UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common, $0.01 per share par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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.
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]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Issuer as of June 30, 2008, based on a per share average
bid and asked price of $.04 was $387,088.
Number of shares of registrant's common stock outstanding as of March 11, 2009:
48,461,644 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2009 Annual
Meeting of Stockholders, which definitive Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
Registrant's year end at December 31, 2008, are incorporated by reference into
Part III of this Form 10-K.
ii
PART I
This Annual Report on Form 10-K 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 TelVue to obtain sufficient cash to continue its
operations, the ability of TelVue to continue its growth strategy, increases in
costs of labor and employee benefits, general market conditions, competition and
similar matters discussed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These
forward-looking statements may include declarations regarding our belief or
current expectations of management, such as statements including the words
"budgeted," "anticipate," "project," "estimate," "expect," "may," "believe,"
"potential" and similar statements are intended to be among the statements that
are forward-looking statements. Because such statements reflect the reality of
risk and uncertainty that is inherent in our business, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are made as of the date this report was filed with the
Securities and Exchange Commission.
Readers are advised that we undertake no obligation to release publicly
any revisions to the forward-looking statements to reflect events or
circumstances after the date hereof or to reflect unanticipated events or
development. To the extent that the information presented in this Annual Report
on Form 10-K for the year ended December 31, 2008 discusses financial
projections, information or expectations about our products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. We are making these forward-looking statements in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These risks and uncertainties
are described, among other places in this Annual Report, in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Although we believe 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 Annual Report will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included in this Annual Report, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
ITEM 1. BUSINESS
GENERAL
TelVue Corporation, a Delaware corporation ("TelVue" or the "Company"),
was incorporated on November 26, 1986. Until December 30, 1988, TelVue was a
wholly owned subsidiary of Science Dynamics Corporation ("Science"). On that
date, TelVue's shares of common stock were distributed to Science's shareholders
of record as of December 30, 1988, on the basis of three shares of TelVue's
common stock for each share of Science's common stock then outstanding.
1
TelVue operates two business segments. The first segment, TelVue
Products and Services ("TPS"), includes equipment such as the TelVue
Princeton(TM) Server Product Line and services such as WEBUS(R) and PEG.TV(TM).
The TelVue Princeton(TM) Server Product Line includes high performance digital
video systems, servers, and software that support capture, storage, manipulation
and play-out of digital media in multiple popular formats. WEBUS(R) is a
broadcast digital signage system for displaying a fully automated TV
station-like display on a cable system access channel using computer-based
digital technology. PEG.TV(TM) is a live streaming and Video-on-Demand service
for integrating video on the Internet.
During the second quarter of 2008, the Company embarked upon a new
branding and sales re-organization plan. The new branding consolidated certain
of the Company's products and services under one name - TPS. The services
formerly referred to as TelVue Virtual Television Networks ("TVTN") collectively
are now referred to as follows:
WEBUS(R) Automated broadcast digital signage display on TV Channel
WEBUS Inside(TM) WEBUS(R) integrated within TelVue Princeton(TM) Servers
PEG.TV(TM) Internet Streaming and Video-on-Demand Service
WEBLINX(TM) Automated WEBUS(R) message display on websites
VideoActives(TM) Real time, dynamic video content for channels
WEB-EM(R) Automated WEBUS(R) message display on cell phones and email
The products formerly referred to as Princeton Server Group ("PSG") are
now known as the TelVue Princeton(TM) Server Product Line. These products offer
high performance digital video systems, servers, and software that support
capture, storage, manipulation and play-out of digital media in multiple popular
formats. The TelVue Princeton(TM) Server Product Line includes, but is not
limited to:
TelVue Princeton(TM) B100
TelVue Princeton(TM) B1000
TelVue Princeton(TM) B3000
TelVue Princeton(TM) S3000F
TelVue Princeton(TM) C500W
TelVue Princeton(TM) T7400E
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 as a leading
technology provider for hyperlocal broadcasters, energizes its staff, and better
educates the market regarding the many products and services provided by TelVue.
In 2003, TelVue developed the WEBUS(R) service. WEBUS(R) is a digital
signage 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 products and services to municipal governments,
K-12 school districts, higher education institutions, cable Multi System
Operators ("MSOs"), and other broadcasters 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") or Local Origination channels.
Currently, most municipalities use a simple TV display made up of only text
2
messages with background music. TelVue directly charges the municipalities a
start-up and yearly support fee. For some clients, a sponsorship program helps
locate 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.
TelVue optionally offers video and graphics production services to its
WEBUS(R) customers who do not have the capability to produce their own local
videos or desire a custom look and feel for their channel. WEBUS(R) customers
also receive TelVue's WEBLINX(TM) plug-in application that transmits a town's
WEBUS(R) messages and graphics directly to the town's website. If residents do
not have cable TV access, they can easily view messages via the Internet.
While WEBUS(R) is well suited for broadcast digital signage and
bulletin board, the TelVue Princeton(TM) Server Product Line provides digital
server and broadcast automation technology to store, schedule, and playback
long-form video during the local programming time allocated on the channels.
TelVue acquired Princeton Server Group, Inc. because it believes the TelVue
Princeton(TM) Server Product Line and WEBUS(R) together will provide a complete
technology and support solution to owners and operators of PEG Channels and
other Local Origination Channels. The PSG acquisition included four pending
patents filed with the U.S. Patent Office. As a further integration of the two
companies, TelVue introduced WEBUS Inside(TM) in the first quarter of 2009,
which integrates the WEBUS(R) bulletin board technology into the TelVue
Princeton(TM) broadcast servers on a single hardware platform. A multi-channel
TelVue Princeton(TM) video server can run multiple independent WEBUS(R) feeds,
automatically filling program gaps with community bulletin board and digital
signage. This combination of broadcast digital signage and playback in a single
server offers TelVue a competitive and cost advantage.
As a complement to the WEBUS(R) service, TelVue has introduced
VideoActives(TM), which are real-time, data-driven, on-air graphics such as
local weather, local traffic, headline news, financial market indices, sports,
quotes of the day and trivia questions. VideoActives(TM) are designed to enhance
the presentation of the channels with dynamic and local content driven
automatically by live data feeds.
During the second quarter of 2008, TelVue introduced another new
service, PEG.TV(TM). 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" on their website. PEG.TV(TM) gives a town, school, or other
organization complete control and branding of their web video content. TelVue
introduced a new PEG.TV(TM) feature in the first quarter of 2009 that allows
customers to index their videos. For example, customers can add Agenda Chapter
points and related information to long town council meetings. This service,
along with other products and services, demonstrates TelVue's initiative to
provide comprehensive and industry-leading solutions to its marketplace for both
traditional television broadcast over cable, DTV, and satellite as well as
modern Internet video delivery.
The WEB-EM(R) technology enables local management officials to send
messages to residents over cell phones and email. This four-in-one technology
provides simultaneous phone, email, website and television notification. While
we still maintain the WEB-EM(R) technology, we are not actively marketing it to
customers due to soft initial sales, in addition to increased competition from
companies focusing solely on the text messaging market.
3
To expand its sales reach, TelVue recently commenced a change in sales
strategy to incorporate a third-party reseller network distribution method. This
method broadens TelVue's sales reach by employing both locally-based and
national-based resellers to create sales opportunities, supported by TelVue's
internal 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, significantly reducing
direct sales staff and management. To date, 13 resellers have been contracted.
Many are still in the training and orientation process. To help expedite the
impact of our Reseller relationships, TelVue launched a Partner Resource Center
in March 2009 on our website that includes training materials, videos, and sales
tools to assist our new resellers.
Additionally, in November 2008, TelVue reached an agreement with a
leading U.S. designer, manufacturer, and supplier of a comprehensive line of
broadband systems equipment to co-develop digital video storage products to be
sold under the partner's brand. This original equipment manufacturer ("OEM")
sales strategy is expected to complement our reseller network and provide
additional growth opportunities leveraging our OEM partner's strong distribution
channel and brand.
TelVue's second and legacy business segment is a marketing and service
company which sells automatic number identification ("ANI") telecommunications
services to the cable and satellite television industry for the automated
ordering of pay-per-view features and events (the "ANI service").
The ANI service permits cable and satellite 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 digital, interactive two-way services are
offered by cable, satellite, and broadband service providers for
Video-on-Demand.
LICENSES AND PATENTS
On July 8, 2003, TelVue filed for a patent for WEBUS(R). WEBUS(R)
provides the operators of Cable TV Public, Educational, Government Access
Channels, and other hyperlocal broadcasters such as schools, cable companies,
and retirement communities, with the ability to generate a computerized TV
signal on those channels. The WEBUS(R) signal is comprised of pictures,
headlines, voice-over narration, full motion video clips and graphics. The
pending patent includes the WEBUS(R) system. The WEBUS(R) system is a
proprietary system that allows WEBUS(R) customers to independently post messages
on their TV channel remotely and instantaneously. On July 27, 2005, TelVue filed
for a second patent for WEBUS(R) which encompasses three additional claims. The
claims consist of (i) WEBLINX(TM), a process that allows the WEBUS(R) content to
appear on an affiliated website; (ii) a system for installation of a
text-to-speech conversion that converts text screens to speech for use on the
radio; and (iii) a mass emergency broadcast system which allows one WEBUS(R)
user to broadcast an emergency message to one or more WEBUS(R) affiliates
simultaneously. In 2009, TelVue chose to abandon the second WEBUS(R) patent
application due to since discovered prior art.
4
As a result of our PSG acquisition, we acquired 4 pending patents filed
prior to March 12, 2007 for various improvements related to digital video
servers and a system for self-service digital media broadcast.
TelVue has developed and has in service a system that allows
subscribers to order pay-per-view movies and events from their provider using
the Internet. TelVue holds United States Patent No. 6,286,139, issued September
4, 2001 related to this system.
TelVue previously purchased Switched-access Audio Response Units
("SARUs") and one communication subsystem ("HP") from Atlas Telecom (formerly
Syntellect). TelVue possesses a perpetual, no charge license for the
pay-per-view application software residing on the SARUs it currently owns and
for any future SARUs purchased. TelVue did not purchase any SARUs from Atlas
Telecom during 2007 or 2008. There is no affiliation between TelVue and Atlas
Telecom other than a customer and supplier relationship.
TelVue pays Telco Solutions, Inc. a monthly licensing fee for an
exclusive license within the United States for the use of pay-per-view
application software, which resides on two HPs that TelVue owns. TelVue
purchases Link On equipment ("LINK ONs") from Telco Solutions, Inc. The LINK ONs
are used to expand call capacity to accommodate new customers. The LINK ONs work
in conjunction with the SARUs. TelVue had purchased LINK ONs in place of SARUs
because the LINK ONs are more cost effective. TelVue pays Telco Solutions, Inc.
a monthly licensing fee for an exclusive license within the United States for
the use of pay-per-view application software residing on the LINK ONs. TelVue
did not purchase any LINK ONs during 2007 or 2008.
