-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PUI3jD1W0q8AiEFlIqr1OJixdwLmGhK33zlE/Kqfw7r19x3rbzYQEnykcGkM10Vl kVQt6l8PgORCeHkEBZl/jA== 0001161697-08-000912.txt : 20080814 0001161697-08-000912.hdr.sgml : 20080814 20080814142128 ACCESSION NUMBER: 0001161697-08-000912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080814 DATE AS OF CHANGE: 20080814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELVUE CORP CENTRAL INDEX KEY: 0000839443 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 510299879 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17170 FILM NUMBER: 081017720 BUSINESS ADDRESS: STREET 1: 16000 HORIZON WAY STE 500 CITY: MT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 8562738888 MAIL ADDRESS: STREET 1: 16000 HORIZON WAY STREET 2: SUITE 500 CITY: MT LAUREL STATE: NJ ZIP: 08054 10-Q 1 form10q.txt FORM 10-Q FOR 06-30-2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________to________ Commission File Number: 0-17170 TELVUE CORPORATION (Exact name of registrant issuer as specified in its charter) DELAWARE 51-0299879 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16000 Horizon Way, Suite 500 Mt. Laurel, New Jersey 08054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (856) 273-8888 Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [_] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule, 12b-2 of the Exchange Act) Yes [_] No [X] Number of shares of registrant's common stock outstanding as of August 5, 2008: 48,461,644 shares. TELVUE CORPORATION INDEX PAGE NO. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2008 (unaudited) and as of December 31, 2007 ........................... 3 Consolidated Statements of Operations for the three months ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) ........... 4 Consolidated Statements of Operations for the six months ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) ........... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) ........... 6 Notes to Consolidated Financial Statements (unaudited) ............ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................. 21 Item 4T. Controls and Procedures .................................. 21 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders ...... 21 Item 6. Exhibits ................................................. 21 SIGNATURES ................................................................. 24 EXHIBIT INDEX .............................................................. 24 2 PART I. Financial Information ITEM I. Financial Statements TELVUE CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, December 31, 2008 2007 ------------ ------------ (Unaudited) * ASSETS CURRENT ASSETS Cash and cash equivalents .................. $ 208,542 $ 225,660 Accounts receivable - trade, net of Allowances of $5,035 at June 30, 2008 and $6,500 at December 31, 2007 ...... 508,491 641,683 Inventory .................................. 369,876 244,994 Prepaid expenses ........................... 147,148 120,646 ------------ ------------ TOTAL CURRENT ASSETS .................... 1,234,057 1,232,983 PROPERTY AND EQUIPMENT ....................... 7,572,198 7,364,421 Less accumulated depreciation .............. 6,045,831 5,763,185 ------------ ------------ 1,526,367 1,601,236 DEFINITE-LIVED INTANGIBLE ASSETS, Net of accumulated amortization of $827,294 at June 30, 2008 and $507,050 at December 31, 2007 ............. 3,721,426 4,041,670 INDEFINITE-LIVED INTANGIBLE ASSETS-GOODWILL .. 1,921,405 1,921,405 INDEFINITE-LIVED INTANGIBLE ASSETS-OTHER ..... 397,260 397,260 OTHER ASSETS ................................. 8,800 8,800 ------------ ------------ $ 8,809,315 $ 9,203,354 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable - trade ................... $ 271,312 $ 705,182 Accrued expenses ........................... 319,199 236,538 Deferred service revenue ................... 468,241 416,434 Other liabilities .......................... 1,366 3,178 ------------ ------------ TOTAL CURRENT LIABILITIES ............... 1,060,118 1,361,332 LINES OF CREDIT - MAJORITY STOCKHOLDER ....... 14,625,000 12,200,000 NOTE PAYABLE - MAJORITY STOCKHOLDER .......... 541,000 541,000 ACCRUED INTEREST - MAJORITY STOCKHOLDER ...... 1,478,544 992,278 STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value, 100,000,000 shares authorized, 48,461,644 and 48,433,074 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively ... 484,616 484,331 Additional paid-in capital .................. 4,877,353 4,876,639 Accumulated deficit ......................... (14,257,316) (11,252,226) ------------ ------------ (8,895,347) (5,891,256) ------------ ------------ $ 8,809,315 $ 9,203,354 ============ ============ * Derived from audited financial statements. The accompanying unaudited notes are an integral part of these statements. 3 TELVUE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended June 30, ----------------------------- 2008 2007 ---- ---- REVENUES ANI services ............................... $ 334,763 $ 356,696 TelVue products and services ............... 505,975 908,542 ------------ ------------ 840,738 1,265,238 COST OF REVENUES ANI services ............................... 125,713 131,021 TelVue products and services ............... 334,262 452,286 ------------ ------------ TOTAL COST OF REVENUES ....................... 459,975 583,307 ------------ ------------ GROSS MARGIN ................................. 380,763 681,931 OPERATING EXPENSES Selling and marketing ...................... 479,543 461,957 General and administrative ................. 791,259 733,392 Depreciation and amortization .............. 304,744 244,393 ------------ ------------ 1,575,546 1,439,742 ------------ ------------ OPERATING LOSS ............................... (1,194,783) (757,811) OTHER INCOME (EXPENSE) Interest income ............................ 64 301 Interest expense ........................... (230,750) (240,636) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) ................. (230,686) (240,335) ------------ ------------ NET LOSS ..................................... $ (1,425,469) $ (998,146) ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE .. $ (.03) $ (.02) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC AND DILUTED .......................... 48,437,783 48,359,703 ============ ============ The accompanying unaudited notes are an integral part of these statements. 4 TELVUE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended June 30, ----------------------------- 2008 2007 ---- ---- REVENUES ANI services ............................... $ 641,120 $ 695,451 TelVue products and services ............... 955,475 1,182,183 ------------ ------------ 1,596,595 1,877,634 COST OF REVENUES ANI services ............................... 211,266 221,680 TelVue products and services ............... 728,331 642,420 ------------ ------------ TOTAL COST OF REVENUES ....................... 939,597 864,100 ------------ ------------ GROSS MARGIN ................................. 656,998 1,013,534 OPERATING EXPENSES Selling and marketing ...................... 928,884 865,710 General and administrative ................. 1,644,415 1,088,881 Depreciation and amortization .............. 602,890 346,009 ------------ ------------ 3,176,189 2,300,600 ------------ ------------ OPERATING LOSS ............................... (2,519,191) (1,287,066) OTHER INCOME (EXPENSE) Interest income ............................ 367 30,716 Interest expense ........................... (486,266) (339,443) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) ................. (485,899) (308,727) ------------ ------------ NET LOSS ..................................... $ (3,005,090) $ (1,595,793) ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE .. $ (.06) $ (.03) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC AND DILUTED .......................... 48,435,429 48,358,065 ============ ============ The accompanying unaudited notes are an integral part of these statements. 5 TELVUE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, --------------------------- 2008 2007 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ...................................... $(3,005,090) $(1,595,793) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation and amortization ............... 602,890 346,010 Changes in assets and liabilities: Accounts receivable - trade ................. 133,192 (194,186) Inventory ................................... (124,882) (226,261) Prepaid expenses ............................ (26,502) (58,518) Accounts payable - trade .................... (433,870) 314,610 Accrued expenses ............................ 80,849 (188,728) Deferred service revenue .................... 51,807 27,144 Accrued interest - majority stockholder ..... 