955,701
Vested unexercised stock options - 267,083
----------- ---------- --------
Diluted $ 191,145 88,467,737 $ .00
=========== ========== ========
2000 $ 32,304 24,304,445 $ .00
Effect of dilution
Warrants 29,915,160
Convertible preferred stock 105,561 29,793,110
Convertible accrued interest - 955,701
Vested unexercised stock options - 27,500
----------- ---------- --------
Diluted $ 137,865 84,995,916 $ .00
=========== ========== ========
5. DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK:
----------------------------------------------------
As of March 31, 2001 accrued dividends on outstanding preferred stock
amounted to $1,372,293
6. 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:
2001 2000
----------- ----------
Current
Federal $ - $ -
State - -
----------- ----------
- -
Deferred
Federal (102,595) (76,939)
State - -
---------- ----------
$(102,595) $ (76,939)
========== ==========
The Company has a net operating loss carryforward of approximately $1,560,000
on a tax reporting basis. The carryforward will begin to expire in 2007, 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.
7. NOTES PAYABLE AND ACCRUED INTEREST
----------------------------------
Notes Payable and Accrued Interest - Majority Stockholder:
- ---------------------------------------------------------
On March 5, 2001, the Company borrowed $650,000 from the majority stockholder
for the purchase of Source Communications Group. Interest on the loan is set
at the rate of prime plus one percent (1%) compounded monthly. The principal
on the loan is due on or about January 1, 2004. This brings the total
outstanding notes due to the majority stockholder in the aggregate principal
amount of $1,191,000 and accrued interest due on these notes in the aggregate
amount of $2,087,632. Effective as of March 31, 2001, the Company obtained
from the majority stockholder an extension to January 1, 2003, 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 of at least $25,000 through December
31, 2001. The Company makes current interest payments from the monthly
payment and the balance of the payment is applied to accrued interest. The
Company may make monthly payments in excess of $25,000 when, in the opinion
of management, the Company has excess cash that is not needed to fund
operations. The Company made payments of $75,000 during the three months
ended March 31, 2001. The Company has classified $51,600 of the accrued
interest as a current liability on the balance sheet.
Notes Payable - Dacon Corporation d/b/a Source Communications Group
- -------------------------------------------------------------------
On March 9, 2001, the Company acquired substantially all of the assets
of Source Communications Group for $1.3 million. The assets, which consisted
primarily of material contracts with equipment, software and communication
service providers, were purchased for $1,000,000 in cash and $300,000
pursuant to a promissory note. The promissory note has a term of three years.
Interest only is payable monthly during year one at the rate of 8% per annum.
Beginning in year two, both principal and interest are payable monthly at
the rate of 5.06% per annum. As of March 31, 2001, the principal amount of
the note was $300,000.
Notes Payable - Ford Motor Credit Corp
- --------------------------------------
TelVue purchased a van for $21,402, to be used for installations related
to the Source business. The Company paid cash of $8,402 and financed the
balance of $13,000. The loan is payable monthly in the amount of $390
including principal and interest, has a term of three years and bears
interest at 5.0% per annum.
8. 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 against 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.
The Company has not received any notice of alleged infringement from the
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.
9. FINANCIAL DATA BUSINESS SEGMENT
-------------------------------
The Company had conducted all of its operations as a marketing and service
company primarily selling automatic number identification ("ANI")
telecommunications services to the cable industry for the automated
ordering of pay-per-view features and events. As discussed in note 2,
on March 9, 2001, the Company acquired substantially all of the assets of
Source, a communications solutions provider and network integrator. The
following represents information for the Company's ANI and Source business
segments.
Three Months Ended March 31, 2001 ANI Source Total
- --------------------------------- ---------- --------- ----------
Revenues $1,326,624 $ 42,096 $1,368,720
Operating income 362,587 (22,291) 340,296
Interest expense 57,056 - 57,056
Income before income taxes 316,031 (22,291) 293,740
Capital expenditures 44,030 1,321,402 1,365,432
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
TelVue Corporation ("TelVue") 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"). TelVue provides the
Service through equipment it purchases. TelVue'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, such as,
"Custom Greeting" which identifies the cable operator by name, "Title Speak"
which speaks the movie or event title, start-time and channel appearance on
accepted orders, and "Call Redirect" which automatically redirects unaccepted
order calls to the cable operator's customer service representative for
assistance. TelVue believes these enhanced service features are necessary
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"). TelVue serves cable television systems across
the United States via trunk lines and data circuits that it currently leases
from MCIWorldcom. TelVue believes it receives a favorable trunk usage rate
from MCIWorldcom.
