UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
[_] 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
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 (ss.232.405 of
this chapter) 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 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]
Number of shares of registrant's common stock outstanding as of May 11, 2010:
48,561,644 shares.
TELVUE CORPORATION
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2010 (unaudited) and
December 31, 2009 ................................................. 3
Statements of Operations for the three months ended
March 31, 2010 (unaudited) and March 31, 2009 (unaudited) ......... 4
Statements of Cash Flows for the three months ended
March 31, 2010 (unaudited) and March 31, 2009 (unaudited) ......... 5
Notes to Financial Statements (unaudited) ......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .............................................. 24
Item 4T. Controls and Procedures .................................. 24
PART II. OTHER INFORMATION
Item 6. Exhibits ................................................. 24
SIGNATURES ................................................................. 28
EXHIBIT INDEX .............................................................. 28
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
TELVUE CORPORATION
BALANCE SHEETS
March 31, December 31,
2010 2009
------------ ------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents .................. $ 249,997 $ 112,213
Accounts receivable - trade, net of
Allowances of $13,240 at March 31,
2010 and $19,080 at December 31, 2009 ..... 648,742 934,933
Inventory .................................. 347,091 258,952
Prepaid expenses ........................... 63,814 18,206
------------ ------------
TOTAL CURRENT ASSETS .................... 1,309,644 1,324,304
PROPERTY AND EQUIPMENT ....................... 7,378,127 7,367,653
Less accumulated depreciation .............. 6,624,927 6,495,749
------------ ------------
753,200 871,904
DEFINITE-LIVED INTANGIBLE ASSETS,
Net of accumulated amortization of
$1,871,157 at March 31, 2010 and
$1,723,520 at December 31, 2009 ........... 2,677,563 2,825,200
INDEFINITE-LIVED INTANGIBLE ASSETS-OTHER ..... 397,260 397,260
OTHER ASSETS ................................. 19,665 19,665
------------ ------------
$ 5,157,332 $ 5,438,333
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade ................... $ 226,642 $ 331,993
Accrued expenses ........................... 242,212 81,225
Deferred service revenue ................... 563,244 538,472
Other liabilities .......................... 997 704
------------ ------------
TOTAL CURRENT LIABILITIES ............... 1,033,095 952,394
LINES OF CREDIT - MAJORITY STOCKHOLDER ....... 17,700,000 17,400,000
NOTE PAYABLE - MAJORITY STOCKHOLDER .......... 541,000 541,000
ACCRUED INTEREST - MAJORITY STOCKHOLDER ...... 2,981,937 2,769,311
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 100,000,000
shares authorized, 48,561,644 and 48,561,644
shares issued and outstanding at March 31,
2010 and December 31, 2009, respectively ... 485,617 485,617
Additional paid-in capital .................. 4,879,853 4,879,853
Accumulated deficit ......................... (22,464,170) (21,589,842)
------------ ------------
(17,098,700) (16,224,372)
------------ ------------
$ 5,157,332 $ 5,438,333
============ ============
See the accompanying unaudited notes which are an integral part of these
statements.
3
TELVUE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
2010 2009
------------ ------------
REVENUES
TPS services ............................. $ 633,451 $ 626,315
ANI services ............................. 254,121 297,430
------------ ------------
887,572 923,745
COST OF REVENUES
TPS services ............................. 283,317 335,828
ANI services ............................. 40,786 95,342
------------ ------------
TOTAL COST OF REVENUES ..................... 324,103 431,170
------------ ------------
GROSS MARGIN ............................... 563,469 492,575
OPERATING EXPENSES
Selling and marketing .................... 323,451 233,602
General and administrative ............... 624,905 672,752
Depreciation and amortization ............ 276,815 284,951
------------ ------------
1,225,171 1,191,305
------------ ------------
OPERATING LOSS ............................. (661,702) (698,730)
OTHER INCOME (EXPENSE)
Interest income .......................... - 2
Interest expense ......................... (212,626) (190,214)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ............... (212,626) (190,212)
------------ ------------
NET LOSS ................................... $ (874,328) $ (888,942)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.02) $ (.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC AND DILUTED ....................... 48,561,644 48,461,644
============ ============
See the accompanying unaudited notes which are an integral part of these
statements.
4
TELVUE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2010 2009
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................... $ (874,328) $ (888,942)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization ............ 276,815 284,951
Changes in assets and liabilities:
Accounts receivable - trade .............. 286,191 (184,281)
Inventory ................................ (88,139) (11,945)
Prepaid expenses ......................... (45,608) (47,314)
Other Assets ............................. - (1,630)
Accounts payable - trade ................. (105,351) (691)
Accrued expenses ......................... 161,280 54,102
Deferred service revenue ................. 24,772 100,896
Accrued interest - majority stockholder 212,626 190,214
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES . (151,742) (504,640)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ....... (10,474) (87,321)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit - majority
stockholder ............................. 300,000 400,000
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS ............................... 137,784 (191,961)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ....................... 112,213 250,698
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .... $ 249,997 $ 58,737
=========== ===========
See the accompanying unaudited notes which are an integral part of these
statements.