TelVue also uses equipment purchased from Science. Science holds United
States Patent No. 4,797,913 (issued January 10, 1989) encompassing ANI ordering
equipment and services employing the use of Feature Group D services (the
"Science Patent"). TelVue holds a perpetual, no charge and nonexclusive license
to use the Science Patent.
MARKETING OF SERVICES
We co-market our products and services to hyperlocal broadcasters using:
o direct mail;
o e-mail;
o Internet banner ads;
o Search Engine Optimization;
o our website;
o online videos and webinars; and
o telemarketing.
Additionally, we attend key industry conferences where we demonstrate
our products and services. TelVue's partner program includes co-op marketing
opportunities with our Resellers.
Sales of TelVue's ANI service to date have been made to operating cable
and satellite television companies with a broad geographical distribution. We
believe that relations with all of our customers are generally good.
Unfortunately, many cable operators are moving their subscribers onto digital
two-way ordering and, as a result, the number of subscribers TelVue serves is
declining and it is unable to attract many new cable customers to its ANI
service. As of December 31, 2008, there were no MSOs that individually comprised
more than 10% of TelVue's ANI service revenues. Percentages of service revenue
may vary as cable operators continue to consolidate their systems with other
cable operators, as cable operators leave the ANI service and as the TPS segment
grows.
5
COMPETITION
TPS currently has competition from software and hardware suppliers to
broadcasters including municipalities that operate PEG cable access channels. As
broadcasters upgrade to all-digital equipment and workflows, many have a
significant learning curve and face new integration challenges so they
appreciate a company that can offer comprehensive solutions that integrate
seamlessly. While there are other competitors in our core markets, few offer the
comprehensive solution that TelVue provides. Additionally, our IT and
Web-centric approach to broadcast automation and workflow and the simplicity of
our applications makes our technology easy to adopt and highly accessible.
TelVue uses telephone company grade, feature-laden equipment for its
automated pay-per-view order processing service. TelVue has a reputation for
offering customer friendly features and excellent customer service. TelVue is
unaware of any direct competitors to its ANI service. TelVue is aware, however,
that some TelVue customers have elected to process their own orders by
constructing their own ANI ordering processing platform.
EMPLOYEES
At December 31, 2008, TelVue had 26 full-time employees, compared to 40
full-time employees and one part-time employee as of December 31, 2007. This
decrease in staffing was the result of two reductions in workforce conducted in
2008 where 14 positions that no longer fit our new business model were
eliminated. As of December 19, 2008, Joseph M. Murphy resigned from his position
as the Chief Executive Officer and President of TelVue. Mr. Murphy's resignation
was not due to any disagreement or dispute with TelVue. On December 23, 2008,
the Board of Directors of TelVue appointed Jesse Lerman to serve as Chief
Executive Officer and President. Mr. Lerman has been a director of TelVue since
January 2008. Prior to his appointment as President and Chief Executive Officer,
he served as Executive Vice President and Chief Technical Officer as well as
Executive Vice President of Engineering since March 12, 2007 when Princeton
Server Group, Inc. was acquired by TelVue. Prior to joining TelVue, Mr. Lerman
was chief executive officer of Princeton Server Group, Inc., a digital video
server company which he co-founded in 2003.
In March 2009, TelVue restructured its organization, reducing its staff
to 21 full-time employees, and reorganizing key departments. Paul Andrews was
promoted from VP Business Development to SVP Sales and Marketing, and Dan
Pisarski was promoted from Director Software Development to VP Engineering and
Technical Support. The restructuring was intended to make operations more
efficient and reduce cost in a manner that would not hurt top line growth.
Additional personnel may be added as circumstances require.
BACKLOG
TelVue service revenues are computed and assessed a fixed monthly
support and initial installation fee. As a result, no form of backlog exists,
other than that which is represented by accumulated service charge income, which
has yet to be paid to TelVue. Currently, TelVue is in the process of fulfilling
TPS orders for nine customers valued at approximately $43,000. TelVue's ANI
service revenues are computed and assessed on the basis of a fixed charge for
every order placed with a subscribing customer for specialized cable programming
services or for other services transmitted through its equipment.
6
RESEARCH AND DEVELOPMENT
With the acquisition of Princeton Server Group, Inc., TelVue gained a
strong and highly technical R&D capability. Material research and development is
performed to introduce features on its TelVue Princeton(TM) servers and its
WEBUS(R) and PEG.TV(TM) services.
ITEM 1A. RISK FACTORS
TelVue, a smaller reporting company, is not required to provide
information required by this Item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
TelVue leases approximately 8,700 square feet of office space in the
Mt. Laurel, New Jersey, Horizon Way Corporate Center. The lease expires May 31,
2012. However, TelVue has the right to terminate the lease after the first year
provided it gives written notice 120 days before the end of the first year of
the lease term and pays a termination fee of $13,098. The office space is used
to house the equipment used to provide the ANI service and TelVue Product and
Services, as well as the executive, sales, secretarial and technical support
personnel.
TelVue also leases approximately 848 square feet of space in Princeton,
New Jersey. This lease expired on June 30, 2008, and was extended on a
month-to-month basis. This facility is used for lab space for continued TelVue
Princeton(TM) research and development.
Additionally TelVue leases rack space and Internet bandwidth at a
co-location facility at 401 N. Broad St., Philadelphia PA. We host our
PEG.TV(TM) Internet streaming and Video-on-Demand service at the co-location
facility and have plans to move our WEBUS(R) and ANI infrastructure to the
facility in 2009 for further operational cost savings and increased service
capacity and performance.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings that arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through
solicitation of proxies or otherwise during the fourth quarter of fiscal year
2008.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
TelVue's common stock is eligible for quotation on the Over-the-Counter
Market under the symbol TEVE. The range of high and low bid prices for TelVue's
common stock for the two most recent fiscal years, as reported by The NASDAQ
Stock Market, Inc. is as follows:
QUARTER 2008 HIGH LOW
First $.08 $.04
Second $.05 $.025
Third $.04 $.011
Fourth $.03 $.013
QUARTER 2007
First $.11 $.04
Second $.12 $.07
Third $.19 $.07
Fourth $.13 $.05
The above market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
HOLDERS
As of March 11, 2009, there were 263 holders of record of the common
stock of TelVue.
DIVIDEND POLICY
TelVue has paid no cash dividends since its incorporation. TelVue
intends to retain any future earnings for use in its business and has no present
intention to pay cash dividends on its common stock in the foreseeable future.
Holders of the common stock are entitled to share ratably in dividends when and
as declared by the Board of Directors out of funds legally available therefore.
Shares of common stock which have had the same beneficial owner for a
continuous period in excess of two years prior to the record date of any meeting
of stockholders, are entitled to 10 votes per share in any matters submitted for
vote, at a meeting of stockholders. All other stockholders have one vote per
share unless this limitation is waived by the Board of Directors. On August 21,
2006, the Board of Directors, with Mr. H.F. Lenfest, TelVue's majority
stockholder, 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. H.F. Lenfest received for the conversion
of his preferred stock in August 2005. As of March 11, 2009, 41,061,018 shares
of TelVue's common stock were entitled to 10 votes per share. The remaining
7,400,626 shares of common stock were entitled to one vote per share. Mr. H.F.
Lenfest owns 38,016,586 shares of common stock, all of which are entitled to ten
votes per share.
8
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
NUMBER OF NUMBER OF
SECURITIES TO BE WEIGHTED-AVERAGE SECURITIES
ISSUED UPON EXERCISE PRICE OF REMAINING
EXCERISE OF OUTSTANDING AVAILABLE FOR
OUTSTANDING OPTIONS, WARRANTS FUTURE ISSUANCE
OPTIONS, WARRANTS AND RIGHTS UNDER EQUITY
PLAN CATEGORY AND RIGHTS COMPENSATION PLANS COMPENSATION PLANS
- ------------------- ----------------- ------------------ ------------------
Equity compensation
plans approved by
security holders 5,995,000 $.062 4,765,000
Equity compensation
plans not approved
by security holders (a) (a) (a)
500,000(b) .033(b) (b)
--------- ----- ---------
Total 6,495,000 $.062 4,765,000
========= ===== =========
(a) In December 1997, TelVue adopted a director compensation plan. Under this
plan, each non-employee director, other than the majority stockholder, is
compensated $500 for each meeting attended by receiving shares of common stock
issued at the higher of per share fair market value of the common stock as of
the board of directors meeting date or $.05 per share.
(b) In 2006, TelVue issued 200,000 stock options to certain consultants of the
former TVTN. In 2008, an additional 300,000 stock options were issued to certain
consultants of TelVue.
ITEM 6. SELECTED FINANCIAL DATA
TelVue, a smaller reporting company, is not required to provide
information required by this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes appearing elsewhere in this Annual Report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, the ability of TelVue to obtain
sufficient cash to continue its operations, the ability of TelVue to continue
its growth strategy, increases in costs of labor and employee benefits, general
market conditions, competition and similar matters.
OVERVIEW
TelVue is a broadcast technology company that helps hyperlocal
television channels look better, work better and remain viable in a cost
efficient manner. We do it through our own hardware appliances, software and
services, combined with today's open technologies. TelVue's technology gives
hyperlocal broadcasters the ability to transition to all-digital equipment and
workflow, simplify broadcast operations, and reduce costs.
9
TelVue has three core product offerings:
TelVue Princeton(TM) Server Product Line and Video Workflow Equipment
TelVue WEBUS(R) Broadcast Digital Signage System
TelVue PEG.TV(TM) Internet Web Streaming and Video-on-Demand
Our robust TelVue Princeton(TM) Digital Broadcasters are all-in-one
video servers, controlled from any connected web browser that uniquely combine
multiple functions in a single platform. These functions include playback,
recording, content management, scheduling, automation, on-air graphics and
broadcast digital signage. TelVue Princeton(TM) servers are designed with
features and functionality that allow customers to achieve the same results as
studios with larger staffs and bigger budgets within minutes of unpacking the
server. Our web-based applications make it simple to upload video files and
DVDs, manage content, schedule play-outs and automatically update the stations'
website with a searchable program guide. TelVue Princeton(TM) platforms are
scalable for small one-person stations, large broadcast facilities, as well as
distributed broadcast networks. With its intuitive web-based interface, our
customers can operate their TelVue Princeton(TM) server from anywhere at
anytime. TelVue Princeton(TM) Digital Broadcasters are the heart of TelVue's
modular broadcast system architecture. TelVue also offers workflow products for
video ingest, transcoding, and storage, as well as services to help improve a
hyperlocal TV channel's image on-air and on the Internet.
