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 ----------------------------------- 					Frank J. Carcione 	President(Chief Executive Officer) Dated: 5/14/01 	 	 By: /s/Irene A. DeZwaan 		 	--------------------------------- 		Irene A. DeZwaan 		Treasurer (Controller)