486,266 339,443 ----------- ----------- NET CASH (USED IN) OPERATING ACTIVITIES .... (2,235,340) (1,236,279) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment .......... (207,777) (390,672) Acquisition of business ...................... - (213,698) ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES .... (207,777) (604,370) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit - majority stockholder ............................... 2,425,000 1,800,000 Issuance of common stock ..................... 999 1,000 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES .. 2,425,999 1,801,000 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS ...... (17,118) (39,649) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 225,660 191,157 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD ....... $ 208,542 $ 151,508 =========== =========== The accompanying unaudited notes are an integral part of these statements. 6 TELVUE CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION --------------------- Summary Financial Information and Results of Operations - ------------------------------------------------------- In the opinion of management, the accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the regulations of the Securities and Exchange Commission and contain all adjustments (consisting of only normal recurring adjustments) necessary to make the financial statements not misleading and to present fairly the financial condition as of June 30, 2008 and the results of operations for the three and six months ended June 30, 2008 and 2007 and cash flows for the six months ended June 30, 2008 and 2007. Going Concern and Management's Plan - ----------------------------------- The accompanying financial statements of TelVue Corporation ("TelVue" or the "Company") have been prepared on the basis of generally accepted accounting principles applicable to a "going concern," which assume that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations. Conditions exist, however, that cast doubt about the Company's ability to continue as a "going concern." In order to fund operations, the Company relies on funds drawn on lines of credit held by the Company with the Company's majority stockholder, H.F. (Gerry) Lenfest. Based on the Company's current draw-down rate, the funds remaining in the current lines of credit are not sufficient to sustain the Company's operations for the next 12 month period. Funding the Company's future capital requirements will depend on numerous factors including, but not limited to, the Company receiving continued financial support from Mr. Lenfest, which he has not committed to at this time, or seeking other alternatives. While management is working towards mitigating the adverse conditions and events which raise doubt about the validity of the "going concern" assumption used in preparing these financial statements, there can be no assurance that management will be successful. These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a "going concern." If the Company were unable to continue as a "going concern," then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported expenses, and the balance sheet classifications used. Interim Financial Information - ----------------------------- While management believes that the disclosures presented are adequate to prevent misleading information, these unaudited financial statements must be read in conjunction with the audited financial statements and notes included in TelVue Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2007, as filed with the Securities and Exchange Commission. Prior period financial statements have been reclassified to conform with current quarter presentation. 7 Basis of Consolidation - ---------------------- The consolidated financial statements include the accounts of TelVue and Princeton Server Group, Inc. ("PSG"), which was acquired on March 12, 2007 and was maintained as a wholly-owned subsidiary until February 28, 2008, on which date PSG was merged into TelVue. From the date of the acquisition of PSG until the merger date, intercompany accounts and transactions were eliminated in consolidation. Since the merger date, the accounts of PSG have been included directly within TelVue's accounts. Business Combination - -------------------- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," the Company accounts for all business combinations by the purchase method. Furthermore, the Company recognizes intangible assets apart from goodwill if they arise from contractual or legal rights or if they are separable from goodwill. Goodwill, Trademarks and Other Intangible Assets - ------------------------------------------------ In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill. The Company tests intangible assets with definite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. The Company records an impairment charge when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset. Intangible assets with indefinite lives and goodwill are not amortized. The Company tests these intangible assets and goodwill for impairment at least annually or more frequently if events or circumstances indicate that such intangible assets or goodwill might be impaired. All goodwill is assigned to reporting units, which are one level below TelVue's operating segments. Goodwill is assigned to the reporting unit that benefits from the synergies arising from each business combination. The Company performs impairment tests of goodwill at each reporting unit level. Such impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill. When the fair value is less than the carrying value of the intangible assets or the reporting unit, the Company records an impairment charge to reduce the carrying value of the assets to fair value. The Company determines the useful lives of its identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement, the history of the asset, the Company's long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 1 to 15 years. 8 2. ACQUISITION ----------- On March 12, 2007, the Company acquired all of the issued and outstanding shares of capital stock of PSG for a purchase price of $6,100,000 in cash plus the forgiveness of a $400,000 loan owed by PSG. The acquisition was funded with funds drawn under a $10,000,000 line of credit held by the Company with the Company's majority stockholder, Mr. Lenfest. The Company accounts for this acquisition as a business combination under the purchase method of accounting. The results of PSG are included in the TelVue Products and Services operating segment. Upon closing of the acquisition, the Company made preliminary estimates of the fair values of the assets and liabilities for consolidation. The Company has since obtained a third-party valuation for many of the assets and liabilities acquired. There were no material differences between the preliminary estimates and the final valuations. The amount of purchase price allocated to software is $3,600,000, patent applications is $788,000, other finite-lived intangible assets is $160,000, trademarks is $397,000 and goodwill is approximately $1,900,000. The trademarks have been assigned an indefinite life. The accompanying financial statements include the operations of PSG since the date of acquisition. The following unaudited pro forma information for the six months ended June 30, 2008 and 2007, is presented as if the acquisition of PSG occurred on January 1, 2007. This information is based on historical results of operations, adjusted for acquisition costs, and, in the opinion of management, is not necessarily indicative of what the results would have been had the Company operated PSG since January 1, 2007. 2008 2007 ------------ ------------ Revenues .............................. $ 1,596,595 $ 2,168,179 Net loss .............................. $(3,005,090) $(2,135,357) Basic and diluted net loss per share .. $ (.06) $ (.04) 3. SUPPLEMENTAL CASH FLOW INFORMATION ---------------------------------- SUPPLEMENTAL SCHEDULE RELATING TO ACQUISITION - --------------------------------------------- Accounts receivable ............................. $ 105,634 Inventory ....................................... 104,393 Property and equipment .......................... 129,707 Definite-lived intangible assets ................ 4,548,720 Goodwill ........................................ 1,894,829 Other indefinite-lived intangible assets ........ 397,260 Accounts payable and accrued expenses ........... (279,533) Deferred service revenue ........................ (186,983) Note payable .................................... (400,329) Amount financed ................................. (6,100,000) ----------- CASH PAID FOR ACQUISITION ....................... $ 213,698 =========== No income taxes or interest were paid during either the six months ended June 30, 2008 or 2007. 