On March 9, 2001, TelVue acquired substantially all of the assets of
Source Communications Group a Delaware corporation located in Mullica Hill,
NJ ("Source") for $1.3 million. Source was a privately held regional
communications solution provider and network integrator serving clients
mainly in the Mid-Atlantic states. Source represents a number of well-known
equipment, software and communications service suppliers. Source molds
these resources into a custom business solution for its clients and
satisfies its customers' individual voice and data communications needs.
The acquisition is part of a strategy to allow TelVue to grow and diversify
both its product lines and customer base beyond the cable TV industry.
TelVue plans to expand Source's current sales and marketing activities
along with enhancing its existing installation and maintenance services.
Under the terms of the asset purchase agreement, TelVue retained the
employees and management of Source and Source relocated its principal
offices to TelVue's offices in Mt. Laurel, NJ. Jeffery Kraengel, the former
President of Source, has joined TelVue as an Executive Vice President with
the responsibility of integrating the Source operations into TelVue,
expanding existing business with current customers and suppliers,
identifying and creating new business opportunities, supervising research
and development, and training employees.
TelVue had net income of $191,045 and $137,865 for the three months
ended March 31, 2001 and 2000, respectively. Service revenue increased
$135,531 for the three months ended March 31, 2001. This is partially
a result of revenue from Source of $42,096. Service revenue also increased
as a result of an increase in feature revenue of $123,916. Pay-per-view
buy revenue decreased $45,765 due to a reduction in the average monthly
buy rate from 9.5% to 8.2% for the three months ended March 31, 2000 and
2001, respectively. TelVue believes the decrease in the buy rates is
attributable to a somewhat weak movie product, a lack of major special
events and the movement of cable operators to impulse ordering on digital
cable systems (see below).
Service expenses increased $24,449 for the three months ended March
31, 2001. This is primarily due to cost of goods sold expense of $35,484
related to the Source business. No such costs were incurred during 2000.
Service expenses also increased as a result of an increase in payroll of
$7,285 due to salary increases.
Selling and marketing expenses increased $34,135 for the three months
ended March 31, 2001. This increase is due in part to an increase in payroll
taxes and benefits of $21,531, as a result of salary increases and Source
personnel. General and administrative expenses increased $52,281 for the
three months ended March 31, 2001. This is partially a result of an increase
of $9,605 in payroll taxes and benefits as a result of salary increases and
Source personnel, and an increase in legal expense of $33,127 related to
the Source acquisition.
During the three months ended March 31, 2001, TelVue purchased
$115,432 of equipment compared to $16,059 purchased during the same period
of 2000. Included in the 2001 equipment purchases is $50,000 of equipment
which was acquired with the purchase of Source. Also included is the
purchase of a van in the amount of $21,402, of which $13,000 is being
financed through Ford Motor Credit Corp. Depreciation and amortization
expense decreased $29,202 for the three months ended March 31, 2001,
as a result of equipment being fully depreciated. Depreciation and
amortization accounted for 8% of total operating expenses for the three
months ended March 31, 2001, compared to 12% for the three months ended
March 31, 2000.
TelVue recorded income tax expense of $102,595 and $76,939 for the
three months ended March 31, 2001 and 2000, respectively. TelVue's net
operating loss carryforward was approximately $1,560,000 on a tax-reporting
basis as of March 31, 2001 (see Note 6 to TelVue's financial statements).
As of March 31, 2001, TelVue was serving approximately 18,400,000
full-time cable subscribers and 1,600,000 part-time cable subscribers,
compared to approximately 15,900,000 full-time cable subscribers and
1,300,000 part-time cable subscribers served as of March 31, 2000. The
part-time subscribers did not significantly contribute to the revenue or
service expenses for the three months ended March 31, 2001 and 2000.
