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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, OR
[ ] 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: 1-14120
BLONDER TONGUE LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1611421
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
One Jake Brown Road, Old Bridge, New Jersey 08857
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 679-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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Common Stock, Par Value $.001 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant (computed by using the closing stock price on March 21, 2000, as
reported by the American Stock Exchange): $22,172,993.
Number of shares of common stock, par value $.001, outstanding as of March 21,
2000: 7,583,157
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 4, 2000 (which is expected to be filed
with the Commission not later than 120 days after the end of the registrant's
last fiscal year) are incorporated by reference into Part III of this report.
Forward-Looking Statements
In addition to historical information, this Annual Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the sections entitled Item 1 - Business, Item 3 - Legal
Proceedings, and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. The words "believe", "expect",
"anticipate", "project" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission.
PART I
ITEM 1. BUSINESS
Introduction
Blonder Tongue Laboratories, Inc. ("Blonder Tongue" or the "Company") is a
designer, manufacturer and supplier of a comprehensive line of electronics and
systems equipment for the cable television ("CATV") industry (both franchise and
non-franchise, or "private," cable). The Company's products are used to acquire,
distribute and protect the broad range of communications signals carried on
fiber optic and coaxial cable distribution systems. These products are sold to
customers providing an array of communications services, including television,
high-speed data (Internet) and telephony, to single family dwellings, multiple
dwelling units ("MDUs"), the lodging industry and institutions such as
hospitals, prisons, schools and marinas. The Company's products are also used in
surveillance systems ranging in complexity from simple in-home monitoring
systems to advanced business security systems with hundreds of cameras.
Blonder Tongue's product line can be separated, according to function, into
the following categories: (i) headend products used by a system operator for
signal acquisition, processing, monitoring, controlling and manipulation for
further transmission ("Headend Products"), (ii) distribution products used to
permit signals to travel to their ultimate destination in a home, apartment
unit, hotel room, office or other terminal location ("Distribution Products"),
(iii) subscriber products (which include interdiction products) used to control
access to television programs, voice channels and data channels and to interface
with multiple television receivers, personal computers and telephone hand sets
("Subscriber Products"), and (iv) microwave products used to transmit the output
of headend products to multiple locations using point-to-point communication
links in the 18GHz range ("Microwave Products").
The Company's principal customers are systems integrators that design,
package, install and in most instances operate cable systems.
The Company has historically enjoyed, and continues to enjoy, a dominant
market position in the private cable industry. Over the past few years, however,
the Company has recognized that its continued growth will depend upon
successfully penetrating and expanding its sales to the much larger franchise
cable industry. The Company has also observed a recent blurring of the historic
distinction between private and franchise cable operators, at least as it
relates to serving the MDU market, as large franchise cable companies have been
selectively acquiring large MDU systems from private cable operators.
Accordingly, the Company's recent development efforts have focused primarily on
substantially increasing the Company's sales to the franchise cable industry,
initially through marketing of its interdiction products which enable a system
integrator to control subscriber access to premium channels and other enhanced
services through jamming controlled by a computer located off-premises.
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To this end, during March, 1998, the Company acquired all of the assets and
technology rights of the interdiction business of Scientific-Atlanta, Inc.
("Scientific"), including the SMI Interdiction product line which has been
engineered for the franchise cable market, for a purchase price consisting of
(i) $19 million in cash, (ii) 67,889 shares of the Company's common stock, (iii)
a warrant to purchase 150,000 additional shares of the Company's common stock at
an exercise price of $14.25 per share and (iv) assumption by the Company of
certain obligations under executory contracts with vendors and customers and
certain warranty obligations and other current liabilities of Scientific's
interdiction business.
The Company is also attempting to expand its franchise cable market sales
by offering circuit-switched telephony, internet protocol telephony and
high-speed cable modem products to franchise cable system operators. On January
31, 2000, the Company signed distributorship and license agreements with GAD
Line, Ltd., a supplier of advanced telephone-over-cable and high-speed data
system products used in hybrid-fiber coaxial networks. Initially, the
arrangement provides Blonder Tongue immediate access to distribute
telephony-over-cable and high-speed cable modem products in North America under
its private label and follows with access to certain technology and a license to
manufacture high-speed cable modems.
