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, 2009
[_] 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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [_] 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, 2009, based on a per share average
bid and asked price of $.14 was $1,399,758.
Number of shares of registrant's common stock outstanding as of March 19, 2010:
48,561,644 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2010
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, 2009, are incorporated by reference into
Part III of this Form 10-K.
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 Corporation ("TelVue" or the "Company") 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 TelVue's belief or current expectations of management,
such as statements including the words "budgeted," "anticipate," "project,"
"estimate," "expect," "may," "believe," "potential" and similar statements which
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 TelVue's 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 TelVue undertakes 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
developments. To the extent that the information presented in this Annual Report
on Form 10-K for the year ended December 31, 2009 discusses financial
projections, information or expectations about TelVue's products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. The Company is making these forward-looking statements in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Although the Company believes 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 TelVue believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this 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 TelVue or any other
person that the Company's objectives and plans will be achieved.
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ITEM 1. BUSINESS
GENERAL
TelVue is a broadcast technology company that specializes in playback,
automation and workflow solutions for public, education and government ("PEG")
television stations, cable, telephone company ("Telco") and satellite television
providers, K-12 and higher education institutions and professional broadcasters.
TelVue was incorporated in Delaware 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.
TelVue operates two business segments. The first segment, TelVue
Products and Services ("TPS"), includes equipment such as the TelVue
Princeton(TM) broadcast and storage servers, and encoding and transcoding
workstations ("TelVue Princeton(TM)") and services such as WEBUS(R) and
PEG.TV(TM). TelVue Princeton(TM) are 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. TelVue is currently marketing TelVue Princeton(TM), WEBUS(R), and
PEG.TV(TM) to municipal governments, K-12 school districts, higher education
institutions, cable and Telco Multi System Operators ("MSOs"), and other
broadcasters as a means of lowering the cost, simplifying operations, and
improving the quality of their local channels.
TPS products include:
TelVue Princeton(TM) Digital Broadcaster B100
TelVue Princeton(TM) Digital Broadcaster B1000
TelVue Princeton(TM) Digital Broadcaster B3000
TelVue Princeton(TM) Digital Video Archive Server S3000F
TelVue Princeton(TM) Encoding Workstation C500W
TelVue Princeton(TM) Encoding and Transcoding Workstation T7400E
The Company's 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. TelVue's 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, TelVue's
customers can operate their TelVue Princeton(TM) server from anywhere at
anytime. TelVue Princeton(TM) have been expanded to include all popular
broadcast formats to meet the needs of local origination broadcasters across
multiple market segments including PEG, K-12, higher education, cable and Telco,
and professional broadcast television. TelVue also offers workflow products for
video ingest, transcoding, and storage under the TelVue Princeton(TM) brand.
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TPS services include:
WEBUS(R) Automated broadcast digital signage display on TV Channel
WEBUS Inside(TM) WEBUS(R) integrated within TelVue Princeton(TM) Servers
WEBLINX(TM) Automated WEBUS(R) message display on websites
VideoActives(TM) Real time, dynamic video content for channels
PEG.TV(TM) Internet Streaming and Video-on-Demand Service
WEB-EM(R) Automated WEBUS(R) message display on cell phones and email
WEBUS(R) is a web-based, multi-user digital signage system that enables
multiple, authorized users such as township officials, school principals and
civic leaders to update broadcast graphics and videos on their access channel
and website from any Internet connected computer or mobile device. The WEBUS(R)
service helps communities and television station operators better manage
workflow by eliminating the routine tasks of video message creation, 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.
WEBUS Inside(TM) is a version of the WEBUS(R) digital signage display
application that runs natively on the Company's TelVue Princeton(TM) video
server. This offers a significant cost savings as well as an opportunity to
offer WEBUS(R) as a software-only upgrade to existing TelVue Princeton(TM)
customers. It also provides a competitive advantage in the Company's ability to
offer a combination broadcast video server and signage player in a single
platform, including multiple channels on multi-channel servers.
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.
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. VideoActives(TM) integrate directly with the
WEBUS(R) service.
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. PEG.TV(TM) allows TelVue to sell
Internet Live Streaming and Video-on-Demand to its 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
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present a library of videos. This expands TelVue's addressable market beyond
those communities and organizations that have traditional broadcast channel
capability. PEG.TV(TM) is designed 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.
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
TelVue still maintains the WEB-EM(R) technology, the Company is 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.
TelVue's second and legacy business segment is the marketing and
service company which sells automatic number identification ("ANI")
telecommunication services to the cable television industry. 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 National Data Center in
Philadelphia, Pennsylvania. TelVue serves cable television systems across the
United States via trunk lines and data circuits that it currently leases from
Qwest. TelVue believes it receives a favorable trunk usage rate from Qwest.
TelVue does expect 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.
NEW PRODUCTS AND SERVICES
TelVue continued to invest in research and development throughout 2009
and introduced a number of new products and feature enhancements.
In the second quarter of 2009, TelVue introduced a new TelVue
Princeton(TM) broadcast server model (B100-IP) with all digital outputs for
professional cable and Telco broadcast markets. The easy to operate TelVue
Princeton(TM) B100-IP model is ideal for these broadcasters, as it allows for
multiple unit deployments across their networks at an affordable price without
the added costs of an encoder.
In the second quarter of 2009, TelVue relocated the WEBUS(R)
information technology infrastructure from its Mt. Laurel, New Jersey office
location to TelVue's National Data Center at its facility in Philadelphia,
Pennsylvania. This facility provides significantly increased bandwidth to the
Internet to accommodate WEBUS(R) service growth, improving the quality of
service to end users. In addition, the facility provides a more robust operating
environment with additional redundancies and security for increased service
availability. The relocation of service eliminates Internet bandwidth usage
related to the WEBUS(R) service at the Company's Mt. Laurel office, allowing
increased bandwidth availability for normal office productivity. There were no
additional Internet or space costs associated with the relocation because
adequate space and bandwidth were already in place for TelVue's PEG.TV(TM)
service infrastructure which has been run out of this facility.
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In the second quarter of 2009, TelVue expanded its PEG.TV(TM) Internet
live streaming and Video-on-Demand service to support additional popular media
formats. Live streaming now supports the Flash(R) video format, and
Video-on-Demand now supports the MPEG-4 Advanced Video Codec format. These
enhancements increase PEG.TV(TM) compatibility with industry standard tools for
creating web video and existing web video libraries that organizations may have
already created. Live Flash(R) video support leverages the wide deployment base
of the Flash(R) player, allowing most end users to avoid installing additional
software plug-ins, whether on a Mac or PC, to view PEG.TV(TM) content.
In the third quarter of 2009, TelVue released version 3.6 of its TelVue
Princeton(TM) digital broadcast server software. The version 3.6 software
contains significant improvements and several new integrated workflow features
including Audio Level Normalization and MPEG File Repair. MPEG file repair and
normalization tools can be costly if purchased separately. Integrating these
tools natively adds even more value to TelVue Princeton(TM) and further
streamlines workflow.
Also, in the third quarter of 2009, TelVue launched a beta test of the
Alliance for Community Media ("ACM") compliant Shared Content Server ("SCS")
platform designed for PEG stations to easily share broadcast quality video
programming with other stations using the Internet. In addition to supporting
station-to-station sharing, the system also acts as a distribution network for
content producers who want to effectively reach the thousands of PEG stations
across the country.
