EXHIBIT INDEX APPEARS ON PAGE U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 Commission File Number: 0-17170 TELVUE CORPORATION (Exact name of small business issuer as specified in its charter) DELAWARE 51-0299879 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16000 Horizon Way, Suite 500 Mt. Laurel, New Jersey 08054 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code:(609) 273-8888 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Number of shares of registrant's common stock outstanding as of October 26, 1997: 23,794,500 shares. Transitional Small Business Disclosure Form: Yes No X ------ ------ This report includes a total of 16 pages. TELVUE CORPORATION INDEX PAGE NO. ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of September 30, 1997 (unaudited) and as of December 31, 1996 Statements of Operations for the three months ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited) Statements of Operations for the nine months ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited) Statements of Cash Flows for the nine months ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited) Notes to Financial Statements (unaudited) 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 September 30, December 31, 1997 1996 ------------- ----------- ASSETS (Unaudited) * CURRENT ASSETS Cash and cash equivalents $ 550,331 $ 668,367 Accounts receivable - trade 939,983 913,106 Other receivables 4,648 289,342 Other current assets 12,684 12,964 ----------- ----------- TOTAL CURRENT ASSETS 1,507,646 1,883,779 PROPERTY AND EQUIPMENT Machinery and equipment 4,459,406 4,111,240 Less accumulated depreciation 2,487,640 1,872,504 ----------- ----------- 1,971,766 2,238,736 DEFERRED TAXES, net 2,620,000 - SECURITY DEPOSITS 9,300 8,800 ----------- ----------- $ 6,108,712 $ 4,131,315 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Notes payable-majority stockholder-current $ 700,000 $ 1,000,000 Accounts payable - trade 327,552 220,415 Accounts payable - equipment 16,196 98,559 Accrued expenses 177,864 164,876 Accrued dividends 268,707 - Deferred trunk credit 195,850 190,800 ----------- ----------- TOTAL CURRENT LIABILITIES 1,686,169 1,674,650 NOTES PAYABLE - MAJORITY STOCKHOLDER 4,119,712 5,369,712 ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,262,791 1,902,964 REDEEMABLE CONVERTIBLE PREFERRED STOCK, $1 par value, 6,900,000 shares authorized, 2,985,636 shares issued and outstanding 2,985,636 2,985,636 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Common stock, $.01 par value, 100,000,000 shares authorized, 23,794,500 shares issued and outstanding 237,945 237,945 Additional paid-in capital 1,515,535 1,515,535 Accumulated deficit (6,699,076) (9,555,127) ----------- ----------- (4,945,596) (7,801,647) ----------- ----------- $ 6,108,712 $ 4,131,315 =========== =========== * 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 September 30, -------------------------------- 1997 1996 ---- ---- REVENUES $ 1,548,768 $ 1,403,410 OPERATING EXPENSES Service 733,618 769,196 Selling and marketing 147,265 138,011 General and administrative 153,856 146,679 Depreciation 212,037 225,280 ----------- ----------- 1,246,776 1,279,166 ----------- ----------- OPERATING INCOME 301,992 124,244 OTHER INCOME (EXPENSE) Interest income 11,515 2,712 Interest expense (111,121) (145,479) Gain (loss) on disposal of property and equipment - 200 ----------- ----------- (99,606) (142,567) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 202,386 (18,323) INCOME TAX BENEFIT 800,000 - --------- ----------- NET INCOME (LOSS) 1,002,386 (18,323) DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (89,569) (78,745) ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 912,817 $ (97,068) ============ ============ NET INCOME (LOSS) PER COMMON SHARE $.04 $(.004) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 23,794,500 23,794,500 =========== =========== The accompanying unaudited notes are an integral part of these statements. TELVUE CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ended September 30, -------------------------------- 1997 1996 ---- ---- REVENUES $ 4,708,153 $ 3,987,525 OPERATING EXPENSES Service 2,347,507 2,206,052 Selling and marketing 431,233 465,902 General and administrative 481,191 448,640 Depreciation 615,153 678,553 ----------- ----------- 3,875,084 3,799,147 ----------- ----------- OPERATING INCOME 833,069 188,378 OTHER INCOME (EXPENSE) Interest income 32,654 2,712 Interest expense (360,965) (437,347) Loss on disposal of property and equipment - (9,440) ----------- ----------- (328,311) (444,075) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 504,758 (255,697) INCOME TAX BENEFIT 2,620,000 - ----------- ----------- NET INCOME (LOSS) 3,124,758 (255,697) DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (268,707) (230,719) ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 2,856,051 $ (486,416) ============ ============ NET INCOME (LOSS) PER COMMON SHARE $.12 $(.02) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 23,794,500 23,794,500 =========== =========== The accompanying unaudited notes are an integral part of these statements. TELVUE CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, ------------------------------- 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 3,124,758 $ (255,697) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 