UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________to________
Commission File Number: 0-17170
TELVUE CORPORATION
(Exact name of registrant 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)
Registrant's telephone number, including area code: (856) 273-8888
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule, 12b-2 of the Exchange Act) Yes [_] No [X]
Number of shares of registrant's common stock outstanding as of August 5, 2008:
48,461,644 shares.
TELVUE CORPORATION
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2008
(unaudited) and as of December 31, 2007 ........................... 3
Consolidated Statements of Operations for the three months ended
June 30, 2008 (unaudited) and June 30, 2007 (unaudited) ........... 4
Consolidated Statements of Operations for the six months ended
June 30, 2008 (unaudited) and June 30, 2007 (unaudited) ........... 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2008 (unaudited) and June 30, 2007 (unaudited) ........... 6
Notes to Consolidated Financial Statements (unaudited) ............ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .............................................. 21
Item 4T. Controls and Procedures .................................. 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ...... 21
Item 6. Exhibits ................................................. 21
SIGNATURES ................................................................. 24
EXHIBIT INDEX .............................................................. 24
2
PART I. Financial Information
ITEM I. Financial Statements
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2008 2007
------------ ------------
(Unaudited) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................. $ 208,542 $ 225,660
Accounts receivable - trade, net of
Allowances of $5,035 at June 30,
2008 and $6,500 at December 31, 2007 ...... 508,491 641,683
Inventory .................................. 369,876 244,994
Prepaid expenses ........................... 147,148 120,646
------------ ------------
TOTAL CURRENT ASSETS .................... 1,234,057 1,232,983
PROPERTY AND EQUIPMENT ....................... 7,572,198 7,364,421
Less accumulated depreciation .............. 6,045,831 5,763,185
------------ ------------
1,526,367 1,601,236
DEFINITE-LIVED INTANGIBLE ASSETS,
Net of accumulated amortization of
$827,294 at June 30, 2008 and
$507,050 at December 31, 2007 ............. 3,721,426 4,041,670
INDEFINITE-LIVED INTANGIBLE ASSETS-GOODWILL .. 1,921,405 1,921,405
INDEFINITE-LIVED INTANGIBLE ASSETS-OTHER ..... 397,260 397,260
OTHER ASSETS ................................. 8,800 8,800
------------ ------------
$ 8,809,315 $ 9,203,354
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade ................... $ 271,312 $ 705,182
Accrued expenses ........................... 319,199 236,538
Deferred service revenue ................... 468,241 416,434
Other liabilities .......................... 1,366 3,178
------------ ------------
TOTAL CURRENT LIABILITIES ............... 1,060,118 1,361,332
LINES OF CREDIT - MAJORITY STOCKHOLDER ....... 14,625,000 12,200,000
NOTE PAYABLE - MAJORITY STOCKHOLDER .......... 541,000 541,000
ACCRUED INTEREST - MAJORITY STOCKHOLDER ...... 1,478,544 992,278
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 100,000,000
shares authorized, 48,461,644 and 48,433,074
shares issued and outstanding at June 30,
2008 and December 31, 2007, respectively ... 484,616 484,331
Additional paid-in capital .................. 4,877,353 4,876,639
Accumulated deficit ......................... (14,257,316) (11,252,226)
------------ ------------
(8,895,347) (5,891,256)
------------ ------------
$ 8,809,315 $ 9,203,354
============ ============
* Derived from audited financial statements.
The accompanying unaudited notes are an integral part of these statements.
3
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
-----------------------------
2008 2007
---- ----
REVENUES
ANI services ............................... $ 334,763 $ 356,696
TelVue products and services ............... 505,975 908,542
------------ ------------
840,738 1,265,238
COST OF REVENUES
ANI services ............................... 125,713 131,021
TelVue products and services ............... 334,262 452,286
------------ ------------
TOTAL COST OF REVENUES ....................... 459,975 583,307
------------ ------------
GROSS MARGIN ................................. 380,763 681,931
OPERATING EXPENSES
Selling and marketing ...................... 479,543 461,957
General and administrative ................. 791,259 733,392
Depreciation and amortization .............. 304,744 244,393
------------ ------------
1,575,546 1,439,742
------------ ------------
OPERATING LOSS ............................... (1,194,783) (757,811)
OTHER INCOME (EXPENSE)
Interest income ............................ 64 301
Interest expense ........................... (230,750) (240,636)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ................. (230,686) (240,335)
------------ ------------
NET LOSS ..................................... $ (1,425,469) $ (998,146)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE .. $ (.03) $ (.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC AND DILUTED .......................... 48,437,783 48,359,703
============ ============
The accompanying unaudited notes are an integral part of these statements.
4
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
-----------------------------
2008 2007
---- ----
REVENUES
ANI services ............................... $ 641,120 $ 695,451
TelVue products and services ............... 955,475 1,182,183
------------ ------------
1,596,595 1,877,634
COST OF REVENUES
ANI services ............................... 211,266 221,680
TelVue products and services ............... 728,331 642,420
------------ ------------
TOTAL COST OF REVENUES ....................... 939,597 864,100
------------ ------------
GROSS MARGIN ................................. 656,998 1,013,534
OPERATING EXPENSES
Selling and marketing ...................... 928,884 865,710
General and administrative ................. 1,644,415 1,088,881
Depreciation and amortization .............. 602,890 346,009
------------ ------------
3,176,189 2,300,600
------------ ------------
OPERATING LOSS ............................... (2,519,191) (1,287,066)
OTHER INCOME (EXPENSE)
Interest income ............................ 367 30,716
Interest expense ........................... (486,266) (339,443)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ................. (485,899) (308,727)
------------ ------------
NET LOSS ..................................... $ (3,005,090) $ (1,595,793)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE .. $ (.06) $ (.03)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC AND DILUTED .......................... 48,435,429 48,358,065
============ ============
The accompanying unaudited notes are an integral part of these statements.
5
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................... $(3,005,090) $(1,595,793)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization ............... 602,890 346,010
Changes in assets and liabilities:
Accounts receivable - trade ................. 133,192 (194,186)
Inventory ................................... (124,882) (226,261)
Prepaid expenses ............................ (26,502) (58,518)
Accounts payable - trade .................... (433,870) 314,610
Accrued expenses ............................ 80,849 (188,728)
Deferred service revenue .................... 51,807 27,144
Accrued interest - majority stockholder ..... 486,266 339,443
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES .... (2,235,340) (1,236,279)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .......... (207,777) (390,672)
Acquisition of business ...................... - (213,698)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES .... (207,777) (604,370)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit - majority
stockholder ............................... 2,425,000 1,800,000
Issuance of common stock ..................... 999 1,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .. 2,425,999 1,801,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...... (17,118) (39,649)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .......................... 225,660 191,157
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....... $ 208,542 $ 151,508
=========== ===========
The accompanying unaudited notes are an integral part of these statements.
6
TELVUE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 accordance with accounting principles generally accepted
in the United States of America 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, 2008 and the
results of operations for the three and six months ended June 30, 2008 and 2007
and cash flows for the six months ended June 30, 2008 and 2007.
