Close ain't the word. I just noticed it came out friday. Boy, do I feel stupid.
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May 15, 1998
TELVUE CORP (TEVE)
Quarterly Report (SEC form 10-Q)
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 POPS to the cable systems' billing vendors.
The Company had income before income taxes of $167,034 for the quarter ended March 31, 1998, compared $159,272 for the quarter ended March 31, 1997. The Company experienced a decrease in the average monthly buy rate from 24.2% for the quarter ended March 31, 1997 to 19.5% for the quarter ended March 31, 1998. The drop in the buy rate caused the pay-per-view buy revenue to decrease $67,578 for the quarter ended March 31, 1998. 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 overall increase in service revenue of $58,509 for the quarter ended March 31, 1998 when compared to the quarter ended March 31, 1997. The growth in service revenue is partially attributable to the Company serving approximately 1,100,000 more full-time cable subscribers during the quarter ended March 31, 1998. The service revenue increase is also a result of an increase in National POP feature revenue of $75,462, as a result of both new and existing customers using more optional features. The Company had an increase in PPV+ revenue of $76,116 for the quarter ended March 31, 1998. The PPV+ revenue increased 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 $93,034 for the quarter ended March 31, 1998. Included in net income is income tax of $74,000 for the quarter ended March 31, 1998 compared to an income tax benefit of $1,070,000 for the quarter ended March 31, 1997. The Company's income before income taxes is $167,034 for the quarter ended March 31, 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 March 31, 1998, the Company's net operating loss carryforward is approximately $4,800,000 on a tax reporting basis (see Note 5 to the financial statements).
Service expenses for the quarter ended March 31, 1998, decreased $17,309 from the comparable 1997 period. The decrease in service expenses is partially attributable to a decrease in 800 number database expenses of $9,693 as a result of an FCC rate restructuring and a decrease in data link expense of $16,785 primarily as a result of customers consolidating their billing centers. These decreases are partially offset by increases in other service expense categories.
As of March 31, 1998, the Company was serving approximately 9,800,000 full-time cable subscribers and 1,300,000 part-time subscribers on the National POP compared to approximately 8,700,000 full-time cable subscribers and 1,600,000 part-time subscribers served as of March 31, 1997. The part- time subscribers did not significantly contribute to the revenue or service expenses for the quarters ended March 31, 1998 and 1997.
The Company's operations had required a substantial purchase of equipment by the Company. During the quarter ended March 31, 1998, the Company purchased $86,833 of equipment compared to $101,388 purchased during the quarter ended March 31, 1997. Depreciation accounted for 17% of total operating expenses for the quarter ended March 31, 1998, compared to 16% for the quarter ended March 31, 1997. For the quarter ended March 31, 1998, selling and marketing expenses increased 26% as a result of an increase of approximately $10,000 in advertising expense, $6,000 in promotional expenses, and an increase of approximately $10,000 in travel and entertainment expenses. General and administrative expenses decreased $1,591 during the quarter ended March 31, 1998.
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 $381,172 and total assets decreased $393,699 for the quarter ended March 31, 1998. The decrease in total liabilities was primarily a result of a decrease in notes payable - majority stockholder of $550,000 due to debt repayment. Partially offsetting the debt repayment is an increase in accrued interest of $140,204 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 $105,561. The decrease in assets is attributable to a decrease in cash of $243,162 as a result of debt repayment and a decrease in current deferred tax asset of $74,000 (see above and Note 5 to the financial statements). The Company's days for sales in accounts receivable is 52 days for the quarter ended March 31, 1998, compared to 53 days for the quarter ended March 31, 1997. The Company believes the decrease of 1 day is not material. The Company does not offer incentives/discounts to its customers, nor has it changed its credit terms with its customers.
The Company had positive cash flow from operations of $393,671 during the quarter ended March 31, 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 $383,875 for the quarter ended March 31, 1998, compared to positive cash flow from operating activities of $357,248 for the quarter ended March 31, 1997. The increase in cash flow for the quarter ended March 31, 1998, is primarily a result of increased revenue and a decrease in service expenses (see above).
Since November 2, 1989, the Company has funded its expansion and operating deficit from the $2,500,000 of proceeds from the sale of shares of the Company's Common Stock and Preferred Stock to Mr. Lenfest and from borrowings from Mr. Lenfest. 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 March 31, 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 along with the increase in revenue has enabled the Company to accumulate cash. Interest payments would have amounted to $140,204 for the quarter ended March 31, 1998, compared to $127,904 for the quarter ended March 31, 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 quarter of 1998, the Company made principal payments of $550,000 to Mr. Lenfest. The aggregate outstanding loan balances due to Mr. Lenfest as of March 31, 1998 are $3,769,712.
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. However, the Company experienced a decrease in the average monthly buy rate from 24.2% for the quarter ended March 31, 1997 to 19.5% for the quarter ended March 31, 1997, as a result of an industry wide drop in buy rates. Hence, there can be no assurance that buys rates will continue to increase or will remain at their current level.
The Company remains dependent upon the deferral of principal and interest payments due to Mr. Lenfest to fund operations and capital expenditures from operating cash flow. Mr. Lenfest has agreed not to demand the cash repayment of principal or accrued interest on the outstanding loans through January 1, 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.
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Recent Filings: Aug 1997 (Qtrly Rpt) | Nov 1997 (Qtrly Rpt) | Mar 1998 (Annual Rpt) | May 1998 (Qtrly Rpt)
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