5
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
Summary Financial Information and Results of Operations
- -------------------------------------------------------
In the opinion of management of TelVue Corporation ("TelVue" or the "Company"),
the accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and with the regulations of the Securities and Exchange Commission and contain
all adjustments (consisting of only normal recurring adjustments) necessary to
make the financial statements not misleading and to present fairly the financial
condition as of March 31, 2010 and December 31, 2009 and the results of
operations for the three months ended March 31, 2010 and 2009 and cash flows for
the three months ended March 31, 2010 and 2009.
Interim Financial Information
- -----------------------------
While management believes that the disclosures presented are adequate to prevent
misleading information, these unaudited financial statements must be read in
conjunction with the audited financial statements and notes included in TelVue's
Annual Report on Form 10-K for the year ended December 31, 2009, as filed with
the Securities and Exchange Commission.
Prior period financial statements have been reclassified to conform with current
quarter presentation.
Business Combination
- --------------------
Under the provisions of generally accepted accounting principles, the Company
accounts for all business combinations by the acquisition method. Furthermore,
the Company recognizes intangible assets apart from goodwill if they arise from
contractual or legal rights or if they are separable from goodwill.
Goodwill, Trademarks and Other Intangible Assets
- ------------------------------------------------
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.
6
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Intangible assets with indefinite lives and goodwill are not amortized. The
Company tests these intangible assets and goodwill for impairment at least
annually or more frequently if events or circumstances indicate that such
intangible assets or goodwill might be impaired. All goodwill is assigned to
reporting units, which are one level below TelVue's operating segments. Goodwill
is assigned to the reporting unit that benefits from the synergies arising from
each business combination. The Company performs impairment tests of goodwill at
each reporting unit level. Such impairment tests for goodwill include comparing
the fair value of the respective reporting unit with its carrying value,
including goodwill. When the fair value is less than the carrying value of the
intangible assets or the reporting unit, the Company records an impairment
charge to reduce the carrying value of the assets to fair value.
The Company determines the useful lives of its identifiable intangible assets
after considering the specific facts and circumstances related to each
intangible asset. Factors the Company considers when determining useful lives
include the contractual term of any agreement, the history of the asset, the
Company's long-term strategy for the use of the asset, any laws or other local
regulations which could impact the useful life of the asset, and other economic
factors, including competition and specific market conditions. Intangible assets
that are deemed to have definite lives are amortized, generally on a
straight-line basis, over their useful lives, ranging from 1 to 15 years.
2. ACQUISITION
-----------
On March 12, 2007, the Company acquired all of the issued and outstanding shares
of capital stock of Princeton Server Group, Inc. ("PSG") for a purchase price of
$6,100,000 in cash plus the forgiveness of a $400,000 loan owed by PSG, in
addition to the cancellation of a warrant that was issued in conjunction with
the loan. The acquisition was funded with funds drawn under a $10,000,000 line
of credit held by the Company with its majority stockholder, Mr. Lenfest. The
Company accounts for this acquisition as a business combination under the
acquisition method of accounting. The results of PSG are included in the
Company's TelVue Products and Services ("TPS") operating segment.
Upon closing of the acquisition, the Company made preliminary estimates of the
fair values of the assets and liabilities for consolidation. The Company has
since obtained a third-party valuation for many of the assets and liabilities
acquired. There were no material differences between the preliminary estimates
and the final valuations. The amount of purchase price allocated to software is
$3,600,000, patent applications is $788,000, other finite-lived intangible
assets is $160,000, trademarks is $397,000 and goodwill is $1,921,405. At
December 31, 2008, management determined that the goodwill acquired with the
acquisition of PSG in 2007 was impaired and an impairment charge of $1,921,405
was recognized, eliminating the goodwill balance. The trademarks have been
assigned an indefinite life.
3. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
No income taxes or interest were paid during the three months ended March 31,
2010 or 2009.
7
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. EARNINGS PER COMMON SHARE
-------------------------
Basic earnings per common share is computed by dividing net income, after
deduction of preferred stock dividends, when applicable, by the weighted average
number of shares of outstanding common stock. Diluted earnings per common share
is computed by dividing net income, after the deduction of preferred stock
dividends, when applicable, by the weighted average number of shares of
outstanding common stock adjusted to include incremental common shares that
would have been outstanding if potentially dilutive common shares had been
issued. Common equivalent shares are excluded from the computation in periods in
which they have an antidilutive effect. Because of the net loss available to
common stockholders for the three months ended March 31, 2010 and 2009, no
potential common shares were included in the computation of a diluted per share
amount since such potential common shares would not have a dilutive effect.
5. CORPORATE INCOME TAXES
----------------------
The Company uses the asset and liability method of accounting for income taxes.
This method requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the differences between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. Differences between financial reporting and tax bases arise most
frequently from differences in timing of income and expense recognition.
Deferred income tax expense is measured by the change in the net deferred income
tax asset or liability during the year.
