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 September 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)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 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 November 5,
2008: 48,461,644 shares.
TELVUE CORPORATION
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2008
(unaudited) and as of December 31, 2007 ........................... 3
Consolidated Statements of Operations for the three
months ended September 30, 2008 (unaudited) and
September 30, 2007 (unaudited) .................................... 4
Consolidated Statements of Operations for the nine
months ended September 30, 2008 (unaudited) and
September 30, 2007 (unaudited) .................................... 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2008 (unaudited) and
September 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 .............................................. 22
Item 4T. Controls and Procedures .................................. 22
PART II. OTHER INFORMATION
Item 6. Exhibits ................................................. 22
SIGNATURES ................................................................. 25
EXHIBIT INDEX .............................................................. 25
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2008 2007
------------ ------------
ASSETS (Unaudited) *
CURRENT ASSETS
Cash and cash equivalents .................. $ 138,970 $ 225,660
Accounts receivable - trade, net of
Allowances of $5,837 at September 30,
2008 and $6,500 at December 31, 2007 ...... 576,833 641,683
Inventory .................................. 455,753 244,994
Prepaid expenses ........................... 90,168 120,646
------------ ------------
TOTAL CURRENT ASSETS .................... 1,261,724 1,232,983
PROPERTY AND EQUIPMENT ....................... 7,687,595 7,364,421
Less accumulated depreciation .............. 6,195,928 5,763,185
------------ ------------
1,491,667 1,601,236
DEFINITE-LIVED INTANGIBLE ASSETS,
Net of accumulated amortization of
$985,332 at September 30, 2008 and
$507,050 at December 31, 2007 ............. 3,563,388 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
------------ ------------
$ 8,644,244 $ 9,203,354
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade ................... $ 264,446 $ 705,182
Accrued expenses ........................... 301,652 236,538
Deferred service revenue ................... 519,180 416,434
Other liabilities .......................... 1,729 3,178
------------ ------------
TOTAL CURRENT LIABILITIES ............... 1,087,007 1,361,332
LINES OF CREDIT - MAJORITY STOCKHOLDER ....... 15,200,000 12,200,000
NOTE PAYABLE - MAJORITY STOCKHOLDER .......... 541,000 541,000
ACCRUED INTEREST - MAJORITY STOCKHOLDER ...... 1,727,952 992,278
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 September
30, 2008 and December 31, 2007, respectively 484,616 484,331
Additional paid-in capital .................. 4,877,353 4,876,639
Accumulated deficit ......................... (15,273,684) (11,252,226)
------------ ------------
(9,911,715) (5,891,256)
------------ ------------
$ 8,644,244 $ 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
September 30,
-----------------------------
2008 2007
---- ----
REVENUES
ANI services ............................... $ 313,389 $ 323,847
TelVue products and services ............... 636,010 662,902
------------ ------------
949,399 986,749
COST OF REVENUES
ANI services ............................... 74,248 104,506
TelVue products and services ............... 296,411 414,102
------------ ------------
TOTAL COST OF REVENUES ....................... 370,659 518,608
------------ ------------
GROSS MARGIN ................................. 578,740 468,141
OPERATING EXPENSES
Selling and marketing ...................... 346,940 439,020
General and administrative ................. 690,393 614,799
Depreciation and amortization .............. 308,135 277,020
------------ ------------
1,345,468 1,330,839
------------ ------------
OPERATING LOSS ............................... (766,728) (862,698)
OTHER INCOME (EXPENSE)
Interest income ............................ (232) 7,753
Interest expense ........................... (249,408) (267,805)
Gain on sale of marketable securities ...... - 10,045
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ................. (249,640) (250,007)
------------ ------------
NET LOSS ..................................... $ (1,016,368) $ (1,112,705)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE .. $ (.02) $ (.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC AND DILUTED ......................... 48,461,644 48,409,885
============ ============
The accompanying unaudited notes are an integral part of these statements.
