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, 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 November 1, 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 September 30, 1998 (unaudited) and as of December 31, 1997 Statements of Operations for the three months ended September 30, 1998 (unaudited) and September 30, 1997 (unaudited) Statements of Operations for the nine months ended September 30, 1998 (unaudited) and September 30, 1997 (unaudited) Statements of Cash Flows for the nine months ended September 30, 1998 (unaudited) and September 30, 1997 (unaudited) Notes to Financial Statements (unaudited) PART II. OTHER INFORMATION Item 5. 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, 1998 1997 ------------- ----------- ASSETS (Unaudited) * CURRENT ASSETS Cash and cash equivalents $ 380,302 $ 445,368 Accounts receivable - trade 785,376 922,737 Other receivables 4,783 5,281 Prepaid income taxes 1,000 - Deferred tax asset 416,987 477,987 Other current assets 42,803 10,898 ----------- ---------- TOTAL CURRENT ASSETS 1,631,251 1,862,271 PROPERTY AND EQUIPMENT Machinery and equipment 4,732,269 4,534,168 Less accumulated depreciation 3,299,482 2,639,651 ----------- ---------- 1,432,787 1,894,517 DEFERRED TAXES, net 1,910,450 2,027,450 SECURITY DEPOSITS 9,300 9,300 ----------- ---------- $4,983,788 $5,793,538 =========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Notes payable-majority stockholder-current $ 1,800,000 $ 1,800,000 Accounts payable - trade 274,434 422,527 Accounts payable - equipment 26,150 1,324 Accrued expenses 264,690 192,305 Accrued dividends 316,683 - Income taxes payable - 12,000 Deferred trunk credit 169,250 164,200 ----------- ---------- TOTAL CURRENT LIABILITIES 2,851,207 2,592,356 NOTES PAYABLE - MAJORITY STOCKHOLDER 1,069,712 2,519,712 ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,585,707 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 September 30, 1998 and December 31, 1997, respectively 241,945 238,145 Additional paid-in capital 1,550,535 1,516,335 Accumulated deficit (6,834,012) (6,779,425) ----------- ----------- (5,041,532) (5,024,945) ----------- ----------- $4,983,788 $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 September 30, ---------------------------- 1998 1997 ---- ---- REVENUES $ 1,515,761 $ 1,548,768 OPERATING EXPENSES Service 743,320 733,618 Selling and marketing 129,932 147,265 General and administrative 148,395 153,856 Depreciation 223,383 212,037 ----------- ----------- 1,245,030 1,246,776 ----------- ----------- OPERATING INCOME 270,731 301,992 OTHER INCOME (EXPENSE) Interest income 5,961 11,515 Interest expense (125,726) (111,121) Litigation settlement, net 7,033 - ----------- ----------- (112,732) (99,606) ----------- ----------- INCOME BEFORE INCOME TAXES 157,999 202,386 (INCOME TAX) INCOME TAX BENEFIT (53,000) 800,000 ------------ ----------- NET INCOME 104,999 1,002,386 DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (105,561) (89,569) ----------- ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (562) $ 912,817 =========== ============ NET INCOME (LOSS) PER COMMON SHARE BASIC ($.00) $.04 ============ =========== DILUTED ($.00) $.01 ============ =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 24,194,500 23,794,500 ========== ========== DILUTED 80,866,511 76,909,746 ========== ========== The accompanying unaudited notes are an integral part of these statements. TELVUE CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) Nine months Ended September 30, -------------------- 1998 1997 ---- ---- REVENUES $ 4,706,869 $ 4,708,153 OPERATING EXPENSES Service 2,239,638 2,347,507 Selling and marketing 446,926 431,233 General and administrative 495,027 481,191 Depreciation 659,831 615,153 ----------- ----------- 3,841,422 3,875,084 ----------- ----------- OPERATING INCOME 865,447 833,069 OTHER INCOME (EXPENSE) Interest income 18,066 32,654 Interest expense (397,986) (360,965) Litigation settlement, net (33,430) - ----------- ----------- (413,350) (328,311) ----------- ----------- INCOME BEFORE INCOME TAXES 452,097 504,758 (INCOME TAX) INCOME TAX BENEFIT (190,000) 2,620,000 ---------- ----------- NET INCOME 262,097 3,124,758 DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (316,683) (268,707) ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (54,586) $ 2,856,051 =========== ============ NET INCOME (LOSS) PER COMMON SHARE BASIC ($.00) $.12 =========== =========== DILUTED ($.00) $.04 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 23,981,533 23,794,500 =========== =========== DILUTED 80,653,544 76,909,746 =========== =========== The accompanying unaudited notes are an integral part of these statements. TELVUE CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 262,097 $ 3,124,758 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 659,831 615,153 Deferred taxes 178,000 (2,620,000) Issuance of common stock 38,000 - Changes in assets and liabilities: Decrease (increase) in - Accounts receivable - trade 137,361 (26,877) Other receivables 498 284,694 Prepaid income taxes (1,000) - Other current assets (31,906) 280 Security deposits - (500) Increase (decrease) in - Accounts payable - trade (148,093) 107,137 Accounts payable - equipment 24,826 (82,363) Accrued expenses 72,385 12,988 Income taxes payable (12,000) - Deferred trunk credit 5,050 5,050 Accrued