The provisions for income tax benefit from continuing operations for the three
months ended March 31, 2010 and
2009 consisted of the following components:
2010 2009
----------- ----------
Current
Federal .......................... $ - $ -
State ............................ - -
----------- ----------
- -
Deferred
Federal .......................... 246,000 730,000
State ............................ 67,000 228,000
----------- ----------
313,000 958,000
Valuation allowance increase ...... (313,000) (958,000)
----------- ----------
- -
----------- ----------
Total ............................. $ - $ -
=========== ==========
8
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
TelVue recorded an increase in valuation allowance of $313,000 at March 31, 2010
which reduced its deferred tax asset to zero. The valuation allowance was
recorded due to the uncertainty as to whether future net income would be
generated that would utilize TelVue's net operating loss carry forward. TelVue's
federal net operating loss carry forward was approximately $14,000,000 on a
tax-reporting basis as of March 31, 2010. The carry forward will begin to expire
on December 31, 2010, if not utilized.
In June 2006, the Financial Accounting Standards Board issued guidance
establishing a single model to address accounting for uncertain tax positions.
This guidance clarifies the accounting for income taxes by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. This guidance also provides direction on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The Company adopted the
provisions of this guidance on January 1, 2007. Upon adoption, the Company
recognized no adjustment in the amount of unrecognized tax benefits. As of the
date of adoption, the Company had no unrecognized tax benefits. The Company's
policy is to recognize interest and penalties that would be assessed in relation
to the settlement value of unrecognized tax benefits as a component of income
tax expense.
The Company 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 2003 and state income tax examinations
before 2002. However, to the extent allowed by law, the tax authorities may have
the right to examine prior periods where net operating losses were generated and
carried forward, and make adjustments up to the amount of the net operating loss
carry forward amount. The Company is not currently under Internal Revenue
Service tax examination. The Company is not currently under examination by any
state jurisdictions.
6. NOTES PAYABLE AND LINES OF CREDIT - MAJORITY STOCKHOLDER
--------------------------------------------------------
Note Payable - Majority Stockholder
- -----------------------------------
On June 16, 2005, the members of the Board of Directors of the Company and Mr.
Lenfest, a director and the majority stockholder of the Company, extended the
maturity date of a promissory note in the principal amount of $541,000 issued by
the Company and currently held by Mr. Lenfest (the "Science Note") to January 1,
2011. The Science Note was originally issued by the Company to Science Dynamics
Corporation ("Science") and was payable December 31, 1996. In January 1995, Mr.
Lenfest purchased the Science Note from Science. The Science Note is
non-interest bearing.
9
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Line of Credit (2005 Note) - Majority Stockholder
- -------------------------------------------------
On April 27, 2005, TelVue entered into a Line of Credit Note with Mr. Lenfest
(the "2005 Note"). The 2005 Note was secured to provide funding to grow the
TelVue Virtual Television Network ("TVTN"). Under the terms of the 2005 Note,
the Company 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 is equal to the prime rate plus one percent (1%).
The 2005 Note contains customary events of default, including, among others,
non-payment of principal and interest and in the event the Company is involved
in certain insolvency proceedings. In the event of a default, all of the
obligations of the Company under the 2005 Note may be declared immediately due
and payable. The 2005 Note is unsecured and will expire six years from the date
of the first advance, which is November 23, 2011, unless extended or renewed.
Principal and interest on the 2005 Note are also due and payable on November 23,
2011. The 2005 Note was exhausted by the end of 2007. As of March 31, 2010,
accrued interest due on the 2005 Note was $961,929.
Line of Credit (2006 Note) - Majority Stockholder
- -------------------------------------------------
On November 3, 2006, the Company entered into an additional Line of Credit Note
with Mr. Lenfest, in the principal amount of $10,000,000 (the "2006 Note").
Under the 2006 Note, the Company could request up to $5,000,000 for general
working capital and an additional $5,000,000 for purposes other than general
working capital upon mutual agreement by the Company and Mr. Lenfest. The
minimum advance under the 2006 Note is $100,000 and the interest rate is equal
to the prime rate plus one percent (1%). The 2006 Note contains customary events
of default, including, among others, non-payment of principal and interest and
in the event TelVue is involved in certain insolvency proceedings. In the event
of a default, all of the obligations of the Company under the 2006 Note may be
declared immediately due and payable. The 2006 Note is unsecured and will expire
six years from the date of the first advance under the 2006 Note unless extended
or renewed. Principal and interest are also due and payable six years from the
date of the first advance under the 2006 Note. As of March 31, 2010, TelVue had
borrowed $10,000,000 under the 2006 Note, fully exhausting the 2006 Note. As of
March 31, 2010, accrued interest due on the 2006 Note was $1,685,863.
