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 June 30, 1998 Commission File Number: 0-17170 TELVUE CORPORATION (Exact name of small business issuer as specified in its charter) DELAWARE 51-0299879 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16000 Horizon Way, Suite 500 Mt. Laurel, New Jersey 08054 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code:(609) 273-8888 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Number of shares of registrant's common stock outstanding as of July 28, 1998: 24,194,500 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 June 30, 1998 (unaudited) and as of December 31, 1997 Statements of Operations for the three months ended June 30, 1998 (unaudited) and June 30, 1997 (unaudited) Statements of Operations for the six months ended June 30, 1998 (unaudited) and June 30, 1997 (unaudited) Statements of Cash Flows for the six months ended June 30, 1998 (unaudited) and June 30, 1997 (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 June 30, December 31, 1998 1997 ------------- ----------- ASSETS (Unaudited) * CURRENT ASSETS Cash and cash equivalents $ 186,132 $ 445,368 Accounts receivable - trade 928,504 922,737 Other receivables 120,029 5,281 Prepaid income taxes 1,000 - Deferred tax asset 477,987 477,987 Other current assets 28,820 10,898 ----------- ----------- TOTAL CURRENT ASSETS 1,742,472 1,862,271 PROPERTY AND EQUIPMENT Machinery and equipment 4,665,667 4,534,168 Less accumulated depreciation 3,076,099 2,639,651 ----------- ----------- 1,589,568 1,894,517 DEFERRED TAXES, net 1,902,450 2,027,450 SECURITY DEPOSITS 9,300 9,300 ----------- ----------- $ 5,243,790 $5,793,538 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Notes payable-majority stockholder-current $ 1,875,000 $ 1,800,000 Accounts payable - trade 374,614 422,527 Accounts payable - equipment 19,031 1,324 Accrued expenses 205,706 192,305 Accrued dividends 211,122 - Income taxes payable - 12,000 Deferred trunk credit 100,900 164,200 ----------- ----------- TOTAL CURRENT LIABILITIES 2,786,373 2,592,356 NOTES PAYABLE - MAJORITY STOCKHOLDER 1,519,712 2,519,712 ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,459,981 2,187,721 REDEEMABLE CONVERTIBLE PREFERRED STOCK, $1 par value, 6,900,000 shares authorized, 3,518,694 shares issued and outstanding 3,518,694 3,518,694 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Common stock, $.01 par value, 100,000,000 shares authorized, 24,194,500 and 23,814,500 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 241,945 238,145 Additional paid-in capital 1,550,535 1,516,335 Accumulated deficit (6,833,450) (6,779,425) ----------- ----------- (5,040,970) (5,024,945) ----------- ----------- $ 5,243,790 $ 5,793,538 =========== =========== * 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 June 30, ---------------------------- 1998 1997 ---- ---- REVENUES $ 1,589,755 $ 1,616,541 OPERATING EXPENSES Service 742,303 842,565 Selling and marketing 147,213 149,436 General and administrative 184,093 165,090 Depreciation 221,492 205,140 ----------- ----------- 1,295,101 1,362,231 ----------- ----------- OPERATING INCOME 294,654 254,310 OTHER INCOME (EXPENSE) Interest income 4,929 10,730 Interest expense (132,056) (121,940) Litigation settlement (40,463) - ----------- ----------- (167,590) (111,210) ----------- ----------- INCOME BEFORE INCOME TAXES 127,064 143,100 (INCOME TAX) INCOME TAX BENEFIT (63,000) 750,000 --------- ----------- NET INCOME 64,064 893,100 DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (105,561) (89,569) ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (41,497) $ 803,531 ============ ============ NET INCOME (LOSS) PER COMMON SHARE BASIC ($.00) $.03 ============ ============ DILUTED ($.00) $.01 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 23,931,424 23,794,500 =========== =========== DILUTED 23,931,424 76,676,708 =========== =========== The accompanying unaudited notes are an integral part of these statements. TELVUE CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended June 30, ---------------------------- 1998 1997 ---- ---- REVENUES $ 3,191,108 $ 3,159,385 OPERATING EXPENSES Service 1,496,318 1,613,889 Selling and marketing 316,994 283,968 General and administrative 346,632 327,335 Depreciation 436,448 403,116 ----------- ----------- 2,596,392 2,628,308 ----------- ----------- OPERATING INCOME 594,716 531,077 OTHER INCOME (EXPENSE) Interest income 12,105 21,139 Interest expense (272,260) (249,844) Litigation settlement, net (40,463) - ----------- ----------- (300,618) (228,705) ----------- ----------- INCOME BEFORE INCOME TAXES 294,098 302,372 (INCOME TAX) INCOME TAX BENEFIT (137,000) 1,820,000 --------- ----------- NET INCOME 157,098 2,122,372 DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (211,122) (179,138) ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (54,024) $ 1,943,234 ============ ============ NET INCOME (LOSS) PER COMMON SHARE BASIC ($.00) $.08 ============ ============ DILUTED ($.00) $.03 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 23,873,285 23,794,500 =========== =========== DILUTED 23,873,285 76,676,708 =========== =========== The accompanying unaudited notes are an integral part of these statements. TELVUE CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, ---------------------------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 157,098 $ 2,122,372 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 436,448 403,116 Deferred taxes 125,000 (1,820,000) Issuance of common stock 38,000 - Changes in assets and liabilities: Decrease (increase) in - Accounts receivable - trade (5,767) (46,030) Other receivable (114,748) 288,507 Prepaid income taxes (1,000) - Other current assets (17,922) (6,510) Security deposits - (500) Increase (decrease) in - Accounts payable - trade (47,913) 153,896 Accounts payable - equipment 17,707 (98,559) Accrued expenses 13,401 37,931 Income taxes payable (12,000) - Deferred trunk credit (63,300) (63,300) Accrued interest - majority stockholder 272,260 248,706 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 797,264 1,219,629 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (131,500) (245,309) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Debt reduction: Notes payable - majority stockholder (925,000) (950,000) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (259,236) 24,320 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 445,368 668,367 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 186,132 $ 692,687 =========== =========== 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 June 30, 1998, the results of operations for the three and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. Interim Financial Information - ----------------------------- While management believes that the disclosures presented are adequate to prevent misleading information, these unaudited financial statements must be read in conjunction with the audited financial statements and notes included in the Company's Form 10-KSB report for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission. Prior period financial statements have been reclassified to conform with current quarter presentation. 2. SUPPLEMENTAL CASH FLOW INFORMATION: ----------------------------------- Supplemental disclosures of cash paid during the period- 1998 1997 ---- ---- Income taxes $ 25,000 $ 0 Interest $ 0 $ 0 Non-cash Investing and Financing Transactions - --------------------------------------------- The Company accrued dividends on its redeemable convertible preferred stock of 211,122 and 179,138 during the six months ended June 30, 1998 and 1997, respectively. During the six months ended June 30, 1998 and 1997, no shares of preferred stock were issued in payment of preferred stock dividends. In June 1998, the Company issued 380,000 shares of common stock to certain key executives of the Company and one non-employee board member. 3. EARNINGS (LOSS) PER COMMON SHARE: -------------------------------- Earnings (loss) per common share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect. In February 1997, the Financial Accounting Standards Board issued SFAS 128 Earnings per Share ("SFAS 128"), which specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company has adopted SFAS 128 as of the fourth quarter of 1997 and has restated all previously reported per share amounts to conform to the new presentation. The following is a reconciliation from basic earnings per share to diluted earnings per share for the six months ended June 30, 1997. Because of the net loss available to common stockholders for the six months ended June 30, 1998, no potential common shares are included in the computation of a diluted per share amount since such potential common shares would not have a dilutive effect. Net Income (Loss) Available Average to Common Shares Earnings Stockholders Outstanding Per Share ------------ ----------- --------- 1998 $ (54,024) 23,873,285 $ .00 =========== ========== ========== 1997 $1,943,234 23,794,500 $ .08 Effect of dilution Warrants 29,915,160 Convertible preferred stock 179,138 19,905,169 Convertible accrued interest 70,916 3,061,879 ----------- ---------- ---------- Diluted $2,193,288 76,676,708 $ .03 =========== ========== ========== 4. DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK: ---------------------------------------------------- As of June 30, 1998, undeclared dividends on outstanding preferred stock amounted to $211,122. 5. CORPORATE INCOME TAXES: ----------------------- The Company uses the asset and liability method of accounting for income taxes in accordance with Financial Accounting Standards Board Statement (SFAS) No. 109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Differences between financial reporting and tax bases arise most frequently from differences in timing of income and expense recognition. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The provisions for income tax benefit (expense) consist of the following components: 1998 1997 ----------- ---------- Current Federal $ (12,000) $ - State - - ------------ ----------- (12,000) - Deferred Federal (97,000) (107,500) State (28,000) (32,500) ----------- ---------- (125,000) (140,000) Valuation allowance decrease - 1,960,000 ----------- ---------- (125,000) 1,820,000 ----------- ---------- $ (137,000) $1,820,000 =========== ========== The Company has a net operating loss carryforward of approximately $4,400,000 on a tax reporting basis. The carryforward will begin to expire in 2004, if not utilized. Differences between the effective income tax rate and the statutory federal income tax rate were primarily the result of the change in the valuation allowance. 6. NOTES PAYABLE AND ACCRUED INTEREST - MAJORITY STOCKHOLDER: ---------------------------------------------------------- As of June 30, 1998, the Company had various outstanding notes due to the majority stockholder in the aggregate principal amount of $3,394,712 and accrued interest due on these notes in the aggregate amount of $2,459,981. Effective as of March 31, 1998, the Company obtained from the majority stockholder an extension to January 1, 2000, of his prior agreement not to demand repayment of his loans or the accrued interest on the loans. The Company has decided to voluntarily make, and the majority stockholder has agreed to accept, monthly payments against loan principal in the amount of $150,000 through December 31, 1998. The Company may make monthly principal payments in excess of $150,000 when, in the opinion of management, the Company has excess cash that is not needed to fund operations. The Company made principal payments of $925,000 during the six months ended June 30, 1998. During June 1998, the Company made a reduced principal payment to the majority stockholder in the amount of $75,000 because the Company needed additional funds to settle a lawsuit filed by a former employee of the Company (see below). The Company will pay Mr. Lenfest the additional $75,000 when it is reimbursed by its insurance carrier for a portion of the settlement fees paid. The Company has classified twelve payments of $150,000 each plus the $75,000 due for June 1998 as a current liability on the balance sheet. 7. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company has received notice from a cable operating company customer asserting its right to be indemnified against claims of patent infringement made to the cable operator by a third party. The third party has alleged to the cable operator that portions of the cable operator's pay-per-view operations infringe one or more patents held by such party. No notice of alleged infringement has been received by the Company from such third party. The Company has retained independent patent counsel to review the third party patents and the alleged infringement. The Company is unable at this time to determine if it has liability under the indemnity provisions of the contracts with the cable operator or the amount of such liability if it exists. 8. LITIGATION SETTLEMENT --------------------- In April 1996, a former employee filed suit against the Company and its majority stockholder, James T. Shelley vs. TelVue Corporation and H.F. Lenfest, with the Superior Court of Burlington County, New Jersey, Civil Action Number 01368-96 (the "Shelley Case"). The complaint alleged breach of contract, breach of implied covenant of good faith and fair dealing detrimental reliance and unjust enrichment. The lawsuit sought compensation and compensatory damages. Although the Company believed the employee's claims were without merit, the Company settled the lawsuit in June 1998, after considering the amount the Company's insurance carrier was willing to reimburse the Company versus the legal fees that would be incurred if the case went to trial. The Company has recorded $40,463 in litigation settlement expense, net of proceeds to be received from the Company's insurance carrier. 9. STOCK COMPENSATION ------------------ In June 1998, the Company issued 375,000 shares of its common stock to four of its executives as a discretionary bonus and 5,000 shares compensation to a non-employee board member. The shares were issued at the fair value on the grant date of $.10 per share. The Company recorded compensation expense of $38,000 with the issuance of these shares. All of these shares are fully vested. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION TelVue Corporation (the "Company") is a marketing and service company primarily selling automatic number identification ("ANI") telecommunications services to the cable television industry for the automated ordering of pay-per-view features and events (the "Service"). The Company provides the Service through equipment it purchases. The Company also leases trunk telephone lines from local and long distance telephone companies to connect present cable television subscribers to the Company's National Point of Presence ("National POP") for ordering the Service from their local cable television systems. The Company also leases data circuits from local and long distance telephone companies to link the National POP to the cable systems' billing vendors. The Company had income before income taxes of $127,064 for the second quarter ended June 30, 1998, compared $143,100 for the second quarter ended June 30, 1997. The Company had income before income taxes of $294,098 for the six months ended June 30, 1998, compared $302,372 for the six months ended June 30, 1997. The Company experienced a decrease in the average monthly buy rate from 22.2% and 23.2% for the second quarter and six months ended June 30, 1997, respectively to 18.2% and 18.9% for the second quarter and six months ended June 30, 1998, respectively. The drop in the buy rate caused the pay-per-view-view buy revenue to decrease $65,301 and $132,879 for the second quarter and six months ended June 30, 1998, respectively. This is a result of a cable industry wide drop in pay-per-view buy rates. Although the pay-per-view buy revenue decreased the Company still had an increase in feature revenue of $73,363 and $148,825 for the second quarter and six months ended June 30, 1998, respectively, when compared to the same periods of 1997. This is a result of the Company serving approximately 1,228,000 more full- time subscribers during the six months ended June 30, 1998. PPV+ revenue had a decrease of $26,253 and an increase of $49,863 for the second quarter and six months ended June 30, 1998, respectively. The PPV+ revenue decreased for the second quarter of 1998 because no major special events were broadcast during June 1998. During June 1997, the Tyson fight had been broadcasted and the Company generated approximately $102,650 in PPV+ revenue as a result of the fight. PPV+ revenue increased for the six months ended June 30, 1998, as a result of offering more promotions and having more new and previously existing customers using the PPV+ Service. The Company had net income of $157,098 for the six months ended June 30, 1998. Included in net income is income tax of $137,000 for the six months ended June 30, 1998 compared to an income tax benefit of $1,820,000 for the six months ended June 30, 1997. The Company's income before income taxes is $294,098 for the six months ended June 30, 1998. In 1997, the Company reduced its deferred tax asset valuation allowance since the Company believes that it will benefit from the full utilization of its net operating losses. As of December 31, 1997, the valuation allowance was reduced to zero and, as a result, there will be no further reduction of the valuation allowance in 1998 and no further resulting tax benefit. As of June 30, 1998, the Company's net operating loss carryforward is approximately $4,400,000 on a tax reporting basis (see Note 5 to the Company's financial statements). Service expenses decreased $100,262 and $117,571 for the second quarter and six months ended June 30, 1998, respectively. The decrease in service expenses is partially attributable to a decrease in trunk expense of $29,593 and $43,065 for the second quarter and six months ended June 30, 1998, respectively, as a result of the buy rate decrease (see above) and a reduction in the telephone rates charged by MCI. There was a decrease in 800 number database expenses of $9,693 and $19,386 for the second quarter and six months ended June 30, 1998, respectively, as a result of an FCC rate restructuring. Data link expense decreased $18,903 and $35,688 for the second quarter and six months ended June 30, 1998, respectively, primarily as a result of customers consolidating their billing centers. During June 1998, the Company settled a lawsuit filed by a former employee and recorded litigation settlement expense of $40,463, net of proceeds to be received from the Company's insurance carrier (see Note 8 to the Company's financial statements). The Company decided to settle the lawsuit after considering the amount the Company's insurance carrier was willing to reimburse the Company versus the legal fees that would be incurred if the case went to trial. As of June 30, 1998, the Company was serving approximately 10,282,000 full-time cable subscribers and 1,200,000 part-time subscribers on the National POP compared to approximately 9,100,000 full-time cable subscribers and 1,800,000 part-time subscribers served as of June 30, 1997. The part- time subscribers did not significantly contribute to the revenue or service expenses for the six months ended June 30, 1998 and 1997. However, during the first half of 1998, 165,000 part-time subscribers converted to using the Company's service on a full-time basis. The Company's operations had required a substantial purchase of equipment by the Company. During the six months ended June 30, 1998, the Company purchased $131,500 of equipment compared to $245,309 purchased during the six months ended June 30, 1997. Depreciation accounted for 17% of total operating expenses