WEBUS(R) is a web-based multi-user bulletin board and digital signage
service that enables multiple, authorized users such as township officials,
school principals and civic leaders to update broadcast graphics on their access
channel and website from any Internet connected computer or mobile device. The
WEBUS(R) service helps communities and stations operators better manage workflow
by eliminating the routine tasks of program scheduling and issuing urgent
communications, such as emergency alerts or school closings. This enhancement to
the workflow process allows station personnel to perform more creative and value
added functions. Authorized users can schedule messages including real-time
weather, traffic, and news "on the 5s", with the goal of making certain that a
channels' and website's information is always fresh and current.
PEG.TV(TM) is an Internet based Video-on-Demand and Live Streaming
Video service developed specifically for local communities and television
stations. PEG.TV(TM) enables broadcasters to reach a whole new audience on the
Internet and make their website a popular community destination. Unlike the many
free video services on the Internet, PEG.TV(TM) gives customers complete control
over how their content will look on the Internet through their own searchable,
branded video player and helps drive traffic to the customer's website.
PEG.TV(TM) also makes it easy to add chapter points and related links to video
segments making it a valuable tool to municipalities that need to archive
recorded town council and other meetings. Our PEG.TV(TM) offering expands
TelVue's addressable market beyond communities running a traditional cable
broadcast station as any community can now broadcast and offer a video library
on the Internet.
2008 REVENUE AND BUSINESS MODEL REFOCUS
The decrease in 2008 TelVue Princeton(TM) sales and revenue as well as
the decrease in new WEBUS(R) subscriptions compared to 2007 are largely
attributed to the sponsorship business model approach that dominated the second
half of 2007 and first half of 2008. TelVue's original TVTN business model
relied on providing bulletin board and playback equipment to municipal access
channels for no or low cost in exchange for the ability to broker PBS-like
underwriting and deliver sponsored content on the channels. With thousands of
10
PEG access channels across the United States, this sponsorship and content
driven model had the potential to aggregate municipal access channels into the
largest television network in the world. One of TelVue's primary reasons for
acquiring Princeton Server Group was to gain access to a long form programming
storage and playback platform that could help realize the sponsorship business
model while also providing owner economics and consolidation of the core
broadcast technologies required. Despite early success selling the sponsorship
model, this model did not scale for us primarily due to the challenges of
scaling sponsor sales to offset the costs of providing the technology. Regional
and national sponsor sales were not successful due to the fact that contiguous
DMA coverage often expected in traditional television markets could not be
guaranteed and precise PEG channel viewership statistics are not available as
they are on commercial television channels. Hyperlocal sponsor sales required a
strong local presence and without consistent market coverage in a given region,
the costs for a local presence simply did not scale. Additionally, many access
stations resisted the idea of allowing a third party company to participate in
programming and sponsor decisions on the channel, despite the many mutually
positive benefits. We believe the focus on the sponsor model caused a negative
market reaction to our products in 2008, including the TelVue Princeton(TM)
product line that had conversely seen growth from 2006 to 2007.
In the second half of 2008, we reacted to the market feedback and
re-focused our business on our technology, products, and services strengths.
TelVue was re-branded by merging the TVTN WEBUS(R) technology and Princeton
Server Group technology under one consistent brand, image, and sales model.
TelVue now sells its products and services without sponsorship to empower
hyperlocal channels to improve quality, streamline operations, and future-proof
with modern technologies. Although the business model changes naturally impacted
2008 performance, we are optimistic that the refocusing back to our core
strengths as a broadcast technology company has been successful. The marketplace
has already reacted favorably, and coupled with our new reseller strategy we are
very optimistic about returned growth in 2009. Additionally, with a
restructuring in 2008 largely to eliminate positions that no longer were a fit
with our new focus, we have significantly improved our cost structure.
With new management appointed in December 2008 and these important
company changes, TelVue has entered into 2009 with strong momentum that includes
three new service offerings and a new entry level video server product. We are
committed to developing our reseller network that already includes 13 resellers
nationwide including a national reseller to both the cable and education
markets. Despite a down economy, growth is still attainable by scaling our sales
presence through resellers, expanding into additional vertical markets beyond
our core municipal access stations, and increased marketing budget made
available through aforementioned cost savings.
CASH FLOW
With our streamlined organization and expected revenue growth, we
anticipate our operational cash flow requirements to be significantly less in
2009. In the first quarter of 2009, we received a $400,000 Line of Credit from
our majority stockholder, H.F. (Gerry) Lenfest. While Mr. Lenfest has
demonstrated his support for our new management and technology focus, there is
no guarantee that he will continue to provide funding in the future.
11
MARKETS
We have primarily focused our TelVue Products and Services ("TPS")
marketing and sales efforts to date on municipalities operating community
television stations. We expect this to continue to be a growth area for the
company, however we see significant growth opportunity for the company by
expanding our marketing and sales efforts into additional vertical markets where
our product line-up is already a perfect fit. These markets include K-12,
University, Cable MSOs, Low Power Television Stations, Professional Digital TV
and Satellite Broadcasters, Retirement Communities, and more. Our reseller sales
strategy will help us reach these vertical markets more quickly.
Already in the first quarter of 2009, we have received multiple
broadcast system orders from a major cable television company streamlining its
cable Local Origination and Leased Access operations.
INDUSTRY TRENDS
A number of industry trends that we believe play to our strengths
include:
o the continued transition from analog/tape-based video systems to
digital and digital file-based systems.
o the continued transition from standard definition to
high-definition.
o Increased competition between cable and telephone company MSOs is
proving that hyper-local content can be an important
differentiator. As such MSOs will likely put more focus and be
more supportive of PEG, Local Origination, and Leased Access
channels.
o the Digital TV transition and new "dot" channel capacity.
Professional Broadcasters will be looking to inexpensively
utilize these additional channels with new programming.
o the intersection and cross promotion of traditional broadcast
television programming, delivery, and advertising with video and
advertising on the Internet.
o new IT-centric workflows and web-hosted application to help
broadcasters streamline operations, securely access systems
remotely, and save cost.
o Edge-casting-networks of edge video servers under central
management with Internet file delivery. Edge-casting allows
highly targeted programming at the edge and saves cost versus
traditional linear Satellite video delivery.
o the explosion of Digital Signage and out-of-home networks in
which each display is essentially a hyperlocal broadcast channel.
o The continued efficiency of IP networks giving rise to more IP
Video and IPTV applications.
12
Conversely industry trends that could present risks to TelVue's growth
or create increased competition are:
o FCC regulation of MSOs could change and negatively affect the
number of PEG Channels or how they are funded. Such changes could
negatively affect our PEG market sales.
o Internet video and social networking sites such as YouTube and
Facebook that may offer customers a free alternative to
PEG.TV(TM). However, we believe content control and broadcast
workflow for our core markets will still be strengths for TelVue.
o Our Digital Signage deployments have been focused on broadcast
television markets. It remains untested whether our digital
signage solutions will be accepted in other, non-broadcast
signage markets.
o As Internet video delivery continues to become more robust and
competes with traditional broadcast television delivery, future
services offered by major Internet video companies could present
competitive solutions for local broadcasters.
NEW PRODUCTS AND SERVICES
With our technology and business model re-focused, from the second half
of 2008 into the first quarter of 2009, we aggressively introduced a number of
exciting new products and services including PEG.TV(TM), WEBUS Inside(TM),
VideoActives(TM), and a new entry level, ultra-compact and affordable TelVue
Princeton(TM) broadcast server, the B100.
PEG.TV(TM) allows us to up-sell Internet Live Streaming and
Video-on-Demand to our existing customer base as well as to customers of
competing video server systems. PEG.TV(TM) also makes it easy for any
organization to run a television channel on the Internet and present a library
of videos. This expands our addressable market beyond those communities and
organization that have traditional broadcast channel capability. PEG.TV(TM) is
poised to address the growing number of towns looking to archive and stream
meetings on-line in a cost-effective manner. PEG.TV(TM) helps a station get
their content on the Internet, and also allows them to cross promote their
television channel and website. Hyperlocal channels and websites continue to
offer strong revenue potentials for the organizations, and TelVue's technology
can help realize this revenue potential. This is a strong value proposition
given the current economic conditions.
WEBUS Inside(TM) is the technology culmination of TelVue's acquisition
of Princeton Server Group, Inc. and merging of each company's technologies. Our
development team has integrated the WEBUS(R) digital signage display application
natively in our TelVue Princeton(TM) video server. This offers a significant
cost savings including up-sell opportunities to offer WEBUS(R) as a
software-only upgrade to existing TelVue Princeton(TM) customers. It also
provides a competitive advantage in our ability to offer a combination broadcast
video server and signage player in a single platform, including multiple
channels on our multi-channel servers.
VideoActives(TM) are real-time, data-driven, on-air graphics such as
local weather, local traffic, headline news, financial market indices, sports,
quotes of the day and trivia questions. VideoActives(TM) are designed to enhance
the presentation of a channel with dynamic and local content driven
automatically by live data feeds.
13
In April 2009, TelVue will be attending the NAB broadcast show in Las
Vegas and will be demonstrating new High-Definition IPTV and DVB-ASI TelVue
Princeton(TM) server offerings as well as our core product lineups.
CRITICAL ACCOUNTING POLICIES
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
certain estimates and assumptions that affect the amounts reported therein.
Several of the estimates and assumptions we are required to make relate to
matters that are inherently uncertain as they pertain to future events. However,
events that are outside of our control cannot be predicted and, as such, they
cannot be contemplated in evaluating such estimates and assumptions. If there is
a significant unfavorable change to current conditions, it will likely result in
a material adverse impact to our consolidated results of operations, financial
position and liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Use of Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to impairment of long-lived assets and
allowance for doubtful accounts. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
Areas that require estimates and assumptions include valuation of
accounts receivable and inventory, determination of useful lives of property and
equipment, estimation of certain liabilities and sales returns.
Goodwill and Other Intangibles
Goodwill and other intangibles are reviewed for impairment annually, or
more frequently if impairment indicators arise. Goodwill is required to be
tested for impairment between the annual tests if an event occurs or
circumstances change that more-likely-than-not reduce the fair value of a
reporting unit below its carrying value. As of December 31, 2008, based on
concerns over our net loss and negative cash flow, uncertainty regarding future
cash flows and uncertainty whether the current carrying value of the Goodwill
related to the PSG acquisition will be recovered by future cash flows, we
determined that the carrying value of this Goodwill was impaired, and we
recorded a $1,921,405 charge to write off this Goodwill. As a result, our net
loss for 2008 was increased by this amount to $7,545,259. Had we not made this
subjective determination, we would not have recorded this charge.