On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under the 2006
Note to loan to PSG to fund their operating expenses (the "PSG Note"). The PSG
Note was a convertible note that bore interest at a rate of six percent (6%) per
annum. No payments of principal or interest were due until July 1, 2007. Under
the PSG Note, interest accrued through July 1, 2007 was to be added to the
principal. Interest was payable monthly from July 1, 2007 through January 1,
2008. The remaining balance was payable in forty eight (48) monthly installments
of principal and interest commencing February 1, 2008. The PSG Note was
scheduled to mature in January 2012. The Company had the option to convert the
unpaid principal balance of the PSG Note and all accrued interest into common
stock of PSG. In connection with the PSG Note, TelVue received a warrant, which
entitled TelVue to purchase 129,629 shares of common stock of PSG for $1.08 per
share. The warrant was to commence on July 1, 2007 and expire on December 31,
2016. The PSG Note was forgiven and the warrant was canceled on March 12, 2007,
in connection with TelVue's acquisition of all of the outstanding stock of PSG.
10
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
On March 12, 2007, PSG was acquired by TelVue for $6,100,000, the forgiveness of
the PSG Note and cancellation of the warrant (described above). TelVue borrowed
the $6,100,000 from Mr. Lenfest under the 2006 Note to fund the acquisition. PSG
develops high performance digital video systems, appliances and software that
support capture, storage, manipulation and play-out of digital media in multiple
popular formats. PSG markets its product to local Cable TV Public, Education and
Government Local Access Channels ("PEG Channels") and Local Origination
broadcast stations, professional broadcast stations and schools and
universities. TelVue acquired PSG as a complement to TVTN with the objective
being to offer towns, municipalities and schools a packaged turnkey product of
hardware and software.
Line of Credit (2007 Note) - Majority Stockholder
- -------------------------------------------------
As a result of the anticipated exhaustion of the line of credit under the 2006
Note, TelVue entered into an additional Line of Credit Note with Mr. Lenfest on
December 21, 2007 in the principal amount of $2,300,000 (the "2007 Note"). The
minimum advance under the 2007 Note is $100,000 and the interest rate is equal
to the prime rate plus one percent (1%). The 2007 Note contains customary events
of default, including, among others, non-payment of principal and interest and
in the event TelVue is involved in certain insolvency proceedings. In the event
of a default, all of the obligations of TelVue under the 2007 Note may be
declared immediately due and payable. The 2007 Note is unsecured and will expire
six years from the date of the first advance under the 2007 Note unless extended
or renewed. Principal and interest on the 2007 Note are also due and payable six
years from the date of the first advance under the 2007 Note, which was May 5,
2008. As of March 31, 2010, TelVue had borrowed $2,300,000 under the 2007 Note,
fully exhausting the 2007 Note. As of March 31, 2010, accrued interest due on
the 2007 Note was $170,343.
Line of Credit (2009 Q1 Note) - Majority Stockholder
- ----------------------------------------------------
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 with Mr. Lenfest on
March 2, 2009 in the principal amount of $400,000 (the "2009 Q1 Note"). The
minimum advance under the 2009 Q1 Note is $100,000 and the interest rate 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 March 31, 2010, TelVue
had borrowed $400,000 under the 2009 Q1 Note, fully exhausting the 2009 Q1 Note.
As of March 31, 2010, accrued interest due on the 2009 Q1 Note was $18,167.
11
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Line of Credit (2009 Q2 Note) - Majority Stockholder
- ----------------------------------------------------
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 with Mr. Lenfest
on June 8, 2009 in the principal amount of $500,000 (the "2009 Q2 Note"). The
minimum advance under the 2009 Q2 Note is $100,000 and the interest rate 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 March 31, 2010, TelVue had
borrowed $500,000 under the 2009 Q2 Note, fully exhausting the 2009 Q2 Note. As
of March 31, 2010, accrued interest due on the 2009 Q2 Note was $15,610.
Line of Credit (2009 Q3 Note) - Majority Stockholder
- ----------------------------------------------------
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 with Mr. Lenfest
on October 5, 2009 in the principal amount of $400,000 (the "2009 Q3 Note"). The
minimum advance under the 2009 Q3 Note is $100,000 and the interest rate 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 March 31, 2010, TelVue
had borrowed $400,000 under the 2009 Q3 Note, fully exhausting the 2009 Q3 Note.
As of March 31, 2010, accrued interest due on the 2009 Q3 Note was $6,612.
Line of Credit (2010 Note) - Majority Stockholder
- -------------------------------------------------
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 with Mr. Lenfest
on December 8, 2009 in the principal amount of $1,500,000 (the "2010 Note"). The
minimum advance under the 2010 Note is $100,000 and the interest rate 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, which was March
16, 2010. As of March 31, 2010, TelVue had borrowed $300,000 under the 2010
Note, with accrued interest in the amount of $524.
12
TELVUE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS
--------------------------
See Note 6, included herein, for information of related party transactions
between TelVue and its majority stockholder.
8. FINANCIAL DATA BUSINESS SEGMENTS
--------------------------------
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 division
which sells automatic number identification ("ANI") telecommunication services
to the cable television industry.