interest - majority stockholder 397,986 359,827 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,583,035 1,780,147 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (198,101) (348,183) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Debt reduction: Notes payable - majority stockholder (1,450,000) (1,550,000) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (65,066) (118,036) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 445,368 668,367 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 380,302 $ 550,331 =========== ============ 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, 1998, the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 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 $316,683 and $268,707 during the nine months ended September 30, 1998 and 1997, respectively. During the nine months ended September 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 reconciliation from basic earnings per share to diluted earnings per share for the nine months ended September 30, 1997. Because of the net loss available to common stockholders for the nine months ended September 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 $ (54,586) 23,981,533 $ .00 =========== ========== ======== 1997 $2,856,051 23,794,500 $ .12 Effect of dilution Warrants 29,915,160 Convertible preferred stock 268,707 19,905,235 Convertible accrued interest 105,860 3,294,851 ----------- ---------- -------- Diluted $3,230,618 76,909,746 $ .04 =========== ========== ======== 4. DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK: ---------------------------------------------------- As of September 30, 1998, undeclared dividends on outstanding preferred stock amounted to $316,683. 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 $ (18,000) $ - State - - ----------- ---------- (18,000) - Deferred Federal (149,000) (200,000) State (23,000) (55,000) ----------- ---------- (172,000) (255,000) Valuation allowance decrease - 2,875,000 ----------- ---------- (172,000) 2,620,000 ----------- ---------- $ (190,000) $2,620,000 =========== ========== The Company has a net operating loss carryforward of approximately $4,200,000 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 September 30, 1998, the Company had various outstanding notes due to the majority stockholder in the aggregate principal amount of $2,869,712 and accrued interest due on these notes in the aggregate amount of $2,585,707. 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 $1,450,000 during the nine months ended September 30, 1998. The Company has classified twelve payments of $150,000 each 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 $33,430 in litigation settlement expense, net of proceeds 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 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 $157,999 for the quarter ended September 30, 1998, compared $202,386 for the quarter ended September 30, 1997. The Company had income before income taxes of $452,097 for the nine months ended September 30, 1998, compared $504,758 for the nine months ended September 30, 1997. The Company experienced a decrease in the average monthly buy rate from 20.3% and 22.2% for the quarter and nine months ended September 30, 1997, respectively, to 17.0% and 18.2% for the third quarter and nine months ended September 30, 1998, respectively. The drop in the buy rate caused the pay-per-view buy revenue to decrease $36,417 and $169,296 for the quarter and nine months ended September 30, 1998, respectively. During the third quarter 1998, a somewhat weak movie product contributed to the low buy rates. The Company believes the decrease in the buy rates for the nine months ended September 30, 1998, is attributable to a lack of major special events. Although the pay-per-view buy revenue decreased, the Company still had an increase in feature revenue of $79,705 and $228,530 for the quarter and nine months ended September 30, 1998, respectively, when compared to the same periods of 1997. This is a result of the Company serving approximately 1,800,000 more full-time subscribers at September 30, 1998. PPV+ revenue decreased $88,716 and $38,853 for the quarter and nine months ended September 30, 1998, respectively. The PPV+ revenue decrease for the third quarter is partially due to the Company writing off PPV+ revenue of $60,207 generated from club promotions in 1998. The vendor who was responsible for the billing and collection of the club package fees from consumers has filed for bankruptcy. The Company intends to pursue payment of its portion of the revenue that may be received from a bankruptcy claim. However, in an effort to conservatively present the financial statements all unpaid club promotion revenue has been reversed. PPV+ revenue decreased for the nine months ended September 30, 1998, as a result of the buy rate decrease (see above) and fewer major boxing events being broadcast. The Company had net income of $262,097 for the nine months ended September 30, 1998. Included in net income is income tax of $190,000 for the nine months ended September 30, 1998 compared to an income tax benefit of $2,620,000 for the nine months ended September 30, 1997. The Company's income before income taxes is $452,097 for the nine months ended September 30, 1998. In 1997, the Company reduced its deferred tax