14
Revenue Recognition
In accordance with accounting principles generally accepted in the
United States, we recognize revenues related to our TelVue Princeton(TM) server
product line upon shipment of the equipment to our customers. Revenues related
to our WEBUS(R) and PEG.TV(TM) services are recognized on a monthly basis, being
amortized over the term of the agreement. TelVue also sells annual product
maintenance plans covering equipment support and application upgrades. The
revenue related to these plans is recognized on a straight-line basis over the
term being covered by the plan. If we chose to recognize these revenues when we
received payments under these agreements, then we would recognize more revenue
in earlier periods and would not record any deferred revenues. We believe that
our practice allows us to better match revenues with the expenses related to
providing these services over the term of the agreements and, accordingly, is a
better reflection of generally accepted accounting principles. Revenue related
to our ANI service is recognized in the month the service is provided.
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair
value recognition provisions of SFAS 123R. We use a Black-Scholes option-pricing
valuation model which requires the input of highly subjective assumptions. These
assumptions include estimating the length of time employees will retain their
vested stock options before exercising them ("expected term"), the estimated
volatility of our common stock price over the expected term and the number of
options that will ultimately not complete their vesting requirements. Changes in
the subjective assumptions can materially affect the estimate of fair value of
stock-based compensation.
The above listing is not intended to be a comprehensive list of all our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. See our
audited financial statements and notes thereto included in this Annual Report on
Form 10-K which contains accounting policies and other disclosures required by
accounting principles generally accepted in the United States.
RESULTS OF OPERATIONS
Beginning in January 2008, TelVue began a weighted allocation of all
compensation, general and administrative, interest and amortization expenses
between ANI and TPS. Previously, only a minimal amount of expenses were
allocated between business segments. It should also be noted that the 2007
historical results include the operating results for Princeton Server Group (now
included as part of the TPS segment) only from the date it was acquired by
TelVue, which was March 12, 2007.
During 2008, TelVue conducted two separate reductions in workforce.
Combined, they involved the elimination of 14 full-time positions and resulted
in net expense savings of approximately $550,000 for the calendar year, which
was recognized across all departments and business segments.
15
The following discussion deals with the decrease in operating income
for the year ended December 31, 2008, compared to the year ended December 31,
2007, and the reasons for the decrease. TelVue further discusses the continued
loss of its subscriber base for the ANI service when comparing the year ended
December 31, 2008 to the year ended December 31, 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 TPS and the changes in
TPS revenue and expenses.
2008 2007 $ Change % Change
----------- ----------- ----------- --------
Revenues
ANI Services ............. $ 1,274,155 $ 1,364,543 $ (90,388) (6.6)
TPS ...................... 2,434,129 2,674,096 (239,967) (9.0)
Cost of Revenues
ANI Services ............. 376,126 459,492 (83,366) (18.1)
TPS ...................... 1,852,339 1,595,651 256,688 16.1
Operating Expenses
Selling and marketing .... 1,515,579 1,700,830 (185,251) (10.9)
General and administrative 3,405,042 2,482,082 922,960 37.2
Depreciation and
amortization ........... 1,214,860 929,600 285,260 30.7
Goodwill Impairment ...... 1,921,405 - 1,921,405 N/A
----------- ----------- ----------- -------
Operating Loss ............. (6,577,067) (3,129,016) (3,448,051) (110.2)
Other Income (Expense) ..... (968,192) (831,783) (136,409) (16.4)
----------- ----------- ----------- -------
Net Loss ................... (7,545,259) (3,960,799) (3,584,460) (90.5)
=========== =========== =========== =======
The ANI segment had operating income of $621,937 for the year ended
December 31, 2008, compared to $478,790 for the year ended December 31, 2007.
The TPS segment had an operating loss of $7,199,004 for the year ended December
31, 2008, compared to an operating loss of $3,607,806 for the year ended
December 31, 2007.
Revenues
ANI service revenue declined $90,388 for the year ended December 31,
2008, when compared to the same period of 2007. As expected, pay-per-view buy
revenue decreased $27,667 for the year ended December 31, 2008, and feature
revenue decreased $24,252 for the year ended December 31, 2008 when compared to
the same periods of 2007. These decreases were mainly due to a reduction in the
number of subscribers served during this period when compared to 2007 (as
discussed below). This loss was offset by a price increase that was implemented
in May 2008.
16
As of December 31, 2008, TelVue was serving approximately 4.2 million
full-time cable subscribers compared to approximately 4.6 million full-time
cable subscribers served as of December 31, 2007. During the year ended December
31, 2008, approximately 400,000 full-time and part-time cable subscribers
cancelled the ANI service. During the same period, 5,000 new cable 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
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.
TPS revenue decreased $239,967 for the year ended December 31, 2008,
compared to the year ended December 31, 2007. The majority of the revenue
decreases were attributed to three particular items. First, there was a decrease
in TelVue Princeton(TM) Product Line sales due to the focus on a sponsorship
driven sales model in the second half of 2007, through the first half of 2008.
Second, there was a significant decline in sponsorship revenue due to the
previously mentioned change in direction of TelVue moving away from a
sponsorship driven sales model. Third, there was a decrease in consulting
revenue due to a decline in technical consulting services that TelVue provided
to specific customers. As of December 31, 2008, TelVue was providing its
WEBUS(R) service to 182 customers compared to 132 customers at December 31,
2007. TelVue is marketing its products and services nationally with an increased
focus in the Mid-Atlantic region. TelVue has also sold equipment in 37 different
states and the District of Columbia. The use of resellers is expected to
significantly increase TelVue's national reach.
Cost of Revenues
ANI cost of revenues decreased for the year ended December 31, 2008 by
$83,366 when compared to the year ended December 31, 2007. This decrease was
primarily due to a favorable variance in compensation expense. This favorable
variance was the result of savings related to the previously mentioned reduction
in workforce that occurred during the year, in addition to savings based on a
higher percentage of payroll expense being allocated to the TPS segment.
Cost of revenues for TPS increased $256,688 for the year ended December
31, 2008, when compared to the year ended December 31, 2007, mainly as a result
of an entry that was recorded in 2008 to expense the remaining net book value of
equipment related to the WEBUS(R) service that had been maintained as a fixed
asset by TelVue.
Selling and Marketing Expenses
Total selling expenses decreased by $185,251 for the year ended
December 31, 2008 when compared to the year ended December 31, 2007. Selling
expenses related to the ANI service decreased by $54,166 for the year ended
December 31, 2008, when compared to the same periods of 2007. This decrease was
also a result of savings in compensation related to the previously mentioned
reduction in workforce, in addition to savings in commissions due to the loss of
ANI subscribers in 2008. Selling expenses related to TPS decreased $131,085 for
the year ended December 31, 2008, when compared to the year ended December 31,
2007. This decrease was a result of savings in outside sales consulting expense
when compared to prior year, in addition to savings in commissions due to lower
sales. These savings were offset by increased marketing expenses related to the
re-branding of the Company.
17
General and Administrative Expenses
General and administrative expenses increased by $922,960 for the year
ended December 31, 2008 when compared to the year ended December 31, 2007. ANI
segment general and administrative expenses decreased $57,229 for the year ended
December 31, 2008 when compared to the year ended December 31, 2007, once again
related to the reduction in workforce and a higher percentage of expenses being
allocated to the TPS segment. TPS general and administrative expenses increased
$980,189 for the year December 31, 2008 when compared to the year ended December
31, 2007. A contributing factor to this increase was a larger portion of
operational expenses being allocated to the TPS segment, in addition to a full
calendar year of expenses in 2008 related to PSG, as opposed to only the period
subsequent to the acquisition in 2007. Compensation expense increased
significantly, primarily due to an accrual recorded for separation pay to be
paid to the former President/CEO. Other factors contributing to this increase
were higher legal and accounting fees compared to prior year, in addition to
higher consulting and executive search fees paid in 2008. As with many start-up
ventures, management anticipates that expenses will continue to grow as the
operations and marketing efforts for TPS increase.
Depreciation and Amortization Expense
During the year ended December 31, 2008, TelVue purchased $496,309 of
equipment compared to $996,581 purchased during the year ended December 31,
2007. The majority of the equipment purchased during the year ended December 31,
2008 and 2007 was for software development and equipment related to the TPS
segment. Depreciation and amortization expense increased $166,390 and $118,870
for the year ended December 31, 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 20% and 18% of total operating
expenses for the year ended December 31, 2008 and 2007, respectively.
Additionally, at December 1, 2008, management determined that the goodwill
acquired with the PSG acquisition was impaired and an impairment charge of
$1,921,405 was recognized.
Goodwill Impairment / Net Loss
TelVue had a net loss of $7,545,259 for the year ended December 31,
2008, compared to a net loss of $3,960,799 for the year ended December 31, 2007.
A significant portion of this increased net loss was attributable to the
goodwill impairment write-down of $1,921,405 mentioned below. Additionally, the
decrease in 2008 TelVue Princeton(TM) sales and revenue as well as the decrease
in new WEBUS(R) subscriptions compared to 2007 were largely attributed to the
sponsorship business model approach that dominated the second half of 2007 and
first half of 2008 and did not reach market acceptance compared to previous
technology sales models. At December 31, 2008 and 2007, TelVue recorded
valuation allowance increases of $4,668,193 and $1,677,702, 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 $12,200,000 on a tax-reporting
basis as of December 31, 2008 (see Note 13 of TelVue's accompanying financial
statements).
Accounts Receivable and Allowance For Doubtful Accounts
As of December 31, 2008, TelVue maintained a bad debt reserve in the
amount of $5,662 as compared to $6,510 as of December 31, 2007. The reserve was
calculated based on the estimate that 1% of outstanding receivables would not be
collected.
18
TelVue's days for sales in average accounts receivable was 60 days at
December 31, 2008, compared to 47 days at December 31, 2007. TelVue does not
offer incentives or discounts to its customers, nor has it changed its credit
terms with its customers for its WEBUS(R) or ANI services. A 2% cash, 1% net 15
days discount is offered for payments related to TelVue Princeton(TM) equipment
purchases. TelVue had negative cash flow from operating activities of $3,229,653
and $2,241,437 for the years ended December 31, 2008 and 2007, respectively. The
decrease in cash flow in 2008 compared to 2007 was primarily due to a reduction
in ANI service revenue and an increase in TPS expenses (as described above).
LIQUIDITY AND CAPITAL RESOURCES
Going Concern and Management's Plan
The accompanying financial statements of TelVue have been prepared on
the basis of generally accepted accounting principles applicable to a "going
concern," which assume that TelVue 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 TelVue's ability to
continue as a "going concern." In order to fund operations, TelVue relies on
funds drawn on lines of credit provided by TelVue's majority stockholder, H.F.