9 4. EARNINGS PER COMMON SHARE ------------------------- Basic earnings per common share is computed by dividing net income, after deduction of preferred stock dividends, when applicable, by the weighted average number of shares of outstanding common stock. Diluted earnings per common share is computed by dividing net income, after the deduction of preferred stock dividends, when applicable, by the weighted average number of shares of outstanding common stock adjusted to include incremental common shares that would have been outstanding if potentially dilutive common shares had been issued. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect. Because of the net loss available to common stockholders for the six months ended June 30, 2008 and 2007, no potential common shares were included in the computation of a diluted per share amount since such potential common shares would not have a dilutive effect. 5. CORPORATE INCOME TAXES ---------------------- The Company uses the asset and liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Differences between financial reporting and tax bases arise most frequently from differences in timing of income and expense recognition. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The provisions for income tax benefit from continuing operations for the three months ended June 30, 2008 and 2007 consisted of the following components: 2008 2007 --------- --------- Current Federal ........................... $ - $ - State ............................. - - --------- --------- - - Deferred Federal ........................... 481,000 443,000 State ............................. 128,000 121,000 --------- --------- 609,000 564,000 Valuation allowance increase ....... (609,000) (564,000) --------- --------- - - --------- --------- $ - $ - ========= ========= TelVue recorded an increase in valuation allowance of $609,000 at June 30, 2008 to reduce its deferred tax asset to zero. The valuation allowance was recorded due to the uncertainty as to whether future net income would be generated that would utilize TelVue's net operating loss carry forward. TelVue's federal net operating loss carry forward was approximately $8,800,000 on a tax-reporting basis as of June 30, 2008. The carry forward will begin to expire in 2010, if not utilized. 10 In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN 48"). FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. Upon adoption, the Company recognized no adjustment in the amount of unrecognized tax benefits. As of the date of adoption, the Company had no unrecognized tax benefits. The Company's policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. The Company and its subsidiary are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2003 and state income tax examinations before 2002. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carry forward amount. The Company is not currently under Internal Revenue Service tax examination. The Company is not currently under examination by any state jurisdictions. 6. NOTES PAYABLE AND LINE OF CREDIT - MAJORITY STOCKHOLDER ------------------------------------------------------- Note Payable - Majority Stockholder - ----------------------------------- On June 16, 2005, the members of the Board of Directors of the Company and Mr. Lenfest, a director and the majority stockholder of the Company, extended the maturity date of a promissory note in the principal amount of $541,000 issued by the Company and currently held by Mr. Lenfest (the "Science Note") to January 1, 2011. The Science Note was originally issued by the Company to Science Dynamics Corporation ("Science") and was payable December 31, 1996. In January 1995, Mr. Lenfest purchased the Science Note from Science, and since then the maturity date had been extended by the Company and Mr. Lenfest on a yearly basis. The Science Note is non-interest bearing. Line of Credit (2005 Note) - Majority Stockholder - ------------------------------------------------- On April 27, 2005, TelVue entered into a Line of Credit Note with Mr. Lenfest (the "2005 Note"). The 2005 Note was secured to provide funding to grow the TelVue Virtual Television Network ("TVTN".) Under the terms of the 2005 Note, the Company could borrow, from time to time, up to the maximum principal amount of the 2005 Note which is $3,800,000. The minimum advance under the 2005 Note is $100,000 and the interest rate is equal to the prime rate plus one percent (1%). The 2005 Note contains customary events of default, including, among others, non-payment of principal and interest and in the event the Company is involved in certain insolvency proceedings. In the event of a default, all of the obligations of the Company under the 2005 Note may be declared immediately due and payable. The Line of Credit is unsecured and will expire six years from the date of the first advance, which is November 23, 2011, unless extended or renewed. Principal and interest on the 2005 Note are also due and payable on November 23, 2011. The Note was exhausted by the end of 2007. As of June 30, 2008, accrued interest due on the 2005 Note was $589,696. 11 Line of Credit (2006 Note) - Majority Stockholder - ------------------------------------------------- On November 3, 2006, the Company entered into an additional Line of Credit Note (the "2006 Note") with Mr. Lenfest, in the principal amount of $10,000,000. Under this Line of Credit, the Company could request up to $5,000,000 for general working capital and an additional $5,000,000 for purposes other than general working capital upon mutual agreement by the Company and Mr. Lenfest. The minimum advance under the 2006 Note is $100,000 and the interest rate is equal to the prime rate plus one percent (1%). The 2006 Note contains customary events of default, including, among others, non-payment of principal and interest and in the event TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of the Company under the 2006 Note may be declared immediately due and payable. The 2006 Note is unsecured and will expire six years from the date of the first advance under the 2006 Note unless extended or renewed. Principal and interest are also due and payable six years from the date of the first advance under the 2006 Note. As of June 30, 2008, the Company had borrowed $10,000,000 under the 2006 Note, fully exhausting the Note. As of June 30, 2008, accrued interest due on the 2006 Note was $885,677. On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under the 2006 Note to loan to PSG to fund their operating expenses (the "PSG Note"). The PSG Note was a convertible note that bore interest at a rate of six percent (6%) per annum. No payments of principal or interest were due until July 1, 2007. Under the PSG Note, interest accrued through July 1, 2007 was to be added to the principal. Interest was payable monthly from July 1, 2007 through January 1, 2008. The remaining balance was payable in forty eight (48) monthly installments of principal and interest commencing February 1, 2008. The PSG Note was scheduled to mature in January 2012. The Company had the option to convert the unpaid principal balance of the PSG Note and all accrued interest into common stock of PSG. In connection with the PSG Note, TelVue received a warrant, which entitled TelVue to purchase 129,629 shares of common stock of PSG for $1.08 per share. The warrant was to commence on July 1, 2007 and expire on December 31, 2016. The PSG Note was forgiven and the warrant was canceled on March 12, 2007, in connection with TelVue's acquisition of all of the outstanding stock of PSG. On March 12, 2007, PSG was acquired by TelVue for $6,100,000 and the forgiveness of the PSG Note and cancellation of the warrant (described above). TelVue borrowed the $6,100,000 from Mr. Lenfest under the 2006 Note. PSG develops high performance digital video systems, appliances, and software that support capture, storage, manipulation and play-out of digital media in multiple popular formats. PSG markets its product to local Cable TV Public, Education and Government Local Access Channels ("PEG Channels") and local origination broadcast stations, professional broadcast stations and schools and universities. TelVue acquired PSG as a complement to its TVTN Network with the objective being to offer towns, municipalities and schools a packaged turnkey product of hardware and software. 