Industry Overview
The broadband signal distribution industry (involving the high-speed
transmission of television, telephony and internet signals) is currently
dominated by CATV. The markets for wireless, direct-broadcast satellite ("DBS")
and digital subscriber line ("DSL") used for this purpose are small presently,
but are growing more rapidly. Within the CATV market there are an increasing
number of metropolitan areas that have awarded second CATV franchises to create
competition with the existing franchisee. This "overbuilder" market is also
growing rapidly. The government has been in favor of competition in this market
and has passed regulations to encourage it. Franchise cable companies are ever
watchful of DBS penetration in their franchise areas and react rapidly to
competition from overbuilders, all to the eventual benefit of the consumer. To
fight competition, the operators offer more services and more TV channels as
well as discounted prices. The lineup of services typically includes an analog
block of channels from 54 to 550 MHz, high speed data service using high-speed
cable modems, cable telephony either interfacing with switched networks or
internet protocol networks, and digital television in the 550 to 750 MHz range.
These upgraded services are possible in every system that has been rebuilt to
750 MHz of bandwidth. The standard architecture for these enhanced systems
contemplates a hybrid distribution network with a combination of fiber optic and
coaxial cable to nodes of 100 to 500 subscribers, with coaxial cable from the
node to the customer and full reverse-path capability for the data and phone
services.
The traditional customer targeted for these expanded services is a
homeowner likely to remain in the same home as a long-term subscriber. For a
variety of reasons, including the transient nature of the residents of many
areas, high levels of theft of service and excessive cost of replacing lost or
stolen converters and modems, approximately 35% of CATV subscribers not only are
not offered the new services, but are never offered the full analog lineup of
channels. Since converters, DBS receivers, digital converters and modems are
offered at very low prices to stimulate sales, the operational costs in these
demographic areas are too high to justify the advanced services. To retain
customers in these areas a technology must be found that minimizes the
operational losses due to theft and "churn" while providing a level of video,
data and phone service that compares favorably with DBS, DSL and wireless
providers.
The Company believes that its lineup of products, which includes
interdiction as well as cable and telephone modems, is the ideal solution for
deployment in these areas. The market size of this pocket deployment strategy is
more than $500 million per year with a total potential in the next few years of
several billion dollars. Overbuilders are ideal targets for the Company's
products, with a total market size over the next several years that is difficult
to quantify, but is in excess of $1 billion.
CATV
Most CATV operators are building fiber optic networks with alternative
combinations of fiber optic and coaxial cable to deliver television signal
programming data and phone services on one drop cable. CATV's deployment of
fiber optic trunk has been completed in more than 50% of existing systems. The
system architecture being employed to accomplish the combined provision of
television and telephone service is a hybrid
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fiber coaxial ("HFC") network. In an HFC network, fiber optic trunk lines
connect to nodes which feed 200 to 400 subscribers, using coaxial cable.
Extensive rebuilding of a CATV system is required to provide the full array of
expanded services. Consequently, not only are the overbuilders faced with
enormous capital expenditures to enter the broadband signal delivery business,
but existing CATV system operators are faced with similar expenditures to
compete with them (or to discourage them from entering the race) to provide the
"information superhighway".
The Company believes that most major metropolitan areas will eventually
have complex networks of two or more independent operators interconnecting the
homes while private cable operators will have large networks interconnecting
many multi-dwelling complexes. All of these networks are potential users of
Blonder Tongue headend and interdiction products.
MDU
Since 1991, the FCC has designated special frequency bands enabling private
cable operators to link multiple properties to one central headend system via
microwave signal transmission, thereby spreading the cost of headend electronics
over multiple MDUs and a wider potential subscriber base. 18 GHz service, which
is wide enough to support the transmission of 72 channels of television
programming, has fueled the growth and product investment of MDU system
operators, and caused a substantial increase in the demand for quality Headend
Products. The use of 18 GHz for future interconnections is questionable at this
time due to both legal and technological impediments. During 1999, the FCC
issued a Notice of Proposed Rulemaking proposing to grant primary status for use
of the 18 GHz frequency band to Fixed Satellite Service Operators. While this
matter has not yet been resolved, it has generated a degree of uncertainty over
the use of this technology in private cable systems. Coupling this uncertainty
with the complexity of making these systems two-way for data and telephony,
results in systems that are no longer competitive with fiber optic cable. The
Company believes that since fiber optic networks are expanding at a tremendous
rate, most private cable networks will eventually employ fiber optics to make
interconnections between building and development sites. In addition, provisions
of the Telecommunications Act of 1996 permit private cable system operators to
use coaxial cable or fiber optic connections between adjacent properties where
no access to public rights-of-way are required. Further, fiber optic networks
built by regional and long distance telephone service providers, which are
common carriers, could be used by private cable system integrators as
interconnects.