In the fourth quarter of 2009, TelVue enhanced its PEG.TV(TM) Internet
streaming and video-on-demand service by adding a Banner Ad Management feature
for announcements and sponsorship revenue generation. PEG.TV(TM) Banner Ad
Management was designed to assist PEG.TV(TM) user organizations with the
promotion of breaking community news, special events, local business
sponsorships, public meetings and health or safety alerts. Additionally, website
hyperlinks can be embedded in each banner ad to provide additional details about
an organization's sponsor or event. PEG.TV(TM) Banner Ad Management can be used
by organizations as an effective way to generate sponsorship revenue to offset
costs.
In the fourth quarter of 2009, TelVue introduced a new multi-channel
high-definition TelVue Princeton(TM) broadcast server model (B3000-PRO) with up
to four independent high-definition channels. The multi-channel high-definition
broadcast server is geared towards high-end PEG and University channels, as well
as professional broadcasters. The TelVue Princeton(TM) broadcast server family
supports all major broadcast interfaces, making TelVue the only hyperlocal
broadcast company to offer the full complement of broadcast interface options
including analog, SDI/HD-SDI, DVB-ASI, and pure IP. The Company also added
support to TelVue Princeton(TM) line for third party trafficking and middleware
interfaces. These additions make the TelVue Princeton(TM) broadcast server
interoperable with many primary professional broadcast, cable, Telco, and IPTV
ecosystem components.
LICENSES AND PATENTS
On July 8, 2003, TelVue filed for a patent for WEBUS(R). WEBUS(R)
provides the operators of PEG 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
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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.
As a result of TelVue's acquisition of Princeton Server Group, Inc.
("PSG") in 2007, the Company acquired four 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. Two of these pending patents have
since been abandoned.
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 2008 or 2009. 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
purchased 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 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 2008 or 2009.
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.
SALES OF PRODUCTS AND SERVICES
To expand its sales reach, TelVue complements its internal sales staff
with a third-party reseller network. This method broadens TelVue's sales reach
by employing both local and national resellers to create sales opportunities,
supported by TelVue's internal sales staff, which increases sales while reducing
and delaying some sales expenses until a sale is consummated. To date, 18
resellers have been contracted. To help expedite the impact of the Company's
reseller relationships, TelVue launched a Partner Resource Center in March 2009
on the Company's website that includes training materials, videos, and sales
tools to assist TelVue's resellers.
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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 complements TelVue's reseller network and provides additional
growth opportunities leveraging the Company's OEM partners' strong distribution
channel and brand.
MARKETING OF PRODUCTS AND SERVICES
TelVue markets its products and services to hyperlocal broadcasters
using:
o direct mail;
o e-mail;
o Internet banner ads;
o Search Engine Optimization;
o the Company's website;
o online videos and webinars; and
o telemarketing.
Additionally, TelVue attends key industry conferences where the Company
demonstrates its products and services. TelVue's partner program includes co-op
marketing opportunities with the Company's Resellers.
Sales of TelVue's ANI service to date have been made to operating cable
and satellite television companies with a broad geographical distribution.
TelVue believes that relations with all of its 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, 2009, there were no MSOs that individually comprised
more than 10% of TelVue's 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.
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 TelVue's core markets, few
offer the comprehensive solution that the Company provides. Additionally,
TelVue's IT and web-centric approach to broadcast automation and workflow and
the simplicity of its applications make TelVue 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.
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EMPLOYEES
At December 31, 2009, TelVue had 24 full-time employees, compared to 26
full-time employees and one part-time employee as of December 31, 2008. 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 ten customers valued at approximately $59,000. 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.
RESEARCH AND DEVELOPMENT
With the acquisition of PSG, TelVue gained a strong and highly
technical research and development 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 was to expire on
May 31, 2012. However, TelVue had 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. On January 29,
2010, TelVue exercised its right of early termination and paid the termination
fee of $13,098. On March 1, 2010 TelVue executed a new 5 year lease to remain at
this location. Additionally, on March 15, 2010, TelVue executed the First
Amendment to this lease, which established the operating expense allocation. The
space is used to house the equipment used to provide the ANI service and TelVue
Product and Services, and provides office space for the executive, sales,
secretarial and technical support personnel.
8
TelVue also leased 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 was used for lab space for continued TelVue
Princeton(TM) research and development. This lease was terminated on August 31,
2009 and all of the equipment from that facility was relocated to the Mt.
Laurel, New Jersey office space.
Additionally, TelVue leases rack space and Internet bandwidth at a
co-location facility at 401 N. Broad St., Philadelphia PA. TelVue hosts its
PEG.TV(TM) Internet streaming and Video-on-Demand service at the co-location
facility. Additionally, in 2009 the Company moved its WEBUS(R) and ANI
infrastructure to the facility for further operational cost savings and
increased service capacity and performance.
ITEM 3. LEGAL PROCEEDINGS
From time to time, TelVue 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 TelVue's business.
TelVue is currently not aware of any such legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
affect on TelVue's business, financial condition or operating results.
ITEM 4. (REMOVED AND RESERVED)
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 2009 HIGH LOW
First $.15 $.01
Second $.20 $.035
Third $.22 $.045
Fourth $.175 $.051
QUARTER 2008
First $.08 $.04
Second $.05 $.025
Third $.04 $.011
Fourth $.03 $.013
The above market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
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HOLDERS
As of March 19, 2010, 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. (Gerry) 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. Lenfest received for the conversion of his
preferred stock in August 2005. As of March 19, 2010, 41,130,019 shares of
TelVue's common stock were entitled to 10 votes per share. The remaining
7,431,625 shares of common stock were entitled to one vote per share. Mr.
Lenfest owns 38,016,586 shares of common stock, all of which are entitled to ten
votes per share.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
NUMBER OF NUMBER OF
SECURITIES TO BE SECURITIES
ISSUED UPON WEIGHTED-AVERAGE REMAINING
EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR
OUTSTANDING OUTSTANDING FUTURE ISSUANCE
OPTIONS, WARRANTS OPTIONS, WARRANTS UNDER EQUITY
PLAN CATEGORY AND RIGHTS AND RIGHTS COMPENSATION PLANS
- ------------------- ----------------- ------------------ ------------------
Equity
compensation plans
approved by
security holders ..... 4,495,000 $.066 3,695,000
Equity
compensation plans
not approved by
security holders ..... (a) (a) (a)
100,000(b) .033(b) 100,000(b)
--------- ----- ---------
Total ................ 4,595,000 $.066 3,795,000
========= ===== =========
(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 2008, TelVue issued 300,000 stock options to a certain consultant of
TelVue. 200,000 of these stock options have been forfeited.
10
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 TelVue's financial condition
and results of operations should be read in conjunction with the Company's
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 to achieve professional results at affordable prices. TelVue
currently serves over 550 TV broadcast outlets including Professional
Broadcasters, cable, Telco, K-12, Higher Education, and PEG channels with
modern, cost effective broadcast technology solutions. TelVue combines its
proprietary digital media software and today's open technologies to simplify
professional broadcast equipment and workflow. As a result, TelVue's customers
benefit from improved programming and reduced costs and are better positioned to
meet the new challenges of a rapidly changing industry including a stronger
Internet presence.
Despite a down economy and tighter budgets in many of its market
segments, TelVue grew TPS revenue by 32.3% while decreasing operating expenses
by 44.7% in 2009 compared to the prior year. Excluding the goodwill impairment
charge that was recorded in 2008, operating expenses decreased by 27.5% in 2009
compared to the prior year. TelVue achieved these results through expansion into
the cable and Telco markets that were not as heavily impacted by the economy,
growing its reseller network that now includes a national reseller in each of
the cable, Telco, and education markets, and introducing a number of new
products and services. Additionally, as a value provider, TelVue's products and
services remained attractive to its core municipal and PEG markets despite
tighter budgets.