Summarized financial information by reporting segment as of and for each of the
three months ended March 31,
2010 and 2009, is as follows:
Three months ended March 31, 2010 TPS ANI Total
- --------------------------------- --------- -------- ---------
Revenues ......................... $ 633,451 $254,121 $ 887,572
Depreciation and amortization .... 241,797 35,018 276,815
Operating income/(loss) .......... (791,430) 129,728 (661,702)
Interest expense ................. 177,181 35,445 212,626
Net income/(loss) ................ (968,611) 94,283 (874,328)
Capital expenditures ............. 10,474 - 10,474
Three months ended March 31, 2009 TPS ANI Total
- --------------------------------- --------- -------- ---------
Revenues ......................... $ 626,315 $297,430 $ 923,745
Depreciation and amortization .... 240,857 44,094 284,951
Operating income/(loss) .......... (798,715) 99,985 (698,730)
Interest expense ................. 148,366 41,846 190,212
Net income/(loss) ................ (947,081) 58,139 (888,942)
Capital expenditures ............. 87,321 - 87,321
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainty, including, without limitation, the
ability of TelVue to obtain sufficient cash to continue its operations, the
ability of TelVue to continue its growth strategy, increases in costs of labor
and employee benefits, general market conditions, competition and similar
matters discussed in TelVue's Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 and in this Quarterly Report on Form 10-Q. These
forward-looking statements may include declarations regarding the Company's
belief or current expectations of management, such as statements including the
words "budgeted," "anticipate," "project," "estimate," "expect," "may,"
"believe," "potential" and similar statements are intended to be among the
statements that are forward-looking statements. Because such statements reflect
the reality of risk and uncertainty that is inherent in the Company'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 the Company 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
development. To the extent that the information presented in this Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010 discusses financial
projections, information or expectations about the Company'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 assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Quarterly Report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this Quarterly Report, the inclusion of
such information should not be regarded as a representation by TelVue or any
other person that the Company's objectives and plans will be achieved.
OVERVIEW OF COMPANY:
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 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 Multi System Operators ("MSOs") and the
nation's largest telephone company.
TelVue 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
14
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 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
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
TelVue's second and legacy business segment is the marketing and service company
which sells 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 expects continued loss of its subscriber base for the ANI service
as digital, interactive two-way services are offered by cable, satellite, and
broadband service providers for Video-on-Demand.
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.
15
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.
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.
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 of 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 related notes included in its Annual
Report on Form 10-K for the year ended December 31, 2009, which contains
accounting policies and other disclosures required by accounting principles
generally accepted in the United States.
16
RESULTS OF OPERATIONS:
The following discussion deals with the increase in operating income for the
three months ended March 31, 2010, compared to the three months ended March 31,
2009, and the reasons for the increase. TelVue further discusses the continued
loss of its subscriber base for the ANI service, when comparing the three months
ended March 31, 2010 to the three months ended March 31, 2009. TelVue also
discusses the changes in TPS revenue and expenses.
March 31, March 31, $ Change % Change
2010 2009 Fav/(Unfav) Fav/(Unfav)
--------- --------- ----------- -----------
Revenues
TPS ...................... $ 633,451 $ 626,315 $ 7,136 1.1
ANI Services ............. 254,121 297,430 (43,309) (14.6)
Cost of Revenues
TPS ...................... 283,317 335,828 52,511 15.6
ANI Services ............. 40,786 95,342 54,556 57.2
Operating Expenses
Selling and marketing .... 323,451 233,602 (89,849) (38.5)
General and administrative 624,905 672,752 47,847 7.1
Depreciation and
amortization ............ 276,815 284,951 8,136 2.9
--------- --------- ---------- ----------
Operating Loss .............. (661,702) (698,730) 37,028 5.3
Other Income (Expense) ...... (212,626) (190,212) (22,414) (11.8)
--------- --------- ---------- ----------
Net Loss .................... $(874,328) $(888,942) $ 14,614 1.6
========= ========= ========== ==========
The TPS segment had an operating loss of $791,430 for the three months ended
March 31, 2010, compared to an operating loss of $798,715 for the three months
ended March 31, 2009 primarily due to an increase in TPS segment revenue, in
addition to overall expense savings. The ANI segment had operating income of
$129,728 for the three months ended March 31, 2010, compared to $99,985 for the
three months ended March 31, 2009. The increase in operating income for the ANI
segment was mainly a result of a change in the allocation of expenses whereby a
lower percentage of expenses were allocated to the ANI segment, in addition to
savings in telecommunications expenses related to the ANI service.
Revenues
TPS revenues increased $7,136 for the three months ended March 31, 2010,
compared to the same period of 2009. The majority of the revenue increases were
attributed to an increase in PEG.TV(TM) revenue, in addition to an increase in
TelVue Princeton(TM) support revenue. These increases were offset by declines in
sponsorship revenue related to the WEBUS(R) service, in addition to lower TelVue
Princeton(TM) equipment sales and lower consulting revenue when comparing the
three months ended March 31, 2010 to the three months ended March 31, 2009.