Going Concern and Management's Plan
- -----------------------------------
The accompanying financial statements of TelVue Corporation ("TelVue" or the
"Company") have been prepared on the basis of generally accepted accounting
principles applicable to a "going concern," which assume that the Company will
continue in operation for at least one year and will be able to realize its
assets and discharge its liabilities in the normal course of operations.
Conditions exist, however, that cast doubt about the Company's ability to
continue as a "going concern." In order to fund operations, the Company relies
on funds drawn on lines of credit held by the Company with the Company's
majority stockholder, H.F. (Gerry) Lenfest. Based on the Company's current
draw-down rate, the funds remaining in the current lines of credit are not
sufficient to sustain the Company's operations for the next 12 month period.
Funding the Company's future capital requirements will depend on numerous
factors including, but not limited to, the Company receiving continued financial
support from Mr. Lenfest, which he has not committed to at this time, or seeking
other alternatives. While management is working towards mitigating the adverse
conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that management will be successful.
These financial statements do not reflect adjustments that would be necessary if
the Company were unable to continue as a "going concern." If the Company were
unable to continue as a "going concern," then substantial adjustments would be
necessary to the carrying values of assets, the reported amounts of its
liabilities, the reported expenses, and the balance sheet classifications used.
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 TelVue
Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2007,
as filed with the Securities and Exchange Commission.
Prior period financial statements have been reclassified to conform with current
quarter presentation.
7
Basis of Consolidation
- ----------------------
The consolidated financial statements include the accounts of TelVue and
Princeton Server Group, Inc. ("PSG"), which was acquired on March 12, 2007 and
was maintained as a wholly-owned subsidiary until February 28, 2008, on which
date PSG was merged into TelVue. From the date of the acquisition of PSG until
the merger date, intercompany accounts and transactions were eliminated in
consolidation. Since the merger date, the accounts of PSG have been included
directly within TelVue's accounts.
Business Combination
- --------------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," the Company accounts for all business combinations by
the purchase method. Furthermore, the Company recognizes intangible assets apart
from goodwill if they arise from contractual or legal rights or if they are
separable from goodwill.
Goodwill, Trademarks and Other Intangible Assets
- ------------------------------------------------
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company classifies intangible assets into three categories: (1) intangible
assets with definite lives subject to amortization, (2) intangible assets with
indefinite lives not subject to amortization, and (3) goodwill. The Company
tests intangible assets with definite lives for impairment if conditions exist
that indicate the carrying value may not be recoverable. Such conditions may
include an economic downturn in a geographic market or a change in the
assessment of future operations. The Company records an impairment charge when
the carrying value of the definite lived intangible asset is not recoverable by
the cash flows generated from the use of the asset.
Intangible assets with indefinite lives and goodwill are not amortized. The
Company tests these intangible assets and goodwill for impairment at least
annually or more frequently if events or circumstances indicate that such
intangible assets or goodwill might be impaired. All goodwill is assigned to
reporting units, which are one level below TelVue's operating segments. Goodwill
is assigned to the reporting unit that benefits from the synergies arising from
each business combination. The Company performs impairment tests of goodwill at
each reporting unit level. Such impairment tests for goodwill include comparing
the fair value of the respective reporting unit with its carrying value,
including goodwill. When the fair value is less than the carrying value of the
intangible assets or the reporting unit, the Company records an impairment
charge to reduce the carrying value of the assets to fair value.
The Company determines the useful lives of its identifiable intangible assets
after considering the specific facts and circumstances related to each
intangible asset. Factors the Company considers when determining useful lives
include the contractual term of any agreement, the history of the asset, the
Company's long-term strategy for the use of the asset, any laws or other local
regulations which could impact the useful life of the asset, and other economic
factors, including competition and specific market conditions. Intangible assets
that are deemed to have definite lives are amortized, generally on a
straight-line basis, over their useful lives, ranging from 1 to 15 years.
8
2. ACQUISITION
-----------
On March 12, 2007, the Company acquired all of the issued and outstanding shares
of capital stock of PSG for a purchase price of $6,100,000 in cash plus the
forgiveness of a $400,000 loan owed by PSG. The acquisition was funded with
funds drawn under a $10,000,000 line of credit held by the Company with the
Company's majority stockholder, Mr. Lenfest. The Company accounts for this
acquisition as a business combination under the purchase method of accounting.
The results of PSG are included in the TelVue Products and Services operating
segment.
Upon closing of the acquisition, the Company made preliminary estimates of the
fair values of the assets and liabilities for consolidation. The Company has
since obtained a third-party valuation for many of the assets and liabilities
acquired. There were no material differences between the preliminary estimates
and the final valuations. The amount of purchase price allocated to software is
$3,600,000, patent applications is $788,000, other finite-lived intangible
assets is $160,000, trademarks is $397,000 and goodwill is approximately
$1,900,000. The trademarks have been assigned an indefinite life.
The accompanying financial statements include the operations of PSG since the
date of acquisition.
The following unaudited pro forma information for the six months ended June 30,
2008 and 2007, is presented as if the acquisition of PSG occurred on January 1,
2007. This information is based on historical results of operations, adjusted
for acquisition costs, and, in the opinion of management, is not necessarily
indicative of what the results would have been had the Company operated PSG
since January 1, 2007.
2008 2007
------------ ------------
Revenues .............................. $ 1,596,595 $ 2,168,179
Net loss .............................. $(3,005,090) $(2,135,357)
Basic and diluted net loss per share .. $ (.06) $ (.04)
3. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
SUPPLEMENTAL SCHEDULE RELATING TO ACQUISITION
- ---------------------------------------------
Accounts receivable ............................. $ 105,634
Inventory ....................................... 104,393
Property and equipment .......................... 129,707
Definite-lived intangible assets ................ 4,548,720
Goodwill ........................................ 1,894,829
Other indefinite-lived intangible assets ........ 397,260
Accounts payable and accrued expenses ........... (279,533)
Deferred service revenue ........................ (186,983)
Note payable .................................... (400,329)
Amount financed ................................. (6,100,000)
-----------
CASH PAID FOR ACQUISITION ....................... $ 213,698
===========
No income taxes or interest were paid during either the six months ended June
30, 2008 or 2007.
9
4. EARNINGS PER COMMON SHARE
-------------------------
Basic earnings per common share is computed by dividing net income, after
deduction of preferred stock dividends, when applicable, by the weighted average
number of shares of outstanding common stock. Diluted earnings per common share
is computed by dividing net income, after the deduction of preferred stock
dividends, when applicable, by the weighted average number of shares of
outstanding common stock adjusted to include incremental common shares that
would have been outstanding if potentially dilutive common shares had been
issued. Common equivalent shares are excluded from the computation in periods in
which they have an antidilutive effect. Because of the net loss available to
common stockholders for the six months ended June 30, 2008 and 2007, no
potential common shares were included in the computation of a diluted per share
amount since such potential common shares would not have a dilutive effect.