TelVue now delivers local programming to over 15 Million homes
nationwide, powers over 1,000 PEG television channels and provides Leased Access
and Local Origination solutions to 7 of the top 10 MSOs and the nation's largest
telephone company.
CASH FLOW
With its streamlined organization and revenue growth, TelVue's
operational cash flow requirements were significantly less. TelVue was required
to draw $1,450,000 from its lines of credit in 2009 compared to $3,750,000 in
2008. This represented a 61% decrease. In the fourth quarter of 2009, TelVue
received a $1,500,000 line of credit from its majority stockholder, Mr. Lenfest,
to assist in continuing to grow the business. While Mr. Lenfest has demonstrated
his support for TelVue's new management and technology focus, there is no
guarantee that he will continue to provide funding in the future.
11
TelVue had negative cash flow from operating activities of $1,364,253
and $3,229,653 for the years ended December 31, 2009 and 2008, respectively. The
increase in cash flow in 2009 compared to 2008 was primarily due to increased
TelVue Princeton(TM) sales in addition to reductions in operating expenses.
MARKETS
TelVue has primarily focused its TPS marketing and sales efforts to
date on municipalities operating community television stations and powers over
1,000 PEG channels. TelVue expects the PEG market to continue to be a growth
area for the Company; however, TelVue sees additional growth opportunity for the
Company by expanding its marketing and sales efforts into markets including
cable, Telco, K-12, University, Professional Broadcast and more. TelVue's
reseller sales strategy will help it expand in these vertical markets more
quickly.
In the first quarter of 2009, TelVue received multiple broadcast system
orders from a major cable television company streamlining its cable Local
Origination and Leased Access operations. TelVue continued its expansion in the
cable and Telco markets through 2009, and it now provides Leased Access and
Local Origination broadcast solutions to 7 out of 10 of the top MSOs and the
largest telephone company in the United States.
INDUSTRY TRENDS
A number of industry trends that TelVue believes play to its strengths
include:
o The continued transition from analog/tape-based video systems to
digital and digital file-based systems.
o Stations using first generation digital video systems are beginning to
upgrade to second generation systems.
o The continued transition from standard definition to high-definition.
o Increased competition between cable and Telco television providers and
satellite broadcast providers is proving that hyper-local content can
be an important differentiator. As such cable and Telco television
providers 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.
12
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.
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 TelVue's 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,
TelVue believes content control and broadcast workflow for its core
markets will still be strengths for TelVue.
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.
CRITICAL ACCOUNTING POLICIES
In presenting its financial statements in conformity with accounting
principles generally accepted in the United States, TelVue is required to make
certain estimates and assumptions that affect the amounts reported therein.
Several of the estimates and assumptions the Company is required to make relate
to matters that are inherently uncertain as they pertain to future events.
However, events that are outside of TelVue's 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 TelVue's results of operations,
financial position and liquidity. TelVue believes that the estimates and
assumptions used when preparing its financial statements were the most
appropriate at that time. Presented below are those accounting policies that
TelVue believes require subjective and complex judgments that could potentially
affect reported results.
Use of Estimates
TelVue's discussion and analysis of its financial condition and results
of operations are based upon its financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the Company 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, TelVue evaluates estimates, including
those related to impairment of long-lived assets and allowance for doubtful
accounts. TelVue bases its estimates on historical experience and on various
other assumptions that the Company believes 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, TelVue believes that its estimates,
including those for the above-described items, are reasonable.
13
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 TelVue's 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,
the Company determined that the carrying value of this Goodwill was impaired,
and a charge of $1,921,405 was recorded to write off this Goodwill. As a result,
TelVue's net loss for 2008 was increased by this amount to $7,545,259. Had this
subjective determination not been made, the Company would not have recorded this
charge.
Revenue Recognition
In accordance with accounting principles generally accepted in the
United States, TelVue recognizes revenues related to TelVue Princeton(TM) upon
shipment of the equipment to its customers. Revenues related to its 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 the Company chose to recognize these revenues when payments were
received under these agreements, then the Company would recognize more revenue
in earlier periods and would not record any deferred revenues. TelVue believes
that its practice allows the Company 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 TelVue's ANI service is recognized in the month the service
is provided.
Stock-Based Compensation
TelVue accounts for stock-based compensation in accordance with the
fair value recognition method. The Company uses 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 TelVue's 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
TelVue's 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
TelVue's 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.
14
RESULTS OF OPERATIONS
Beginning in January 2008, TelVue began a weighted allocation of all
compensation, general and administrative, interest and amortization expenses
between its two segments, TPS and ANI. Previously, only a minimal amount of
expenses were allocated between business segments.
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.
Additionally, in March 2009, there was a reduction in workforce
involving the elimination of five positions, resulting in an annualized savings
on compensation expense of $360,000.
The following discussion deals with the decrease in operating loss for
the year ended December 31, 2009, compared to the year ended December 31, 2008,
and the reasons for the decrease. TelVue also discusses the marketing of its TPS
segment and the changes in TPS revenue and expenses. TelVue further discusses
the continued loss of its subscriber base for the ANI service when comparing the
year ended December 31, 2009 to the year ended December 31, 2008. 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.
$ Change % Change
----------- -----------
2009 2008 Fav/(Unfav) Fav/(Unfav)
----------- ----------- ----------- -----------
Revenues
TPS ................. $ 3,220,728 $ 2,434,129 $ 786,599 32.3
ANI Services ........ 1,160,258 1,274,155 (113,897) (8.9)
Cost of Revenues
TPS ................. 1,707,764 1,852,339 144,575 7.8
ANI Services ........ 207,107 376,126 169,019 44.9
Operating Expenses
Selling and marketing 1,014,577 1,515,579 501,002 33.0
General and
administrative ..... 2,305,037 3,405,042 1,100,005 32.3
Depreciation and
Amortization ....... 1,130,259 1,214,860 84,601 6.9
Goodwill Impairment . - 1,921,405 1,921,405 N/A
----------- ----------- ----------- ------
Operating Loss ........ (1,983,758) (6,577,067) 4,593,309 69.8
Other Income (Expense) (808,599) (968,192) 159,593 16.5
----------- ----------- ----------- ------
Net Loss .............. $(2,792,357) $(7,545,259) $ 4,752,902 63.0
=========== =========== =========== ======
15
The TPS segment had an operating loss of $2,562,381 for the year ended
December 31, 2009, compared to an operating loss of $7,199,004 for the year
ended December 31, 2008. The ANI segment had operating income of $578,623 for
the year ended December 31, 2009, compared to $621,937 for the year ended
December 31, 2008.
Revenues
TPS revenue increased $786,599 for the year ended December 31, 2009,
compared to the year ended December 31, 2008. The majority of the revenue
increases were attributed to increased focus on selling TelVue Princeton(TM),
growth in the cable and Telco markets, and a 74% growth in reseller sales
compared to 2008, in addition to the previously mentioned new products. There
was also an increase in consulting revenue in 2009 when compared to 2008. These
increases were offset by a continued decline in sponsorship revenues. As of
December 31, 2009, TelVue was providing its WEBUS(R) service to 246 customers
compared to 182 customers at December 31, 2008. TelVue is marketing its products
and services nationally. TelVue has also sold equipment in 41 different states
and the District of Columbia. The use of resellers is expected to significantly
increase TelVue's national reach.