asset valuation allowance since the Company believed that it would benefit from the full utilization of its net operating losses. As of December 31, 1997, the valuation allowance was reduced to zero and, as a result, there will be no further reduction of the valuation allowance in 1998 and no further resulting tax benefit. As of September 30, 1998, the Company's net operating loss carryforward is approximately $4,200,000 on a tax-reporting basis (see Note 5 to the Company's financial statements). Service expenses increased $9,702 for the third quarter and decreased $107,869 for the nine months ended September 30, 1998. Trunk expense decreased $34,529 and $77,594 for the third quarter and nine months ended September 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 an increase in 800 number database expenses of $79,220 and $59,834 for the quarter and nine months ended September 30, 1998, respectively. This is a result of the Company receiving, during August 1997, a refund of $73,803 from its 800 number database management company. 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. Data link expense decreased $6,966 and $42,654 for the third quarter and nine months ended September 30, 1998, respectively, primarily as a result of cable operating customers consolidating their billing centers. During June 1998, the Company settled a lawsuit filed by a former employee and recorded litigation settlement expense of $33,430, net of proceeds received from the Company's insurance carrier (see 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 September 30, 1998, the Company was serving approximately 11,200,000 full-time cable subscribers and 1,300,000 part-time subscribers on the National POP compared to approximately 9,300,000 full-time cable subscribers and 1,700,000 part-time subscribers served as of September 30, 1997. The part-time subscribers did not significantly contribute to the revenue or service expenses for the nine months ended September 30, 1998 and 1997. However, during the nine months ended September 30, 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 nine months ended September 30, 1998, the Company purchased $198,101 of equipment compared to $348,183 purchased during the nine months ended September 30, 1997. Depreciation accounted for 17% of total operating expenses for the nine months ended September 30, 1998, compared to 16% for the nine months ended September 30, 1997. For the nine months ended September 30, 1998, selling and marketing expenses increased 4% and general and administrative expenses increased 3%. This is primarily a result of an increase in compensation expense of $10,000 and $20,500 for selling and marketing and general and administrative expenses, respectively, due to issuing stock grants (see Note 9 to the Company's financial statements). The Company's software for its pay-per-view ANI ordering is "Year 2000 Compliant". The Company's long distance telecommunications provider, MCIWorldCom, has informed the Company that they have implemented a Strategic Year 2000 Compliance Plan in which appropriate remedial action to non-compliant elements is being performed. Many telecommunications providers use the same switch suppliers. Telecommunications companies, including MCIWorldCom, will not be able to declare their systems compliant until these switch manufacturers have completed their compliance programs. MCIWorldCom is targeting all systems to be compliant by the second quarter 1999 to allow full testing and monitoring. Interconnect agreements formed with other telecommunications companies mean that some of MCIWorldCom's services are dependent on third party carriers. All the major telecommunications companies, including MCIWorldCom, rely to some extent on interconnect agreements with third parties and need to validate the compliance of these third parties. In the event that MCI is not Year 2000 compliant, there exists the possibility that the Company would not be able to receive telephones calls from the cable operator subscribers, and therefore, could not process any orders. If MCIWorldCom does not become fully Year 2000 compliant during 1999, the Company will switch to another long distance telephone service provider who is Year 2000 compliant. As a result of such switch the Company would incur duplicate facility and data link costs for a few months as a result of temporarily having redundant facilities in service. The Company has also requested Year 2000 compliance certificates from the cable operator billing vendors to whom the Company transmits the pay-per-view ordering data. In the event that the billing vendors do not become Year 2000 compliant, the Company would not be able to transfer information regarding pay-per-view orders, and therefore, no pay-per-view orders could be fulfilled. To date, the billing vendors have indicated they are working on being Year 2000 compliant. The Company plans to run tests during the first quarter of 1999, to see if the billing vendors are Year 2000 compliant with regard to processing the pay-per-view ordering information transmitted by the Company. There is presently no contingency plan in the event of non-compliance by the billing vendors. The Company's contingency plan would be determined by the cable operator's decision with respect to selecting a different billing vendor. A majority