(Gerry) Lenfest. Based on TelVue's current draw-down rate, the funds remaining
in the current lines of credit are not sufficient to sustain TelVue's operations
for the next 12 month period. Funding TelVue's future capital requirements will
depend on numerous factors including, but not limited to, TelVue receiving
continued financial support from Mr. Lenfest, which he has not committed to at
this time, or seeking other alternatives. While management is working toward
mitigating the adverse conditions and events which raise doubt about the
validity of the "going concern" assumption used in preparing the accompanying
financial statements, there can be no assurances that management will be
successful.
The accompanying financial statements do not reflect adjustments that
would be necessary if TelVue were unable to continue as a "going concern." If
TelVue were unable to continue as a "going concern," then substantial
adjustments would be necessary to the carrying value of assets, the reported
amounts of its liabilities, the reported expenses, and the balance sheet
classifications used.
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. H.F. Lenfest, TelVue's majority
stockholder, and from loans from Mr. Lenfest. From November 1989 to February
1996, TelVue borrowed an aggregate of $6,128,712 from Mr. Lenfest. These loans
and accrued interest were repaid in their entirety during 2003. On March 5,
2001, TelVue borrowed $650,000 from Mr. Lenfest to fund a portion of the Source
acquisition, at an interest rate of prime plus one percent (1%) compounded and
due on or before January 1, 2004. This loan was repaid in its entirety in 2001.
In addition to the borrowings noted above, 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.
19
On March 9, 2001, pursuant to the terms of the acquisition of the
assets of Source for $1,300,000, TelVue paid $1,000,000 in cash and $300,000
pursuant to a promissory note (the "Source Note"). The Source Note had a term of
three years. Interest only was payable monthly during year one at the rate of 8%
per annum. Beginning in year two, both principal and interest were payable
monthly at the rate of 5.06% per annum. During the first quarter of 2004, TelVue
paid the remaining balance on the Source Note in its entirety.
On April 27, 2005, TelVue entered into a Line of Credit Note (the "2005
Note) with Mr. Lenfest. The purpose of the 2005 Note was to provide funding to
grow the TVTN Network. Under the terms of the 2005 Note, TelVue may 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. During the year
ended December 31, 2007, TelVue borrowed $1,600,000 under the terms of the 2005
Note, bringing outstanding borrowings under the 2005 Note to $3,800,000 and
accrued interest on the borrowings to $716,632 as of December 31, 2008, fully
exhausting this note.
As a result of the anticipated exhaustion of the credit under the 2005
Note, 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 may request up to $5,000,000 for general working
capital. TelVue may 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
December 31, 2008, TelVue had borrowed $10,000,000 under the 2006 Note with
accrued interest in the amount of $1,200,461, fully exhausting this note.
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, which was May 5, 2008. As of December 31, 2008, TelVue had
borrowed $2,150,000 under the 2007 Note with accrued interest in the amount of
$43,615.
20
As a result of the anticipated exhaustion of the line of credit under
the 2007 Note, TelVue entered into an additional Line of Credit Note (the "2009
Q1 Note") with Mr. Lenfest on March 2, 2009, in the principal amount of
$400,000. The minimum advance under the 2009 Q1 Note is $100,000 and the
interest rate on the 2009 Q1 Note is equal to the prime rate plus one percent
(1%). The 2009 Q1 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 2009 Q1 Note may be declared immediately due
and payable. The 2009 Q1 Note is unsecured and will expire six years from the
date of the first advance under the 2009 Q1 Note unless extended or renewed.
Principal and interest on the 2009 Q1 Note are also due and payable six years
from the date of the first advance under the 2009 Q1 Note.
On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under
the 2006 Note to loan to Princeton Server Group 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 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 to purchase
129,629 shares of common stock of PSG at an exercise price of $1.08 per share.
The warrant was to commence on July 1, 2007 and expire on December 31, 2016. The
PSG Note was forgiven 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 TV 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 78.3 percent as of December 31, 2006. 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.
21
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. As discussed above, during the year ended
December 31, 2008, TelVue had 400,000 full and part-time subscribers cancel
service and only 5,000 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. As discussed
above, the financing from Mr. Lenfest under the 2005 Note and 2006 Note have
been exhausted, and TelVue believes that the financing from Mr. Lenfest under
the 2007 Note will be exhausted in early 2009. As a result of this, TelVue
secured the 2009 Q1 Note from Mr. Lenfest to help TelVue grow to a profitable
level. The 2005 Note and 2006 Note have helped, and the 2007 Note and 2009 Q1
Note will help, to fund the growth of TelVue Product and Services. While
maintaining the ANI pay-per-view ordering business, TelVue intends to continue
to aggressively market and sell TelVue Product and Services. However, there can
be no assurance that its marketing efforts will be successful.
We do expect to see some adverse effects on sales in 2009 due to the
current economic conditions, primarily in the public, education and government
markets. We do anticipate some of this being offset by federal stimulus dollars
being allocated to these markets. Additionally, we feel that our expansion into
markets outside of these will broaden our sources of revenue which will help to
offset any revenue declines related to the economy.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements at December 31, 2008 that
had or are reasonably likely to have, a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to our interests.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TelVue, a smaller reporting company, is not required to provide
information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth in this report beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements of any nature at any time with
TelVue's auditors with regard to any aspect of TelVue's financial statements,
its financial disclosure or its accounting practices.
ITEM 9A(T). 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 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 the company, particularly during the period in which this
annual report on Form 10-K was being prepared.
(b) Changes in Internal Controls. During the annual 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.
(c) Management's Report on Internal Control Over Financial Reporting.
TelVue's management is responsible for the preparation and integrity of
the Consolidated Financial Statements appearing in our annual report on Form
10-K. The financial statements were prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and,
accordingly, include certain amounts based on our best judgments and estimates.
Financial information in this annual report on Form 10-K is consistent with that
in the financial statements.
Management is also responsible for establishing and maintaining
effective internal control over financial reporting as such term is defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. TelVue's
internal control over financial reporting includes those policies and procedures
that pertain to TelVue's ability to record, process, summarize and report
reliable financial data. Management recognizes that there are inherent
limitations in the effectiveness of any internal control over financial
reporting, including the possibility of human error and the circumvention or
overriding of internal control. Accordingly, even effective internal control
over financial reporting can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions, the
effectiveness of internal control over financial reporting may vary over time.
23
In order to ensure TelVue's internal control over financial reporting
is effective, management regularly assesses such controls and did so most
recently for its financial reporting as of December 31, 2008. This assessment
was based on criteria for effective internal control over financial reporting
described in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes the Corporation maintained effective internal control over
financial reporting as of December 31, 2008.
TelVue's Board of Directors, acting through its Audit Committee, is
responsible for the oversight of accounting policies, financial reporting and
internal control. The Audit Committee of the Board of Directors is comprised
entirely of outside directors who are independent of management. The Audit
Committee is responsible for performing an oversight role by reviewing and
monitoring the financial, accounting and auditing procedures of TelVue in
addition to reviewing TelVue's financial statements. TelVue's independent
auditors have full and unlimited access to the Audit Committee, with or without
management, to discuss the adequacy of internal control over financial
reporting, and any other matters which they believe should be brought to the
attention of the Audit Committee.
This annual report does not include an attestation report from TelVue's
independent auditors regarding internal control over financial reporting.
Management's report was not subject to attestation by TelVue's independent
auditors pursuant to temporary rules of the Securities and Exchange Commission
that permit TelVue to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this Item is incorporated herein by
reference to TelVue's Proxy Statement for its 2009 Annual Meeting of
Stockholders that will be filed not later than April 30, 2009.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated herein by
reference to TelVue's Proxy Statement for its 2009 Annual Meeting of
Stockholders that will be filed not later than April 30, 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by this Item is incorporated herein by
reference to TelVue's Proxy Statement for its 2009 Annual Meeting of
Stockholders that will be filed not later than April 30, 2009.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
At December 31, 2008, TelVue was indebted to Mr. Lenfest in the
principal amount of $15,950,000 and accrued interest of $1,960,708.
Other related transactions are described in Notes 4, 7, 8, 10 and 14 of
the 2008 Financial Statements of TelVue.
Certain other information called for by this Item is incorporated
herein by reference to TelVue's Proxy Statement for its 2009 Annual Meeting of
Stockholders that will be filed not later than April 30, 2009.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this Item is incorporated herein by
reference to TelVue's Proxy Statement for its 2009 Annual Meeting of
Stockholders that will be filed not later than April 30, 2009.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm dated March 30, 2009.
Balance Sheets as of December 31, 2008 and 2007.
Statements of Operations for the years ended December 31, 2008 and 2007.
Statements of Stockholders' Deficit for the years ended December 31, 2008 and
2007.
Statements of Cash Flows for the years ended December 31, 2008 and 2007.
Notes to Financial Statements.
25
TelVue Corporation
Consolidated Financial Statements
Years Ended December 31, 2008 and 2007
Table of Contents Page No.