ANI service revenue declined $113,897 for the year ended December 31,
2009, when compared to the same period of 2008. As expected, feature revenue
decreased $45,466, pay-per-view plus revenue decreased $45,448, and pay-per-view
buy revenue decreased $15,307, for the year ended December 31, 2009 when
compared to the same periods of 2008. These decreases were mainly due to a
continued reduction in the number of subscribers served during this period when
compared to 2008 (as discussed below).
As of December 31, 2009, TelVue ANI was serving approximately 3.8
million full-time cable subscribers compared to approximately 4.2 million
full-time cable subscribers served as of December 31, 2008. During the year
ended December 31, 2009, approximately 426,000 full-time and part-time cable
subscribers cancelled the ANI service. During the same period, there were no new
cable subscribers 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.
Cost of Revenues
Cost of revenues for TPS decreased $144,575 for the year ended December
31, 2009, when compared to the year ended December 31, 2008, 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. There were also savings in compensation related to the
previously mentioned reduction in workforce.
ANI cost of revenues decreased for the year ended December 31, 2009 by
$169,019 when compared to the year ended December 31, 2008. 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 the reversal of
previously accrued royalties that were determined to be no longer payable.
16
Selling and Marketing Expenses
Total selling expenses decreased by $501,002 for the year ended
December 31, 2009 when compared to the year ended December 31, 2008. Selling
expenses related to TPS decreased $483,642 for the year ended December 31, 2009,
when compared to the year ended December 31, 2008. These decreases were
primarily a result of decreased compensation related to the previously mentioned
reductions in workforce. There were also savings in marketing expenses in 2009
when compared to 2008; for example, in 2008, the Company spent significant funds
related to re-branding that it did not expend in 2009. Selling expenses related
to the ANI service decreased by $17,360 for the year ended December 31, 2009,
when compared to 2008. This decrease was also a result of a decrease in
compensation related to the previously mentioned reductions in workforce, in
addition to savings in commissions due to the Company's decision to no longer
pay commissions on ANI sales activities.
General and Administrative Expenses
General and administrative expenses decreased by $1,100,005 for the
year ended December 31, 2009 when compared to the year ended December 31, 2008.
TPS general and administrative expenses decreased $1,040,964 for the year
December 31, 2009 when compared to the year ended December 31, 2008. A
contributing factor to this decrease was a reduction in compensation expense,
primarily due to an expense recorded in 2008 for separation pay to the former
President and Chief Executive Officer. Other factors contributing to this
decrease were lower legal and accounting fees compared to prior year, in
addition to lower consulting and executive search fees paid than in 2008. The
Company's rent expense also decreased as a result of vacating the office space
it had occupied in Princeton as of August 31, 2009. ANI segment general and
administrative expenses decreased $59,041 for the year ended December 31, 2009
when compared to the year ended December 31, 2008, once again related to the
2008 separation pay mentioned above.
Depreciation and Amortization Expense
During the year ended December 31, 2009, TelVue purchased $227,732 of
equipment compared to $496,309 purchased during the year ended December 31,
2008. The majority of the equipment purchased during the year ended December 31,
2009 and 2008 was for software development and equipment related to the TPS
segment. Depreciation and amortization expense decreased $49,230 and $35,371 for
the year ended December 31, 2009, as a result of the fewer capital purchases and
older assets becoming fully depreciated, in addition to lower amortization
expense related to the PSG intangible assets. Depreciation and amortization
accounted for 25% and 20% of total operating expenses, excluding goodwill
impairment, for the years ended December 31, 2009 and 2008, respectively. At
December 31, 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 $2,792,357 for the year ended December 31,
2009, compared to a net loss of $7,545,259 for the year ended December 31, 2008.
A large portion of this decreased 2009 net loss was attributable to the Goodwill
impairment write-down of $1,921,405 mentioned above. Additionally, the increase
in 2009 TelVue Princeton(TM) sales and revenue as well as the previously
mentioned decreases in operating expense were contributing factors to this
decrease in net loss. At December 31, 2009 and 2008, TelVue recorded valuation
17
allowance increases of $652,992 and $2,467,398, 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 $13,200,000 on a tax-reporting
basis as of December 31, 2009 (see Note 11 of TelVue's accompanying financial
statements).
Accounts Receivable and Allowance for Doubtful Accounts
As of December 31, 2009, TelVue maintained a bad debt reserve in the
amount of $19,080 as compared to $5,662 as of December 31, 2008. The reserve was
calculated based on the estimate that 2% of outstanding receivables at December
31, 2009 and 1% of outstanding receivables at December 31, 2008 would not be
collected.
TelVue's days for sales in average accounts receivable was 63 days at
December 31, 2009, compared to 60 days at December 31, 2008. TelVue will from
time to time offer sales incentives and/or discounts to its TelVue Princeton(TM)
customers. The Company has not 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.
LIQUIDITY AND CAPITAL RESOURCES
Since November 2, 1989, TelVue has funded its expansion and operating
deficit from the proceeds of the sale of shares of TelVue's common stock and
Preferred Stock (as defined below) to Mr. Lenfest, TelVue's majority
stockholder, and from loans from Mr. Lenfest. 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
acquisition of Source Communications Group ("Source"), 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, TelVue's non-interest bearing note in the amount
of $541,000 (the "Science Note"). The Science Note was originally issued by
TelVue to Science and was payable December 31, 1996. The maturity date of the
Science Note had been extended by TelVue and Mr. Lenfest on a yearly basis. On
June 16, 2005, the members of the Board of Directors of TelVue and Mr. Lenfest
extended the maturity date of the Science Note to January 1, 2011.
On 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 WEBUS(R) service. 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
18
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 $912,373 as of December 31, 2009, 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, 2009, TelVue had borrowed $10,000,000 under the 2006 Note with
accrued interest in the amount of $1,685,863, 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, 2009, TelVue had
borrowed $2,300,000 under the 2007 Note with accrued interest in the amount of
$144,635, fully exhausting this note.
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, which was March 3,
2009. As of December 31, 2009, TelVue had borrowed $400,000 under the 2009 Q1
Note with accrued interest in the amount of $13,815, fully exhausting this note.
19
As a result of the anticipated exhaustion of the line of credit under
the 2009 Q1 Note, TelVue entered into an additional Line of Credit Note (the
"2009 Q2 Note") with Mr. Lenfest on June 8, 2009, in the principal amount of
$500,000. The minimum advance under the 2009 Q2 Note is $100,000 and the
interest rate on the 2009 Q2 Note is equal to the prime rate plus one percent
(1%). The 2009 Q2 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 Q2 Note may be declared immediately due
and payable. The 2009 Q2 Note is unsecured and will expire six years from the
date of the first advance under the 2009 Q2 Note unless extended or renewed.
Principal and interest on the 2009 Q2 Note are also due and payable six years
from the date of the first advance under the 2009 Q2 Note, which was June 9,
2009. As of December 31, 2009, TelVue had borrowed $500,000 under the 2009 Q2
Note with accrued interest in the amount of $10,244, fully exhausting this note.
As a result of the anticipated exhaustion of the line of credit under
the 2009 Q2 Note, TelVue entered into an additional Line of Credit Note (the
"2009 Q3 Note") with Mr. Lenfest on October 5, 2009, in the principal amount of
$400,000. The minimum advance under the 2009 Q3 Note is $100,000 and the
interest rate on the 2009 Q3 Note is equal to the prime rate plus one percent
(1%). The 2009 Q3 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 Q3 Note may be declared immediately due
and payable. The 2009 Q3 Note is unsecured and will expire six years from the
date of the first advance under the 2009 Q3 Note unless extended or renewed.