of the Company's software that it uses for administrative purposes is "Year 2000 Compliant". The software that creates the customer invoices is not presently Year 2000 compliant. The vendor of such software has made available software to upgrade to be Year 2000 compliant. The Company is currently working on upgrading the software. In the unlikely event that such software does not get upgraded, the Company would have to create its invoices in another software program, which would be time consuming and involve some manual effort. The Company has performed its Year 2000 compliance checks internally and therefore has not incurred any related costs. The Company expects the fees to be nominal for converting its administrative software to be Year 2000 compliant. Total liabilities decreased $793,163 and total assets decrease $809,750 for the nine months ended September 30, 1998. The decrease in total liabilities was primarily a result of a decrease in notes payable - - majority stockholder of $1,450,000 due to debt repayment. Partially offsetting the debt repayment is an increase in accrued interest of $397,986 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 $316,683. The decrease in assets is partially attributable to a decrease in deferred tax asset of $178,000 (see above and Note 5 to the financial statements), and an increase in accumulated depreciation of $659,831. The Company's days for sales in accounts receivable is 50 days for the nine months ended September 30, 1998 compared to 54 days for the nine months ended September 30, 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 $1,583,035 during the nine months ended September 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 $1,137,928 for the nine months ended September 30, 1998, compared to positive cash flow from operating activities of $1,119,911 for the nine months ended September 30, 1997. Cash flow for the nine months ended September 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 September 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 $397,986 for the nine months ended September 30, 1998, compared to $359,827 for the nine months ended September 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 loan 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 nine months of 1998, the Company made principal payments of $1,450,000 to Mr. Lenfest. The aggregate outstanding loan balances due to Mr. Lenfest as of September 30, 1998 are $2,869,712 in principal and $2,585,707 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 has no control over the buy rates. As noted above, the Company experienced a decrease in the average monthly buy rate from 22.2% for the nine months ended September 30, 1997 to 18.2% for the nine months ended September 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 5. Other Information At the end of October 1998, the previous disclosed insider trading suit filed by the Securities and Exchange Commission against H.F. Lenfest and his wife in the United States Court for the Eastern District of Pennsylvania was dismissed by the trial judge. 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 September 30, 1990 Form 10-Q). 10.1 Distributorship Agreement, dated November 2, 1989, between the Company and Science (incorporated by reference to the 1989 Form 10-K). 10.2 Stock Purchase Agreement, dated November 2, 1989, between the Company and H.F. Lenfest (incorporated by reference to the Company's Report on Form 8-K, dated November 15, 1989, (the "1989 Form 8-K")). 10.3 Shareholders' Agreement, dated November 2, 1989, among the Company and certain of its stockholders (incorporated by reference to the Company's 1989 Form 8-K). 10.4 Option Agreement, dated November 2, 1989, among the Company and certain of its stockholders (incorporated by reference to the 1989 Form 8-K). 10.5 Form of Credit Agreement between the Company and H.F. Lenfest (incorporated by reference to the 1990 Form 10-K). 10.7 Form of Line of Credit Agreement between the Company and H.F. Lenfest (incorporated by reference to the 1990 Form 10-K). 10.8 Subordinated Promissory Note, dated November 15, 1994 the principal amount of $541,000 payable to Science Dynamics Corporation (incorporated by reference to the 1994 Form 10-KSB). 10.10 Letter Agreement dated November 8, 1990 between Science Dynamics Corporation and H.F. Lenfest (incorporated by reference to the Company's Report on Form 8-K for November 16, 1990). 10.11 Loan Agreement dated December 24, 1991, between the Company and H.F. Lenfest (incorporated by reference to the 1991 Form 10-K). 10.12 Lease Agreement for office space and the First Amendment to Lease dated March 30, 1994, between the Company and Bloom Associates (incorporated by reference to the 1994 Form 10-KSB). 10.13 Letter effective as of March 31, 1998, from H.F. Lenfest, waiving the repayment of loans and accrued interest until January 1, 2000 (incorporated by reference to the March 31, 1998, Form 10-QSB). 11. Statement re: Computation of Per Share Earnings (see the Company's September 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: 11/12/98 By: /s/Frank J. Carcione -------------------------------------------- Frank J. Carcione, (Chief Executive Officer) Dated: 11/12/98 By: /s/Irene A. DeZwaan ------------------------------------------- Irene A. DeZwaan, Treasurer (Controller)