Report of Independent Registered Public Accounting Firm .... F - 2
Consolidated Financial Statements
Consolidated Balance Sheets ............................. F - 3
Consolidated Statements of Operations ................... F - 5
Consolidated Statements of Stockholders' Deficit ........ F - 6
Consolidated Statements of Cash Flows ................... F - 7
Notes to Consolidated Financial Statements .............. F - 8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders
TelVue Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of TelVue
Corporation (a Delaware corporation) and subsidiary as of December 31, 2008 and
2007, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TelVue Corporation
and subsidiary as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a loss of $7,545,259 for the year
ended December 31, 2008, and as of that date, had a stockholders' deficit of
$13,435,515. As more fully described in Note 2 to the consolidated financial
statements, the Company does not have adequate financing to fund the projected
loss for 2009. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Pressman Ciocca Smith LLP
Huntingdon Valley, Pennsylvania
March 30, 2009
F-2
TelVue Corporation and Subsidiary
Consolidated Balance Sheets
December 31, 2008 and 2007
ASSETS 2008 2007
------------ ------------
CURRENT ASSETS
Cash and cash equivalents ...................... $ 250,698 $ 225,660
Accounts receivable - trade, net of
allowance for doubtful accounts of $5,700
in 2008 and $6,500 in 2007 .................... 560,579 641,683
Inventory ...................................... 266,032 244,994
Prepaid expenses ............................... 54,636 120,646
------------ ------------
TOTAL CURRENT ASSETS ............................. 1,131,945 1,232,983
PROPERTY AND EQUIPMENT ........................... 7,235,689 7,364,421
Less accumulated depreciation .................. 6,051,809 5,763,185
------------ ------------
1,183,880 1,601,236
DEFINITE-LIVED INTANGIBLE ASSETS ................. 3,415,751 4,041,670
INDEFINITE-LIVED INTANGIBLE ASSETS - GOODWILL .... - 1,921,405
INDEFINITE-LIVED INTANGIBLE ASSETS - OTHER ....... 397,260 397,260
OTHER ASSETS ..................................... 8,800 8,800
------------ ------------
$ 6,137,636 $ 9,203,354
============ ============
See accompanying notes
F-3
TelVue Corporation and Subsidiary
Consolidated Balance Sheets (continued)
December 31, 2008 and 2007
LIABILITIES AND STOCKHOLDERS' DEFICIT 2008 2007
------------ ------------
CURRENT LIABILITIES
Accounts payable ............................... $ 315,236 $ 705,182
Accrued expenses ............................... 444,659 236,538
Deferred service revenue ....................... 359,764 416,434
Other liabilities .............................. 1,784 3,178
------------ ------------
TOTAL CURRENT LIABILITIES ........................ 1,121,443 1,361,332
LINES OF CREDIT - MAJORITY STOCKHOLDER ........... 15,950,000 12,200,000
NOTE PAYABLE - MAJORITY STOCKHOLDER .............. 541,000 541,000
ACCRUED INTEREST - MAJORITY STOCKHOLDER .......... 1,960,708 992,278
REDEEMABLE CONVERTIBLE PREFERRED STOCK
$1 par value, 6,900,000 shares authorized,
no shares outstanding .......................... - -
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 100,000,000
shares authorized, 48,461,644 and
48,433,074 shares issued and outstanding
at December 31, 2008 and 2007, respectively ... 484,617 484,331
Additional paid-in capital ..................... 4,877,353 4,876,639
Accumulated deficit ............................ (18,797,485) (11,252,226)
------------ ------------
(13,435,515) (5,891,256)
------------ ------------
$ 6,137,636 $ 9,203,354
============ ============
See accompanying notes
F-4
TelVue Corporation and Subsidiary
Consolidated Statements of Operations
Years Ended December 31, 2008 and 2007
2008 2007
------------ ------------
REVENUES
ANI services ................................. $ 1,274,155 $ 1,364,543
TPS .......................................... 2,434,129 2,674,096
------------ ------------
3,708,284 4,038,639
COST OF REVENUES
ANI services ................................. 376,126 459,492
TPS .......................................... 1,852,339 1,595,651
------------ ------------
2,228,465 2,055,143
------------ ------------
GROSS PROFIT ................................... 1,479,819 1,983,496
OPERATING EXPENSES
Selling and marketing ........................ 1,515,579 1,700,830
General and administrative ................... 3,405,042 2,482,082
Depreciation and amortization ................ 1,214,860 929,600
Goodwill impairment .......................... 1,921,405 -
------------ ------------
8,056,886 5,112,512
------------ ------------
OPERATING LOSS ................................. (6,577,067) (3,129,016)
OTHER INCOME (EXPENSE)
Interest expense - related party ............. (968,429) (880,543)
Interest income .............................. 237 38,715
Gain on sale of marketable securities ........ - 10,045
------------ ------------
(968,192) (831,783)
------------ ------------
LOSS BEFORE INCOME TAXES ....................... (7,545,259) (3,960,799)
INCOME TAX EXPENSE ........................... - -
------------ ------------
NET LOSS ....................................... $ (7,545,259) $ (3,960,799)
============ ============
BASIC NET LOSS PER COMMON SHARE .............. $ (0.16) $ (0.08)
============ ============
DILUTED NET LOSS PER COMMON SHARE ............ $ (0.16) $ (0.08)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 48,448,920 48,387,348
============ ============
See accompanying notes
F-5
TelVue Corporation and Subsidiary
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 2008 and 2007
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Deficit
------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 2007 ................ $ 483,564 $ 4,874,656 $ (7,291,427) $ (1,933,207)
Issuance of 76,667 shares
of common stock ........................ 767 1,983 - 2,750
Net loss ................................ - - (3,960,799) (3,960,799)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2007 ........... 484,331 4,876,639 (11,252,226) (5,891,256)
Issuance of 28,570 shares of common stock 286 714 - 1,000
Net loss ................................ - - (7,545,259) (7,545,259)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2008 ........... $ 484,617 $ 4,877,353 $(18,797,485) $(13,435,515)
============ ============ ============ ============
See accompanying notes
F-6
TelVue Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2008 and 2007
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................... $(7,545,259) $(3,960,799)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization .................. 1,214,860 929,600
Loss on disposal of equipment included in
Cost of sales .................................. 324,724 -
Goodwill impairment ............................ 1,921,405 -
(Gain) on sale of marketable securities ........ - (10,045)
Changes in operating assets and liabilities:
Accounts receivable - trade .................... 81,104 (143,915)
Inventory ...................................... (21,038) (140,601)
Prepaid expenses ............................... 66,010 (58,318)
Accounts payable ............................... (389,946) 320,540
Accrued expenses ............................... 208,121 (136,623)
Deferred service revenue ....................... (56,670) 76,410
Other liabilities .............................. (1,394) 1,771
Accrued interest - majority stockholder ........ 968,430 880,543
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES ............ (3,229,653) (2,241,437)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition ........................ - (240,274)
Proceeds from sale of marketable securities ...... - 10,045
Purchases of property and equipment .............. (496,309) (996,581)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES ............ (496,309) (1,226,810)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lines of credit-majority stockholder 3,750,000 3,500,000
Issuance of common stock ......................... 1,000 2,750
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 3,751,000 3,502,750
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......... 25,038 34,503
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ... 225,660 191,157
----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR ................ $ 250,698 $ 225,660
=========== ===========
See accompanying notes
F-7
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
NOTE 1 - Summary of Significant Accounting Policies
This summary of significant accounting policies of TelVue Corporation and
subsidiary ("the Company") is presented to assist in understanding its
consolidated financial statements. These accounting policies conform to
accounting principles generally accepted in the United States of America and
have been consistently applied in the preparation of the consolidated financial
statements.
Basis of Consolidation
The consolidated financial statements include the accounts of TelVue Corporation
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 Corporation. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Business Activity and Concentration of Credit Risk
The Company operates two business segments. One segment is a marketing and
service division, which sells automatic number identification telecommunications
services ("ANI service") to the cable television industry throughout the United
States for the automated ordering of pay-per-view features and events. The
Company grants credit to cable television operators throughout the nation.
Consequently, the Company's ability to collect the amounts due from customers is
affected by economic fluctuations in the cable television industry. The other
business segment, TelVue Products and Services ("TPS"), is a system for
displaying a fully automated television station-like display on a cable system
access channel using computer based digital technology. This segment also
includes PSG, which develops high performance digital video systems, appliances
and software that support capture, storage, manipulation and playout of digital
media in multiple popular formats.
The Company maintains cash balances at a financial institution located in the
Philadelphia area. Accounts at this institution are insured by the FDIC up to
$250,000. The Company maintains cash balances in excess of the insured amount.
During 2007, one customer accounted for 10% of revenues and accounted for 8% of
receivables at December 31, 2007. There were no significant customers during
2008.
Currently, the Company's primary source of financing is the majority
stockholder. The Company has not sought to obtain significant funding from third
parties on terms that are acceptable to the Company.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-8
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term debt securities purchased with an original maturity of three (3)
months or less to be cash equivalents.
Accounts Receivable - Trade
Trade accounts receivable are stated at the amount management expects to collect
from outstanding balances. Management provides for probable uncollectible
amounts through a charge to earnings and a credit to a valuation allowance based
on its assessment of the current status of individual accounts. Balances that
are still outstanding after management has used reasonable collection efforts
are written off through a charge to the valuation allowance and a credit to
trade accounts receivable.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by the
specific-identification method, and market represents the lower of replacement
cost or estimated net realizable value.
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. The total cost of acquisitions is allocated to the
underlying assets, based on fair market values as determined by an independent
appraiser. The Company recognizes intangible assets apart from goodwill if they
arise from contractual or legal rights or if they are separable from goodwill.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided over the estimated useful lives using the straight-line method.
Amortization of leasehold improvements is included with depreciation expense and
is provided over the shorter of the remaining lease term or estimated useful
life. Property and equipment consists primarily of operating equipment. For
income tax purposes, recovery of capital costs for property and equipment is
made using accelerated methods over statutory recovery periods.
Customer installation costs incurred to provide the TPS service are capitalized
and depreciated over the term of the contract, which is typically three (3)
years.
Expenditures for renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
F-9
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
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 the 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.
At December 31, 2008, management determined that the goodwill acquired with the
PSG acquisition, described in Note 3, was impaired and recognized an impairment
charge of $1,921,405.
The Company determines the useful lives of our 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.
Valuation of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company periodically evaluates whether events or
circumstances have occurred that indicate that the remaining useful lives of its
long-lived assets, including property and equipment should be revised or that
the remaining balance of such assets may not be recoverable using objective
methodologies. Such methodologies include evaluations based on cash flows
generated by the underlying assets or other determinants of fair value. As of
December 31, 2008, management determined that the goodwill acquired with the PSG
acquisition, described in Note 3, was impaired and recognized an impairment
charge of $1,921,405. As of December 31, 2008, management believes that no
revisions to the remaining lives or further write-downs of carrying values are
required.
F-10
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Revenue Recognition
The Company recognizes ANI service revenues in the month service is provided,
net of an estimate for programs not billable by the cable television operator.
The Company recognizes TPS service revenues in the month the service is
provided. Amounts billed for start-up are deferred and recognized on the
straight-line basis over the term of the contract.
Income Taxes
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 2004 and state income tax
examinations before 2003. 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 carryforward amount. The Company is not currently
under Internal Revenue Service ("IRS") tax examination. The Company is not
currently under examination by any state jurisdictions.
The Company uses the asset and liability method of accounting for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes". SFAS 109
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the consolidated
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. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be realized.
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.
F-11
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Share-Based Compensation
The Company adopted the provisions of SFAS No. 123R, "Share-Based Payment," and
related interpretations, to account for share-based compensation. SFAS 123R
superseded APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
revised guidance in SFAS 123, "Accounting for Stock-Based Compensation". The
Company elected to use the modified prospective method of SFAS 123R, which
requires that compensation expense be recognized in the consolidated financial
statements for share-based awards based on the grant date fair value of those
awards. Under APB No. 25, compensation was recognized only if the exercise price
was less than the quoted market price of the stock on the grant date.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense is included in selling and marketing expense in
the accompanying statements of operations.
Fair Value Measurement
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) which
delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years beginning after November 15, 2008. Nonfinancial items for the
purpose of FSP 157-2 include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and nonfinancial assets
acquired and liabilities assumed in a business combination. Effective January 1,
2008, the Company adopted SFAS No. 157 for financial assets and liabilities
recognized at fair value on a recurring basis. The partial adoption of SFAS No.
157 for financial assets and liabilities did not have an impact on the
consolidated financial position, results of operations or cash flows of the
Company. The adoption of SFAS No. 157 for nonfinancial assets and liabilities,
in the first quarter of 2009, is not expected to have an impact on the
consolidated financial position, results of operations or cash flows of the
Company upon adoption.