12 Line of Credit (2007 Note) - Majority Stockholder - ------------------------------------------------- As a result of the anticipated exhaustion of the line of credit under the 2006 Note, TelVue entered into an additional Line of Credit Note (the "2007 Note") with Mr. Lenfest on December 21, 2007 in the principal amount of $2,300,000. The minimum advance under the 2007 Note is $100,000 and the interest rate on the 2007 Note is equal to the prime rate plus one percent (1%). The 2007 Note contains customary events of default, including, among others, non-payment of principal and interest and in the event TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of TelVue under the 2007 Note may be declared immediately due and payable. The 2007 Note is unsecured and will expire six years from the date of the first advance under the 2007 Note unless extended or renewed. Principal and interest on the 2007 Note are also due and payable six years from the date of the first advance under the 2007 Note. As a result of the exhaustion of the 2006 Note, TelVue began drawing on the 2007 Note. As of June 30, 2008, the Company had borrowed $825,000 under the 2007 Note, with accrued interest due on the Note of $3,170. 7. RELATED PARTY TRANSACTIONS -------------------------- See Note 6, included herein, for information of related party transactions between TelVue and its majority stockholder. 8. FINANCIAL DATA BUSINESS SEGMENT ------------------------------- Based on the criteria set forth in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," the Company operates two business segments. One segment is a marketing and service division, which sells automatic number identification ("ANI") telecommunications services to the cable television industry. The other segment, TelVue Products and Services, is a system for displaying a fully automated TV station-like display on a cable system access channel using computer based digital technology. The TelVue Products and Services segment includes PSG, which was acquired on March 12, 2007. PSG develops high performance digital video systems, appliances, and software that support capture, storage, manipulation and play-out of digital media in multiple popular formants. Summarized financial information by reporting segment as of and for each of the six months ended June 30, 2008 and 2007, is as follows: TelVue Products Six months ended June 30, 2008 ANI and Services Total - ------------------------------ ----------- ------------ ----------- Revenues ..................... $ 641,120 $ 955,475 $ 1,596,595 Operating income/(loss) ...... 220,091 (2,739,282) (2,519,191) Interest expense ............. 80,189 406,077 486,266 Net income/(loss) ............ 140,269 (3,145,359) (3,005,090) Capital expenditures ......... - 207,777 207,777 TelVue Products Six months ended June 30, 2007 ANI and Services Total - ------------------------------ ----------- ------------ ----------- Revenues ..................... $ 695,451 $ 1,182,183 $ 1,877,634 Operating income/(loss) ...... 239,033 (1,526,099) (1,287,066) Interest expense ............. - 339,443 339,443 Net income/(loss) ............ 265,828 (1,861,621) (1,595,793) Capital expenditures ......... - 390,672 390,672 13 9. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company provided ANI service to Adelphia Communications ("Adelphia"). Adelphia filed for Chapter 11 bankruptcy on June 25, 2002. At the time of its pre-bankruptcy filing, outstanding accounts receivable from Adelphia of $157,210 were due to the Company. During the fourth quarter of 2002, the Company established a bad debt reserve of $78,605, representing 50% of the outstanding balance due from Adelphia as of the bankruptcy filing date on June 25, 2002. During August 2006, the Company received payments totaling $48,949 from Adelphia which represented payment of a number of outstanding invoices at 100% of their value. Because these invoices had a previously established bad debt reserve of 50% of their value, the Company reduced the bad debt reserve by $24,474 at September 30, 2006. In February 2007, the Company received payment in full for all outstanding invoices including accrued interest. The payment was made partially in cash, with the remainder being paid through the issuance of Time Warner Cable stock with a value of $63,719 at the time of the payment. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. All forward-looking statements involve risks and uncertainty, including, without limitation, the ability of the Company to continue its growth strategy, increases in costs of labor and employee benefits, as well as general market conditions and competition. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such information should not be regarded as a presentation by the Company or any other person that the objectives and plans of the Company will be achieved. OVERVIEW OF COMPANY: TelVue Corporation ("TelVue" or the "Company") operates two business segments. The first segment, TelVue Products and Services, includes TelVue Virtual Television Networks ("TVTN") and Princeton Server Group, Inc. ("PSG"). TVTN is a system for displaying a fully automated TV station-like display on a cable system access channel using computer based digital technology. PSG, which was acquired on March 12, 2007, develops high performance digital video systems, appliances, and software that support capture, storage, manipulation and play-out of digital media in multiple popular formats. During the second quarter of this year, the Company embarked upon a new branding and sales re-organization plan. The new branding consolidates certain of the Company's products and services under one name - TelVue Products and Services. The products formerly referred to as TVTN are now referred to as follows: WEBUS(R) Automated graphics/message display on TV Channel WEB-EM(R) Automated messaging on TV, web, cell and email WEBLINX(TM) Automated graphics/message display on websites PEG.TV Internet Streaming and Video on Demand Service 14 The products formerly referred to as PSG are now known as the Princeton Server Product Line. These products offer high performance digital video systems, appliances, and software that support capture, storage, manipulation and play-out of digital media in multiple popular formats. The Princeton Server Product Line includes, but is not limited to: Princeton Server B100 Princeton Server B3400 This branding and re-organization effort, backed with a new Company logo, marketing materials and exhibit materials, was released on July 9, 2008 at a major industry conference. TelVue's new website should be completed in September 2008. This effort provides focus on TelVue's primary business, energizes its staff, and better educates the market regarding the many products and services provided by the combined companies. In 2003, TelVue developed the WEBUS(R) service and has applied for three patents related to the products. WEBUS(R) is a system for displaying a fully-automated, TV station-like display on a cable system access channel using computer-based digital technology. WEBUS(R) displays the programming as graphics, text, imbedded music and pictures with voice narration and can run full-motion video clips. TelVue is currently marketing WEBUS(R) and its other TelVue Products and Services to municipal governments and school districts as a means of providing richer and more robust TV programming for their local Cable TV Public, Education and Government Local Access Channels ("PEG Channels".) Currently, most municipalities use a simple TV display made up of only text messages with background music. TelVue directly charges the municipalities a nominal start-up and monthly support fee and, for some clients, a sponsorship program that finds regional and national businesses as sponsors or underwriters for TelVue clients to help defray TelVue charges. In return, the TelVue client places an acknowledgement of the sponsor's support on its town or school's access channel. While TelVue specializes in creating a customized look for the PEG Channels and provides localized and dynamic content, the Princeton Server Product Line provides digital server technology to store, schedule, archive and playback video during the video content time allocated on the PEG Channel. TelVue acquired PSG because it believes the Princeton Server Product Line and WEBUS(R) together will provide a complete technology and support solution to owners and operators of PEG Channels. The PSG acquisition included three pending patents filed with the U.S. Patent Office. As a complement to the WEBUS(R) service, TelVue has introduced WEB-EM(R), technology enabling local emergency management officials to send emergency messages to residents over cell phones and computers. This four-in-one technology provides simultaneous phone, email, website and television notification. The new capability is available exclusively to residents in towns affiliated with TelVue. During the second quarter of this year, TelVue introduced another new service, PEG.TV. This Internet streaming and video-on-demand service provides operators of PEG Channels the opportunity to stream their channel live on the Internet and/or to place selected video content on an Internet-based "player." This feature, along with other products and services, demonstrates TelVue's initiative to provide comprehensive and industry-leading solutions to its marketplace. To expand its sales reach, TelVue recently commenced a change in sales strategy to incorporate a third-party reseller network or Value Added Reseller ("VAR") sales distribution method. This method broadens TelVue's sales reach by employing locally-based resellers to create sales opportunities, supported by its sales staff, which should increase sales while reducing and delaying some sales expenses until a sale is consummated. This change in strategy resulted in a restructuring of TelVue's sales department, reducing direct sales staff and management by fifty percent (50%). To date, thirteen (13) VAR's have been contracted and most are in the training and product orientation process. 