4
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------
2008 2007
---- ----
REVENUES
ANI services ............................... $ 954,509 $ 1,019,298
TelVue products and services ............... 1,591,485 1,845,085
------------ ------------
2,545,994 2,864,383
COST OF REVENUES
ANI services ............................... 285,514 326,186
TelVue products and services ............... 1,024,742 1,056,522
------------ ------------
TOTAL COST OF REVENUES ....................... 1,310,256 1,382,708
------------ ------------
GROSS MARGIN ................................. 1,235,738 1,481,675
OPERATING EXPENSES
Selling and marketing ...................... 1,275,824 1,304,730
General and administrative ................. 2,334,808 1,703,680
Depreciation and amortization .............. 911,025 623,029
------------ ------------
4,521,657 3,631,439
------------ ------------
OPERATING LOSS ............................... (3,285,919) (2,149,764)
OTHER INCOME (EXPENSE)
Interest income ............................ 135 38,469
Interest expense ........................... (735,674) (607,248)
Gain on sale of marketable securities ...... - 10,045
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ................. (735,539) (558,734)
------------ ------------
NET LOSS ..................................... $ (4,021,458) $ (2,708,498)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE .. $ (.08) $ (.06)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC AND DILUTED .......................... 48,444,231 48,375,052
============ ============
The accompanying unaudited notes are an integral part of these statements.
5
TELVUE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................... $(4,021,458) $(2,708,498)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization ............... 911,025 623,029
Gain on sale of marketable securities ....... - (10,045)
Changes in assets and liabilities:
Accounts receivable - trade ................. 64,850 51,776
Inventory ................................... (210,759) (276,675)
Prepaid expenses ............................ 30,478 (35,546)
Accounts payable - trade .................... (440,736) 22,633
Accrued expenses ............................ 63,665 (190,056)
Deferred service revenue .................... 102,746 38,248
Accrued interest - majority stockholder ..... 735,674 607,248
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES .... (2,764,515) (1,877,886)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .......... (323,174) (649,181)
Acquisition of business ...................... - (213,720)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES .... (323,174) (862,901)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit - majority
stockholder ............................... 3,000,000 2,600,000
Proceeds from sale of marketable securities .. - 10,045
Issuance of common stock ..................... 999 2,250
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .. 3,000,999 2,612,295
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS .................................. (86,690) (128,492)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .......................... 225,660 191,157
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....... $ 138,970 $ 62,665
=========== ===========
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 September 30, 2008 and the
results of operations for the three and nine months ended September 30, 2008 and
2007 and cash flows for the nine months ended September 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'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, in addition to the cancellation of a
warrant that was issued in conjunction with the loan. 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 nine months ended
September 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 ........................... $ 2,545,994 $ 3,154,928
Net loss ........................... $(4,021,458) $(3,248,063)
Basic and diluted net loss per share $ (.08) $ (.07)
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 ..................................... 1,894,851
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 .................... $ 213,720
No income taxes or interest were paid during either the nine months ended
September 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 nine months ended September 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 nine
months ended September 30, 2008 and 2007 consisted of the following components:
2008 2007
----------- -----------
Current
Federal ....................... $ - $ -
State ......................... - -
----------- -----------
- -
Deferred
Federal ....................... 1,339,000 1,231,000
State ......................... 362,000 336,000
----------- -----------
1,701,000 1,567,000
Valuation allowance increase ... (1,701,000) (1,567,000)
----------- -----------
- -
----------- -----------
$ - $ -
=========== ===========
10
TelVue recorded valuation allowance increases of $1,701,000 and $1,567,000 for
the nine months ended September 30, 2008 and 2007, 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 $11,000,000 on a tax-reporting
basis as of September 30, 2008. The carry forward will begin to expire in 2010,
if not utilized.
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%).
11
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 September
30, 2008, accrued interest due on the 2005 Note was $656,417.
Line of Credit (2006 Note) - Majority Stockholder
- -------------------------------------------------
On November 3, 2006, the Company entered into an additional Line of Credit Note
with Mr. Lenfest, in the principal amount of $10,000,000 (the "2006 Note").
Under the 2006 Note, 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 September 30, 2008, the
Company had borrowed $10,000,000 under the 2006 Note, fully exhausting the Note.