Principal and interest on the 2009 Q3 Note are also due and payable six years
from the date of the first advance under the 2009 Q3 Note, which was October 14,
2009. As of December 31, 2009, TelVue had borrowed $400,000 under the 2009 Q3
Note with accrued interest in the amount of $2,381, fully exhausting this note.
As a result of the anticipated exhaustion of the line of credit under
the 2009 Q3 Note, TelVue entered into an additional Line of Credit Note (the
"2010 Note") with Mr. Lenfest on December 8, 2009, in the principal amount of
$1,500,000. The minimum advance under the 2010 Note is $100,000 and the interest
rate on the 2010 Note is equal to the prime rate plus one percent (1%). The 2010
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 2010 Note may be declared immediately due and payable. The 2010
Note is unsecured and will expire six years from the date of the first advance
under the 2010 Note unless extended or renewed. Principal and interest on the
2010 Note are also due and payable six years from the date of the first advance
under the 2010 Note. No amounts were outstanding on the 2010 Note as of December
31, 2009. The first advance was made on March 16, 2010.
On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under
the 2006 Note to loan to PSG to fund their operating expenses (the "PSG Note").
The PSG Note was a convertible note that bore interest at a rate of six percent
(6%) per annum. No payments of principal or interest were due until July 1,
2007. Under the PSG Note interest accrued through July 1, 2007 was to be added
to the principal. Interest was payable monthly from July 1, 2007 through January
1, 2008. The remaining balance was payable in 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
20
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 WEBUS(R) service 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.
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, 2009, TelVue had 426,000 full and part-time subscribers cancel
service and no new subscribers were added to the ANI service. The cable
operators cancelled the ANI service primarily as a result of moving their
subscribers onto two-way digital service.
21
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 financings from Mr. Lenfest under the 2005 Note, 2006 Note, 2007
Note, 2009 Q1 Note, 2009 Q2 Note and 2009 Q3 Note have been exhausted. As a
result of this, TelVue secured the 2010 Note from Mr. Lenfest to help TelVue
grow to a profitable level. The 2005 Note, 2006 Note, 2007 Note, 2009 Q1 Note,
2009 Q2 Note and 2009 Q3 Note have helped, and the 2010 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.
TelVue expects to see some continued adverse effects on sales in 2010
due to the current economic conditions, primarily in the PEG markets. The
Company anticipates some of this being offset by federal stimulus dollars being
allocated to these markets. Additionally, TelVue feels that its expansion into
markets outside of these will broaden its 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, 2009 that
had or are reasonably likely to have, a current or future effect on TelVue's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to TelVue's interests.
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 disclosures 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.
22
(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 Financial Statements appearing in TelVue's 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 the Company's 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.
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, 2009. 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, 2009.
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.
23
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 2010 Annual Meeting of
Stockholders that will be filed not later than April 30, 2010.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated herein by
reference to TelVue's Proxy Statement for its 2010 Annual Meeting of
Stockholders that will be filed not later than April 30, 2010.
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 2010 Annual Meeting of
Stockholders that will be filed not later than April 30, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
At December 31, 2009, TelVue was indebted to Mr. Lenfest in the
principal amount of $17,400,000 and accrued interest of $2,769,311.
Other related transactions are described in Notes 5, 6, 8 and 12 of the
2009 Financial Statements of TelVue.
Certain other information called for by this Item is incorporated
herein by reference to TelVue's Proxy Statement for its 2010 Annual Meeting of
Stockholders that will be filed not later than April 30, 2010.
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 2010 Annual Meeting of
Stockholders that will be filed not later than April 30, 2010.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm dated March 30, 2010.
Balance Sheets as of December 31, 2009 and 2008.
Statements of Operations for the years ended December 31, 2009 and 2008.
Statements of Stockholders' Deficit for the years ended December 31, 2009 and
2008.
Statements of Cash Flows for the years ended December 31, 2009 and 2008.
Notes to Financial Statements.
24
TelVue Corporation
Financial Statements
Years Ended December 31, 2009 and 2008
Table of Contents Page No.
Report of Independent Registered Public Accounting Firm ................ F - 2
Financial Statements
Balance Sheets ...................................................... F - 3
Statements of Operations ............................................ F - 5
Statements of Stockholders' Deficit ................................. F - 6
Statements of Cash Flows ............................................ F - 7
Notes to Financial Statements ....................................... F - 8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders
TelVue Corporation
We have audited the accompanying balance sheets of TelVue Corporation (a
Delaware corporation) as of December 31, 2009 and 2008, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of TelVue Corporation as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Pressman Ciocca Smith LLP
Huntingdon Valley, Pennsylvania
March 30, 2010
F-2
TelVue Corporation
Balance Sheets
December 31, 2009 and 2008
ASSETS 2009 2008
------------ ------------
CURRENT ASSETS
Cash and cash equivalents .................. $ 112,213 $ 250,698
Accounts receivable - trade, net of
allowance for doubtful accounts of
$19,080 in 2009 and $5,662 in 2008 ....... 934,933 560,579
Inventory ................................ 258,952 266,032
Prepaid expenses ......................... 18,206 54,636
------------ ------------
TOTAL CURRENT ASSETS ......................... 1,324,304 1,131,945
PROPERTY AND EQUIPMENT ....................... 7,367,653 7,235,689
Less accumulated depreciation .............. 6,495,749 6,051,809
------------ ------------
871,904 1,183,880
DEFINITE-LIVED INTANGIBLE ASSETS ............. 2,825,200 3,415,751
INDEFINITE-LIVED INTANGIBLE ASSETS - OTHER ... 397,260 397,260
OTHER ASSETS ................................. 19,665 8,800
------------ ------------
$ 5,438,333 $ 6,137,636
============ ============
See accompanying notes
F-3
TelVue Corporation
Balance Sheets (continued)
December 31, 2009 and 2008
LIABILITIES AND STOCKHOLDERS' DEFICIT 2009 2008
------------ ------------
CURRENT LIABILITIES
Accounts payable ........................... $ 331,993 $ 315,236
Accrued expenses ........................... 81,225 444,659
Deferred service revenue ................... 538,472 359,764
Other liabilities .......................... 704 1,784
------------ ------------
TOTAL CURRENT LIABILITIES .................... 952,394 1,121,443
LINES OF CREDIT - MAJORITY STOCKHOLDER ....... 17,400,000 15,950,000
NOTE PAYABLE - MAJORITY STOCKHOLDER .......... 541,000 541,000
ACCRUED INTEREST - MAJORITY STOCKHOLDER ...... 2,769,311 1,960,708
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,
48,561,644 and 48,461,644 shares
issued and outstanding at December
31, 2009 and 2008, respectively .......... 485,617 484,617
Additional paid-in capital ................ 4,879,853 4,877,353
Accumulated deficit ....................... (21,589,842) (18,797,485)
------------ ------------
(16,224,372) (13,435,515)
------------ ------------
$ 5,438,333 $ 6,137,636
============ ============
See accompanying notes
F-4
TelVue Corporation
Statements of Operations
Years Ended December 31, 2009 and 2008
2009 2008
------------ ------------
REVENUES
TelVue products and services ............. $ 3,220,728 $ 2,434,129
ANI ...................................... 1,160,258 1,274,155
------------ ------------
4,380,986 3,708,284
COST OF REVENUES
TelVue products and services ............. 1,707,764 1,852,339
ANI ...................................... 207,107 376,126
------------ ------------
1,914,871 2,228,465
------------ ------------
GROSS PROFIT ............................... 2,466,115 1,479,819
OPERATING EXPENSES
Selling and marketing .................... 1,014,577 1,515,579
General and administrative ............... 2,305,037 3,405,042
Depreciation and amortization ............ 1,130,259 1,214,860
Goodwill impairment ...................... - 1,921,405
------------ ------------