for the six months ended June 30, 1998, compared to 15% for the six months ended June 30, 1997. For the six months ended June 30, 1998, selling and marketing expenses increased 12% and general and administrative expenses increased 6% A portion of the selling and marketing expenses increase is a result of an increase of approximately $7,200 in promotional expenses and an increase of $4,000 in travel and entertainment expenses. Compensation expense increased $10,000 and $20,500 for selling and marketing and general and administrative expenses, respectively, as a result of issuing stock grants (see Note 9 to the Company's financial statements). The Company's software is "Year 2000 Compliant" for its pay-per-view ANI ordering as well as software used for administrative purposes. As a result, the Company does not anticipate any material effect on its operating results or financial condition arising from Year 2000 compliance issues. Total liabilities decreased $533,723 and total assets decreased $549,748 for the six months ended June 30, 1998. The decrease in total liabilities was primarily a result of a decrease in notes payable - majority stockholder of $925,000 due to debt repayment. Partially offsetting the debt repayment is an increase in accrued interest of $272,260 on outstanding loans from Mr. H.F. Lenfest, the majority stockholder and Chairman of the Board of Directors of the Company ("Mr. Lenfest"), and an increase in accrued dividends on preferred stock of $211,122. The decrease in assets is attributable to a decrease in cash of $259,236 as a result of debt repayment, an increase in accumulated depreciation of $436,448, and a decrease in deferred tax asset of $125,000 (see above and Note 5 to the financial statements). Partially offsetting the asset decreases is an increase in other receivables of $114,748 primarily as a result of a reimbursement due from the Company's insurance carrier (see Note 8 to the Company's financial statements). The Company's days for sales in accounts receivable is 53 days for both the six months ended June 30, 1998 and 1997. The Company does not offer incentives/discounts to its customers, nor has it changed its credit terms with its customers. The Company had positive cash flow from operations of $797,264 during the six months ended June 30, 1998. Ignoring changes in operating assets and liabilities that result from timing issues, and considering only adjustments to reconcile net loss to net cash provided by operating activities, the Company would have positive cash flow from operating activities of $756,546 for the six months ended June 30, 1998, compared to positive cash flow from operating activities of $705,488 for the six months ended June 30, 1997. Cash flow for the six months ended June 30, 1998, has not increased significantly as a result of the decrease in buy rates (see above) despite more subscribers using the Company's Service. Since November 2, 1989, the Company has funded its expansion and operating deficit from the $2,500,000 of proceeds from the sale of shares of the Company's Common Stock and Preferred Stock to Mr. Lenfest and from borrowings from Mr. Lenfest. From November 1989 to February 1996, the Company borrowed an aggregate of $6,128,712 from Mr. Lenfest. The interest rates on the loans range from a floating rate based on the prime rate of PNC Bank to a fixed rate of 12% Interest on one of the loans in the principal amount of $1,471,272 as of June 30, 1998, is payable quarterly and, at the option of the Company may be paid by the delivery of shares of the Company's Preferred Stock at the rate of one share of Preferred Stock for each one dollar of accrued interest. Interest due on this loan through December 31, 1997, in the amount of $473,682 has been paid with 473,682 shares of Preferred Stock. In addition, during January 1995, Mr. Lenfest purchased from Science the Company's non-interest bearing note in the amount of $541,000 (the "Prior Science Note"). Effective as of March 31, 1998, the Company obtained from Mr. Lenfest a written agreement stating he will not demand repayment of his loans or the cash payment of accrued interest on the loans through January 1, 2000. The deferring of the interest payments has enabled the Company to accumulate cash. Interest payments would have amounted to $272,260 for the six months ended June 30, 1998, compared to $248,706 for the six months ended June 30, 1997. During the fourth quarter of 1997, the Board of Directors of the Company (with Mr. Lenfest not participating) authorized the Company to make monthly principal payments of $150,000 to Mr. Lenfest and, at management's discretion, the Company may make monthly principal payments in excess of $150,000 when the Company has excess cash not needed to fund operations. In addition, the Board also authorized the Company to begin accruing interest on all unpaid interest on all outstanding loans balances due to Mr. Lenfest effective January 1, 1998. Mr. Lenfest has agreed to