As of September 30, 2008, accrued interest due on the 2006 Note was $1,051,137.
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, 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 to fund the acquisition. 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 with Mr. Lenfest on
December 21, 2007 in the principal amount of $2,300,000 (the "2007 Note"). The
minimum advance under the 2007 Note is $100,000 and the interest rate 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
September 30, 2008, the Company had borrowed $1,400,000 under the 2007 Note,
with accrued interest due on the 2007 Note of $20,398.
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
nine months ended September 30, 2008 and 2007, is as follows:
TelVue Products
Nine months ended September 30, 2008 ANI and Services Total
- ------------------------------------ ----------- ------------ -----------
Revenues ........................... $ 954,509 $ 1,591,485 $ 2,545,994
Operating income/(loss) ............ 376,693 (3,662,612) (3,285,919)
Interest expense ................... 120,094 615,580 735,674
Net income/(loss) .................. 257,016 (4,278,474) (4,021,458)
Capital expenditures ............... - 323,174 323,174
TelVue Products
Nine months ended September 30, 2007 ANI and Services Total
- ------------------------------------ ----------- ------------ -----------
Revenues ........................... $ 1,019,298 $ 1,845,085 $ 2,864,383
Operating income/(loss) ............ 367,313 (2,517,076) (2,149,763)
Interest expense ................... - 607,248 607,248
Net income/(loss) .................. 411,906 (3,120,404) (2,708,498)
Capital expenditures ............... - 649,181 649,181
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 services such as
WEBUS(R) and equipment such as TelVue's Princeton Server Product Line. 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. Princeton Server
Product Line includes 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 services formerly referred to as TelVue Virtual Television Networks ("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 Princeton Server Group ("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. Additionally, TelVue's website was redesigned and
updated to reflect the new branding. The new website was completed on November
5, 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. 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
Channels. 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. WEBLINX(TM) is a plug-in application that transmits a
town's television broadcast messages directly to the town's website. If
residents do not have cable TV access, they can easily view messages via the
internet. 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.
15
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.
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 the 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 nine months ended September 30, 2008, compared to the three and nine
months ended September 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 nine months ended September 30, 2008 to the three
and nine months ended September 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 $923,330 and
$3,662,612 for the three and nine months ended September 30, 2008, compared to
operating losses of $990,977 and $2,517,076 for the three and nine months ended
September 30, 2007, primarily due to the inclusion of the PSG operation for the
full nine months in 2008 as opposed to only the six and a half month period
(March 12-September 30) in 2007 when PSG was owned by TelVue. TelVue Products
and Services segment revenue decreased $26,892 and $253,600 for the three and
16
nine months ended September 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 September 30,
2008, the WEBUS(R) service was provided to 159 towns/schools/retirement
communities compared to 148 at September 30, 2007. TelVue is marketing all of
TelVue Products and Services nationally.
Cost of revenues for the TelVue Products and Services segment decreased $117,691
for the three months ended September 30, 2008, when compared to the same period
of 2007 primarily due to the fulfillment of fewer sales orders, in addition to
savings in compensation. For the nine months ended September 30, 2008, cost of
revenues decreased by $31,780 when compared to the same period of 2007 due lower
expenses related to the fulfillment of fewer sales orders, offset by the
expenses related to the PSG operating unit. Selling expenses related to the
TelVue Products and Services segment decreased $76,149 for the three months
ended September 30, 2008 when compared to the same period of 2007, primarily due
to savings in consulting/outside services and advertising expenses. For the nine
months ended September 30, 2008, selling expenses increased $16,689 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 $93,792 and $709,455 for the three and nine months ended
September 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 $153,632 and $376,693 for the three and
nine months ended September 30, 2008, compared to $128,280 and $367,313 for the
three and nine months ended September 30, 2007. The decreases in operating
income were mainly a result of decreases of $10,458 and $64,789 in service
revenue for the three and nine month periods ended September 30, 2008, when
compared to the same period of 2007. As expected, pay-per-view buy revenue
decreased $6,863 and $24,550 for the three and nine months ended September 30,
2008, and pay-per view plus revenues decreased by $5,863 and $14,822 for the
same periods when compared to 2007. ANI feature revenue showed decreases of
$3,451 and $16,231 for the three and nine months ended September 30, 2008, 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 decreases recorded in ANI
feature revenue for the three and nine months ended September 30, 2008 were
offset by a price increase implemented for the ANI services, which became
effective May 1, 2008. These variances were offset by favorable expense
variances due to a change in methodology regarding the allocation of expenses
whereby a higher percentage of expenses were allocated to the TelVue Products
and Services segment. 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.