615,153 678,553 Loss on disposal of property and equipment - 9,440 Provision for deferred taxes, net (2,620,000) - Changes in assets and liabilities: Decrease (increase) in - Accounts receivable - trade (26,877) (94,540) Other receivable 284,694 10,858 Other current assets 280 (16,257) Security deposits (500) - Increase (decrease) in - Accounts payable - trade 107,137 (150,724) Accounts payable - equipment (82,363) (22,054) Accrued expenses 12,988 (91,938) Deferred trunk credit 5,050 222,450 Accrued interest - majority stockholder 359,827 437,347 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,780,147 727,438 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (348,183) (441,328) Proceeds from sale of property and equipment - 200 ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (348,183) (441,128) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - majority stockholder - 143,000 Debt reduction: Notes payable - majority stockholder (1,550,000) (150,000) ----------- ----------- NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES (1,550,000) (7,000) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS (118,036) 279,310 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 668,367 216,409 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 550,331 $ 495,719 =========== =========== 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 September 30, 1997, the results of operations for the three and nine months ended September 30, 1997 and 1996 and cash flows for the nine months ended September 30, 1997 and 1996. Interim Financial Information - ----------------------------- While management believes that the disclosures presented are adequate to prevent misleading information, these unaudited financial statements must be read in conjunction with the audited financial statements and notes included in the Company's Form 10-KSB report for the fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission. Prior period financial statements have been reclassified to conform with current quarter presentation. 2. SUPPLEMENTAL CASH FLOW INFORMATION: ----------------------------------- For purposes of Statements of Cash Flows, the Company considers investment instruments with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash paid during the period- 1997 1996 ---- ---- Income taxes $ 0 $ 0 Interest $ 0 $ 0 Non-cash Investing and Financing Transactions - --------------------------------------------- The Company accrued dividends on its redeemable convertible preferred stock of 268,707 and 230,719 during the nine months ended September 30, 1997 and 1996, respectively. During the nine months ended September 30, 1997 and 1996, no shares of preferred stock were issued in payment of preferred stock dividends. 3. NET INCOME (LOSS) PER COMMON SHARE: ----------------------------------- The net income (loss) per Common Share is based on the weighted average number of shares of Common Stock outstanding during each period. 4. DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK: ---------------------------------------------------- As of September 30, 1997, undeclared dividends on outstanding preferred stock amounted to $268,707. 5. CORPORATE INCOME TAXES: ----------------------- The Company uses the asset and liability method of accounting for income taxes in accordance with Financial Accounting Standards Board Statement (SFAS) No. 109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Differences between financial reporting and tax bases arise most frequently from differences in timing of income and expense recognition. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The provisions for income tax benefit consist of the following components: 1997 1996 ----------- ---------- Current $ - $ - Deferred Federal (200,000) - State (55,000) - Decrease in valuation allowance 2,875,000 - ----------- ---------- 2,620,000 - =========== ========== The Company has a net operating loss ("NOL") carryforward of approximately $6,124,000 on a tax reporting basis. The carryforward will begin to expire in 2004, if not utilized. Prior to 1997, the Company believed it was more likely than not that the NOL would expire unused and, therefore, recorded a 100% valuation allowance against the net deferred tax asset. However, as a result of pre-tax income of $504,758 for the nine months ended September 30, 1997, the Company has reassessed the likelihood that it may utilize the NOL to offset corporate taxable income. As a result, the Company has recorded a net deferred tax asset of $2,620,000 at September 30, 1997, by reducing the valuation allowance it had previously provided to offset the income tax benefit of the NOL. At September 30, 1996, any tax benefit of the loss carryforward and of other cumulative temporary differences were offset by a valuation allowance of the same amount. Differences between the actual income tax rate and the statutory federal income tax rate were primarily the result of the valuation allowance decrease in 1997 and the valuation allowance increase in 1996. 