Total liabilities increased $1,120,045 and total assets increased
$1,205,630 for the three months ended March 31, 2001. The increase in
total liabilities was partially a result of an increase in notes payable
to the majority stockholder of $650,000 and notes payable - Dacon Corporation
of $300,000, both which are related to the purchase of Source. The increase
in assets is primarily attributable to an increase in goodwill of $1,232,703
as a result of the Source purchase. TelVue's days for sales in average
accounts receivable was 55 days at March 31, 2001 and 2000. TelVue does
not offer incentives or discounts to its customers, nor has it changed its
credit terms with its customers.
TelVue had positive cash flow from operating activities of $289,760
for the three months ended March 31, 2001, compared to $141,565 for the three
months ended March 31, 2000. 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, TelVue
would have positive cash flow from operating activities of $377,037 for the
three months ended March 31, 2001, compared to positive cash flow from
operating activities of $327,302 for the three months ended March 31, 2000.
The increase in cash flow is a result of the increase in service revenue
(see above).
Since November 2, 1989, TelVue has funded its expansion and operating
deficit from the proceeds from the sale of shares of TelVue's Common Stock
and Preferred Stock to Mr. H.F. Lenfest, TelVue's majority stockholder
("Mr. Lenfest") and from borrowings from Mr. Lenfest. From November 1989
to February 1996, TelVue 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 is payable quarterly and, at the option of TelVue may be paid by the
delivery of shares of TelVue's Preferred Stock at the rate of one share of
Preferred Stock for each one dollar of accrued interest. Accrued interest
on this loan was $143,348 as of March 31, 2001, and there was no outstanding
principal. Interest due on this loan prior to 1998, 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 Dynamics Corporation
TelVue's non-interest bearing note in the amount of $541,000.
On March 9, 2001, TelVue acquired substantially all of the assets of
Source for $1.3 million (see Notes 2 and 7 to the financial statements). The
assets, which consisted primarily of material contracts with equipment,
software and communication service providers, were purchased for $1,000,000
in cash and $300,000 pursuant to a promissory note. The promissory note has
a term of three years. Interest only is payable monthly during year one at
the rate of 8% per annum. Beginning in year two, both principal and interest
are payable monthly at the rate of 5.06% per annum. TelVue funded a portion
of the acquisition by borrowing $650,000 from Mr. Lenfest on March 5, 2001,
at an interest rate of prime plus one percent (1%) compounded and due on or
about January 1, 2004. The acquisition of Source is part of TelVue's long
term business strategy to expand and diversify its operations. TelVue is
assessing ways to cross-train its personnel and promote the integration of
Source. These efforts may temporarily increase operating costs.
TelVue remains dependent upon the deferral of a lump sum repayment
of principal and interest due to Mr. Lenfest to fund operations and capital
expenditures from operating cash flow. Effective as of March 31, 2001, TelVue
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, 2003. On January 1, 1999, TelVue began to pay current
monthly interest payments to Mr. Lenfest from its monthly loan payment. The
balance of the payment is applied to loan principal. TelVue has made
payments of $25,000 per month for the period January 2001 through March 2001,
bringing total payments to $75,000 for the three months ended March 31, 2001.
TelVue intends to continue to make voluntary monthly repayments to Mr.
Lenfest throughout 2001. The monthly payment amount may vary during 2001
depending on the availability of cash. TelVue intends to invest cash in
the Source business during the remainder of 2001 in an effort to grow the
business. The aggregate outstanding loan balance due to Mr. Lenfest as of
March 31, 2001, is $1,191,000 in loan principal and $2,087,632 in accrued
interest (see Note 7 to TelVue's financial statements).
TelVue's ability to fund its operating expenses primarily depends on
three factors: (i) the continued expansion of TelVue's subscriber base, (ii)
the cable industry's buy rates, and (iii) the continued deferral by Mr.
Lenfest of a lump sum cash repayment of his loans to TelVue. Management
believes that its present marketing strategies will further increase the
customer base, although there can be no assurances that TelVue 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. TelVue has no control over the buy
rates and therefore cannot assure that buys rates will increase or will
remain at their current level. As noted above, TelVue experienced a decrease
in the average monthly buy rate from 9.5% to 8.2% for the three months ended
March 31, 2001.
The decrease in buy rates noted above is partially a result of the
movement of cable operators to impulse ordering on digital cable systems.