TelVue Princeton(TM) sales growth was slowed largely due to reduced municipal
budgets impacting PEG and K-12 educational market sales. TelVue believes that
government and K-12 educational markets have seen a delayed reaction to the
economic downturn that began in 2008 due to the nature of their budget approval
cycles. Additionally, growth in reseller and Original Equipment Manufacturer
sales to these markets was similarly impacted. The Company expects to see a
modest increase in government and K-12 educational sales as new budgets are
approved for fiscal year 2010-2011. TelVue also expects to offset slower growth
17
in PEG and K-12 educational sales through increased sales to cable, Telco and
professional broadcasters as the Company has seen an increased interest in new
Internet Protocol ("IP") broadcast server products such as the TelVue
Princeton(TM) B100 and B3000 IP models. IP-based broadcast servers eliminate the
cost of encoders, improve quality and allow for higher density solutions for
hyperlocal channel origination.
ANI services revenue decreased $43,309 for the three month period ended March
31, 2010, when compared to the same period of 2009. As expected, pay-per-view
buy revenue decreased $1,738 for the three months ended March 31, 2010, and
pay-per-view plus revenue decreased $5,813 for the three months ended March 31,
2010 when compared to the same periods of 2009. These decreases were mainly due
to a reduction in the number of subscribers served during this period when
compared to 2009 (as discussed below). Additionally, there were decreases in
feature revenue and data link revenue of $26,769 and 10,117, respectively, when
comparing the three months ended March 31, 2010 to the three months ended March
31, 2009. These declines were offset by an increase of $1,723 in program number
revenue. TelVue believes there is a loss of focus by cable operators on the
pay-per-view product line, primarily because of the amount of time cable
operators are spending on promoting new product lines such as digital service
and high-speed Internet access.
As of March 31, 2010, the TelVue ANI service was serving approximately 3.7
million full-time cable subscribers compared to approximately 4.1 million
full-time cable subscribers served as of March 31, 2009. The subscriber decline
is the result of cable operators moving to two-way digital services which limit
the number of analog pay-per-view channels available for content and allow the
cable operator's customers to order digital pay-per-view or video on demand via
the set top box, eliminating the need for the TelVue 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 experience a decrease in its revenue and operating income indefinitely for
its ANI segment.
Cost of Revenues
Cost of revenues for the TPS segment decreased $52,511 for the three months
ended March 31, 2010, when compared to the same period of 2009, primarily as a
result of savings in compensation, lower cost of sales related to consulting
revenue and lower product cost of sales, offset by an increase in product
discounts.
ANI cost of revenues decreased $54,556 for the three months ended March 31,
2010, when compared to the same period of 2009. This decrease was primarily due
to savings in compensation expense, in addition to savings in telecommunication
expenses related to ANI services.
Selling and Marketing Expenses
Selling expenses related to the TPS segment increased $90,409 for the three
months ended March 31, 2010, when compared to the same period of 2009. This
increase was attributed to higher consulting expenses related to the use of
outside sales representatives and an outside marketing consultant, in addition
to higher compensation expense due to being fully staffed for the three months
ended March 31, 2010, while having positions open for portions of the three
months ended March 31, 2009.
Selling expenses related to the ANI segment decreased $560 for the three months
ended March 31, 2010 when compared to the same period of 2009. This decrease was
the result of the Company's decision to no longer pay employees commissions on
ANI transactions.
18
General and Administrative Expenses
TPS general and administrative expenses decreased $38,987 for the three months
ended March 31, 2010 when compared to the same period of 2009. This decrease was
related to savings in compensation due to reduced staffing, in addition to lower
expenses related to computer supply purchases when comparing the three months
ended March 31, 2010 to the same period of 2009.
ANI general and administrative expenses decreased $8,860 for the three months
ended March 31, 2010, when compared to the same period of 2009, primarily a
result of a change in allocation percentages, where a lower percentage of
expenses are being allocated to the ANI segment.
Net Loss
TelVue had a net loss of $874,328 for the three months ended March 31, 2010,
compared to a net loss of $888,942 for the three months ended March 31, 2009,
primarily due to expense savings for the three month period exceeding lower ANI
revenues for the three months ended March 31, 2010 when compared to the three
months ended March 21, 2009.
Income Taxes
At March 31, 2010 and 2009, TelVue recorded valuation allowance increases of
$313,000 and $958,000, respectively, to reduce its deferred tax asset to zero.
The valuation allowances were recorded due to the uncertainty as to whether
future net income would be generated that would utilize TelVue's net operating
loss carry forward. TelVue's federal net operating loss carry forward was
approximately $14,000,000 on a tax-reporting basis as of March 31, 2010 (see
Note 5 of TelVue's accompanying financial statements).
Depreciation and Amortization
TelVue purchased $10,474 of equipment during the three months ended March 31,
2010 compared to $87,321 purchased during the three months ended March 31, 2009.
The majority of the equipment purchased during the three months ended March 31,
2010 and 2009 was for software development and equipment related to the TPS
segment. Depreciation and amortization expense decreased $8,136 for the three
months ended March 31, 2010 when compared to the three months ended March 31,
2009, as a result of fewer capital purchases, in addition to declining
amortization expense related to the PSG intangible assets. Depreciation and
amortization accounted for 23% of total operating expenses for the three months
ended March 31, 2010.