Note 2 - Liquidity and Going Concern
As shown in the accompanying consolidated financial statements, the Company
incurred losses of $7,545,259 and $3,960,799 for the years ended December 31,
2008 and 2007, respectively, and as of those dates, the Company's liabilities
exceeded its assets by $13,435,515 and $5,891,256, respectively. These factors
create an uncertainty as to the Company's ability to continue as a going
concern. Currently, the Company does not have adequate financing to fund the
projected loss for 2009.
The financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
F-12
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Note 3 - 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 by the Company under a $10,000,000 line of credit from the Company's
majority stockholder. The Company accounts for this acquisition as a business
combination under the purchase method of accounting. The results of PSG are
included in the Company's TPS/PSG operating segment.
The accompanying consolidated financial statements include the operations of PSG
since the date of acquisition.
The following unaudited pro forma information for the years ended December 31,
2008 and 2007, is presented as if the acquisition of PSG occurred on January 1,
2007. This information is based on the 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 ........................... $ 3,708,284 $ 4,329,184
Net loss ........................... $ (7,545,259) $ (4,497,861)
Basic and diluted net loss per share $ (0.16) $ (0.09)
Note 4 - Supplemental Disclosures of 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 ............................... 1,921,405
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 ........... $ 240,274
===========
During 2008 and 2007, there was no cash paid for interest or income taxes.
Noncash Investing and Financing Transactions
During the year ended December 31, 2007, the Company received marketable
securities with a value of $63,719 from a customer as partial payment of
outstanding receivables. These securities were sold in July 2007, resulting in a
realized gain of $10,045.
F-13
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Note 5 - Property and Equipment
A schedule of property and equipment at December 31, 2008 and 2007, is as
follows:
Estimated
Useful Lives
2008 2007 in Years
----------- ----------- ------------
Operating equipment ........... $ 6,465,755 $ 6,739,755 3-5
Office furniture and equipment 468,011 462,970 3-5
Leasehold improvements ........ 46,089 46,089 5
Software ...................... 255,834 115,607 3
----------- -----------
$ 7,235,689 $ 7,364,421
=========== ===========
Note 6 - Intangible Assets
A schedule of definite-lived intangible assets and accumulated amortization as
of December 31, 2008 and 2007 is as follows:
Weighted
Average
Accumulated Amortization
December 31, 2008 Amount Amortization Net Period
- --------------------- ---------- ------------ ---------- ------------
Software ............ $3,600,000 $ 921,428 $2,678,572 7 years
Patents ............. 788,220 94,148 694,072 15 years
Customer list ....... 74,900 74,900 - 18 months
Customer contract ... 57,800 25,890 31,910 4 years
Maintenance contracts 27,800 16,603 11,197 3 years
---------- ---------- ----------
$4,548,720 $1,132,969 $3,415,751
========== ========== ==========
December 31, 2007
- ---------------------
Software ............ $3,600,000 $ 407,143 $3,192,857 7 years
Patents ............. 788,220 41,600 746,620 15 years
Customer list ....... 74,900 39,531 35,369 18 months
Customer contract ... 57,800 11,440 46,360 4 years
Maintenance contracts 27,800 7,336 20,464 3 years
---------- ---------- ----------
$4,548,720 $ 507,050 $4,041,670
========== ========== ==========
F-14
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Amortization expense from definite-lived assets for the years ended December 31,
2008 and 2007 was $625,919 and $507,050, respectively. The following table
presents the Company's estimate of amortization expense for each of the five
succeeding years for definite-lived intangible assets:
Year Ending December 31,
2009 ............. $ 590,550
2010 ............. 583,214
2011 ............. 569,844
2012 ............. 566,834
2013 ............. 566,834
Thereafter .......... 538,475
-----------
$ 3,415,751
===========
A schedule of indefinite-lived intangible assets as of December 31, 2008 and
2007 is as follows:
2008 2007
---------- ----------
Goodwill . $ - $1,921,405
Trademarks 397,260 397,260
---------- ----------
$ 397,260 $2,318,665
========== ==========
At December 31, 2008, management determined that the goodwill acquired with the
PSG acquisition, described in Note 3, was impaired and recognized an impairment
charge of $1,921,405.
Note 7 - Lines of Credit - Majority Stockholder
In April 2005, the Company entered into a line of credit agreement with the
majority stockholder. Under the terms of the agreement, the Company may borrow
up to $3.8 million, the maximum principal amount of the line. Amounts
outstanding accrue interest at prime plus one percent (1%). The effective
interest rates at December 31, 2008 and 2007 were 4.25% and 8.25%, respectively.
Accrued interest is due at maturity. The line is unsecured and will mature in
November 2011. As of December 31, 2008 and 2007, the amounts outstanding under
this line of credit were $3,800,000 each year.
In November 2006, the Company entered into an additional line of credit
agreement with the majority stockholder. Under the terms of the agreement, the
Company may borrow up to $10 million, the maximum principal amount of the line.
The Company may borrow up to $5 million for general working capital and may
borrow up to $5 million for purposes other than general working capital. Amounts
outstanding accrue interest at prime plus one percent (1%). The effective
interest rates at December 31, 2008 and 2007 were 4.25% and 8.25%, respectively.
Accrued interest is due at maturity. The line is unsecured and will mature in
November 2012. At December 31, 2008 and 2007, the amounts outstanding under this
line of credit were $10,000,000 and $8,400,000, respectively.
F-15
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
In December 2007, the Company entered into an additional line of credit
agreement with the majority stockholder. Under the terms of the agreement, the
Company may borrow up to $2.3 million, the maximum principal amount of the line.
Amounts outstanding accrue interest at prime plus one percent (1%). The
effective interest rates at December 31, 2008 and 2007 were 4.25% and 8.25%,
respectively. Accrued interest is due at maturity. The line is unsecured and
will mature six years after the initial advance. At December 31, 2008, the
amount outstanding under this line of credit was $2,150,000. There was no
balance outstanding at December 31, 2007.
Note 8 - Note Payable - Majority Stockholder
In January 1995, the Company's majority stockholder acquired from Science
Dynamics Corporation ("SDC") an unsecured note in the amount of $541,000. The
note is noninterest bearing and repayment is restricted to cash not needed for
operations as determined by the Company. The maturity date of the note is
January 1, 2011.
Note 9 - Lease Commitments
The Company leases office facilities. Future minimum lease payments under
non-cancelable operating leases with initial terms of one year or more consisted
of the following at December 31, 2008:
Year Ending December 31,
2009 ............. $ 51,850
========
Rental expense under the operating lease for office facilities amounted to
$190,021 and $176,442 for the years ended December 31, 2008 and 2007,
respectively.
It is expected that, in the normal course of business, expiring leases will be
renewed or replaced by leases on other properties; thus, it is anticipated that
future minimum operating lease commitments will not be less than the amount
incurred in 2008.
Note 10 - Capital Stock
Common Stock Voting Rights and Concentration of Control
Shares of common stock, which have had the same beneficial owner for a
continuous period in excess of two (2) years prior to the record date of any
meeting of stockholders, will be entitled to 10 votes per share in any matters
submitted for vote at a meeting of stockholders. All other stockholders have one
vote per share unless this limitation is waived by the Board of Directors.
In November 1989, the Company issued 12,896,968 shares of common stock for
$1,250,000 to an individual who effectively acquired control of the Company. In
January 1995, this individual acquired an additional 1,660,485 shares of common
stock of the Company from SDC. In August 2005, this individual converted all of
his 3,518,694 shares of Class A Redeemable Convertible Preferred Stock into
23,459,133 shares of common stock.
F-16
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Redeemable Convertible Preferred Stock
In April 1990, the Company issued 1,250,000 shares of Class A Redeemable
Convertible Preferred Stock ("Preferred Stock") for $1,250,000. The Preferred
Stock had a par value of $1 per share and paid a cumulative $.06 semiannual
dividend. The dividend was payable in cash or additional shares of Preferred
Stock at $1 per share, at the option of the Company. The Company had accrued
dividends on the Preferred Stock, but no dividends had been paid. In June 2005,
the stockholder agreed to relinquish his right to all accrued but unpaid
dividends attributable to the Preferred Stock. Each share of Preferred Stock was
convertible into 6.667 shares of common stock at any time, at the option of the
holder. The Preferred Stock had a preference of $1 per share plus unpaid
dividends in the event of liquidation. The Company may have redeemed the
Preferred Stock at any time for $2 per share. The stockholder of the Preferred
Stock is the majority stockholder. The majority stockholder can designate all of
the Company's directors and, therefore, could have influenced the Company's
willingness to cause redemption of the Preferred Stock. As a result, the
Preferred Stock had been classified outside of the stockholders' deficit section
of the accompanying balance sheets. In August 2005, the majority stockholder
converted all of his 3,518,694 shares of Class A Redeemable Convertible
Preferred Stock into 23,459,133 shares of common stock.
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 outstanding. Diluted 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 outstanding adjusted to
include incremental common shares that would have been outstanding if
potentially dilutive common shares had been issued.
Note 11 - Stock Compensation Plans
The Company elected to use the modified prospective method of SFAS 123R. Under
the "modified prospective" method, compensation costs are recognized for all
newly granted or modified stock-based awards and for the unvested portion of all
awards granted to the effective date. SFAS 123R superseded APB Opinion No. 25.
Under APB Opinion No. 25, no compensation costs was recognized for stock options
with an exercise price equal to the fair market value of the Company's common
stock on the date of grant. The adoption of SFAS 123R did not have a material
effect on share-based compensation expense for the years ended December 31, 2008
and 2007. In addition, the adoption of SFAS 123R will not have a material effect
on the Company's future stock-based compensation expense.
The Company is using the straight-line method to recognize share-based
compensation expense. The amount of share-based compensation recognized during a
period is based on the value of the awards that vest in that period. For the
years ended December 31, 2008 and 2007, stock-based compensation cost was
$49,028 and $21,470, respectively, and had no effect on basic and diluted loss
per share.
F-17
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Director Compensation Plan
In December 1997, the Company adopted a director compensation plan. Under this
plan, each non-employee director, other than the majority stockholder is
compensated $500 for each meeting attended by receiving shares of common stock
issued at the higher of the per share fair market value of the common stock as
of the board of directors meeting date or $.05 per share.
Stock Option Plan
In May 1999, the Company established the TelVue Corporation 1999 Stock Option
Plan (the "Plan"). Under the Plan, the Company may grant options to acquire up
to 10 million shares of common stock. Options granted under the Plan are
intended to be incentive stock options ("ISO"). The exercise price of each ISO
will not be less than the market price of the Company's stock on the date of the
grant. The exercise price for an option, which is not an ISO, will not be less
than 50% of the market price of the Company's stock on the date of the grant.
