FORM 10-KSB/A U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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 Mount Laurel, New Jersey 08054 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: 609-273-8888 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Title of Each Class Common, $0.01 per share par value Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ----- Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X ----- The Issuer's revenue for the fiscal year ended December 31, 1998 was $6,122,249. The Market Value of voting stock held by non-affiliates of the Issuer March 1, 1999, based on a per share average bid and asked price of $.1138 was $1,040,729. Number of shares of Issuer's common stock outstanding as of March 1, 1999: 24,194,500 shares. Transitional Small Business Disclosure Format: Yes No X ----- This Form 10-KSB/A is being filed to amend Part II Item 7 of the annual report on Form 10-KSB of TelVue Corporation for the fiscal year ended December 31, 1998, which was filed with the Securities and Exchange Commission on March 31, 1999 ("Form 10-KSB"), to include Note 11 and portions of Notes 2 and 6 which were incorrectly omitted from the Form 10-KSB, and re-numbering Note 12 of the Financial Statements. ITEM 7. FINANCIAL STATEMENTS TELVUE CORPORATION FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 TABLE OF CONTENTS PAGE NO. -------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS Balance Sheets Statements of Operations Statements of Stockholders' Deficit Statements of Cash Flows Notes to Financial Statements REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders TelVue Corporation We have audited the balance sheets of TelVue Corporation (a Delaware corporation) as of December 31, 1998 and 1997, and the related statements of operations, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TelVue Corporation as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. February 2, 1999 TELVUE CORPORATION BALANCE SHEETS December 31, 1998 and 1997 1998 1997 ------------- --------- [S] [C] [C] ASSETS CURRENT ASSETS Cash and cash equivalents $ 453,569 $ 445,368 Accounts receivable - trade 786,083 922,737 Other receivables 4,910 5,281 Deferred tax asset 285,935 477,987 Other current assets 11,626 10,898 ----------- ---------- TOTAL CURRENT ASSETS 1,542,123 1,862,271 PROPERTY AND EQUIPMENT 4,791,240 4,534,168 Less accumulated depreciation 3,462,823 2,639,651 ----------- ---------- 1,328,417 1,894,517 OTHER ASSETS Deferred tax asset 1,932,778 2,027,450 Deposits 9,300 9,300 ----------- ----------- 1,942,078 2,036,750 ----------- ----------- $4,812,618 $5,793,538 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Notes payable-majority stockholder-current $ 1,380,000 $1,800,000 Accounts payable 512,047 423,851 Accrued expenses 172,839 192,305 Accrued dividends payable 422,244 - Income taxes payable 8,661 12,000 Deferred trunk credit - 164,200 ------------ --------- TOTAL CURRENT LIABILITIES 2,495,791 2,592,356 NOTES PAYABLE - MAJORITY STOCKHOLDER, net of current portion 1,039,712 2,519,712 ACCRUED INTEREST - MAJORITY STOCKHOLDER 2,694,837 2,187,721 REDEEMABLE CONVERTIBLE PREFERRED STOCK, $1 par value, 6,900,000 shares authorized, 3,518,694 shares issued and outstanding at December 31, 1998 and 1997, (liquidation value $3,940,938 and $3,518,694, respectively) 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 December 31, 1998 and 1997, respectively 241,945 238,145 Additional paid-in capital 1,550,535 1,516,335 Accumulated deficit (6,728,896) (6,779,425) ----------- ----------- (4,936,416) (5,024,945) ----------- ---------- $4,812,618 $5,793,538 =========== =========== See accompanying notes TELVUE CORPORATION STATEMENTS OF OPERATIONS Years Ended December 31, 1998 and 1997 1998 1997 ---- ---- REVENUES $ 6,122,249 $ 6,330,675 OPERATING EXPENSES Service 2,711,860 3,186,546 Selling and marketing 593,862 585,544 General and administrative 648,893 642,767 Depreciation 870,095 831,609 ----------- ----------- 4,824,710 5,246,466 ----------- ----------- OPERATING INCOME 1,297,539 1,084,209 OTHER INCOME (EXPENSE) Interest income, net of reimbursement (507,116) (459,352) Interest income 24,165 42,221 Other income (expense) (33,430) (24,881) ----------- ----------- (516,381) (442,012) ----------- ---------- INCOME BEFORE INCOME TAXES 781,158 642,197 INCOME TAX BENEFIT (EXPENSE) (308,385) 2,493,437 ----------- ---------- NET INCOME 472,773 3,135,634 DIVIDENDS ON REDEEMABLE CONVERTIBLE PREFERRED STOCK (422,244) (359,932) ----------- ----------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 50,529 $ 2,775,702 =========== =========== EARNINGS (LOSS) PER COMMON SHARE BASIC $ - $ .12 =========== =========== DILUTED $ .01 $ .04 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 24,036,167 23,795,102 =========== =========== See accompanying notes. TELVUE CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT Years Ended December 31, 1998 and 1997 Additional Total Common Paid-In Accumulated Stockholders' Stock Capital Deficit Deficit ------- ---------- ----------- ----------- BALANCE,DECEMBER 31, 1996 $237,945 $1,515,535 $(9,555,127) $(7,801,647) Accrued dividends on redeemable convertible preferred stock - - (359,932) (359,932) Issuance of 20,000 shares of common stock under director compensation plan 200 800 - 1,000 Net income - - 3,135,634 3,135,634 ------- ---------- ----------- ---------- BALANCE, DECEMBER 31, 1997 238,145 1,516,335 (6,779,425) (5,024,945) Accrued dividends on redeemable convertible preferred stock - - (422,244) (422,244) Issuance of 380,000 shares of common stock 3,800 34,200 - 38,000 Net income - - 472,773 472,773 -------- ---------- ----------- ---------- BALANCE,DECEMBER 31, 1998 $241,945 $1,550,535 $(6,728,896) $(4,936,416) ======== ========== =========== =========== See accompanying notes. TELVUE CORPORATION STATEMENTS OF CASH FLOWS Years Ended December 31, 1998 and 1997 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (loss) $ 472,773 $ 3,135,634 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 870,095 831,609 Loss on sales or disposal of property and equipment - 24,881 Deferred tax (benefit) expense 286,725 (2,505,437) Issuance of common stock 38,000 1,000 Changes in assets and liabilities: Accounts receivable - trade and other 137,025 274,430 Other current assets (728) 2,066 Deposits - (500) Accounts payable - trade and other 88,196 104,877 Accrued expenses (19,466) 27,429 Income taxes payable (3,339) 12,000 Deferred trunk credit (164,200) (26,600) Accrued interest - majority stockholder 507,116 457,883 ----------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,212,197 2,339,272 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (303,996) (513,676) Proceeds from sales or disposal of property and equipment - 1,405 ----------- --------- NET CASH (USED IN)INVESTING ACTIVITIES (303,996) (512,271) CASH FLOWS FROM FINANCING ACTIVITIES Debt reduction: Notes payable - majority stockholder (1,900,000) (2,050,000) ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,201 (222,999) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 445,368 668,367 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 453,569 $ 445,368 =========== ========== See accompanying notes. TELVUE CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of TelVue Corporation ("the Company") is presented to assist in understanding its financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. BUSINESS ACTIVITY AND CONCENTRATION OF CREDIT RISK The Company primarily provides automatic telephone number identification services to the cable television industry throughout the United States for the automated ordering of pay-per-view features and events. The Company grants credit to cable television operators throughout the nation. Consequently, the Company's ability to collect the amounts due from customers is affected by economic fluctuations in the cable television industry. The Company maintains cash balances at a financial institution located in the Philadelphia Area. Accounts at this institution are insured by the Bank Insurance Fund up to $100,000. The Company maintains cash balances in excess of the insured amount. During 1998 and 1997, four customers accounted for 50% and 51% of sales, respectively, and 37% and 48% of receivables at December 31, 1998 and 1997, respectively. Currently, the Company's sole source of financing is the majority stockholder. In the past, the Company has been unable to obtain funding from other third parties on terms that are acceptable to the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all short-term debt securities purchased with an original maturity of three (3) months or less to be cash equivalents. ACCOUNTS RECEIVABLE - TRADE The Company evaluates its accounts receivable on a customer by customer basis and has determined that no allowance for doubtful accounts is necessary at December 31, 1998 and 1997. Historically, the Company has experienced virtually no bad debt. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided over five years using the straight-line method. Property and equipment consists primarily of operating equipment. For income tax purposes, recovery of capital costs for property and equipment is made using accelerated methods over statutory recovery periods. Expenditures for renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. VALUATION OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed of", the Company assesses, on an on-going basis, the recoverability of long-lived assets based on estimates of future undiscounted cash flows for the applicable business acquired compared to net book value. Long- lived assets include property and equipment. If the future undiscounted cash flow estimate is less than net book value, net book value is then reduced to the fair value of the assets. The Company also evaluates the depreciation periods of assets, to determine whether events or circumstances warrant revised estimates of useful lives. As of December 31, 1998, management believes that no revisions to the remaining useful lives or writedowns of long-lived assets are required. REVENUE RECOGNITION The Company recognizes revenue in the month service is provided, net of an estimate for programs not billable by the cable television operator. ADVERTISING The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense is included in selling and marketing expense in the accompanying statements of operations. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share is computed using the weighted average number of shares of outstanding. Diluted earnings (loss) per common share is computed using the weighted average number of shares outstanding adjusted to include incremental common shares that would have been outstanding if potentially dilutive common shares had been issued. Incremental shares of 57,027,826 and 53,497,636 in 1998 and 1997, respectively, were used in the calculation of diluted earnings (loss) per common share. NOTE 2 - SUPPLEMENTARY DISCLOSURES TO STATEMENTS OF CASH FLOWS Cash paid during the year for: 1998 1997 ---- ---- Interest $ - $ 1,470 Income taxes $ 25,000 $ - NONCASH INVESTING AND FINANCING TRANSACTIONS The Company accrued dividends on its redeemable convertible preferred stock of $422,244 and $359,932 in 1998 and 1997, respectively. In 1998 and 1997, the Company issued 5,000 and 20,000 shares of common stock valued at $500 and $1,000, respectively under the Director Compensation Plan (See Note 6). In 1998, the Company issued 375,000 shares of common stock valued at $37,500 to four key employees. In 1997, the Company issued 359,932 shares of redeemable convertible preferred stock in payment of both semi-annual 1997 dividends. In 1997, the Company issued 173,126 shares, of redeemable convertible preferred stock in payment of interest on a line of credit. NOTE 3 - PROPERTY AND EQUIPMENT The schedule of property and equipment at December 31, 1998 and 1997, is as follows: Estimated Useful Lives 1998 1997 in Years ---- ---- ---------- Operating equipment $4,549,957 $4,250,971 5 Office furniture and equipment 201,599 243,513 5 Leasehold improvements 39,684 39,684 5 ---------- ---------- $4,791,240 $4,534,168 ========== ========== NOTE 4 - NOTES PAYABLE - MAJORITY STOCKHOLDER Notes payable to the majority stockholder consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- National equipment loan (a) $1,471,272 $1,471,272 Additional lines of credit (b) 407,440 2,307,440 Notes payable (SDC) (c) 541,000 541,000 ---------- --------- $2,419,712 $4,319,712 ========== ========== (a) In March 1994, the Company's majority stockholder provided a 1,500,000 line of credit for the purchase of additional equipment to expand the National POP (Point of Presence). Amounts outstanding bear interest at prime plus one percent (1%) and interest is payable quarterly. At the option of the Company, interest may be paid by the delivery of shares of Redeemable Convertible Preferred Stock (see Note 6) at $1 per share. In 1997, the Company issued 173,126 shares of redeemable convertible preferred stock in payment of interest. The effective interest rates, at December 31, 1998 and 1997, were 8.75% and 9.5%, respectively. (b) The Company's majority stockholder has provided several additional lines of credit. Borrowings under all of these lines of credit bear interest at prime plus one percent (1%). The effective interest rates, at December 31, 1998 and 1997, were 8.75% and 9.5%, respectively. The availability of additional funding may be terminated at any time if the majority stockholder determines that there is no reasonable prospect that the Company will be able to achieve net income on a consistent basis. (c) In January 1995, the Company's majority stockholder acquired from Science Dynamics Corporation ("SDC") a subordinated note in the amount of $541,000. The note is noninterest-bearing and repayment is restricted to cash not needed for operations as determined by the Company. The Company has obtained from the majority stockholder an extension