6. NOTES PAYABLE AND ACCRUED INTEREST - MAJORITY STOCKHOLDER: ---------------------------------------------------------- As of September 30, 1997, the Company had various outstanding notes due to the majority stockholder in the aggregate principal amount of $4,819,712 and accrued interest due on these notes in the aggregate amount of $2,262,791. Effective as of March 31, 1997, the Company obtained from the majority stockholder an extension to January 1, 1999, of his prior agreement not to demand repayment of his loans or the accrued interest on the loans. The Company has decided to voluntarily make, and the majority stockholder has agreed to accept, monthly payments against loan principal in the amount of $50,000 through December 31, 1997. The Company may make monthly principal payments in excess of $50,000 when, in the opinion of management, the Company has excess cash that is not needed to fund operations. The Company made principal payments of $1,550,000 during the nine months ended September 30, 1997. During October 1997, the Company made a principal payment to the majority stockholder of $150,000. The Company has therefore classified $700,000 of the notes payable to the majority stockholder as a short-term liability and has classified the remaining balance on the notes payable and the accrued interest as long-term liabilities. 7. COMMITMENTS AND CONTINGENCIES ----------------------------- A former employee ("the Plaintiff") of the Company has filed suit against the Company and its majority stockholder. The Plaintiff alleges breach of contract, breach of implied covenant of good faith and fair dealing, detrimental reliance and unjust enrichment. The suit seeks damages in an unspecified amount for compensation and compensatory and punitive damages. Based upon correspondence from plaintiff's counsel prior to filing the suit, the Company's counsel believes that the plaintiff is seeking actual damages of approximately $400,000 for commissions, unpaid salary, stock options and other benefits. The Company believes that the Plaintiff's claims are without merit and intends to vigorously defend the suit brought against it. The Company believes that the likelihood of an unfavorable outcome is low. The Company has received notice from a cable operating company customer 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 provides the Service pursuant to a patent (the "Science Patent") licensed to it by Science Dynamics Corporation. The Company has retained independent patent counsel to review the terms and validity of the third party patents and the terms and validity of the Science Patent. The Company is unable at this time to determine if it has liability under the indemnity provisions of the contracts with the cable operator or the amount of such liability if it exists. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION TelVue Corporation (the "Company") is a marketing and service company primarily selling automatic number identification ("ANI") telecommunications services to the cable television industry for the automated ordering of pay-per-view features and events (the "Service"). The Company provides the Service through equipment it purchases. The Company also leases trunk telephone lines from local and long distance telephone companies to connect cable television subscribers to the Company's Points of Presence ("POPs") for ordering the Service from their local cable television systems. The Company also leases data circuits from local and long distance telephone companies to link the POPS to the cable systems' billing vendors. Since May 1992, the Company has had a POP which is located at the Company's home office in Mt. Laurel, New Jersey (the "National POP"). The National POP provides enhanced service features. These enhanced service features, which identify the cable operator by name ("Custom Greeting") and, on accepted orders, speaks the movie or event title, start-time and channel appearance ("Title Speak"), are necessary, the Company believes, for it to remain competitive within the pay-per-view ANI industry. The National POP also speaks promotional messages for products and services at the time a cable subscriber is placing an order for a pay-per-view movie or event (the "PPV+ service"). The National POP serves cable television systems across the United States via trunk lines and data circuits which it currently leases from MCI Telecommunications Corporation ("MCI"). The Company's amended lease agreement with MCI expires July 10, 2001. The Company believes it receives a favorable trunk usage rate from MCI. The Company had net income before income taxes of $202,386 for the third quarter ended September 30, 1997, compared to a net loss before income taxes of $18,323 for the third quarter ended September 30, 1996. The Company had net income before income taxes of $504,758 for the nine months ended September 30, 1997, compared to a net loss before income taxes of $255,697 for the nine months ended September 30, 1996. The Company experienced a decrease in the average monthly buy rate from 24.6% and 25.1% for the third quarter and nine months ended September 30, 1996, respectively to 20.3% and 22.2% for the third quarter and nine months ended September 30, 1997, respectively. This is a result of a cable industry wide drop in subscriber pay-per-view buy rates. Although the buy rates decreased the Company still had an increase in service revenue of $145,358 and $720,628 for the third quarter and nine months ended September 30, 1997, respectively, over the comparable periods of 1996. The growth in service revenues is partially attributable to the Company serving