15 TelVue's second and legacy business segment is a marketing and service company which sells automatic number identification ("ANI") telecommunications services to the cable television industry for the automated ordering of pay-per-view features and events (the "ANI service"). The ANI service permits cable television companies to process special ordering services without the attendant, high manpower requirements, or extensive physical plant and facilities that are otherwise required. TelVue provides the ANI service through equipment it purchases. TelVue's equipment for providing the ANI service nationwide is located at TelVue's home office in Mount Laurel, New Jersey. TelVue serves cable television systems across the United States via trunk lines and data circuits that it currently leases from Verizon. TelVue believes it receives a favorable trunk usage rate from Verizon. As noted below, TelVue expects continued loss of its subscriber base for the ANI service. As discussed above in Note 1 of the Notes to Consolidated Financial Statements, conditions exist that cast doubt about the Company's ability to continue as a "going concern." In order to fund operations, the Company relies on funds drawn on lines of credit held by the Company with the Company's majority stockholder, H.F. (Gerry) Lenfest. Based on the Company's current draw-down rate, the funds remaining in the current lines of credit are not sufficient to sustain the Company's operations for the next 12 month period. Funding the Company's future capital requirements will depend on numerous factors including, but not limited to, the Company receiving continued financial support from Mr. Lenfest, which he has not committed to at this time, or seeking other outside alternatives. As discussed below, the Company is taking certain measures to address its financial and operating condition. RESULTS OF OPERATIONS: The following discussion deals with the decreases in operating income for the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007, and the reasons for the decreases. TelVue further discusses the continued loss of its subscriber base for the ANI service when comparing the three and six months ended June 30, 2008 to the three and six months ended June 30, 2007. The subscriber decline is the result of cable operators moving to digital services which limit the number of analog pay-per-view channels available for content and allows the cable operator's customers to order digital pay-per-view or video on demand via the set top box. TelVue also discusses the marketing of its TelVue Products and Services segment and the changes in this segment's revenues and expenses. The TelVue Products and Services segment had operating losses of $1,300,955 and $2,739,282 for the three and six months ended June 30, 2008, compared to operating losses of $856,389 and $1,526,099 for the three and six months ended June 30, 2007, primarily due to the inclusion of the PSG operation for the full six months in 2008 as opposed to only the period under TelVue ownership (March 12-June 30) in 2007. TelVue Products and Services segment revenue decreased $402,567 and $226,708 for the three and six months ended June 30, 2008, compared to the same period of 2007. These decreases were based on a variety of factors, including: (i) the lack of payments from a client resulting from the delay of such client's merger with another company (which has now been completed) that put a temporary hold on TelVue Products and Services revenue and (ii) the lack of focus by one of TelVue's VAR's on selling TelVue Products and Services. In addition, poor performance by sales personnel, who are no longer employed by TelVue, contributed to lower than expected revenues for the period. As of June 30, 2008, the WEBUS(R) service was provided to 147 towns/schools/retirement communities compared to 116 at June 30, 2007. TelVue is marketing all of TelVue Products and Services nationally. Cost of revenues for the TelVue Products and Services segment decreased $118,024 for the three months ended June 30, 2008, when compared to the same period of 2007 primarily due to the fulfillment of fewer sales orders. For the six months ended June 30, 2008, cost of revenues increased by $85,911 when compared to the 16 same period of 2007 due to the expenses related to the PSG operating unit, offset by lower expenses related to the fulfillment of fewer sales orders. Selling expenses related to the TelVue Products and Services segment increased $30,808 and $92,838 for the three and six months ended June 30, 2008, when compared to the same period of 2007. These increases were a result of the addition of expenses related to the PSG operating unit, offset by savings in commissions, consulting/outside services and outside advertising related to the TVTN operating unit. TelVue Products and Services general and administrative expenses increased $100,440 and $615,663 for the three and six months ended June 30, 2008 when compared to the same period of 2007. These increases were primarily a result of allocating a larger portion of rent and other operational expenses to the TelVue Products and Services segment from the ANI segment, along with executive search fees paid for newly hired employees, higher legal fees and the addition of the expenses related to the PSG operating unit. As with many start-up ventures, management anticipates that expenses will continue to grow as the operations and marketing efforts for TelVue Products and Services increase. The ANI segment had operating income of $106,172 and $220,091 for the three and six months ended June 30, 2008, compared to $98,578 and $239,033 for the three and six months ended June 30, 2007. The increases in operating income were mainly a result of a change in methodology regarding the allocation of expenses whereby a higher percentage of expenses were allocated to the TelVue Products and Services segment. The increases were offset by decreases of $21,933 and $54,331 in service revenue for the three and six month periods ended June 30, 2008, when compared to the same period of 2007. As expected, pay-per-view buy revenue decreased $10,885 and $17,687 for the three and six months ended June 30, 2008, and pay-per view plus revenues decreased by $10,134 and $8,959 for the same periods when compared to 2007. ANI feature revenue showed an increase of $10,028 for the three months ended June 30, 2008 and a decrease of $12,780 for the six month period, when compared to the same periods of 2007. The decrease in ANI feature revenue was mainly due to a reduction in the number of subscribers served during this period when compared to 2007 (as discussed below). The increase recorded in ANI feature revenue for the three months ended June 30, 2008 was the result of a price increase implemented for the ANI services, which was effective May 1, 2008. TelVue believes there is a loss of focus by cable operators on the pay-per-view product line, primarily because of the amount of time cable operators are spending on promoting new product lines such as digital service and high-speed internet access. As of June 30, 2008, TelVue was serving approximately 4.54 million full-time cable subscribers compared to approximately 4.62 million full-time cable subscribers served as of June 30, 2007. The cable operators cancelled the ANI service primarily as a result of moving their subscribers onto two-way digital service which allows the cable operator to process ordering of pay-per-view movies and events directly from its customers without using TelVue's ANI service. Management believes the long-term effects of deployment of digital two-way service will continue to negatively impact the TelVue ANI service. As a result of the cable and satellite subscriber cancellations noted above, TelVue expects to continue to decrease its revenue and operating income indefinitely for its ANI segment. ANI cost of revenues decreased $5,308 and $10,414 for the three and six months ended June 30, 2008, when compared to the same period of 2007. These decreases were primarily due to savings in compensation expenses as a result of allocating more of the technical payroll and benefits to the TelVue Products and Services segment, offset by higher trunk line expenses. Selling expenses related to the ANI service decreased $13,222 and $29,664 for the three and six months ended June 30, 2008 when compared to the same period of 2007. These decreases were primarily the result of savings in compensation related to the change in allocation methodology, in addition to lower commission and travel and entertainment expenses. ANI segment general and administrative expenses decreased $42,571 and $60,129 for the three and six months ended June 30, 2008, when compared to the same period of 2007, primarily as a result of the previously mentioned change in allocation methodology. 