Accounts Receivable and Allowance for Doubtful Accounts
As of March 31, 2010, TelVue had a net accounts receivable balance of $648,742,
compared to $934,933 as of December 31, 2009. This decrease was primarily due to
cash collections exceeding new invoicing for the three months ended March 31,
2010.
As of March 31, 2010, TelVue maintained a bad debt reserve in the amount of
$13,240, compared to a reserve of $19,080 as of December 31, 2009. The reserve
was calculated based on the estimate that 2.0% of outstanding receivables would
not be collected.
TelVue's days for sales in average accounts receivable was 54 days at March 31,
2010, compared to 64 days at March 31, 2009. 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.
19
Prepaid Expenses
As of March 31, 2010, TelVue had a prepaid expense balance of $63,814, compared
to a balance of $18,206 as of December 31, 2009. This increase was primarily the
result of paying in-full for the Company's business insurance policies during
the three months ended March 31, 2010. The expense related to these policies is
spread out evenly over the policy period.
Accrued Expenses
As of March 31, 2010, TelVue had an accrued expense balance of $242,212,
compared to a balance of $81,225 as of December 31, 2009. This increase was
primarily due to accruals recorded for legal and accounting expenses related to
TelVue's 2009 year-end audit and related financial reporting, in addition to an
accrual recorded for seven days of payroll expense as of March 31, 2010,
compared to four days as of December 31, 2009.
Cash and Cash Flows
TelVue had negative cash flow from operating activities of $151,742 for the
three months ended March 31, 2010, compared to $504,640 for the three months
ended March 31, 2009. The increase in cash flow compared to 2009 was primarily
due to expense savings exceeding the decreases in ANI revenue, in addition to
cash collections for the three months ended March 31, 2010, greatly exceeding
cash collections for the three months ended March 31, 2009.
TelVue had a cash balance of $249,997 as of March 31, 2010, compared to a
balance of $58,737 as of March 31, 2009, primarily due to the factors listed
above.
LIQUIDITY AND CAPITAL RESOURCES:
Since November 2, 1989, TelVue has funded its expansion and operating deficit
from the proceeds of the sale of shares of TelVue's common stock and Preferred
Stock (as defined below) to Mr. Lenfest, TelVue's majority stockholder, and from
loans from Mr. Lenfest.
During January 1995, Mr. Lenfest purchased from Science, TelVue's non-interest
bearing note in the amount of $541,000 (the "Science Note"). The Science Note
was originally issued by TelVue to Science and was payable December 31, 1996.
The maturity date of the Science Note had been extended by TelVue and Mr.
Lenfest on a yearly basis. On June 16, 2005, the members of the Board of
Directors of TelVue and Mr. Lenfest extended the maturity date of the Science
Note to January 1, 2011.
On April 27, 2005, TelVue entered into a Line of Credit Note (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
TelVue under the 2005 Note may be declared immediately due and payable. The 2005
Note is unsecured and will expire six years from the date of the first advance,
which is November 23, 2011, unless extended or renewed. Principal and interest
on the 2005 Note are also due and payable on November 23, 2011. The 2005 Note
was exhausted by the end of 2007. As of March 31, 2010, accrued interest due on
the 2005 Note was $961,929.
20
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 March
31, 2010, TelVue had borrowed $10,000,000 under the 2006 Note with accrued
interest in the amount of $1,808,752, 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 March 31, 2010, TelVue had borrowed
$2,300,000 under the 2007 Note with accrued interest in the amount of $170,343,
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 March 31, 2010, TelVue
had borrowed $400,000 under the 2009 Q1 Note with accrued interest in the amount
of $18,167, fully exhausting this note.
21
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 March
31, 2010, TelVue had borrowed $500,000 under the 2009 Q2 Note with accrued
interest in the amount of $15,610, 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
March 31, 2010, TelVue had borrowed $400,000 under the 2009 Q3 Note with accrued
interest in the amount of $6,612, 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, which was March 16, 2010. As of March 31, 2010, TelVue had borrowed
$300,000 under the 2010 Note, with accrued interest in the amount of $524.
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 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.
22
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 three months ended March 31,
2010, TelVue had 36,000 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.
23
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 the TPS segment. While maintaining the ANI pay-per-view ordering
business, TelVue intends to continue to aggressively market and sell TPS.
However, there can be no assurance that its marketing efforts will be
successful.
TelVue expects to see some continued adverse effects on sales during 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 the PEG markets will broaden its sources of revenue which
will help to offset any revenue declines related to the economy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TelVue, a smaller reporting company, is not required to provide information
required by this Item.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. TelVue's Chief Executive
Officer and its Treasurer (Controller), have evaluated the effectiveness of
TelVue's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by this report.
Based upon that evaluation, TelVue's Chief Executive Officer and its Treasurer
(Controller) have concluded that TelVue's disclosure controls and procedures
were adequate and effective to ensure that material information relating to
TelVue would be made known to them by others within TelVue, particularly during
the period in which this quarterly report on Form 10-Q was being prepared.