Through the use of interconnected networks, private cable operators can
target geographic areas with multiple properties, many of which would not
otherwise have been considered economically feasible, for inclusion as part of
an extensive private cable network. In the past, properties with 100 to 200
subscribers could not financially justify more than 15 to 20 channels, but can
now be linked to a central headend and justify a high channel carrier service of
60 channels or more. This allows private cable operators to supply a wide
variety of programming at a price which is competitive with CATV.
The economic feasibility of a private cable system depends on controlling
the headend cost and spreading that cost over as many subscribers as possible
using links to multiple MDUs. Electronic equipment providing the best possible
performance-to-cost ratio is key to successfully providing for the needs of
private cable operators. The Company believes that its products are
cost-effective and competitive with the products of other companies supplying
the CATV industry, in terms of quality, number of channels and price.
Lodging
Until the early 1990's, one system integrator dominated the lodging market
and manufactured much of its own equipment. During the last ten years, other
private cable integrators have successfully entered and expanded the lodging
market by offering systems with more channels, video-on-demand and
interactivity. These systems have been well received in the market, as property
owners have sought additional revenues and guests have demanded increased
in-room conveniences. The integrators leading this market evolution rely upon
outside suppliers for their system electronics and are Blonder Tongue customers.
These companies and others offer lodging establishments VCR-based systems which
provide true video-on-demand movies with a large selection of titles. To meet
these demands, the typical lodging system headend will include as many as 20 to
40 receivers and as many as 60 to 80 modulators, and will be capable of
providing the guest with more free channels, video-on-demand for a broad
selection of movie titles, and even interactive services such as remote
check-out and concierge services. This
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is in contrast to the systems which preceded them which typically had 10 to 12
receivers and modulators and provided six to ten free channels and two to five
channels of VCR-based movies running at published scheduled times.
There is an accelerating trend to substitute video file servers for VCRs,
which the Company believes will eventually replace VCRs in video-on-demand
systems. The timing and speed of this transition is dependent on availability of
lower cost servers.
Most of the systems with video-on-demand service were initially in large
hotels, where the economics of high channel capacity systems are more easily
justified. The conversion of hotel pay-per-view systems into video-on-demand is
increasing. Smaller hotels and motels are being provided with video-on-demand as
technology results in reduced headend costs, keeping the market growth
reasonably steady.
International
For much of the world, CATV service lags the United States, but is rapidly
expanding as technological advancement reduces the cost to consumers. In
addition, economic development in Latin America and Asia has allowed first time
construction of integrated delivery systems that utilize a variety of
electronics and broadband hardware. The pace of growth is difficult to predict,
but as more alternatives become available and television service becomes
increasingly affordable, it is likely that more equipment will be placed in the
field.
The Company utilizes several distributors in Florida and within Latin
America with an experienced international sales manager supervising this effort.
Earlier efforts to expand the market through exclusive distribution arrangements
were unsatisfactory but accelerated growth is anticipated in the year 2000 and
beyond. With regard to the European market, the Company's "CE" certification
process is essentially complete and the Company is currently initiating efforts
to develop distributors in each European country. Blonder Tongue has already
exhibited in several international trade shows.
Additional Considerations
The technological revolution taking place in the communications industry,
which includes DBS, is providing digital television to an increasing number of
homes. Wireless cable systems and DSL over twisted paired phone lines also
utilize digital compression to provide channel capacity which is competitive
with CATV and other television delivery systems. In addition, franchise cable
companies and overbuilders are building fiber optic networks to offer video,
data, and telephony. There is also the possibility of convergence of data and
video communications, wherein computer and television systems merge and the
computer monitor replaces the television screen. While it is not possible to
predict with certainty which technology will be dominant in the future, it is
clear that digitized video and advances in the ability to compress the digitized
video signal make both digital television and the convergence of computer,
telephone and television systems technically possible.