5. CORPORATE INCOME TAXES
----------------------
The Company uses the asset and liability method of accounting for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 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 from continuing operations for the three
months ended June 30, 2008 and 2007 consisted of the following components:
2008 2007
--------- ---------
Current
Federal ........................... $ - $ -
State ............................. - -
--------- ---------
- -
Deferred
Federal ........................... 481,000 443,000
State ............................. 128,000 121,000
--------- ---------
609,000 564,000
Valuation allowance increase ....... (609,000) (564,000)
--------- ---------
- -
--------- ---------
$ - $ -
========= =========
TelVue recorded an increase in valuation allowance of $609,000 at June 30, 2008
to reduce its deferred tax asset to zero. The valuation allowance was recorded
due to the uncertainty as to whether future net income would be generated that
would utilize TelVue's net operating loss carry forward. TelVue's federal net
operating loss carry forward was approximately $8,800,000 on a tax-reporting
basis as of June 30, 2008. The carry forward will begin to expire in 2010, if
not utilized.
10
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement 109" ("FIN 48"). FIN 48 establishes a single
model to address accounting for uncertain tax positions. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted the provisions of FIN 48 on
January 1, 2007. Upon adoption, the Company recognized no adjustment in the
amount of unrecognized tax benefits. As of the date of adoption, the Company had
no unrecognized tax benefits. The Company's policy is to recognize interest and
penalties that would be assessed in relation to the settlement value of
unrecognized tax benefits as a component of income tax expense.
The Company and its subsidiary are subject to U.S. federal income tax as well as
income tax in multiple state jurisdictions. The Company is no longer subject to
U.S. federal income tax examinations for years before 2003 and state income tax
examinations before 2002. However, to the extent allowed by law, the tax
authorities may have the right to examine prior periods where net operating
losses were generated and carried forward, and make adjustments up to the amount
of the net operating loss carry forward amount. The Company is not currently
under Internal Revenue Service tax examination. The Company is not currently
under examination by any state jurisdictions.
6. NOTES PAYABLE AND LINE OF CREDIT - MAJORITY STOCKHOLDER
-------------------------------------------------------
Note Payable - Majority Stockholder
- -----------------------------------
On June 16, 2005, the members of the Board of Directors of the Company and Mr.
Lenfest, a director and the majority stockholder of the Company, extended the
maturity date of a promissory note in the principal amount of $541,000 issued by
the Company and currently held by Mr. Lenfest (the "Science Note") to January 1,
2011. The Science Note was originally issued by the Company to Science Dynamics
Corporation ("Science") and was payable December 31, 1996. In January 1995, Mr.
Lenfest purchased the Science Note from Science, and since then the maturity
date had been extended by the Company and Mr. Lenfest on a yearly basis. The
Science Note is non-interest bearing.
Line of Credit (2005 Note) - Majority Stockholder
- -------------------------------------------------
On April 27, 2005, TelVue entered into a Line of Credit Note with Mr. Lenfest
(the "2005 Note"). The 2005 Note was secured to provide funding to grow the
TelVue Virtual Television Network ("TVTN".) Under the terms of the 2005 Note,
the Company could borrow, from time to time, up to the maximum principal amount
of the 2005 Note which is $3,800,000. The minimum advance under the 2005 Note is
$100,000 and the interest rate is equal to the prime rate plus one percent (1%).
The 2005 Note contains customary events of default, including, among others,
non-payment of principal and interest and in the event the Company is involved
in certain insolvency proceedings. In the event of a default, all of the
obligations of the Company under the 2005 Note may be declared immediately due
and payable. The Line of Credit is unsecured and will expire six years from the
date of the first advance, which is November 23, 2011, unless extended or
renewed. Principal and interest on the 2005 Note are also due and payable on
November 23, 2011. The Note was exhausted by the end of 2007. As of June 30,
2008, accrued interest due on the 2005 Note was $589,696.
11
Line of Credit (2006 Note) - Majority Stockholder
- -------------------------------------------------
On November 3, 2006, the Company entered into an additional Line of Credit Note
(the "2006 Note") with Mr. Lenfest, in the principal amount of $10,000,000.
Under this Line of Credit, the Company could request up to $5,000,000 for
general working capital and an additional $5,000,000 for purposes other than
general working capital upon mutual agreement by the Company and Mr. Lenfest.
The minimum advance under the 2006 Note is $100,000 and the interest rate is
equal to the prime rate plus one percent (1%). The 2006 Note contains customary
events of default, including, among others, non-payment of principal and
interest and in the event TelVue is involved in certain insolvency proceedings.
In the event of a default, all of the obligations of the Company under the 2006
Note may be declared immediately due and payable. The 2006 Note is unsecured and
will expire six years from the date of the first advance under the 2006 Note
unless extended or renewed. Principal and interest are also due and payable six
years from the date of the first advance under the 2006 Note. As of June 30,
2008, the Company had borrowed $10,000,000 under the 2006 Note, fully exhausting
the Note. As of June 30, 2008, accrued interest due on the 2006 Note was
$885,677.
On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under the 2006
Note to loan to PSG to fund their operating expenses (the "PSG Note"). The PSG
Note was a convertible note that bore interest at a rate of six percent (6%) per
annum. No payments of principal or interest were due until July 1, 2007. Under
the PSG Note, interest accrued through July 1, 2007 was to be added to the
principal. Interest was payable monthly from July 1, 2007 through January 1,
2008. The remaining balance was payable in forty eight (48) monthly installments
of principal and interest commencing February 1, 2008. The PSG Note was
scheduled to mature in January 2012. The Company had the option to convert the
unpaid principal balance of the PSG Note and all accrued interest into common
stock of PSG. In connection with the PSG Note, TelVue received a warrant, which
entitled TelVue to purchase 129,629 shares of common stock of PSG for $1.08 per
share. The warrant was to commence on July 1, 2007 and expire on December 31,
2016. The PSG Note was forgiven and the warrant was canceled on March 12, 2007,
in connection with TelVue's acquisition of all of the outstanding stock of PSG.
On March 12, 2007, PSG was acquired by TelVue for $6,100,000 and the forgiveness
of the PSG Note and cancellation of the warrant (described above). TelVue
borrowed the $6,100,000 from Mr. Lenfest under the 2006 Note. PSG develops high
performance digital video systems, appliances, and software that support
capture, storage, manipulation and play-out of digital media in multiple popular
formats. PSG markets its product to local Cable TV Public, Education and
Government Local Access Channels ("PEG Channels") and local origination
broadcast stations, professional broadcast stations and schools and
universities. TelVue acquired PSG as a complement to its TVTN Network with the
objective being to offer towns, municipalities and schools a packaged turnkey
product of hardware and software.
12
Line of Credit (2007 Note) - Majority Stockholder
- -------------------------------------------------
As a result of the anticipated exhaustion of the line of credit under the 2006
Note, TelVue entered into an additional Line of Credit Note (the "2007 Note")
with Mr. Lenfest on December 21, 2007 in the principal amount of $2,300,000. The
minimum advance under the 2007 Note is $100,000 and the interest rate on the
2007 Note is equal to the prime rate plus one percent (1%). The 2007 Note
contains customary events of default, including, among others, non-payment of
principal and interest and in the event TelVue is involved in certain insolvency
proceedings. In the event of a default, all of the obligations of TelVue under
the 2007 Note may be declared immediately due and payable. The 2007 Note is
unsecured and will expire six years from the date of the first advance under the
2007 Note unless extended or renewed. Principal and interest on the 2007 Note
are also due and payable six years from the date of the first advance under the
2007 Note. As a result of the exhaustion of the 2006 Note, TelVue began drawing
on the 2007 Note. As of June 30, 2008, the Company had borrowed $825,000 under
the 2007 Note, with accrued interest due on the Note of $3,170.