approximately 900,000 more full-time cable subscribers during the nine months ended September 30, 1997 compared to September 30, 1996. The service revenue increase is also a result of an increase in National POP feature revenue of $155,465 and $363,089 for the third quarter and nine months ended September 30, 1997, respectively. National POP feature revenue increased as a result of both new and existing customers using more optional features. The Company had PPV+ revenue of $206,357 and $575,761 for the third quarter and nine months ended September 30, 1997, respectively, compared to $97,620 and $252,542 for the third quarter and the nine months ended September 30, 1996. The PPV+ revenue increased over 1996 as a result of customer additions and more previously existing customers using the PPV+ Service. The Company had net income of $1,002,386 and $3,124,758 for the third quarter and the nine months ended September 30, 1997, respectively. Included in the net income is $800,000 and $2,620,000 in income tax benefits as a result of the recognition of net deferred tax assets for the third quarter and nine months ended September 30, 1997, respectively. The Company's income before income taxes is $202,386 and $504,758 for the third quarter and nine months ended September 30, 1997, respectively. Because of such pre-tax income, the Company reduced its deferred tax asset valuation allowance since the Company now believes that it will benefit, in part, from the utilization of its net operating losses. As of January 1, 1997, the Company's net operating loss carryforward was approximately $6,124,000 on a tax reporting basis (see Note 5 to the financial statements). Service expenses for the third quarter decreased $35,578 and increased $141,455 for the nine months ended September 30, 1997, over the comparable 1996 periods. The decrease in service expenses for the third quarter is due to a refund received of $73,803 from the 800 number database management company the Company uses to reserve and manage its 800 numbers. The refund was for a reduction in 800 number database charges for the period May 1, 1993 through December 31, 1996, as a result of a FCC rate restructuring. The increase in service expenses for the nine months ended September 30, 1997, is primarily attributable to an increase in trunk usage expense of $250,451, as a result of an increase in full-time subscribers, PPV+ usage and feature usage. The National POP and the Regional POPs had required a substantial purchase of equipment by the Company. During the nine months ended September 30, 1997, the Company purchased $348,183 of equipment compared with $441,328 purchased during nine months ended September 30, 1996. Depreciation accounted for 17% and 16% of total operating expenses for the third quarter and nine months ended September 30, 1997, respectively, compared to 18% for both the third quarter and nine months ended September 30, 1996. For the nine months ended September 30, 1997, selling and marketing expenses decreased 7% as a result of a decrease of approximately $25,000 in payroll taxes and benefits due to having one less marketing employee. General and administrative expenses increased 7% during the nine months ended September 30, 1997, primarily as a result of an increase in legal expense of $45,660 related to the suit filed by a former employee (see Note 7 to the financial statements). As of September 30, 1997, the Company was serving approximately 9,300,000 full-time cable subscribers on the National POP compared to approximately 8,400,000 full-time cable subscribers served as of September 30, 1996. In November 1996, the Company began serving cable subscribers on a part-time basis ("Part-time Subscribers"). Part-time Subscribers are subscribers who only use the Company's ANI service for major special events, such as boxing, wrestling and concerts. The Company is marketing and providing service to subscribers on a part-time basis because it wants customers who are using alternate pay-per-view ordering services to become familiar and comfortable with the Company's ANI service in anticipation that these customers may choose to use the Company's ANI service on a full-time basis. As of September 30, 1997, the Company was serving approximately 1,700,000 Part-time Subscribers. The Part-time Subscribers did not significantly contribute to the revenue or service expense increases for the nine months ended September 30, 1997. Total liabilities decreased $878,654 and total assets increased $1,977,397 for the nine months ended September 30, 1997. The decrease in total liabilities was primarily a result of a decrease in notes payable - majority stockholder of $1,550,000 due to debt repayment. Partially offsetting the debt repayment is an increase in accrued interest of $359,827 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 of $268,707. The increase in assets is attributable to an increase in deferred taxes of $2,620,000 as a result of generating net income before income taxes during the nine months ended September 30, 1997 (see above and Note 5 to the financial statements). The increase in deferred taxes is partially offset by a decrease in other receivables of $284,694 as a result of the Company receiving a reimbursement from VJN of $284,619 during January 1997 (see the Company's Form 10-KSB for the period ended December 31, 1996 (the "Report on Form 10-KSB")). The Company's days for sales in accounts receivable is 54 days for the nine months ended September 30, 1997, compared to 57 days for the nine months ended September 30, 1996. The Company believes the decrease of 3 days is not material. The Company does not offer incentives/discounts to its customers, nor has it changed its credit terms with its customers. The Company 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 provides the Service pursuant to a patent (the "Science Patent") licensed to it by Science Dynamics Corporation. The Company has retained independent patent counsel to review the terms and validity of the third party patents and the terms and validity of the Science Patent. 