The options expire ten years after the date of the grant or at the expiration of
the plan, which is June 28, 2009. Options vest ratably over three years,
beginning one year after the date of grant. Employees hired prior to January 1,
1995, are entitled to immediate vesting of 25% of their options. In addition,
the Company has granted stock options to non-employees.
The following table summarizes activity for all stock options for the years
ended December 31, 2008 and 2007:
2008 2007
------- -------
Weighted-average fair value of options granted $ 0.009 $ 0.044
At December 31, 2008, the value of the unvested portion of all outstanding stock
options was $47,818 which the Company expects to amortize and recognize as
compensation expense over the weighted-average service period of approximately
2.0 years.
The fair values of the options granted during the years ended December 31, 2008
and 2007 were determined using the Black-Scholes option pricing model, which
incorporates various assumptions. The risk-free rate of return of interest for
the average contractual life of the option is based on U.S. Government
Securities Treasury Constant Maturities. Expected volatility is based on the
historical daily volatility of the Company's common stock. The expected life is
determined using the short-cut method permitted under Staff Accounting Bulletin
no. 107, Share-Based Payment. The expected dividend yield is zero because the
Company currently does not pay or expect to pay dividends to stockholders. The
following are the weighted average assumptions used during the years ended
December 31, 2008 and 2007:
2008 2007
------ ------
Expected life in years 10.00 10.00
Risk-free interest rate 2.57 % 4.49 %
Volatility ............ 3.69 % 3.05 %
Expected dividend yield - -
F-18
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
A summary of all option activity follows:
Options Outstanding
--------------------------------
Weighted Average
Options Exercise Price
---------- ----------------
Balance, December 31, 2006 2,416,667 $.045
Granted and assumed ...... 2,610,000 .154
Exercised ................ (66,667) .026
Forfeited ................ (633,333) .081
---------- -----
Balance, December 31, 2007 4,326,667 $.089
Granted and assumed ...... 3,330,000 .035
Forfeited ................ (1,161,667) .081
---------- -----
Balance, December 31, 2008 6,495,000 $.062
========== =====
The following table summarizes the status of stock options outstanding and
exercisable at December 31, 2008:
Weighted
Average
Remaining
Exercise Options Contractual Options
Price Outstanding Life (Years) Exercisable
-------- ----------- ------------ -----------
$ .020 140,000 0.5 -
$ .025 350,000 0.5 350,000
$ .030 350,000 0.5 310,000
$ .035 3,000,000 0.5 3,000,000
$ .040 150,000 0.5 126,667
$ .050 250,000 0.5 25,000
$ .070 515,000 0.5 515,000
$ .090 90,000 0.5 25,833
$ .130 1,650,000 0.5 412,500
----------- -----------
Total ............ 6,495,000 4,765,000
=========== ===========
Weighted Average
Exercise Price ... $.062 $.046
=========== ===========
Note 12 - Pension Plan
The Company has a 401(k) plan available to all employees who have completed 90
days of service and are at least 21 years old. Employees may contribute to the
plan, subject to IRS limitations. The Company matches fifty percent (50%) of
contributions by participating eligible employees up to five percent (5%) of
their salary, for a maximum matching contribution of 2.5% of salary. The
Company's contributions for 2008 and 2007 amounted to $49,080 and $48,683,
respectively.
F-19
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Note 13 - Corporate Income Taxes
The provisions for income tax expense (benefit) consist of the following
components:
2008 2007
----------- -----------
Current
Federal .................... $ - $ -
State ...................... - -
----------- -----------
- -
Deferred
Federal .................... (3,649,231) (1,318,913)
State ...................... (1,018,962) (358,789)
----------- -----------
(4,668,193) (1,677,702)
Valuation allowance increase 4,668,193 1,677,702
----------- -----------
- -
----------- -----------
$ - $ -
=========== ===========
The categories of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
Federal State
-------------------------- --------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Deferred Tax Assets:
Net operating loss carryforward ........ $ 4,157,818 $ 2,532,612 $ 1,044,267 $ 614,066
Goodwill ............................... 525,126 - 152,752 -
Accrued interest - stockholder ......... 606,643 307,011 176,464 89,305
Deferred revenue ....................... 111,311 128,845 32,379 37,479
Allowance for bad debts ................ 1,752 2,014 510 586
----------- ----------- ----------- -----------
Gross Deferred Tax Asset ........... 5,402,650 2,970,482 1,406,372 741,436
Deferred Tax Liabilities:
Property and equipment, Principally due
to differences in depreciation ........ (59,823) (67,416) (17,402) (19,610)
Goodwill amortization .................. - (29,724) - (8,647)
----------- ----------- ----------- -----------
Net Deferred Tax Asset Before
Valuation Allowance .................... 5,342,827 2,873,342 1,389,970 713,179
Valuation allowance .................... (5,342,827) (2,873,342) (1,389,970) (713,179)
----------- ----------- ----------- -----------
Net Deferred Tax Asset ............. $ - $ - $ - $ -
=========== =========== =========== ===========
F-20
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible and carryforwards are available. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax assets, the net deferred tax assets are fully offset by a valuation
allowance at December 31, 2008 and 2007. Inherent uncertainty regarding the
development of a market for the Company's products and services has prevented
the Company from reaching the "more likely than not" conclusion required under
the applicable literature to recognize deferred tax assets on its balance sheet
at December 31, 2008 and 2007.
The Company has a net operating loss carryforward for Federal income tax
purposes of approximately $12,200,000 on a tax-reporting basis. The
carryforward, if not utilized, will begin to expire as follows:
Year Ending December 31,
2010 .............. $ 600,000
2019 .............. 1,000,000
2020 .............. 1,100,000
2021 .............. 1,700,000
2022 .............. 3,000,000
2023 .............. 4,800,000
-----------
$12,200,000
===========
The reconciliation of reported income tax expense to the amount of income tax
expense that would result from applying the U.S. Federal income tax rate of 34%
to pretax income is as follows:
2008 2007
----------- -----------
Federal income tax at statutory rates .. $(2,565,388) $(1,346,672)
State income tax, net of federal benefit (595,573) (356,472)
Valuation allowance .................... 3,146,276 1,677,702
Other .................................. 14,685 25,442
----------- -----------
$ - $ -
=========== ===========
Note 14 - Related Party Transactions
The Company has four unsecured lines of credit and a note payable to the
majority stockholder. (See Notes 7, 8 and 17).
F-21
TelVue Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Note 15 - Segment Information
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 ("TPS") is a system for displaying a
fully automated TV station-like display on a cable system access channel using
computer based digital technology. The TPS 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 formats. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
Summarized financial information by reporting segment as of and for each of the
years ended December 31, 2008 and 2007, is as follows:
ANI
Year Ended December 31, 2008 Services TPS Total
- ----------------------------- ----------- ----------- -----------
Revenues .................... $ 1,274,155 $ 2,434,129 $ 3,708,284
Depreciation and amortization 8,363 1,206,497 1,214,860
Operating income (loss) ..... 621,937 (7,199,004) (6,577,067)
Assets ...................... 279,312 5,858,324 6,137,636
Capital expenditures ........ - 496,309 496,309
ANI
Year Ended December 31, 2007 Services TPS Total
- ----------------------------- ----------- ----------- -----------
Revenues .................... $ 1,364,543 $ 2,674,096 $ 4,038,639
Depreciation and amortization 36,977 892,623 929,600
Operating income (loss) ..... 478,790 (3,607,806) (3,129,016)
Assets ...................... 348,671 8,854,683 9,203,354
Capital expenditures ........ - 996,581 996,581
Note 16 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents, Receivables, Accounts Payable, Accrued Expenses and
Notes Payable.
The carrying amount approximates fair market value because of the short maturity
of those instruments.
Note 17 - Subsequent Events
On March 2, 2009, the Company entered into an additional line of credit with the
majority stockholder in the amount of $400,000.
F-22
EXHIBITS
The following is a list of exhibits filed with, or incorporated by reference
into, this report (those exhibits marked with an asterisk are filed herewith and
those exhibits marked "(CP)" are management contracts or compensatory
arrangements in which a director or executive officer participates):
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 the 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).
(CP)
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). (CP)
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). (CP)
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 June 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 June 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).
26
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).
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,
File No. 000-17170). (CP)
10.11 Summary of Director Compensation (incorporated by reference to the 2004
Form 10-KSB, File No. 000-17170). (CP)
10.12 Summary of Executive Compensation, as amended. (CP) *
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,
dated March 12, 2007 (incorporated by reference to the March 13, 2007
Form 8-K, File No. 000-17170).
27
10.17 Convertible Note for $400,000, dated December 26, 2006, issued to TelVue
by the Princeton Server Group, LLC (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). (CP)
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). (CP)
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).
10.22 Separation Agreement by and between TelVue and Joseph Murphy, dated
December 31, 2008 (incorporated by reference to the December 31, 2008
Form 8-K, File No. 000-17170). (CP)
10.23 Line of Credit Note, dated March 2, 2009, between H.F. (Gerry) Lenfest
and TelVue (incorporated by reference to the Form 8-K filed on March 5,
2009, File No. 000-17170).
10.24 Fifth Amendment to Office Lease Agreement Dated March 16, 2009, between
TelVue and The Bloom Organization of South Jersey, LLC. *
11. Statement re: Computation of Per Share Earnings (see Note 10 to TelVue's
December 31, 2008 Financial Statements included herein).
23. Consent of Pressman Ciocca Smith LLP, Independent Registered Public
Accounting Firm. *
31.1 Certification of President and Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a). *
31.2 Certification of Treasurer-Controller pursuant to Rule 13a-14(a) or
15d-14(a). *
32.1 Certification of President 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 Treasurer-Controller pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELVUE CORPORATION
DATED: 03/31/09 By: /s/Jesse Lerman
-------------------
Jesse Lerman
President and Chief Executive Officer
DATED: 03/31/09 By: /s/John Fell
----------------
John Fell
Treasurer-Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ H.F. Lenfest Chairman of the 03/31/09
- ------------------ Board and Director
H.F. Lenfest
/s/ Joy Tartar Director 03/31/09
- ------------------
Joy Tartar
/s/ Robert Lawrence Director 03/31/09
- ------------------
Robert Lawrence
/s/ Jesse Lerman Director 03/31/09
- ------------------
Jesse Lerman
29
EXHIBIT INDEX
10.12 Summary of Executive Compensation, as amended. *
10.24 Fifth Amendment to Office Lease Agreement Dated March 16, 2009, between
TelVue and The Bloom Organization of South Jersey, LLC. *
23. Consent of Pressman Ciocca Smith LLP, Independent Registered Public
Accounting Firm. *
31.1 Certification of President and Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a). *
31.2 Certification of Treasurer-Controller pursuant Rule 13a-14(a) or
15d-14(a). *
32.1 Certification of President and 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 Treasurer-Controller pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
* Filed herewith.
30