Some cable operators have begun deploying digital services to their
customers. These digital services will allow cable operators to offer
additional channels and to offer additional pay-per-view channels. Where
the cable operators have activated two-way cable plant (i.e. the operator
is able to send a signal to and receive a signal from its customer), the
digital service can also allow the cable operator to process ordering of
pay-per-view movies and events directly from its customers, without using
TelVue's service. The long-term effect of the deployment of digital two-way
service on TelVue is not clear. The deployment of digital cable and the
activation of two-way service require a significant capital commitment from
the cable operator. In addition, TelVue has found that some cable operators
with digital service have chosen to use TelVue's single number ordering
technology for pay-per-view ordering. TelVue believes that TelVue's patent
pending Internet pay-per-view technology for pay-per-view order processing
may be used by cable operators as an additional method for the operator's
customers to order pay-per-view movies and events. TelVue intends to
monitor developments in the rollout of digital services by its cable
operator customers and to attempt to position TelVue to continue to be
the cable operator's provider of choice for processing pay-per-view orders.
However, there can be no assurances that TelVue will be successful in this
effort.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of TelVue (incorporated by
reference to TelVue's Registration Statement on Form S-8, dated
March 30, 1989 (the "Registration Statement")).
3.2 Bylaws of TelVue (incorporated by reference to TelVue'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 The TelVue Corporation 1999 Stock Option Plan (incorporated by
reference to Exhibit 99 of TelVue's Registration Statement on Form
S-8, dated September 23, 1999), (the "1999 Stock Option Plan")).
4.2 Form of ISO Option Agreement issued pursuant to the 1999 Stock
Option Plan (incorporated by reference to TelVue's Annual
Report on Form 10-KSB for the year ended December 31, 1999, (the
"1999 Form 10-KSB"))
4.3 Warrant Agreement, dated March 15, 1991, between TelVue and
H.F. Lenfest (incorporated by reference to TelVue'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).
4.5 Form of NQSO Option Agreement issued pursuant to the 1999 Stock
Option Plan (incorporated by reference to the 1999 Form 10-KSB)
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 TelVue
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 TelVue and
certain of its stockholders (incorporated by reference to the 1989
Form 8-K).
10.5 Form of Credit Agreement between TelVue and H.F. Lenfest
(incorporated by reference to the 1990 Form 10-K).
10.6 Form of Line of Credit Agreement between TelVue and H.F.
Lenfest (incorporated by reference to the 1990 Form 10-K).
10.7 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).
10.8 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).
10.9 Loan Agreement dated December 24, 1991, between TelVue and H.F.
Lenfest (incorporated by reference to the 1991 Form 10-K).
10.10 Lease Agreement for office space and the First Amendment to Lease
dated March 30, 1994 ("Office Lease Agreement"), between TelVue
and Bloom Associates (incorporated by reference to the 1994 Form 10-KSB).
10.11 Letter dated March 31, 2001, from H.F. Lenfest, waiving the repayment
of loans and accrued interest until January 1,2003
(incorporated by reference to the 1994 Form 10-KSB)
10.12 Second Amendment to Office Lease Agreement Dated May 5, 1999,between
TelVue and Bloom Associates(incorporated by reference to the 1999
Form 10-KSB)
10.13 Asset Purchase Agreement by and among TelVue Corporation, J.D.
Kraengel and Associates, Inc. f/k/a Dacon Corporation d/b/a Source
Communications Group and Jeffrey Kraengel, dated February 14, 2001
(incorporated by reference to the March 26, 2001 From 8-K).
11. Statement re: Computation of Per Share Earnings (see TelVue's
March 31, 2001 Financial Statements included herein).
(b) Report on Form 8-K
On March 26, 2001, TelVue filed a report on Form 8-K providing
information responsive to the requirements of Item 2 of the form regarding
the acquisition of Source Communications Group by TelVue on March 9, 2001.
TelVue will file a Form 8-K/A on or before May 25, 2001 to provide the
financial information required by Item 7 of the form.
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: 5/14/01 By: /s/Frank J. Carcione
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Frank J. Carcione
President(Chief Executive Officer)
Dated: 5/14/01 By: /s/Irene A. DeZwaan
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Irene A. DeZwaan
Treasurer (Controller)