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. Shares of Common Stock that have had the same beneficial owner since April 21, 1988, or that 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 ten 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 September 30, 1997, 5,500,353 shares of the Company's Common Stock were entitled to one vote per share. The remaining 18,294,147 shares of Common Stock were entitled to ten votes per share. Mr. Lenfest owns 14,557,453 shares of Common Stock that are entitled to ten votes per share. The Company had positive cash flow from operations of $1,780,147 during the nine months ended September 30, 1997. Ignoring changes in assets and liabilities that result from timing issues, and considering only adjustments to reconcile net income (loss) before income taxes to net cash provided by operating activities, the Company would have positive cash flow from operating activities of $1,119,911 for the nine months ended September 30, 1997, compared to positive cash flow from operating activities of $432,296 for the nine months ended September 30, 1996. The increase in cash flow for the nine months ended September 30, 1997, is primarily a result of increased revenue (see above). Since November 2, 1989, the Company has funded its expansion and operating deficit from the $2,500,000 of proceeds from the sale of shares of the Company's Common Stock and Preferred Stock to Mr. Lenfest and from borrowings from Mr. Lenfest. Through September 30, 1997, the Company had borrowed an aggregate of $6,128,712 from Mr. Lenfest, as previously discussed in the Report on Form 10-KSB. Interest on $500,000 of the loans is set at 12% per annum, interest on $411,173 is set at the floating prime interest rate of PNC Bank plus 2%, interest on $5,217,539 of the loans is set at the floating prime interest rate of PNC Bank plus 1% and $541,000 bears no interest. Interest on the $1,471,272 of the loans is to be paid, quarterly. At the option of the Company, the interest 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. Effective as of March 31, 1997, the Company obtained from Mr. Lenfest a written agreement stating he will not demand repayment of his loans or the cash payment of accrued interest on the loans through January 1, 1999. The deferring of the cash interest payments along with the increase in revenue has enabled the Company to accumulate cash. Interest expense due to Mr. Lenfest amounted to $359,827 for the nine months ended September 30, 1997, compared to $437,347 for the nine months ended September 30, 1996. The decrease in interest expense is a result of the Company making, and Mr. Lenfest accepting, cash principal payments instead of cash payments of accrued interest. During 1996, the Board of Directors of the Company (with Mr. Lenfest not participating) authorized the Company to make monthly principal payments of $50,000 to Mr. Lenfest. In addition, the Board of Directors of the Company authorized that at management's discretion, the Company may make monthly principal payments in excess of $50,000 when the Company has excess cash not needed to fund operations. Mr. Lenfest has agreed to accept payments of principal through December 31, 1997. During the first nine months of 1997, the Company made principal payments of $1,550,000 to Mr. Lenfest. The outstanding loan balance due to Mr. Lenfest as of September 30, 1997, is $4,819,712, of which $541,000 accrues no interest. The Company believes that increases in accrued interest under the loans from Mr. Lenfest do not have a direct material effect on operations or continued availability of credit. Cash flow from operations is sufficient to fund current operations but is insufficient to fund total debt repayment. The Company believes its suppliers look primarily to the Company's timely payment of outstanding invoices. Historically, the Company has paid all the suppliers it deals with on a timely basis and, therefore, the cash flow from operations has no effect on the Company's availability of credit from key suppliers of goods and services. The payment terms of the Company's equipment and software providers are net 30 days. The Company's ability to fund its operating expenses primarily depends on three factors: the continued expansion of the Company's subscriber base, the cable industry's buy rates, and the continued deferral by Mr. Lenfest of the cash repayment of his loans to the Company. Management believes its present marketing strategies will further increase the customer base, although there can be no assurances that the Company will be able to attract any further