of a prior agreement whereby the majority stockholder has agreed not to demand repayment of principal or interest during 1999. However, the Company has decided to voluntarily make, and the majority stockholder has agreed to accept, monthly payments against the loan principal in the amount of $115,000. The Company, at its discretion, may make monthly principal payments in excess of $115,000 when the Company has excess cash not needed to fund operations. The Company has, therefore, classified $1,380,000 of the notes payable to the majority stockholder as a short term liability and has classified the balance of the notes payable and the accrued interest as long-term liabilities. NOTE 5 - LEASES The Company leases office facilities and trunk lines and data circuits. Future minimum lease payments under non-cancelable operating leases consisted of the following: Year Ending Operating December 31, Lease ----------- ---------- 1999 $ 49,117 Rental expense under the operating lease for office facilities amounted to $97,798 for each of the years ended December 31, 1998 and 1997. In connection with the lease of its trunk lines, the Company received credits of which $164,200 was not yet earned by the Company as of December 31, 1997. It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum operating lease commitments will not be less than the amount shown for 1999. NOTE 6 - CAPITAL STOCK COMMON STOCK VOTING RIGHTS AND CONCENTRATION OF CONTROL Shares of Common Stock which have had the same beneficial owner since April 21, 1988, or which have had the same beneficial owner for a continuous period in excess of 2 years prior to the record date of any meeting of stockholders, will be entitled to 10 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. In November 1989, the Company issued 12,896,968 shares of Common Stock for $1,250,000 to an individual who effectively acquired control of the Company. In connection with this sale, the Board of Directors waived the waiting period for these shares of Common Stock related to full voting rights described above. In January 1995, this individual acquired an additional 1,660,485 shares of common stock of the Company from SDC. REDEEMABLE CONVERTIBLE PREFERRED STOCK In April 1990, the Company issued 1,250,000 shares of Class A Redeemable Convertible Preferred Stock (Preferred Stock) for $1,250,000. The Preferred Stock has a par value of $1 per share and pays a cumulative $.06 semiannual dividend. The dividend is payable in cash or additional shares of Preferred Stock at $1 per share, at the option of the Company. Each share of Preferred Stock is convertible into 6.667 shares of Common Stock at any time, at the option of the holder. The Preferred Stock has a preference of $1 per share plus unpaid dividends in the event of liquidation. In December 1997, the 1997 semiannual dividends were declared and paid with 359,932 shares of Preferred Stock. The Company may redeem the Preferred Stock at any time for $2 per share. The stockholder of the Preferred Stock is the majority stockholder. The majority stockholder can designate all of the Company's directors and, therefore, could influence the Company's willingness to cause a redemption of the Preferred Stock. As a result, the Preferred Stock has been classified outside of the stockholders' deficit section of the accompanying balance sheets. DIRECTOR COMPENSATION PLAN In December 1997, the Company adopted a Director Compensation Plan. Under this plan, each non-employee director, other than the majority stockholder, is compensated $500 for each meeting attended by receiving shares of Common Stock issued at the higher of the per share fair market value of the Common Stock as of the board of directors meeting date or $.05 per share. In 1998 and 1997, the Company issued 5,000 and 20,000 shares of Common Stock under this plan, respectively, and recognized director compensation expense of $500 and $1,000, respectively. STOCK COMPENSATION In June 1998, the Company issued 375,000 shares of common stock to four executives as a discretionary bonus. The shares were issued at the fair value on the grant date of $.10 per share. The Company recorded compensation expense of $37,500 with the issuance of these shares. COMMON STOCK WARRANTS In connection with one of the lines of credit discussed in Note 4, the Company agreed to issue warrants to the majority stockholder to purchase 29,915,160 shares of the Company's Common Stock for $.01 per share, the fair market value of the Common Stock on the grant date. The warrants provide for adjustments of the exercise price and the number of shares issuable thereunder in the event that the Company issues additional