(b) Changes in Internal Controls. During the quarterly period covered by this
report, there were no changes in TelVue's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect TelVue's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
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).
24
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).
4.2 Form of ISO Option Agreement issued pursuant to the 1999 Stock Option
Plan (incorporated by reference to TelVue's Annual Report on Form 10-KSB
for the year ended December 31, 1999, (the "1999 Form 10-KSB") File No.
000-17170).
4.3 Form of NQSO Option Agreement issued pursuant to the 1999 Stock Option
Plan (incorporated by reference to the 1999 Form 10-KSB, File No.
000-17170).
4.4 Certificate of Designation of Class A Preferred Stock (incorporated by
reference to the September 30, 1990 Form 10-Q, File No. 000-17170).
4.5 Warrant Termination Agreement, dated June 16, 2005, by and between TelVue
and H.F. (Gerry) Lenfest (incorporated by reference to the 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).
10.2 Stock Purchase Agreement, dated November 2, 1989, between the Company and
H.F. (Gerry) 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).
25
10.8 Fourth Amendment to Office Lease Agreement dated April 19, 2006, between
TelVue and The Bloom Organization of South Jersey, LLC (incorporated by
reference to the June 30, 2006 Form 10-QSB, File No. 000-17170).
10.9 Asset Purchase Agreement by and among TelVue and J.D. Kraengel and
Associates, Inc. f/k/a Dacon Corporation d/b/a Source Communications
Group and Jeffrey Kraengel, dated February 14, 2001 (incorporated by
reference to the March 26, 2001 Form 8-K, File No. 000-17170).
10.10 Retirement Agreement dated April 29, 2004 between TelVue and Frank J.
Carcione (incorporated by reference to the December 31, 2004 Form 10-KSB
(the "2004 Form 10-KSB"), File No. 000-17170).
10.11 Summary of Director Compensation (incorporated by reference to the 2004
Form 10-KSB, File No. 000-17170).
10.12 Summary of Executive Compensation, as amended (incorporated by reference
to the December 31, 2008 Form 10-K ("2008 Form 10-K"), File No. 000-
17170).
10.13 Line of Credit Note, dated April 27, 2005, between H.F. (Gerry) Lenfest
and TelVue (incorporated by reference to the Form 8-K filed on May 3,
2005, File No. 000-17170).
10.14 Amended and Restated Promissory Note, in the principal amount of
$541,000, dated June 16, 2005, between H.F. (Gerry) Lenfest and TelVue
(incorporated by reference to the September 30, 2005 Form 10-QSB, File
No. 000-17170).
10.15 Line of Credit Note, dated November 3, 2006, between H.F. (Gerry) Lenfest
and TelVue (incorporated by reference to the Form 8-K filed on November
3, 2006, File No. 000-17170).
10.16 Stock Purchase Agreement by and among TelVue and Princeton Server Group,
Inc. dated March 12, 2007 (incorporated by reference to the March 13,
2007 Form 8-K, File No. 000-17170).
10.17 Convertible Note for $400,000 dated December 26, 2006 issued to TelVue by
the Princeton Server Group, Inc. (incorporated by reference to the
December 31, 2006 Form 10-KSB, File No. 000-17170).
10.18 Separation Agreement by and between TelVue and Stanley Greene, dated
December 29, 2006 (incorporated by reference to the December 31, 2006
Form 10-KSB, File No. 000-17170).
10.19 Separation Agreement by and between TelVue and Irene DeZwaan, dated
February 8, 2007 (incorporated by reference to the December 31, 2006 Form
10-KSB, File No. 000-17170).
10.20 Amendment of Form 8-K filed by TelVue on March 13, 2007 (the "Original
8-K") to include the information required by Item 9.01 of the Form 8-K in
connection with TelVue's acquisition of Princeton Server Group, Inc.
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 and Release by and between TelVue and Joseph M.
Murphy, dated December 31, 2008 (incorporated by reference to the Form
8-K filed on January 6, 2009, File No. 000-17170).
26
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).
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 ("2010 Office Lease
Agreement") and the First Amendment to the 2010 Office Lease Agreement
dated March 15, 2010 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).
11. Statement re: Computation of Per Share Earnings (see TelVue's March 31,
2010 Financial Statements included herein).
23. Consent of Pressman Ciocca Smith LLP, Independent Registered Public
Accounting Firm (incorporated by reference to the December 31, 2009 Form
10-K, File No. 000-17170).
31.1 Certification of President and Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a)(included herein).
31.2 Certification of Treasurer-Controller pursuant to Rule 13a-14(a) or
15d-14(a)(included herein).
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 (included herein).
32.1 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
(included herein).
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELVUE CORPORATION
DATED: 05/17/10 By: /s/ Jesse Lerman
----------------
Jesse Lerman
President and Chief Executive Officer
DATED: 05/17/10 By: /s/ John Fell
-------------
John Fell
Treasurer-Controller
EXHIBIT INDEX
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 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.
28