customers. In addition, revenues are affected by the "buy rates" of subscribers connected to the Service. The Company considers the buy rates of its subscribers to be low compared to long term buy rates projected by industry pay-per-view analysts. Although cable industry buy rates have increased each year for the last four years, the Company experienced a decrease in the average monthly buy rate from 25.1% for the nine months ended September 30, 1996 to 22.2% for the nine months ended September 30, 1997, as a result of a cable industry wide drop in subscriber pay-per-view buy rates. Hence, there can be no assurance that buys rates will continue to increase or will remain at their current level. The Company remains dependent upon the deferral of principal and interest payments due to Mr. Lenfest to fund operations and capital expenditures from operating cash flow. Mr. Lenfest has agreed not to demand the cash repayment of principal or accrued interest on the outstanding loans through January 1, 1999. Nevertheless, management intends to continue to repay the outstanding principal amount of loans made by Mr. Lenfest from cash not needed for operations. Management believes that the Company will have sufficient funds to continue such repayments and will be able to fund its core business from operating cash flow through December 31, 1997. Although no equipment purchases are anticipated for the remainder of 1997 that can not be funded from cash flow generated by operations, should the Company require additional funding, it will seek additional financing from Mr. Lenfest and from other sources. In the event that the Company is unable to secure additional needed funds, the Company will take actions necessary to continue operations with the funds available, including, without limitation, reducing or deferring capital expenditures for the National POP. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3.1 Certificate of Incorporation of the Company (incorporated by reference to the Company's Registration Statement on Form S-8, dated March 30, 1989 (the "Registration Statement")). 3.2 Bylaws of the Company (incorporated by reference to the Company's Registration Statement). 3.3 Certificate of Amendment of Certificate of Incorporation of the Company, dated April 11, 1990 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (the "1991 Form 10-K")). 3.4 Certificate of Amendment of Certificate of Incorporation of the Company, dated March 15, 1991 (incorporated by reference to the 1991 Form 10-K). 3.5 Form of copy of Amendment of Certificate of Incorporation of the Company, filed September 25, 1995 (incorporated by reference to the Company's Form 10-QSB for the period ended September 30, 1995, (the September 30, 1995 Form 10-QSB)). 4.1 Incentive Stock Option Plan (incorporated by reference to the Company's Registration Statement). 4.2 Form of Stock Option Agreement (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, (the "1989 Form 10-K")). 4.3 Warrant Agreement, dated March 15, 1991, between the Company and H.F. Lenfest (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (the "1990 Form 10-K")). 4.4 Certificate of Designation of Class A Preferred Stock (incorporated by reference to the June 30, 1990 Form 10-Q). 10.1 Distributorship Agreement, dated November 2, 1989, between the Company and Science (incorporated by reference to the 1989 Form 10-K). 10.2 Stock Purchase Agreement, dated November 2, 1989, between the Company and H.F. Lenfest (incorporated by reference to the Company's Report on Form 8-K, dated November 15, 1989, (the "1989 Form 8-K")). 10.3 Shareholder's Agreement, dated November 2, 1989, among the Company and certain of its stockholders (incorporated by reference to the Company's 1989 Form 8-K). 10.4 Option Agreement, dated November 2, 1989, among the Company and certain of its stockholders (incorporated by reference to the 1989 Form 8-K). 10.5 Form of Credit Agreement between the Company and H.F. Lenfest (incorporated by reference to the 1990 Form 10-K). 10.7 Form of Line of Credit Agreement between the Company and H.F. Lenfest (incorporated by reference to the 1990 Form 10-K). 10.8 Subordinated Promissory Note, dated November 15, 1994 the principal amount of $541,000 payable to Science Dynamics Corporation (incorporated by reference to the 1994 Form 10-KSB). 10.10 Letter Agreement dated November 8, 1990 between Science Dynamics Corporation and H.F. Lenfest (incorporated by reference to the Company's Report on Form 8-K for November 16, 1990). 10.11 Loan Agreement dated December 24, 1991, between the Company and H.F. Lenfest (incorporated by reference to the 1991 Form 10-K). 10.12 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, 1997, from H.F. Lenfest, waiving the repayment of loans and accrued interest until January 1, 1999 (incorporated by reference to the Company's Form 10-QSB for the period ended March 31, 1997). 11. Statement re: Computation of Per Share Earnings (see the Company's September 30, 1997 Financial Statements included herein). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELVUE CORPORATION Dated: 11/05/97 By: /s/Frank J. Carcione -------------------------------------------- Frank J. Carcione, (Chief Executive Officer) Dated: 11/05/97 By: /s/Irene A. DeZwaan ------------------------------------------- Irene A. DeZwaan, Treasurer (Controller)