shares of Common Stock and other events as defined in the warrant agreement. The warrant holder is entitled, at the Company's expense, to certain registration rights under the Securities Act of 1933 in connection with any shares of the Company's Common Stock issued pursuant to exercise of the warrants. NOTE 7 - 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 (alternative minimum tax) $ (21,660) $ (12,000) State - - ---------- --------- (21,660) (12,000) Deferred Federal (264,994) (208,368) State (73,844) (60,763) ---------- --------- (338,838) (269,131) Valuation allowance (increase) decrease 52,113 2,774,568 ---------- --------- (286,725) 2,505,437 ---------- --------- $ (308,385) $2,493,437 =========== ========== The categories of temporary differences that give rise to deferred tax assets and liabilities are as follows: Federal State --------------- ----------- 1998 1997 1998 1997 ---- ---- ---- ---- Deferred Tax Assets: Accrued interest - stockholder $ 830,347 $ 674,092 $252,641 $205,099 Net operating loss carryforward 1,215,281 1,716,879 190,321 329,764 Alternative minimum tax credit 33,000 12,000 - - ---------- ---------- --------- -------- Gross Deferred Tax Asset 2,078,628 2,402,971 442,962 534,863 Deferred Tax Liabilities: Property and equipment, principally due to differences in depreciation (86,299) (145,648) (26,257) (44,315) ---------- ---------- --------- -------- Net deferred tax asset before	 valuation allowance 1,992,329 2,257,323 416,705 490,548 Valuation allowance - - (190,321) (242,434) ---------- ----------- -------- -------- Net Deferred Tax Asset 1,992,329 $2,257,323 $226,384 $248,114 ========= ========== ======== ======== The Company has a net operating loss carryforward of approximately $3,600,000 on a tax reporting basis. The carryforward will begin to expire in 2004, if not utilized. The Company also has an alternative minimum tax credit carryforward of approximately $33,000. This carryforward has no expiration date. 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. NOTE 8 - PENSION PLAN The Company maintains a Simplified Employee Pension (SEP) plan under section 408(k) of the Internal Revenue Code for all eligible employees. Employees are eligible to participate if they are at least 21 years old and have been employed by the Company for at least 90 days. Under the plan, employees may elect to defer up to 15% of their salary, subject to Internal Revenue Service limits. The Company may make discretionary contributions for the participants. The Company elected to match fifty percent (50%) of 1998 and 1997 contributions by participating eligible employees up to five percent (5%) of their salary, for a maximum contribution of 2.5% of salary. The Company's contributions for 1998 and 1997 amounted to $21,223 and $19,930, respectively. NOTE 9 - RELATED PARTY TRANSACTIONS The Company has several notes payable to the majority stockholder. (See Note 4). The Company provided its automated number identification services to subsidiaries of Lenfest Communications, Inc. ("LCI"). The Company recognized revenues of approximately $400,000 and $470,000 from LCI subsidiaries in 1998 and 1997, respectively and had a receivable of $59,848 and $65,916 due from LCI at December 31, 1998 and 1997, respectively. These services were provided at normal billing rates. The Company and LCI are under the control of the majority stockholder of the Company. NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued Expenses. The carrying amount approximates fair market value because of the short maturity of those instruments Long-term Debt and Accrued Interest Due to the related party nature, it is uncertain at what rate the Company could borrow funds from an unrelated party, if at all. Therefore, it is not practical to estimate the fair market value of the long-term debt and accrued interest. NOTE 11 - LITIGATION SETTLEMENT In April 1996, a former employee filed suit against the Company and its majority stockholder. 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 former employee's claims were without merit, the Company settled the lawsuit in June 1998. The litigation settlement of $33,430, net of proceeds received from the Company's insurance carrier, is included in "other expense" in the accompanying statement of operations. NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company has received notice from a cable operating company customer alerting 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. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELVUE CORPORATION DATED: 5/20/99 By: /s/Frank J. Carcione ------------------------------- Frank J. Carcione President (Chief Executive Officer)