17
As of September 30, 2008, TelVue was serving approximately 4.21 million
full-time cable subscribers compared to approximately 4.62 million full-time
cable subscribers served as of September 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 $30,258 and $40,672 for the three and nine months
ended September 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 and data line expenses. Selling
expenses related to the ANI service decreased $15,931 and $45,595 for the three
and nine months ended September 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 $18,197 and $78,326 for the three and nine months ended
September 30, 2008, when compared to the same period of 2007, primarily as a
result of the previously mentioned change in allocation methodology.
TelVue had net losses of $1,016,368 and $4,021,458 for the three and nine months
ended September 30, 2008, compared to net losses of $1,112,705 and $2,708,498
for the three and nine months ended September 30, 2007, primarily due to the
inclusion of the PSG operation for the full nine-month period in 2008 as opposed
to only the six and a half month period (March 12-September 30) in 2007 when PSG
was owned by TelVue. 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.
For the nine months ended September 30, 2008 and 2007, TelVue recorded valuation
allowance increases of $1,701,000 and $1,567,000, 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 $11,000,000 on a tax-reporting
basis as of September 30, 2008(see Note 5 of TelVue's accompanying financial
statements).
18
TelVue purchased $323,174 of equipment during the nine months ended September
30, 2008 compared to $649,181 purchased during the nine months ended September
30, 2007. The majority of the equipment purchased during the nine months ended
September 30, 2008 and 2007 was for software development and equipment related
to the TelVue Products and Services segment. Depreciation and amortization
expense increased $31,115 and $287,996 for the three and nine months ended
September 30, 2008, when compared to the same periods of 2007, primarily due to
the amortization expense related to the PSG intangible assets. Depreciation and
amortization accounted for 20% and 17% of total operating expenses for the nine
months ended September 30, 2008 and 2007, respectively.
As of September 30, 2008, TelVue maintained a bad debt reserve in the amount of
$5,837, compared to a reserve of $6,110 as of September 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 September
30, 2008, compared to 40 days at September 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 $2,764,515
and $1,877,886 for the nine months ended September 30, 2008 and 2007,
respectively. 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.
In 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.
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 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 September 30, 2008, accrued interest due on the 2005
Note was $656,417.
19
TelVue entered into an additional Line of Credit Note with Mr. Lenfest on
November 3, 2006, in the principal amount of $10,000,000 (the "2006 Note").
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
September 30, 2008, the Company had borrowed $10,000,000 under the 2006 Note,
fully exhausting the Note. As of September 30, 2008, accrued interest due on the
2006 Note was $1,051,137.
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 with Mr. Lenfest on
December 21, 2007, in the principal amount of $2,300,000 (the "2007 Note"). 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 September 30, 2008, the Company had borrowed $1,400,000
under the 2007 Note, with accrued interest due on the Note of $20,398.
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.
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.
20
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 nine months ended September 30, 2008, TelVue had
357,000 full and part-time subscribers cancel service and 4,000 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.
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, 2006 and 2007 Notes
have helped 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.
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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 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).
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).
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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).
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).
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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 (incorporated by
reference to the June 30, 2008 Form 10-Q, File No. 000-17170).
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).
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 September
30, 2008 Financial Statements included herein).
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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: 11/14/2008 By: /s/Joseph M. Murphy
-------------------
Joseph M. Murphy
President (Chief Executive Officer)
DATED: 11/14/2008 By: /s/John Fell
------------
John Fell
Treasurer (Controller)
EXHIBIT INDEX
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.
25