17 TelVue had net losses of $1,425,469 and $3,005,090 for the three and six months ended June 30, 2008, compared to net losses of $998,146 and $1,595,793 for the three and six months ended June 30, 2007, primarily due to the inclusion of the PSG operation for the full six-month period in 2008 as opposed to only the period under TelVue ownership (March 12-June 30) in 2007. To assist in mitigating these adverse financial conditions, TelVue has implemented several expense savings measures. TelVue executives accepted a five percent (5%) reduction in compensation effective May 2, 2008. Also, there were four (4) employee layoffs on April 3, 2008 and an additional ten (10) employee layoffs on May 2, 2008. In addition to the previously mentioned poorly performing sales personnel, these layoffs encompassed what were deemed to be duplicative and/or non-essential positions within a number of different departments. Additionally, there was a freeze put on employee salary increases effective May 2, 2008. These measures will be reviewed on an on-going basis and will be adjusted as management deems appropriate based on operating conditions. At June 30, 2008 and 2007, TelVue recorded valuation allowance increases of $609,000 and $564,000, respectively, to reduce its deferred tax asset to zero. The valuation allowances were recorded due to the uncertainty as to whether future net income would be generated that would utilize TelVue's net operating loss carry forward. TelVue's federal net operating loss carry forward was approximately $8,800,000 on a tax-reporting basis as of June 30, 2008 (see Note 5 of TelVue's accompanying financial statements). TelVue purchased $207,777 of equipment during the six months ended June 30, 2008 compared to $390,672 purchased during the six months ended June 30, 2007. The majority of the equipment purchased during the six months ended June 30, 2008 and 2007 was for software development and equipment related to the TelVue Products and Services segment. Depreciation and amortization expense increased $60,350 and $256,880 for the three and six months ended June 30, 2008, as a result of the capital purchases, in addition to the amortization expense related to the PSG intangible assets. Depreciation and amortization accounted for 19% and 15% of total operating expenses for the six months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, TelVue maintained a bad debt reserve in the amount of $5,035, compared to a reserve of $5,700 as of June 30, 2007. The reserve was calculated based on the estimate that 1% of outstanding receivables would not be collected. TelVue's days for sales in average accounts receivable was 53 days at June 30, 2008, compared to 49 days at June 30, 2007. TelVue does not offer incentives or discounts to its customers, nor has it changed its credit terms with its ANI customers. A 2% cash, 1% net 15 days discount is offered for payments related to the TelVue Products and Services business equipment purchases. TelVue had negative cash flow from operating activities of $2,235,340 for the six months ended June 30, 2008. The decrease in cash flow compared to 2007 was primarily due to a reduction in ANI service revenue and an increase in TelVue Products and Services expenses (as described above). LIQUIDITY AND CAPITAL RESOURCES: Since November 2, 1989, TelVue has funded its expansion and operating deficit from the proceeds of the sale of shares of TelVue's common stock and Preferred Stock (as defined below) to Mr. Lenfest, TelVue's majority stockholder, and from loans from Mr. Lenfest. During January 1995, Mr. Lenfest purchased from Science Dynamics Corporation ("Science") TelVue's non-interest bearing note in the amount of $541,000 (the "Science Note"). The Science Note was originally issued by TelVue to Science and was payable December 31, 1996. The maturity date of the Science Note had been extended by TelVue and Mr. Lenfest on a yearly basis. On June 16, 2005, the members of the Board of Directors of TelVue and Mr. Lenfest extended the maturity date of the Science Note to January 1, 2011. 18 On April 27, 2005, TelVue entered into a Line of Credit Note (the "2005 Note") with Mr. Lenfest. The 2005 Note was secured to provide funding to grow the TVTN Network. Under the terms of the 2005 Note, TelVue could borrow, from time to time, up to the maximum principal amount of the 2005 Note, which is $3,800,000. The minimum advance under the 2005 Note is $100,000 and the interest rate of the 2005 Note is equal to the prime rate plus one percent (1%). The 2005 Note contains customary events of default, including, among others, non-payment of principal and interest and in the event TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of TelVue under the 2005 Note may be declared immediately due and payable. The 2005 Note is unsecured and will expire six years from the date of the first advance, which is November 23, 2011, unless extended or renewed. Principal and interest on the 2005 Note are also due and payable on November 23, 2011. The Note was exhausted by the end of 2007. As of June 30, 2008, accrued interest due on the 2005 Note was $589,696. TelVue entered into an additional Line of Credit Note (the "2006 Note") with Mr. Lenfest on November 3, 2006, in the principal amount of $10,000,000. Under the 2006 Note, TelVue could request up to $5,000,000 for general working capital. TelVue could request up to an additional $5,000,000 available under the 2006 Note for purposes other than general working capital upon mutual agreement by TelVue and Mr. Lenfest. The minimum advance under the 2006 Note is $100,000 and the interest rate on the 2006 Note is equal to the prime rate plus one percent (1%). The 2006 Note contains customary events of default, including, among others, non-payment of principal and interest and in the event TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of TelVue under the 2006 Note may be declared immediately due and payable. The 2006 Note is unsecured and will expire six years from the date of the first advance under the 2006 Note unless extended or renewed. Principal and interest on the 2006 Note are also due and payable six years from the date of the first advance under the 2006 Note, which was December 26, 2006. As of June 30, 2008, the Company had borrowed $10,000,000 under the 2006 Note, fully exhausting the Note. As of June 30, 2008, accrued interest due on the 2006 Note was $885,677. As a result of the anticipated exhaustion of the line of credit under the 2006 Note, TelVue entered into an additional Line of Credit Note (the "2007 Note") with Mr. Lenfest on December 21, 2007, in the principal amount of $2,300,000. The minimum advance under the 2007 Note is $100,000 and the interest rate on the 2007 Note is equal to the prime rate plus one percent (1%). The 2007 Note contains customary events of default, including, among others, non-payment of principal and interest and in the event TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of TelVue under the 2007 Note may be declared immediately due and payable. The 2007 Note is unsecured and will expire six years from the date of the first advance under the 2007 Note unless extended or renewed. Principal and interest on the 2007 Note are also due and payable six years from the date of the first advance under the 2007 Note. As a result of exhaustion of the 2006 Note, TelVue began drawing on the 2007 Note. As of June 30, 2008, the Company had borrowed $825,000 under the 2007 Note, with accrued interest due on the Note of $3,170. On December 26, 2006, TelVue borrowed $400,000 from Mr. Lenfest under the 2006 Note to loan to PSG to fund their operating