4,449,873 8,056,886
------------ ------------
OPERATING LOSS ............................. (1,983,758) (6,577,067)
OTHER INCOME (EXPENSE)
Interest expense - related party ......... (808,603) (968,429)
Interest income .......................... 4 237
------------ ------------
(808,599) (968,192)
------------ ------------
LOSS BEFORE INCOME TAXES ................... (2,792,357) (7,545,259)
INCOME TAX EXPENSE ....................... - -
------------ ------------
NET LOSS ................................... $ (2,792,357) $ (7,545,259)
============ ============
BASIC NET LOSS PER COMMON SHARE ........... $ (0.06) $ (0.16)
============ ============
DILUTED NET LOSS PER COMMON SHARE ......... $ (0.06) $ (0.16)
============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING ...................... 48,531,507 48,448,920
============ ============
See accompanying notes
F-5
TelVue Corporation
Statements of Stockholders' Deficit
Years Ended December 31, 2009 and 2008
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Deficit
------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 2008 ..... $ 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)
Issuance of 100,000 shares of
common stock ............... 1,000 2,500 - 3,500
Net loss ..................... - - (2,792,357) (2,792,357)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2009 $ 485,617 $ 4,879,853 $(21,589,842) $(16,224,372)
============ ============ ============ ============
See accompanying notes
F-6
TelVue Corporation
Statements of Cash Flows
Years Ended December 31, 2009 and 2008
2009 2008
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ....................................... $(2,792,357) $(7,545,259)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization ................ 1,130,259 1,214,860
Loss on disposal of equipment included in
Cost of sales ................................ - 324,724
Goodwill impairment .......................... - 1,921,405
Changes in operating assets and liabilities:
Accounts receivable - trade .................. (374,354) 81,104
Inventory .................................... 7,080 (21,038)
Prepaid expenses ............................. 36,430 66,010
Other assets ................................. (10,865) -
Accounts payable ............................. 16,757 (389,946)
Accrued expenses ............................. (363,434) 208,121
Deferred service revenue ..................... 178,708 (56,670)
Other liabilities ............................ (1,080) (1,394)
Accrued interest - majority stockholder ...... 808,603 968,430
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES .......... (1,364,253) (3,229,653)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ............ (227,732) (496,309)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES .......... (227,732) (496,309)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lines of credit-majority
stockholder ................................... 1,450,000 3,750,000
Issuance of common stock ....................... 3,500 1,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 1,453,500 3,751,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... (138,485) 25,038
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ... 250,698 225,660
----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR .............. $ 112,213 $ 250,698
=========== ===========
See accompanying notes
F-7
TelVue Corporation
Notes to Financial Statements
December 31, 2009 and 2008
NOTE 1 - Summary of Significant Accounting Policies
This summary of significant accounting policies of TelVue Corporation ("TelVue"
or "the Company") is presented to assist in understanding its 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 financial statements. The 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.
Business Activity and Concentration of Credit Risk
TelVue operates two business segments. The first segment, TelVue Products and
Services ("TPS"), includes equipment such as the TelVue Princeton(TM) broadcast
and storage servers, and encoding and transcoding workstations ("TelVue
Princeton(TM)") and services such as WEBUS(R) and PEG.TV(TM). TelVue
Princeton(TM) are 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. TelVue's
second and legacy business segment is the marketing and service company which
sells automatic number identification ("ANI") telecommunication services to the
cable television industry. 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. The Company grants credit to cable television operators
throughout the nation. Consequently, the Company's ability to collect the
amounts due from customers is affected by economic fluctuations in the cable
television industry.
The Company maintains cash balances at a financial institution located in the
Philadelphia area. Accounts at this institution are insured by the FDIC up to
$250,000. At times the Company maintains cash balances in excess of the insured
amount.
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 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 financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
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
Under the provisions of generally accepted accounting principles ("GAAP"), the
Company accounts for all business combinations by the acquisition 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 were capitalized
and depreciated over the term of the contract, which is typically three (3) or
five (5) years. In 2009, the Company expensed these costs as incurred.
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.
Goodwill, Trademarks 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.
F-9
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
2007 PSG acquisition was impaired, and recognized an impairment charge of
$1,921,405.
The Company determines the useful lives of its identifiable intangible assets
after considering the specific facts and circumstances related to each
intangible asset. Factors the Company considers when determining useful lives
include the contractual term of any agreement, the history of the asset, the
Company's long-term strategy for the use of the asset, any laws or other local
regulations which could impact the useful life of the asset, and other economic
factors, including competition and specific market conditions. Intangible assets
that are deemed to have definite lives are amortized, generally on a
straight-line basis, over their useful lives, ranging from 1 to 15 years.
Valuation 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, 2009,
management believes that no revisions to the remaining lives or write-downs of
carrying values are required.
Revenue Recognition
TelVue recognizes revenues related to TelVue Princeton(TM) upon shipment of the
equipment to its customers. Revenues related to its 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.
Revenue related to TelVue's ANI service is recognized in the month the service
is provided.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
F-10
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.
The Company is 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 2006 and state income tax examinations
before 2005. 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 has no unrecognized tax benefits arising from uncertain tax
positions at December 31, 2009 and 2008. 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.
Share-Based Compensation
The Company calculates share-based compensation using the modified prospective
method, which requires that compensation expense be recognized in the financial
statements for share-based awards based on the grant date fair value of those
awards.
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 Financial Accounting Standards Board ("FASB") issued new
guidance which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. In February 2008,
the FASB issued additional guidance which delayed the effective date of the new
guidance 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 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 the guidance for financial assets and
liabilities recognized at fair value on a recurring basis. The partial adoption
for financial assets and liabilities did not have an impact on the financial
position, results of operations or cash flows of the Company. The adoption of
the provisions for nonfinancial assets and liabilities, in the first quarter of
2009, did not have an impact on the financial position, results of operations or
cash flows of the Company upon adoption.
F-11
Note 2 - Supplemental Disclosures of Cash Flow Information
During 2009 and 2008, there was no cash paid for interest or income taxes.
Note 3 - Property and Equipment
A schedule of property and equipment at December 31, 2009 and 2008, is as
follows:
Estimated
Useful Lives
2009 2008 in Years
----------- ----------- ------------
Operating equipment ............. $ 6,559,915 $ 6,465,755 3-5
Office furniture and equipment .. 468,011 468,011 3-5
Leasehold improvements .......... - 46,089 5
Software ........................ 339,727 255,834 3
----------- -----------
$ 7,367,653 $ 7,235,689
=========== ===========
For the years ended December 31, 2009 and 2008, depreciation expense was
$539,708 and $588,941, respectively.