7. RELATED PARTY TRANSACTIONS
--------------------------
See Note 6, included herein, for information of related party transactions
between TelVue and its majority stockholder.
8. FINANCIAL DATA BUSINESS SEGMENT
-------------------------------
Based on the criteria set forth in SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," the Company operates two business
segments. One segment is a marketing and service division, which sells automatic
number identification ("ANI") telecommunications services to the cable
television industry. The other segment, TelVue Products and Services, is a
system for displaying a fully automated TV station-like display on a cable
system access channel using computer based digital technology. The TelVue
Products and Services segment includes PSG, which was acquired on March 12,
2007. PSG develops high performance digital video systems, appliances, and
software that support capture, storage, manipulation and play-out of digital
media in multiple popular formants.
Summarized financial information by reporting segment as of and for each of the
six months ended June 30, 2008 and 2007, is as follows:
TelVue
Products
Six months ended June 30, 2008 ANI and Services Total
- ------------------------------ ----------- ------------ -----------
Revenues ..................... $ 641,120 $ 955,475 $ 1,596,595
Operating income/(loss) ...... 220,091 (2,739,282) (2,519,191)
Interest expense ............. 80,189 406,077 486,266
Net income/(loss) ............ 140,269 (3,145,359) (3,005,090)
Capital expenditures ......... - 207,777 207,777
TelVue
Products
Six months ended June 30, 2007 ANI and Services Total
- ------------------------------ ----------- ------------ -----------
Revenues ..................... $ 695,451 $ 1,182,183 $ 1,877,634
Operating income/(loss) ...... 239,033 (1,526,099) (1,287,066)
Interest expense ............. - 339,443 339,443
Net income/(loss) ............ 265,828 (1,861,621) (1,595,793)
Capital expenditures ......... - 390,672 390,672
13
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company provided ANI service to Adelphia Communications ("Adelphia").
Adelphia filed for Chapter 11 bankruptcy on June 25, 2002. At the time of its
pre-bankruptcy filing, outstanding accounts receivable from Adelphia of $157,210
were due to the Company. During the fourth quarter of 2002, the Company
established a bad debt reserve of $78,605, representing 50% of the outstanding
balance due from Adelphia as of the bankruptcy filing date on June 25, 2002.
During August 2006, the Company received payments totaling $48,949 from Adelphia
which represented payment of a number of outstanding invoices at 100% of their
value. Because these invoices had a previously established bad debt reserve of
50% of their value, the Company reduced the bad debt reserve by $24,474 at
September 30, 2006. In February 2007, the Company received payment in full for
all outstanding invoices including accrued interest. The payment was made
partially in cash, with the remainder being paid through the issuance of Time
Warner Cable stock with a value of $63,719 at the time of the payment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. All forward-looking statements
involve risks and uncertainty, including, without limitation, the ability of the
Company to continue its growth strategy, increases in costs of labor and
employee benefits, as well as general market conditions and competition.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this Quarterly Report, the inclusion of
such information should not be regarded as a presentation by the Company or any
other person that the objectives and plans of the Company will be achieved.
OVERVIEW OF COMPANY:
TelVue Corporation ("TelVue" or the "Company") operates two business segments.
The first segment, TelVue Products and Services, includes TelVue Virtual
Television Networks ("TVTN") and Princeton Server Group, Inc. ("PSG"). TVTN is a
system for displaying a fully automated TV station-like display on a cable
system access channel using computer based digital technology. PSG, which was
acquired on March 12, 2007, develops high performance digital video systems,
appliances, and software that support capture, storage, manipulation and
play-out of digital media in multiple popular formats.
During the second quarter of this year, the Company embarked upon a new branding
and sales re-organization plan. The new branding consolidates certain of the
Company's products and services under one name - TelVue Products and Services.
The products formerly referred to as TVTN are now referred to as follows:
WEBUS(R) Automated graphics/message display on TV Channel
WEB-EM(R) Automated messaging on TV, web, cell and email
WEBLINX(TM) Automated graphics/message display on websites
PEG.TV Internet Streaming and Video on Demand Service
14
The products formerly referred to as PSG are now known as the Princeton Server
Product Line. These products offer high performance digital video systems,
appliances, and software that support capture, storage, manipulation and
play-out of digital media in multiple popular formats. The Princeton Server
Product Line includes, but is not limited to:
Princeton Server B100
Princeton Server B3400
This branding and re-organization effort, backed with a new Company logo,
marketing materials and exhibit materials, was released on July 9, 2008 at a
major industry conference. TelVue's new website should be completed in September
2008. This effort provides focus on TelVue's primary business, energizes its
staff, and better educates the market regarding the many products and services
provided by the combined companies.
In 2003, TelVue developed the WEBUS(R) service and has applied for three patents
related to the products. WEBUS(R) is a system for displaying a fully-automated,
TV station-like display on a cable system access channel using computer-based
digital technology. WEBUS(R) displays the programming as graphics, text,
imbedded music and pictures with voice narration and can run full-motion video
clips. TelVue is currently marketing WEBUS(R) and its other TelVue Products and
Services to municipal governments and school districts as a means of providing
richer and more robust TV programming for their local Cable TV Public, Education
and Government Local Access Channels ("PEG Channels".) Currently, most
municipalities use a simple TV display made up of only text messages with
background music. TelVue directly charges the municipalities a nominal start-up
and monthly support fee and, for some clients, a sponsorship program that finds
regional and national businesses as sponsors or underwriters for TelVue clients
to help defray TelVue charges. In return, the TelVue client places an
acknowledgement of the sponsor's support on its town or school's access channel.
While TelVue specializes in creating a customized look for the PEG Channels and
provides localized and dynamic content, the Princeton Server Product Line
provides digital server technology to store, schedule, archive and playback
video during the video content time allocated on the PEG Channel. TelVue
acquired PSG because it believes the Princeton Server Product Line and WEBUS(R)
together will provide a complete technology and support solution to owners and
operators of PEG Channels. The PSG acquisition included three pending patents
filed with the U.S. Patent Office.
As a complement to the WEBUS(R) service, TelVue has introduced WEB-EM(R),
technology enabling local emergency management officials to send emergency
messages to residents over cell phones and computers. This four-in-one
technology provides simultaneous phone, email, website and television
notification. The new capability is available exclusively to residents in towns
affiliated with TelVue. During the second quarter of this year, TelVue
introduced another new service, PEG.TV. This Internet streaming and
video-on-demand service provides operators of PEG Channels the opportunity to
stream their channel live on the Internet and/or to place selected video content
on an Internet-based "player." This feature, along with other products and
services, demonstrates TelVue's initiative to provide comprehensive and
industry-leading solutions to its marketplace.