accept payments of principal through December 31, 1998. During the first six months of 1998, the Company made principal payments of $925,000 to Mr. Lenfest. Mr. Lenfest agreed to accept a reduced principal payment of $75,000 for June 1998, because the Company needed funds to settle the Shelley Case. The Company will pay Mr. Lenfest the additional $75,000 when it is reimbursed by its insurance carrier a portion of the settlement fees. The aggregate outstanding loan balances due to Mr. Lenfest as of June 30, 1998 are $3,394,712 in principal and $2,459,981 in accrued interest. The Company believes that increases in accrued interest under the loans from Mr. Lenfest do not have a direct material effect on operations or continued availability of credit. Cash flow from operations is sufficient to fund current operations but is insufficient to fund total debt repayment. The Company believes its suppliers look primarily to the Company's timely payment of outstanding invoices. Historically, the Company has paid all the suppliers it deals with on a timely basis and, therefore, the cash flow from operations has no effect on the Company's availability of credit from key suppliers of goods and services. The payment terms of the Company's equipment and software providers are net 30 days. The Company's ability to fund its operating expenses primarily depends on three factors: the continued expansion of the Company's subscriber base, the cable industry's buy rates, and the continued deferral by Mr. Lenfest of the cash repayment of his loans to the Company. Management believes its present marketing strategies will further increase the customer base, although there can be no assurances that the Company will be able to attract any further customers or that it will retain its current customers. In addition, revenues are affected by the "buy rates" of subscribers connected to the Service. The Company considers the buy rates of its subscribers to be low compared to long term buy rates projected by industry pay-per-view analysts. As noted above, the Company experienced a decrease in the average monthly buy rate from 23.2% for the six months ended June 30, 1997 to 18.9% for the six months ended June 30, 1998, as a result of an industry wide drop in buy rates. Hence, there can be no assurance that buys rates will increase or will remain at their current level. The Company remains dependent upon the deferral of principal and interest payments due to Mr. Lenfest to fund operations and capital expenditures from operating cash flow. Mr. Lenfest has agreed not to demand the cash repayment of principal or accrued interest on the outstanding loans through January 1, 2000. Nevertheless, management intends to continue to repay the outstanding principal amount of loans made by Mr. Lenfest from cash not needed for operations. Management believes that the Company will have sufficient funds to continue such repayments and will be able to fund its core business from operating cash flow through December 31, 1998. PART II. OTHER INFORMATION ITEM 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 Shareholders' Agreement, dated November 2, 1989, among the Company and certain of its stockholders (incorporated by reference to the Company's 1989 Form 8-K). 10.4 Option Agreement, dated November 2, 1989, among the Company and certain of its stockholders (incorporated by reference to the 1989 Form 8-K). 10.5 Form of Credit Agreement between the Company and H.F. Lenfest (incorporated by reference to the 1990 Form 10-K). 10.7 Form of Line of Credit Agreement between the Company and H.F. Lenfest (incorporated by reference to the 1990 Form 10-K). 10.8 Subordinated Promissory Note, dated November 15, 1994 the principal amount of $541,000 payable to Science Dynamics Corporation (incorporated by reference to the 1994 Form 10-KSB). 10.10 Letter Agreement dated November 8, 1990 between Science Dynamics Corporation and H.F. Lenfest (incorporated by reference to the Company's Report on Form 8-K for November 16, 1990). 10.11 Loan Agreement dated December 24, 1991, between the Company and H.F. Lenfest (incorporated by reference to the 1991 Form 10-K). 10.12 Lease Agreement for office space and the First Amendment to Lease dated March 30, 1994, between the Company and Bloom Associates (incorporated by reference to the 1994 Form 10-KSB). 10.13 Letter effective as of March 31, 1998, from H.F. Lenfest, waiving the repayment of loans and accrued interest until January 1, 2000 (incorporated by reference to the March 31, 1998, Form 10-QSB). 11. Statement re: Computation of Per Share Earnings (see the Company's June 30, 1998 Financial Statements included herein). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELVUE CORPORATION Dated: 8/05/98 By: /s/Frank J. Carcione -------------------------------------------- Frank J. Carcione, (Chief Executive Officer) Dated: 8/05/98 By: /s/Irene A. DeZwaan ------------------------------------------- Irene A. DeZwaan, Treasurer (Controller)