Note 4 - Intangible Assets
A schedule of definite-lived intangible assets and accumulated amortization as
of December 31, 2009 and 2008 is as follows:
Weighted
Average
Accumulated Amortization
December 31, 2009 Amount Amortization Net Period
- ------------------------------------ ------------ ----------- ------------
Software .............. $ 3,600,000 $ 1,435,714 $ 2,164,286 7 years
Patents ............... 788,220 146,697 641,523 15 years
Customer list ......... 74,900 74,900 - 18 months
Customer contract ..... 57,800 40,340 17,460 4 years
Maintenance contracts . 27,800 25,869 1,931 3 years
----------- ------------ -----------
$ 4,548,720 $ 1,723,520 $ 2,825,200
=========== ============ ===========
December 31, 2008
- -------------------------
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
=========== ============ ===========
F-12
Amortization expense from definite-lived assets for the years ended December 31,
2009 and 2008 was $590,551 and $625,919, 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,
2010 ............. $ 583,214
2011 ............. 569,844
2012 ............. 566,834
2013 ............. 566,834
2014 ............. 159,691
Thereafter .......... 378,783
-----------
$ 2,825,200
===========
A schedule of indefinite-lived intangible assets as of December 31, 2009 and
2008 is as follows:
2009 2008
--------- ---------
Trademarks ......... $ 397,260 $ 397,260
========= =========
Management determined that indefinite-lived intangible assets were not impaired
as of December 31, 2009 and 2008.
Note 5 - 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 rate at December 31, 2009 and 2008 was 4.25% for each year. Accrued
interest is due at maturity. The line is unsecured and will mature in November
2011. As of December 31, 2009 and 2008, 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 rate at December 31, 2009 and 2008 was 4.25% for each year. Accrued
interest is due at maturity. The line is unsecured and will mature in November
2012. At December 31, 2009 and 2008, the amounts outstanding under this line of
credit were $10,000,000 each year.
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 rate at December 31, 2009 and 2008 was 4.25%. Accrued
interest is due at maturity. The line is unsecured and will mature in May 2014.
At December 31, 2009 and 2008, the amounts outstanding under this line of credit
were $2,300,000 and $2,150,000, respectively.
F-13
In March 2009, 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 $400,000, the maximum principal amount of the line. Amounts
outstanding accrue interest at prime plus one percent (1%). The effective
interest rate at December 31, 2009 was 4.25%. Accrued interest is due at
maturity. The line is unsecured and will mature in March 2015. At December 31,
2009, the amount outstanding under this line of credit was $400,000.
In June 2009, 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 $500,000, the maximum principal amount of the line. Amounts
outstanding accrue interest at prime plus one percent (1%). The effective
interest rate at December 31, 2009 was 4.25%. Accrued interest is due at
maturity. The line is unsecured and will mature in June 2015. At December 31,
2009, the amount outstanding under this line of credit was $500,000.
In October 2009, 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 $400,000, the maximum principal amount of the line. Amounts
outstanding accrue interest at prime plus one percent (1%). The effective
interest rate at December 31, 2009 was 4.25%. Accrued interest is due at
maturity. The line is unsecured and will mature in October 2015. At December 31,
2009, the amount outstanding under this line of credit was $400,000.
In December 2009, 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 $1.5 million, the maximum principal amount of the line.
Amounts outstanding accrue interest at prime plus one percent (1%). The
effective interest rate at December 31, 2009 was 4.25%. Accrued interest is due
at maturity. The line is unsecured and will mature six years after the initial
advance. There was no balance outstanding at December 31, 2009.
Scheduled maturities of the various lines of credit - majority stockholder, are
as follows:
Year Ending December 31,
2010 ............. $ -
2011 ............. 3,800,000
2012 ............. 10,000,000
2013 ............. -
2014 ............. 2,300,000
Thereafter .......... 1,300,000
------------
$ 17,400,000
============
Interest expense for the years ended December 31, 2009 and 2008 were $808,603
and $968,429, respectively.
Note 6 - 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.
F-14
Note 7 - Lease Commitments
The Company leases approximately 8,700 square feet of office space in the
Horizon Way Corporate Center in Mount Laurel, New Jersey. The fifth amendment to
the lease dated March 16, 2009, extended the lease term three (3) years
commencing June 1, 2009 and terminating May 31, 2012. Monthly payments total
$12,182 with a rental rate of $9,460 per month and operating expenses of $2,722
per month. Pursuant to the provisions of the lease, the Company informed the
lessor of its intent to terminate the lease in January 2010. Negotiations of
revised terms commenced and a new agreement was signed in March 2010 (see Note
16).
The Company also leased approximately 850 square feet of lab space in Princeton,
New Jersey. The lease expired on June 30, 2008, and was extended on a
month-to-month basis at a rate of $643 per month. The lease was terminated on
August 31, 2009 and all the equipment from that facility was relocated to the
Mount Laurel, New Jersey office space.
Rental expense under the operating leases for office facilities amounted to
$164,313 and $190,021 for the years ended December 31, 2009 and 2008,
respectively.
Note 8 - 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.
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.
F-15
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 9 - Stock Compensation Plans
The Company calculates share-based compensation using the modified prospective
method. 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.
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, 2009 and 2008, stock-based compensation cost was
$16,445 and $49,028, respectively, and had no effect on basic and diluted loss
per share.
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. No shares were awarded
in 2009 at the request of the directors.
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. Upon expiration of the
1999 Stock Option Plan, the Company established the 2009 Stock Option Plan (the
"2009 Plan"). The 2009 Plan expires May 3, 2019 and has terms consistent with
the previous plan.
The following table summarizes activity for all stock options for the years
ended December 31, 2009 and 2008:
2009 2008
------ ------
Weighted-average fair value of options granted .. $ - $0.009
F-16
At December 31, 2009, the value of the unvested portion of all outstanding stock
options was $20,620 which the Company expects to amortize and recognize as
compensation expense over the weighted-average service period of approximately
2.0 years.
No stock options were granted in 2009. The fair value of the options granted
during the year ended December 31, 2008 was 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
year ended December 31, 2008:
2008
-----
Expected life in years ........ 10.00
Risk-free interest rate ....... 2.57%
Volatility .................... 3.69%
Expected dividend yield ....... -
A summary of all option activity follows:
Options Outstanding
-------------------------------
Weighted Average
Options Exercise Price
---------- ----------------
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
Exercised ......................... (100,000) .035
Forfeited ......................... (1,800,000) .054
----------
Balance, December 31, 2009 ........ 4,595,000 $ .066
==========
F-17
The following table summarizes the status of stock options outstanding and
exercisable at December 31, 2009:
Weighted
Average
Remaining
Exercise Options Contractual Options
Price Outstanding Life (Years) Exercisable
-------- ----------- ------------ -----------
$ .025 350,000 0.5 350,000
$ .030 110,000 0.5 110,000
$ .035 2,000,000 0.5 2,000,000
$ .040 120,000 0.5 120,000
$ .050 200,000 0.5 75,000
$ .070 465,000 0.5 465,000
$ .090 50,000 0.5 25,000
$ .130 1,300,000 0.5 650,000
----------- -----------
Total .............. 4,595,000 3,795,000
=========== ===========
Weighted Average
Exercise Price ..... $.066 $.055
=========== ===========
Note 10 - Retirement 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 2009 and 2008 amounted to $33,694 and $49,080,
respectively.