To expand its sales reach, TelVue recently commenced a change in sales strategy
to incorporate a third-party reseller network or Value Added Reseller ("VAR")
sales distribution method. This method broadens TelVue's sales reach by
employing locally-based resellers to create sales opportunities, supported by
its sales staff, which should increase sales while reducing and delaying some
sales expenses until a sale is consummated. This change in strategy resulted in
a restructuring of TelVue's sales department, reducing direct sales staff and
management by fifty percent (50%). To date, thirteen (13) VAR's have been
contracted and most are in the training and product orientation process.
15
TelVue's second and legacy business segment is a marketing and service company
which sells automatic number identification ("ANI") telecommunications services
to the cable television industry for the automated ordering of pay-per-view
features and events (the "ANI service").
The ANI service permits cable television companies to process special ordering
services without the attendant, high manpower requirements, or extensive
physical plant and facilities that are otherwise required. TelVue provides the
ANI service through equipment it purchases. TelVue's equipment for providing the
ANI service nationwide is located at TelVue's home office in Mount Laurel, New
Jersey. TelVue serves cable television systems across the United States via
trunk lines and data circuits that it currently leases from Verizon. TelVue
believes it receives a favorable trunk usage rate from Verizon. As noted below,
TelVue expects continued loss of its subscriber base for the ANI service.
As discussed above in Note 1 of the Notes to Consolidated Financial Statements,
conditions exist that cast doubt about the Company's ability to continue as a
"going concern." In order to fund operations, the Company relies on funds drawn
on lines of credit held by the Company with the Company's majority stockholder,
H.F. (Gerry) Lenfest. Based on the Company's current draw-down rate, the funds
remaining in the current lines of credit are not sufficient to sustain the
Company's operations for the next 12 month period. Funding the Company's future
capital requirements will depend on numerous factors including, but not limited
to, the Company receiving continued financial support from Mr. Lenfest, which he
has not committed to at this time, or seeking other outside alternatives. As
discussed below, the Company is taking certain measures to address its financial
and operating condition.
RESULTS OF OPERATIONS:
The following discussion deals with the decreases in operating income for the
three and six months ended June 30, 2008, compared to the three and six months
ended June 30, 2007, and the reasons for the decreases. TelVue further discusses
the continued loss of its subscriber base for the ANI service when comparing the
three and six months ended June 30, 2008 to the three and six months ended June
30, 2007. The subscriber decline is the result of cable operators moving to
digital services which limit the number of analog pay-per-view channels
available for content and allows the cable operator's customers to order digital
pay-per-view or video on demand via the set top box. TelVue also discusses the
marketing of its TelVue Products and Services segment and the changes in this
segment's revenues and expenses.
The TelVue Products and Services segment had operating losses of $1,300,955 and
$2,739,282 for the three and six months ended June 30, 2008, compared to
operating losses of $856,389 and $1,526,099 for the three and six months ended
June 30, 2007, primarily due to the inclusion of the PSG operation for the full
six months in 2008 as opposed to only the period under TelVue ownership (March
12-June 30) in 2007. TelVue Products and Services segment revenue decreased
$402,567 and $226,708 for the three and six months ended June 30, 2008, compared
to the same period of 2007. These decreases were based on a variety of factors,
including: (i) the lack of payments from a client resulting from the delay of
such client's merger with another company (which has now been completed) that
put a temporary hold on TelVue Products and Services revenue and (ii) the lack
of focus by one of TelVue's VAR's on selling TelVue Products and Services. In
addition, poor performance by sales personnel, who are no longer employed by
TelVue, contributed to lower than expected revenues for the period. As of June
30, 2008, the WEBUS(R) service was provided to 147 towns/schools/retirement
communities compared to 116 at June 30, 2007. TelVue is marketing all of TelVue
Products and Services nationally.
Cost of revenues for the TelVue Products and Services segment decreased $118,024
for the three months ended June 30, 2008, when compared to the same period of
2007 primarily due to the fulfillment of fewer sales orders. For the six months
ended June 30, 2008, cost of revenues increased by $85,911 when compared to the
16
same period of 2007 due to the expenses related to the PSG operating unit,
offset by lower expenses related to the fulfillment of fewer sales orders.
Selling expenses related to the TelVue Products and Services segment increased
$30,808 and $92,838 for the three and six months ended June 30, 2008, when
compared to the same period of 2007. These increases were a result of the
addition of expenses related to the PSG operating unit, offset by savings in
commissions, consulting/outside services and outside advertising related to the
TVTN operating unit. TelVue Products and Services general and administrative
expenses increased $100,440 and $615,663 for the three and six months ended June
30, 2008 when compared to the same period of 2007. These increases were
primarily a result of allocating a larger portion of rent and other operational
expenses to the TelVue Products and Services segment from the ANI segment, along
with executive search fees paid for newly hired employees, higher legal fees and
the addition of the expenses related to the PSG operating unit. As with many
start-up ventures, management anticipates that expenses will continue to grow as
the operations and marketing efforts for TelVue Products and Services increase.
The ANI segment had operating income of $106,172 and $220,091 for the three and
six months ended June 30, 2008, compared to $98,578 and $239,033 for the three
and six months ended June 30, 2007. The increases in operating income were
mainly a result of a change in methodology regarding the allocation of expenses
whereby a higher percentage of expenses were allocated to the TelVue Products
and Services segment. The increases were offset by decreases of $21,933 and
$54,331 in service revenue for the three and six month periods ended June 30,
2008, when compared to the same period of 2007. As expected, pay-per-view buy
revenue decreased $10,885 and $17,687 for the three and six months ended June
30, 2008, and pay-per view plus revenues decreased by $10,134 and $8,959 for the
same periods when compared to 2007. ANI feature revenue showed an increase of
$10,028 for the three months ended June 30, 2008 and a decrease of $12,780 for
the six month period, when compared to the same periods of 2007. The decrease in
ANI feature revenue was mainly due to a reduction in the number of subscribers
served during this period when compared to 2007 (as discussed below). The
increase recorded in ANI feature revenue for the three months ended June 30,
2008 was the result of a price increase implemented for the ANI services, which
was effective May 1, 2008. TelVue believes there is a loss of focus by cable
operators on the pay-per-view product line, primarily because of the amount of
time cable operators are spending on promoting new product lines such as digital
service and high-speed internet access.
As of June 30, 2008, TelVue was serving approximately 4.54 million full-time
cable subscribers compared to approximately 4.62 million full-time cable
subscribers served as of June 30, 2007. The cable operators cancelled the ANI
service primarily as a result of moving their subscribers onto two-way digital
service which allows the cable operator to process ordering of pay-per-view
movies and events directly from its customers without using TelVue's ANI
service. Management believes the long-term effects of deployment of digital
two-way service will continue to negatively impact the TelVue ANI service. As a
result of the cable and satellite subscriber cancellations noted above, TelVue
expects to continue to decrease its revenue and operating income indefinitely
for its ANI segment.