expenses (the "PSG Note"). The PSG Note was a convertible note that bore interest at a rate of six percent (6%) per annum. No payments of principal or interest were due until July 1, 2007. Under the PSG Note, interest accrued through July 1, 2007 was to be added to the principal. Interest was payable monthly from July 1, 2007 through January 1, 2008. The remaining balance was payable in forty eight (48) monthly installments of principal and interest commencing February 1, 2008. The PSG Note was scheduled to mature in January 2012. TelVue had the option to convert the unpaid principal balance of the note and all accrued interest into common stock of PSG. 19 In connection with the PSG Note TelVue received a warrant, which entitled TelVue to purchase 129,629 shares of common stock of PSG for $1.08 per share. The warrant was to commence on July 1, 2007 and expire on December 31, 2016. The PSG Note was forgiven and the warrant was canceled on March 12, 2007, in connection with TelVue's acquisition of all of the outstanding stock of PSG. On March 12, 2007, PSG was acquired by TelVue for $6.1 million and the forgiveness of the PSG Note (described above). TelVue borrowed $6.1 million from Mr. Lenfest under the 2006 Note. PSG develops high performance digital video systems, appliances, and software that support capture, storage, manipulation and play-out of digital media in multiple popular formats. PSG markets their product to PEG Channels and local origination broadcast stations, professional broadcast stations and schools and universities. TelVue acquired PSG as a complement to its TVTN Network with the objective being to offer towns, municipalities and schools a packaged turnkey product of hardware and software. On June 16, 2005, Mr. Lenfest, the holder of all of TelVue's outstanding Class A Redeemable Convertible Preferred Stock (the "Preferred Stock"), informed TelVue of his intent to convert all of his 3,518,694 shares of Preferred Stock into TelVue's common stock. Each share of Preferred Stock was convertible into 6.667 shares of common stock. The conversion of the Preferred Stock to common stock occurred on August 2, 2005, upon Mr. Lenfest's delivery of the Preferred Stock in the form of a lost certificate affidavit. As a result of the conversion, TelVue issued 23,459,133 shares of common stock to Mr. Lenfest. Mr. Lenfest's beneficial ownership interest in the common stock of TelVue, after the cancellation of the warrants to purchase common stock described below, was approximately 78.5 percent as of December 31, 2007. The Preferred Stock was eliminated and is included as 23,459,133 shares of common stock in the stockholders' equity section of the balance sheet. On August 21, 2006, the Board of Directors, with Mr. Lenfest abstaining from the action, waived the two year holding period required to receive the full voting power of ten votes per share for the 23,459,133 shares of common stock Mr. Lenfest received for the conversion of his Preferred Stock. The Preferred Stock had a par value of $1 per share and provided for a cumulative six percent (6%) semiannual dividend. The dividend was payable in cash or additional shares of Preferred Stock at $1 per share, at TelVue's option. TelVue had accrued dividends on the Preferred Stock since the beginning of 1998, but no dividends had been paid. On June 16, 2005, Mr. Lenfest agreed to relinquish his right to all accrued but unpaid dividends attributable to the Preferred Stock. Therefore, $3,061,269 of accrued dividends was reversed and is included in stockholders' equity as a decrease to TelVue's accumulated deficit. On June 16, 2005, the members of the Board of Directors of TelVue and Mr. Lenfest agreed to terminate a Warrant Agreement between Mr. Lenfest and TelVue. Pursuant to the Warrant Agreement, Mr. Lenfest had the right to purchase up to 29,915,160 shares of TelVue's common stock for $.01 per share, the fair market value of the common stock on the grant date. The Warrant Agreement was entered into on March 15, 1991, in connection with a prior line of credit to TelVue provided by Mr. Lenfest. TelVue's ability to fully fund its operating expenses has suffered by the loss of a large number of its subscriber base for the ANI service. As discussed above, TelVue anticipates a continued decrease in revenue and an increase in net loss for the ANI service. In order to continue to fund a majority of its ANI operating expenses, TelVue needs to retain its current subscriber base level. Management believes that over time, continued erosion will occur in the subscriber base. During the six months ended June 30, 2008, TelVue had 28,000 full and part-time subscribers cancel service and no new subscribers were added to the ANI service. The cable operators cancelled the ANI service primarily as a result of moving their subscribers onto two-way digital service. 20 TelVue has been, and continues to be, dependent upon Mr. Lenfest for funds to pay the majority of operating and capital expenditures for the Company. As discussed above, the financing from Mr. Lenfest under the 2005 and 2006 Notes has been exhausted. As a result of this, TelVue secured the 2007 Note from Mr. Lenfest to help TelVue grow to a profitable level. The 2005 and 2006 Notes have helped, and the 2007 Note will help, to fund the growth of TelVue, as well as fund the ANI service in the event it becomes cash flow negative. While maintaining the ANI pay-per-view ordering business, TelVue intends to continue to aggressively market and sell TelVue Products and Services. However, there can be no assurance that its marketing efforts will be successful. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK TelVue, a smaller reporting company, is not required to provide information required by this Item. ITEM 4T. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. TelVue's Chief Executive Officer and its Treasurer (Controller), have evaluated the effectiveness of TelVue's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, TelVue's Chief Executive Officer and its Treasurer (Controller) have concluded that TelVue's disclosure controls and procedures were adequate and effective to ensure that material information relating to TelVue would be made known to them by others within TelVue, particularly during the period in which this quarterly report on Form 10-Q was being prepared. (b) Changes in Internal Controls. During the quarterly period covered by this report, there were no changes in TelVue's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect TelVue's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS TelVue's annual meeting of stockholders was held on June 12, 2008. The following six directors were elected: Vote For Votes Withheld Votes Abstained ----------- -------------- --------------- 1. H.F. Lenfest 374,602,227 254,615 0 2. Joseph Murphy 374,607,227 249,615 0 3. Frank Carcione 374,604,227 252,615 0 4. Jesse Lerman 374,607,227 249,615 0 5. Joy Tartar 374,662,227 194,615 0 6. Robert Lawrence 374,667,227 189,615 0 ITEM 6. EXHIBITS Exhibits 3.1 Certificate of Incorporation of TelVue (incorporated by reference to TelVue's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on April 20, 1989 (the "Registration Statement"), File No. 333-28263). 3.2 Bylaws of TelVue (incorporated by reference to TelVue's Registration Statement, File No. 333-288263). 21 3.3 Certificate of Amendment of Certificate of Incorporation of TelVue, dated April 11, 1990 (incorporated by reference to TelVue's Annual Report on Form 10-K for the year ended December 31, 1991, (the "1991 Form 10-K"), File No. 000-17170). 3.4 Certificate of Amendment of Certificate of Incorporation of TelVue, dated March 15, 1991 (incorporated by reference to the 1991 Form 10-K, File No. 000-17170). 3.5 Form of copy of Amendment of Certificate of Incorporation of TelVue, filed September 25, 1995 (incorporated by reference to TelVue's Form 10-QSB for the period ended September 30, 1995, (the September 30, 1995 Form 10-QSB, File No. 000-17170). 4.1 The TelVue Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit 99 of TelVue's Registration Statement on Form S-8, dated September 23, 1999 (the "1999 Stock Option Plan"), File No. 000-17170). 4.2 Form of ISO Option Agreement issued pursuant to the 1999 Stock Option Plan (incorporated by reference to TelVue's Annual Report on Form 10-KSB for the year ended December 31, 1999, (the "1999 Form 10-KSB") File No. 000-17170). 4.3 Form of NQSO Option Agreement issued pursuant to the 1999 Stock Option Plan (incorporated by reference to the 1999 Form 10-KSB, File No. 000-17170). 4.4 Certificate of Designation of Class A Preferred Stock (incorporated by reference to the September 30, 1990 Form 10-Q, File No. 000-17170). 