Note 11 - Corporate Income Taxes
The provisions for income tax expense (benefit) consist of the following
components:
Current 2009 2008
------------ ------------
Federal ....................... $ - $ -
State ......................... - -
------------ ------------
- -
Deferred
Federal ....................... (664,059) (1,944,359)
State ......................... 11,067 (523,039)
------------ ------------
(652,992) (2,467,398)
Valuation allowance increase .. 652,992 2,467,398
------------ ------------
- -
------------ ------------
$ - $ -
============ ============
F-18
The categories of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
Federal State
-------------------------- --------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Deferred Tax Assets:
Net operating loss carryforward $ 4,482,679 $ 4,157,818 $ 934,533 $ 1,044,267
Accrued interest - stockholder 856,825 606,643 249,238 176,464
Deferred revenue .............. 166,603 111,311 48,462 32,379
Allowance for bad debts ....... 5,903 1,752 1,717 510
----------- ----------- ----------- -----------
Gross Deferred Tax Asset .. 5,512,010 4,877,524 1,233,950 1,253,620
Deferred Tax Liabilities:
Property and equipment,
Principally due to differences
in depreciation .............. (30,250) (59,823) (8,799) (17,402)
----------- ----------- ----------- -----------
Net Deferred Tax Asset Before
Valuation Allowance ........... 5,481,760 4,817,701 1,225,151 1,236,218
Valuation allowance ........... (5,481,760) (4,817,701) (1,225,151) (1,236,218)
----------- ----------- ----------- -----------
Net Deferred Tax Asset .... $ - $ - $ - $ -
=========== =========== =========== ===========
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, 2009 and 2008. 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, 2009 and 2008.
The Company has a net operating loss carryforward for Federal income tax
purposes of approximately $13,200,000 on a tax-reporting basis. The
carryforward, if not utilized, will begin to expire as follows:
Year Ending December 31,
2010 ................... $ 600,000
2024 ................... 1,000,000
2025 ................... 1,100,000
2026 ................... 2,600,000
2027 ................... 2,700,000
2028 ................... 4,100,000
2029 ................... 1,100,000
-----------
$13,200,000
===========
F-19
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:
2009 2008
----- -----
Federal income tax at statutory rates ..... (34)% (34)%
State income tax, net of federal benefit .. (2) (3)
Valuation allowance ....................... 28 23
Other ..................................... 8 14
----- -----
- % - %
===== =====
Note 12 - Related Party Transactions
The Company has seven unsecured lines of credit and a note payable to the
majority stockholder. (See Notes 5 and 6).
Note 13 - Segment Information
The Company operates two business segments. The first segment, TPS, includes
equipment such as the TelVue Princeton(TM) broadcast and storage servers, and
encoding and transcoding workstations and services such as WEBUS(R) and
PEG.TV(TM). TelVue Princeton(TM) are 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. TelVue's second business segment is the marketing and service company
which sells ANI telecommunication services to the cable television industry. 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, 2009 and 2008, is as follows:
Year Ended December 31, 2009 TPS ANI Services Total
- ----------------------------------- ----------- ------------ -----------
Revenues .......................... $ 3,220,728 $ 1,160,258 $ 4,380,896
Depreciation and amortization ..... 955,418 174,841 1,130,259
Operating income (loss) ........... (2,562,381) 578,623 (1,983,758)
Assets ............................ 5,188,056 250,277 5,438,333
Capital expenditures .............. 227,732 - 227,732
Year Ended December 31, 2008 TPS ANI Services Total
- ----------------------------------- ----------- ------------ -----------
Revenues .......................... $ 2,434,129 $ 1,274,155 $ 3,708,284
Depreciation and amortization ..... 1,206,497 8,363 1,214,860
Operating income (loss) ........... (7,199,004) 621,937 (6,577,067)
Assets ............................ 5,858,324 279,312 6,137,636
Capital expenditures .............. 496,309 - 496,309
F-20
Note 14 - 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 15 - Liquidity Matters
The accompanying financial statements have been prepared assuming the Company
will continue to meet its liquidity requirements for the foreseeable future. As
of December 31, 2009, the Company had an accumulated deficit of $21,589,842 and
also had negative cash flows from operations for the years ended December 31,
2009 and 2008 of approximately $1,364,000 and $3,230,000, respectively. These
conditions raised concerns about the Company's ability to continue to meet its
liquidity requirements for the foreseeable future and, as a result management
took the following action. In December 2009, as discussed in Note 5, the Company
entered into an additional line of credit agreement with its majority
stockholder, under which the Company may borrow up to $1.5 million. As with all
lines of credit with the majority stockholder, interest is accrued and is due at
maturity, which is six years after the initial advance. As a result of (i) the
new line of credit agreement, (ii) the accrual of interest on all lines of
credit until the respective maturity dates, (iii) no repayment obligations of
any lines of credit until 2011, and (iv) continued positive TPS growth trends,
the Company believes it will have sufficient funds to operate for the
foreseeable future. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets and classification of liabilities that may result from the outcome of
this uncertainty.
Note 16 - Subsequent Events
In preparing these financial statements, management has evaluated events and
transactions for potential recognition and disclosure through March 30, 2010,
the date the financial statements were available to be issued.
On March 15, 2010, the Company entered into a five (5) year lease agreement for
approximately 8,700 square feet of space in the Horizon Way Corporate Center in
Mount Laurel, New Jersey. The lease commences June 1, 2010 and terminates May
31, 2015. Monthly rental payments escalate annually throughout the term and are
$7,277 per month in Year 1. The Company must also pay an operating expense
allocation monthly, determined based on actual 2009 expenses incurred.
On March 16, 2010 the Company borrowed $300,000 on the line of credit with the
majority stockholder dated December 2009.
F-21
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).
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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 (incorporated by reference to the 2008
Form 10-K, File No. 000-17170). (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).
26
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).
10.17 Convertible Note for $400,000, dated December 26, 2006, issued to TelVue
by the Princeton Server Group, Inc. (incorporated by reference to the
December 31, 2006 Form 10-KSB, File No. 000- 17170).
10.18 Separation Agreement by and between TelVue and Stanley Greene, dated
December 29, 2006 (incorporated by reference to the December 31, 2006
Form 10-KSB, File No. 000-17170). (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 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 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 Form 8-K filed on
January 6, 2009, 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 (incorporated by
reference to the 2008 Form 10-K, File No. 000-17170).
10.25 Line of Credit Note, dated June 8, 2009, between H.F. (Gerry) Lenfest and
TelVue (incorporated by reference to the Form 8-K filed on June 11, 2009,
File No. 000-17170).
10.26 The TelVue Corporation 2009 Stock Option Plan, dated June 10, 2009,
(incorporated by reference to the Form 8-K filed on August 7, 2009, File
No. 000-17170). (CP)
10.27 Line of Credit Note, dated October 5, 2009, between H.F. (Gerry) Lenfest
and TelVue (incorporated by reference to the Form 8-K filed on October 6,
2009, File No. 000-17170).
10.28 Line of Credit Note, dated December 8, 2009, between H.F. (Gerry) Lenfest
and TelVue (incorporated by reference to the Form 8-K filed on December
9, 2009, File No. 000-17170).
10.29 Lease Agreement dated March 1, 2010 for office space and the First
Amendment to Lease dated March 15, 2010 ("Office Lease Agreement"),
between TelVue and The Bloom Organization of South Jersey, LLC
(incorporated by reference to the Form 8-K filed on March 19, 2010, File
No. 000-17170).
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11. Statement re: Computation of Per Share Earnings (see Note 8 to TelVue's
December 31, 2009 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: 03/31/10 By: /s/Jesse Lerman
-------------------------------------
Jesse Lerman
President and Chief Executive Officer
DATED: 03/31/10 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 03/31/10
- ------------------ Board and Director
H.F. Lenfest
/s/Joy Tartar Director 03/31/10
- ------------------
Joy Tartar
/s/Robert Lawrence Director 03/31/10
- ------------------
Robert Lawrence
/s/Jesse Lerman Director 03/31/10
- ------------------
Jesse Lerman
29
EXHIBIT INDEX
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