ANI cost of revenues decreased $5,308 and $10,414 for the three and six months
ended June 30, 2008, when compared to the same period of 2007. These decreases
were primarily due to savings in compensation expenses as a result of allocating
more of the technical payroll and benefits to the TelVue Products and Services
segment, offset by higher trunk line expenses. Selling expenses related to the
ANI service decreased $13,222 and $29,664 for the three and six months ended
June 30, 2008 when compared to the same period of 2007. These decreases were
primarily the result of savings in compensation related to the change in
allocation methodology, in addition to lower commission and travel and
entertainment expenses. ANI segment general and administrative expenses
decreased $42,571 and $60,129 for the three and six months ended June 30, 2008,
when compared to the same period of 2007, primarily as a result of the
previously mentioned change in allocation methodology.
17
TelVue had net losses of $1,425,469 and $3,005,090 for the three and six months
ended June 30, 2008, compared to net losses of $998,146 and $1,595,793 for the
three and six months ended June 30, 2007, primarily due to the inclusion of the
PSG operation for the full six-month period in 2008 as opposed to only the
period under TelVue ownership (March 12-June 30) in 2007. To assist in
mitigating these adverse financial conditions, TelVue has implemented several
expense savings measures. TelVue executives accepted a five percent (5%)
reduction in compensation effective May 2, 2008. Also, there were four (4)
employee layoffs on April 3, 2008 and an additional ten (10) employee layoffs on
May 2, 2008. In addition to the previously mentioned poorly performing sales
personnel, these layoffs encompassed what were deemed to be duplicative and/or
non-essential positions within a number of different departments. Additionally,
there was a freeze put on employee salary increases effective May 2, 2008. These
measures will be reviewed on an on-going basis and will be adjusted as
management deems appropriate based on operating conditions.
At June 30, 2008 and 2007, TelVue recorded valuation allowance increases of
$609,000 and $564,000, respectively, to reduce its deferred tax asset to zero.
The valuation allowances were recorded due to the uncertainty as to whether
future net income would be generated that would utilize TelVue's net operating
loss carry forward. TelVue's federal net operating loss carry forward was
approximately $8,800,000 on a tax-reporting basis as of June 30, 2008 (see Note
5 of TelVue's accompanying financial statements).
TelVue purchased $207,777 of equipment during the six months ended June 30, 2008
compared to $390,672 purchased during the six months ended June 30, 2007. The
majority of the equipment purchased during the six months ended June 30, 2008
and 2007 was for software development and equipment related to the TelVue
Products and Services segment. Depreciation and amortization expense increased
$60,350 and $256,880 for the three and six months ended June 30, 2008, as a
result of the capital purchases, in addition to the amortization expense related
to the PSG intangible assets. Depreciation and amortization accounted for 19%
and 15% of total operating expenses for the six months ended June 30, 2008 and
2007, respectively.
As of June 30, 2008, TelVue maintained a bad debt reserve in the amount of
$5,035, compared to a reserve of $5,700 as of June 30, 2007. The reserve was
calculated based on the estimate that 1% of outstanding receivables would not be
collected.
TelVue's days for sales in average accounts receivable was 53 days at June 30,
2008, compared to 49 days at June 30, 2007. TelVue does not offer incentives or
discounts to its customers, nor has it changed its credit terms with its ANI
customers. A 2% cash, 1% net 15 days discount is offered for payments related to
the TelVue Products and Services business equipment purchases. TelVue had
negative cash flow from operating activities of $2,235,340 for the six months
ended June 30, 2008. The decrease in cash flow compared to 2007 was primarily
due to a reduction in ANI service revenue and an increase in TelVue Products and
Services expenses (as described above).
LIQUIDITY AND CAPITAL RESOURCES:
Since November 2, 1989, TelVue has funded its expansion and operating deficit
from the proceeds of the sale of shares of TelVue's common stock and Preferred
Stock (as defined below) to Mr. Lenfest, TelVue's majority stockholder, and from
loans from Mr. Lenfest.
During January 1995, Mr. Lenfest purchased from Science Dynamics Corporation
("Science") TelVue's non-interest bearing note in the amount of $541,000 (the
"Science Note"). The Science Note was originally issued by TelVue to Science and
was payable December 31, 1996. The maturity date of the Science Note had been
extended by TelVue and Mr. Lenfest on a yearly basis. On June 16, 2005, the
members of the Board of Directors of TelVue and Mr. Lenfest extended the
maturity date of the Science Note to January 1, 2011.
18
On April 27, 2005, TelVue entered into a Line of Credit Note (the "2005 Note")
with Mr. Lenfest. The 2005 Note was secured to provide funding to grow the TVTN
Network. Under the terms of the 2005 Note, TelVue could borrow, from time to
time, up to the maximum principal amount of the 2005 Note, which is $3,800,000.
The minimum advance under the 2005 Note is $100,000 and the interest rate of the
2005 Note is equal to the prime rate plus one percent (1%). The 2005 Note
contains customary events of default, including, among others, non-payment of
principal and interest and in the event TelVue is involved in certain insolvency
proceedings. In the event of a default, all of the obligations of TelVue under
the 2005 Note may be declared immediately due and payable. The 2005 Note is
unsecured and will expire six years from the date of the first advance, which is
November 23, 2011, unless extended or renewed. Principal and interest on the
2005 Note are also due and payable on November 23, 2011. The Note was exhausted
by the end of 2007. As of June 30, 2008, accrued interest due on the 2005 Note
was $589,696.
TelVue entered into an additional Line of Credit Note (the "2006 Note") with Mr.
Lenfest on November 3, 2006, in the principal amount of $10,000,000. Under the
2006 Note, TelVue could request up to $5,000,000 for general working capital.
TelVue could request up to an additional $5,000,000 available under the 2006
Note for purposes other than general working capital upon mutual agreement by
TelVue and Mr. Lenfest. The minimum advance under the 2006 Note is $100,000 and
the interest rate on the 2006 Note is equal to the prime rate plus one percent
(1%). The 2006 Note contains customary events of default, including, among
others, non-payment of principal and interest and in the event TelVue is
involved in certain insolvency proceedings. In the event of a default, all of
the obligations of TelVue under the 2006 Note may be declared immediately due
and payable. The 2006 Note is unsecured and will expire six years from the date
of the first advance under the 2006 Note unless extended or renewed. Principal
and interest on the 2006 Note are also due and payable six years from the date
of the first advance under the 2006 Note, which was December 26, 2006. As of
June 30, 2008, the Company had borrowed $10,000,000 under the 2006 Note, fully
exhausting the Note. As of June 30, 2008, accrued interest due on the 2006 Note
was $885,677.
As a result of the anticipated exhaustion of the line of credit under the 2006
Note, TelVue entered into an additional Line of Credit Note (the "2007 Note")
with Mr. Lenfest on December 21, 2007, in the principal amount of $2,300,000.