4.5 Warrant Termination Agreement, dated June 16, 2005, by and between TelVue and H.F. (Gerry) Lenfest (incorporated by reference to the September 30, 2005 Form 10-QSB, File No. 000-17170). 4.6 Waiver by H.F.(Gerry) Lenfest, waiving the right to receive past, present or future dividends with respect to the TelVue's Class A Redeemable Convertible Preferred Stock (incorporated by reference to the September 30, 2005 Form 10-QSB, File No.000-17170). 10.1 Distributorship Agreement, dated November 2, 1989, between the Company and Science (incorporated by reference to the 1989 Form 10-K, File No. 000-17170). 10.2 Stock Purchase Agreement, dated November 2, 1989, between the Company and H.F. Lenfest (incorporated by reference to the Company's Report on Form 8-K, dated November 15, 1989 (the "1989 Form 8-K"), File No. 000-17170). 10.3 Shareholders' Agreement, dated November 2, 1989, among TelVue and certain of its stockholders (incorporated by reference to the Company's 1989 Form 8-K, File No. 000-17170). 10.4 Option Agreement, dated November 2, 1989, among TelVue and certain of its stockholders (incorporated by reference to the 1989 Form 8-K, File No. 000-17170). 10.5 Lease Agreement dated April 25, 1991 for office space and the First Amendment to Lease dated March 30, 1994 ("Office Lease Agreement"), between TelVue and Bloom Associates (incorporated by reference to the 1994 Form 10-KSB, File No. 000-17170). 22 10.6 Second Amendment to Office Lease Agreement Dated May 5, 1999, between TelVue and Bloom Associates (incorporated by reference to the 1999 Form 10-KSB, File No. 000-17170). 10.7 Third Amendment to Office Lease Agreement Dated April 28, 2004, between TelVue and Bloom Associates (incorporated by reference to the June 30, 2006 Form 10-QSB, File No. 000-17170). 10.8 Fourth Amendment to Office Lease Agreement Dated April 19, 2006, between TelVue and The Bloom Organization of South Jersey, LLC (incorporated by reference to the June 30, 2006 Form 10-QSB, File No. 000-17170). 10.9 Asset Purchase Agreement by and among TelVue and J.D. Kraengel and Associates, Inc. f/k/a Dacon Corporation d/b/a Source Communications Group and Jeffrey Kraengel, dated February 14, 2001 (incorporated by reference to the March 26, 2001 Form 8-K, File No. 000-17170). 10.10 Retirement Agreement dated April 29, 2004 between TelVue and Frank J. Carcione (incorporated by reference to the December 31, 2004 Form 10-KSB (the "2004 Form 10-KSB"), File No. 000-17170). 10.11 Summary of Director Compensation (incorporated by reference to the 2004 Form 10-KSB, File No. 000-17170). 10.12 Summary of Executive Compensation, as amended (included herein). 10.13 Line of Credit Note, dated April 27, 2005, between H.F. (Gerry) Lenfest and TelVue (incorporated by reference to the Form 8-K filed on May 3, 2005, File No. 000-17170). 10.14 Amended and Restated Promissory Note, in the principal amount of $541,000, dated June 16, 2005, between H.F. (Gerry) Lenfest and TelVue (incorporated by reference to the September 30, 2005 Form 10-QSB, File No. 000-17170). 10.15 Line of Credit Note, dated November 3, 2006, between H.F. (Gerry) Lenfest and TelVue (incorporated by reference to the Form 8-K filed on November 3, 2006, File No. 000-17170). 10.16 Stock Purchase Agreement by and among TelVue and Princeton Server Group, Inc. dated March 12, 2007 (incorporated by reference to the March 13, 2007 Form 8-K, File No. 000-17170). 10.17 Convertible Note for $400,000 dated December 26, 2006 issued to TelVue by the Princeton Server Group, Inc. (incorporated by reference to the December 31, 2006 Form 10-KSB, File No. 000-17170). 10.18 Separation Agreement by and between TelVue and Stanley Greene, dated December 29, 2006 (incorporated by reference to the December 31, 2006 Form 10-KSB, File No. 000-17170). 10.19 Separation Agreement by and between TelVue and Irene DeZwaan, dated February 8, 2007 (incorporated by reference to the December 31, 2006 Form 10-KSB, File No. 000-17170). 10.20 Amendment of Form 8-K filed by TelVue Corporation ("TelVue") on March 13, 2007 (the "Original 8-K") to include the information required by Item 9.01 of the Form 8-K in connection with TelVue's acquisition of Princeton Server Group, Inc. ("PSG") incorporated by reference to the May 12, 2007 Form 8-K/A, File No. 000-17170). 23 10.21 Line of Credit Note, dated December 21, 2007, between H.F. (Gerry) Lenfest and TelVue (incorporated by reference to the Form 8-K filed on December 21, 2007, File No. 000-17170). 11. Statement re: Computation of Per Share Earnings (see TelVue's June 30, 2008 Financial Statements included herein). 23. Consent of Pressman Ciocca Smith LLP, Independent Registered Public Accounting Firm (incorporated by reference to the 2007 Form 10-KSB, File No. 000-17170). 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002(included herein). 31.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included herein). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (included herein). 32.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herein). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELVUE CORPORATION DATED: 08/14/2008 By: /s/Joseph M. Murphy ------------------- Joseph M. Murphy President (Chief Executive Officer) DATED: 08/14/2008 By: /s/John Fell ------------ John Fell Treasurer (Controller) EXHIBIT INDEX 10.12 Summary of Executive Compensation 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Controller pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 24 EX-10 2 ex_10-12.txt SUMMARY OF EXECUTIVE COMPENSATION EXHIBIT 10.12 SUMMARY OF EXECUTIVE COMPENSATION Joseph M. Murphy, President and Chief Executive Officer, is employed on an at-will basis and is paid an annual salary of $200,150. Mr. Murphy also receives, as do all other TelVue employees, health, dental, disability and life insurance benefits as well as a contribution of 2.5% of his annual salary to TelVue's 401K Plan. Mr. Murphy, like all other TelVue employees, is eligible to receive stock option grants under the TelVue Stock Option Plan. Jesse Lerman, Executive Vice President of Engineering, is employed on an at-will basis and is paid an annual salary of $153,140. Mr. Lerman also receives, as do all other TelVue employees, health, dental, disability and life insurance benefits as well as a contribution of 2.5% of his annual salary to TelVue's 401K Plan. Mr. Lerman, like all other TelVue employees, is eligible to receive stock option grants under the TelVue Stock Option Plan. Randy Gilson, Vice President of Technical Services, is employed on an at-will basis and is paid an annual salary of $128,213. Mr. Gilson also receives, as do all other TelVue employees, health, dental, disability and life insurance benefits as well as a contribution of 2.5% of his annual salary to TelVue's 401K Plan. Mr. Gilson, like all other TelVue employees, is eligible to receive stock option grants under the TelVue Stock Option Plan. John Fell, Secretary, Treasurer and Controller, is employed on an at-will basis and is paid an annual salary of $111,150. Upon satisfaction of certain conditions, he is eligible for a $2,000 annual bonus. Mr. Fell also receives, as do all other TelVue employees, health, dental, disability and life insurance benefits as well as a contribution of 2.5% of his annual salary to TelVue's 401K Plan. Mr. Fell, like all other TelVue employees, is eligible to receive stock option grants under the TelVue Stock Option Plan. EX-31 3 ex_31-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Joseph M. Murphy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TelVue Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: 08/14/2008 /s/ Joseph M. Murphy -------------------- Joseph M. Murphy President (Chief Executive Officer) EX-31 4 ex_31-2.txt CERTIFICATION OF CONTROLLER EXHIBIT 31.2 CERTIFICATION I, John Fell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TelVue Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: 08/14/2008 /s/ John Fell ------------- John Fell Treasurer (Controller) EX-32 5 ex_32-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 TELVUE CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TelVue Corporation (the "Company") on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph M. Murphy, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: 08/14/2008 /s/ Joseph M. Murphy -------------------- Joseph M. Murphy President (Chief Executive Officer) EX-32 6 ex_32-2.txt CERTIFICATION OF CONTROLLER EXHIBIT 32.2 TELVUE CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TelVue Corporation (the "Company") on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Fell, Controller of the Company, certify, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: 08/14/2008 /s/ John Fell ------------- John Fell Treasurer (Controller) -----END PRIVACY-ENHANCED MESSAGE-----