The minimum advance under the 2007 Note is $100,000 and the interest rate on the
2007 Note is equal to the prime rate plus one percent (1%). The 2007 Note
contains customary events of default, including, among others, non-payment of
principal and interest and in the event TelVue is involved in certain insolvency
proceedings. In the event of a default, all of the obligations of TelVue under
the 2007 Note may be declared immediately due and payable. The 2007 Note is
unsecured and will expire six years from the date of the first advance under the
2007 Note unless extended or renewed. Principal and interest on the 2007 Note
are also due and payable six years from the date of the first advance under the
2007 Note. As a result of exhaustion of the 2006 Note, TelVue began drawing on
the 2007 Note. As of June 30, 2008, the Company had borrowed $825,000 under the
2007 Note, with accrued interest due on the Note of $3,170.
On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under the 2006
Note to loan to PSG to fund their operating expenses (the "PSG Note"). The PSG
Note was a convertible note that bore interest at a rate of six percent (6%) per
annum. No payments of principal or interest were due until July 1, 2007. Under
the PSG Note, interest accrued through July 1, 2007 was to be added to the
principal. Interest was payable monthly from July 1, 2007 through January 1,
2008. The remaining balance was payable in forty eight (48) monthly installments
of principal and interest commencing February 1, 2008. The PSG Note was
scheduled to mature in January 2012. TelVue had the option to convert the unpaid
principal balance of the note and all accrued interest into common stock of PSG.
19
In connection with the PSG Note TelVue received a warrant, which entitled TelVue
to purchase 129,629 shares of common stock of PSG for $1.08 per share. The
warrant was to commence on July 1, 2007 and expire on December 31, 2016. The PSG
Note was forgiven and the warrant was canceled on March 12, 2007, in connection
with TelVue's acquisition of all of the outstanding stock of PSG.
On March 12, 2007, PSG was acquired by TelVue for $6.1 million and the
forgiveness of the PSG Note (described above). TelVue borrowed $6.1 million from
Mr. Lenfest under the 2006 Note. PSG develops high performance digital video
systems, appliances, and software that support capture, storage, manipulation
and play-out of digital media in multiple popular formats. PSG markets their
product to PEG Channels and local origination broadcast stations, professional
broadcast stations and schools and universities. TelVue acquired PSG as a
complement to its TVTN Network with the objective being to offer towns,
municipalities and schools a packaged turnkey product of hardware and software.
On June 16, 2005, Mr. Lenfest, the holder of all of TelVue's outstanding Class A
Redeemable Convertible Preferred Stock (the "Preferred Stock"), informed TelVue
of his intent to convert all of his 3,518,694 shares of Preferred Stock into
TelVue's common stock. Each share of Preferred Stock was convertible into 6.667
shares of common stock. The conversion of the Preferred Stock to common stock
occurred on August 2, 2005, upon Mr. Lenfest's delivery of the Preferred Stock
in the form of a lost certificate affidavit. As a result of the conversion,
TelVue issued 23,459,133 shares of common stock to Mr. Lenfest. Mr. Lenfest's
beneficial ownership interest in the common stock of TelVue, after the
cancellation of the warrants to purchase common stock described below, was
approximately 78.5 percent as of December 31, 2007. The Preferred Stock was
eliminated and is included as 23,459,133 shares of common stock in the
stockholders' equity section of the balance sheet. On August 21, 2006, the Board
of Directors, with Mr. Lenfest abstaining from the action, waived the two year
holding period required to receive the full voting power of ten votes per share
for the 23,459,133 shares of common stock Mr. Lenfest received for the
conversion of his Preferred Stock.
The Preferred Stock had a par value of $1 per share and provided for a
cumulative six percent (6%) semiannual dividend. The dividend was payable in
cash or additional shares of Preferred Stock at $1 per share, at TelVue's
option. TelVue had accrued dividends on the Preferred Stock since the beginning
of 1998, but no dividends had been paid. On June 16, 2005, Mr. Lenfest agreed to
relinquish his right to all accrued but unpaid dividends attributable to the
Preferred Stock. Therefore, $3,061,269 of accrued dividends was reversed and is
included in stockholders' equity as a decrease to TelVue's accumulated deficit.
On June 16, 2005, the members of the Board of Directors of TelVue and Mr.
Lenfest agreed to terminate a Warrant Agreement between Mr. Lenfest and TelVue.
Pursuant to the Warrant Agreement, Mr. Lenfest had the right to purchase up to
29,915,160 shares of TelVue's common stock for $.01 per share, the fair market
value of the common stock on the grant date. The Warrant Agreement was entered
into on March 15, 1991, in connection with a prior line of credit to TelVue
provided by Mr. Lenfest.
TelVue's ability to fully fund its operating expenses has suffered by the loss
of a large number of its subscriber base for the ANI service. As discussed
above, TelVue anticipates a continued decrease in revenue and an increase in net
loss for the ANI service. In order to continue to fund a majority of its ANI
operating expenses, TelVue needs to retain its current subscriber base level.
Management believes that over time, continued erosion will occur in the
subscriber base. During the six months ended June 30, 2008, TelVue had 28,000
full and part-time subscribers cancel service and no new subscribers were added
to the ANI service. The cable operators cancelled the ANI service primarily as a
result of moving their subscribers onto two-way digital service.
20
TelVue has been, and continues to be, dependent upon Mr. Lenfest for funds to
pay the majority of operating and capital expenditures for the Company. As
discussed above, the financing from Mr. Lenfest under the 2005 and 2006 Notes
has been exhausted. As a result of this, TelVue secured the 2007 Note from Mr.
Lenfest to help TelVue grow to a profitable level. The 2005 and 2006 Notes have
helped, and the 2007 Note will help, to fund the growth of TelVue, as well as
fund the ANI service in the event it becomes cash flow negative. While
maintaining the ANI pay-per-view ordering business, TelVue intends to continue
to aggressively market and sell TelVue Products and Services. However, there can
be no assurance that its marketing efforts will be successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TelVue, a smaller reporting company, is not required to provide information
required by this Item.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. TelVue's Chief Executive
Officer and its Treasurer (Controller), have evaluated the effectiveness of
TelVue's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by this report.
Based upon that evaluation, TelVue's Chief Executive Officer and its Treasurer
(Controller) have concluded that TelVue's disclosure controls and procedures
were adequate and effective to ensure that material information relating to
TelVue would be made known to them by others within TelVue, particularly during
the period in which this quarterly report on Form 10-Q was being prepared.
(b) Changes in Internal Controls. During the quarterly period covered by this
report, there were no changes in TelVue's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect TelVue's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TelVue's annual meeting of stockholders was held on June 12, 2008. The
following six directors were elected:
Vote For Votes Withheld Votes Abstained
----------- -------------- ---------------
1. H.F. Lenfest 374,602,227 254,615 0
2. Joseph Murphy 374,607,227 249,615 0
3. Frank Carcione 374,604,227 252,615 0
4. Jesse Lerman 374,607,227 249,615 0
5. Joy Tartar 374,662,227 194,615 0
6. Robert Lawrence 374,667,227 189,615 0
ITEM 6. EXHIBITS
Exhibits
3.1 Certificate of Incorporation of TelVue (incorporated by reference to
TelVue's Registration Statement on Form S-8, filed with the Securities
and Exchange Commission on April 20, 1989 (the "Registration
Statement"), File No. 333-28263).
3.2 Bylaws of TelVue (incorporated by reference to TelVue's Registration
Statement, File No. 333-288263).
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3.3 Certificate of Amendment of Certificate of Incorporation of TelVue,
dated April 11, 1990 (incorporated by reference to TelVue's Annual
Report on Form 10-K for the year ended December 31, 1991, (the "1991
Form 10-K"), File No. 000-17170).
3.4 Certificate of Amendment of Certificate of Incorporation of TelVue,
dated March 15, 1991 (incorporated by reference to the 1991 Form 10-K,
File No. 000-17170).
3.5 Form of copy of Amendment of Certificate of Incorporation of TelVue,
filed September 25, 1995 (incorporated by reference to TelVue's Form
10-QSB for the period ended September 30, 1995, (the September 30, 1995
Form 10-QSB, File No. 000-17170).
4.1 The TelVue Corporation 1999 Stock Option Plan (incorporated by
reference to Exhibit 99 of TelVue's Registration Statement on Form S-8,
dated September 23, 1999 (the "1999 Stock Option Plan"), File No.
000-17170).
4.2 Form of ISO Option Agreement issued pursuant to the 1999 Stock Option
Plan (incorporated by reference to TelVue's Annual Report on Form
10-KSB for the year ended December 31, 1999, (the "1999 Form 10-KSB")
File No. 000-17170).
4.3 Form of NQSO Option Agreement issued pursuant to the 1999 Stock Option
Plan (incorporated by reference to the 1999 Form 10-KSB, File No.
000-17170).
4.4 Certificate of Designation of Class A Preferred Stock (incorporated by
reference to the September 30, 1990 Form 10-Q, File No. 000-17170).
4.5 Warrant Termination Agreement, dated June 16, 2005, by and between
TelVue and H.F. (Gerry) Lenfest (incorporated by reference to the
September 30, 2005 Form 10-QSB, File No. 000-17170).
4.6 Waiver by H.F.(Gerry) Lenfest, waiving the right to receive past,
present or future dividends with respect to the TelVue's Class A
Redeemable Convertible Preferred Stock (incorporated by reference to
the September 30, 2005 Form 10-QSB, File No.000-17170).
10.1 Distributorship Agreement, dated November 2, 1989, between the Company
and Science (incorporated by reference to the 1989 Form 10-K, File No.
000-17170).
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"), File No.
000-17170).
10.3 Shareholders' Agreement, dated November 2, 1989, among TelVue and
certain of its stockholders (incorporated by reference to the Company's
1989 Form 8-K, File No. 000-17170).
10.4 Option Agreement, dated November 2, 1989, among TelVue and certain of
its stockholders (incorporated by reference to the 1989 Form 8-K, File
No. 000-17170).
10.5 Lease Agreement dated April 25, 1991 for office space and the First
Amendment to Lease dated March 30, 1994 ("Office Lease Agreement"),
between TelVue and Bloom Associates (incorporated by reference to the
1994 Form 10-KSB, File No. 000-17170).
22
10.6 Second Amendment to Office Lease Agreement Dated May 5, 1999, between
TelVue and Bloom Associates (incorporated by reference to the 1999 Form
10-KSB, File No. 000-17170).
10.7 Third Amendment to Office Lease Agreement Dated April 28, 2004, between
TelVue and Bloom Associates (incorporated by reference to the June 30,
2006 Form 10-QSB, File No. 000-17170).
10.8 Fourth Amendment to Office Lease Agreement Dated April 19, 2006,
between TelVue and The Bloom Organization of South Jersey, LLC
(incorporated by reference to the June 30, 2006 Form 10-QSB, File No.
000-17170).
10.9 Asset Purchase Agreement by and among TelVue and J.D. Kraengel and
Associates, Inc. f/k/a Dacon Corporation d/b/a Source Communications
Group and Jeffrey Kraengel, dated February 14, 2001 (incorporated by
reference to the March 26, 2001 Form 8-K, File No. 000-17170).
10.10 Retirement Agreement dated April 29, 2004 between TelVue and Frank J.
Carcione (incorporated by reference to the December 31, 2004 Form
10-KSB (the "2004 Form 10-KSB"), File No. 000-17170).
10.11 Summary of Director Compensation (incorporated by reference to the 2004
Form 10-KSB, File No. 000-17170).
10.12 Summary of Executive Compensation, as amended (included herein).
10.13 Line of Credit Note, dated April 27, 2005, between H.F. (Gerry) Lenfest
and TelVue (incorporated by reference to the Form 8-K filed on May 3,
2005, File No. 000-17170).
10.14 Amended and Restated Promissory Note, in the principal amount of
$541,000, dated June 16, 2005, between H.F. (Gerry) Lenfest and TelVue
(incorporated by reference to the September 30, 2005 Form 10-QSB, File
No. 000-17170).
10.15 Line of Credit Note, dated November 3, 2006, between H.F. (Gerry)
Lenfest and TelVue (incorporated by reference to the Form 8-K filed on
November 3, 2006, File No. 000-17170).
10.16 Stock Purchase Agreement by and among TelVue and Princeton Server
Group, Inc. dated March 12, 2007 (incorporated by reference to the
March 13, 2007 Form 8-K, File No. 000-17170).
10.17 Convertible Note for $400,000 dated December 26, 2006 issued to TelVue
by the Princeton Server Group, Inc. (incorporated by reference to the
December 31, 2006 Form 10-KSB, File No. 000-17170).
10.18 Separation Agreement by and between TelVue and Stanley Greene, dated
December 29, 2006 (incorporated by reference to the December 31, 2006
Form 10-KSB, File No. 000-17170).
10.19 Separation Agreement by and between TelVue and Irene DeZwaan, dated
February 8, 2007 (incorporated by reference to the December 31, 2006
Form 10-KSB, File No. 000-17170).
10.20 Amendment of Form 8-K filed by TelVue Corporation ("TelVue") on March
13, 2007 (the "Original 8-K") to include the information required by
Item 9.01 of the Form 8-K in connection with TelVue's acquisition of
Princeton Server Group, Inc. ("PSG") incorporated by reference to the
May 12, 2007 Form 8-K/A, File No. 000-17170).
23
10.21 Line of Credit Note, dated December 21, 2007, between H.F. (Gerry)
Lenfest and TelVue (incorporated by reference to the Form 8-K filed on
December 21, 2007, File No. 000-17170).
11. Statement re: Computation of Per Share Earnings (see TelVue's June 30,
2008 Financial Statements included herein).
23. Consent of Pressman Ciocca Smith LLP, Independent Registered Public
Accounting Firm (incorporated by reference to the 2007 Form 10-KSB,
File No. 000-17170).
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of
2002(included herein).
31.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(included herein).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of
2002 (included herein).
32.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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: 08/14/2008 By: /s/Joseph M. Murphy
-------------------
Joseph M. Murphy
President (Chief Executive Officer)
DATED: 08/14/2008 By: /s/John Fell
------------
John Fell
Treasurer (Controller)
EXHIBIT INDEX
10.12 Summary of Executive Compensation
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
24