Since United States television sets are analog (not digital), direct
satellite television and other digitally compressed programming requires Headend
Products or expensive set-top decoding receivers or converters to convert the
digitally transmitted satellite signals back to analog. The replacement of all
television sets with digital sets will be costly and take many years to
complete. The Company believes that for many years to come, program providers
will be required to deliver an analog television signal on standard channels to
subscribers' television sets using Headend Products at some distribution point
in their networks or employ decoding receivers at each television set. Headend
Products are a large segment of Blonder Tongue's business and except for systems
deploying expensive digital decoders at each television set, the Company
believes interdiction is an ideal product for a system operator to use to
control access to the multitude of programming that will be available. In the
completely digital environment which may develop over the long term, all analog
Headend Products will need to be replaced with pure digital products. The
Company and all other suppliers to private cable, franchise cable and the
television industry generally will need to design and manufacture new products
for that environment.
5
Products
Blonder Tongue's products can be separated, according to function, into the
four broad categories described below:
o Headend Products used by a system operator for signal acquisition,
processing and manipulation for further transmission. Among the
products offered by the Company in this category are satellite
receivers (digital and analog), integrated receiver/decoders,
transcoders, demodulators, modulators, antennas and antenna mounts,
amplifiers, equalizers, and processors. The headend of a television
signal distribution system is the "brain" of the system, the central
location where the multi-channel signal is initially received,
converted and allocated to specific channels for distribution. In some
cases, where the signal is transmitted in encrypted form or digitized
and compressed, the receiver will also be required to decode the signal
or, in the case where digital signals are to be carried on the
distribution system, transcode its modulation from QPSK (quadrature
phase shift key) to QAM (quadrature amplitude modulation) since one is
optimum for satellite transmission and the other optimum for
fiber/coaxial distribution. Blonder Tongue is a licensee of General
Instrument Corporation's VideoCipher(R) and DigiCipher(R) encryption
technologies, EchoStar Communication Corp.'s digital technologies and
Hughes Network Systems' digital technologies, and integrates their
decoders into integrated receiver/decoder products, where required. The
Company estimates that Headend Products accounted for approximately 60%
of the Company's revenues in 1999, 70% in 1998, and 80% in 1997.
o Distribution Products used to permit signals to travel from the headend
to their ultimate destination in a home, apartment unit, hotel room,
office or other terminal location along a distribution network of fiber
optic or coaxial cable. Among the products offered by the Company in
this category are optical transmitters, optical receivers, line
extenders, broadband amplifiers, directional taps, splitters and wall
taps. In CATV systems, the distribution products are either mounted on
exterior telephone poles or encased in pedestals, vaults or other
security devices. In private cable systems the distribution system is
typically enclosed within the walls of the building (if a single
structure) or added to an existing structure using various techniques
to hide the coaxial cable and devices. The non-passive devices within
this category are designed to ensure that the signal distributed from
the headend is of sufficient strength when it arrives at its final
destination to provide high quality audio/video images.
o Subscriber Products used to control access to programming at the
subscriber's location and to split and amplify incoming signals for
transmission to multiple sites and multiple television sets within a
site. Among the products offered by the Company in this category are
addressable interdiction devices, cable modems, telephony modems,
splitters, couplers and multiplexers. The Company believes that the
most significant products within this category are: (i) its
VideoMask(TM) addressable signal jammer, licensed from Philips
Electronics North America Corporation and its affiliate Philips
Broadband Networks, Inc. in August 1995 under certain non-exclusive
technology and patent license agreements (the "Philips License
Agreements"), (ii) the SMI Interdiction product line acquired from
Scientific as part of its interdiction business, and (iii) its recently
introduced circuit-switched telephony headend equipment and cable and
telephony modems for high-speed Internet access, telephony and data
transfers, which are available to the Company through its licensing and
distributorship agreements with GAD Line, Ltd. Interdiction products
limit, through jamming of particular channels, the availability of
programs to subscribers. Such products enable an integrator to control
subscriber access to premium channels and other enhanced services
through a computer located off-premises. They also eliminate the
necessity of an operator having to make a service call to install or
remove passive traps and eliminate the costs associated with damage or
loss of set-top converters in the subscribers' locations. Interdiction
products are also being successfully used by CATV operators as an
anti-piracy system in conjunction with set-top converters. The Company
believes that the reduction in operating costs, programming piracy, and
converter loss which can be obtained through the use of interdiction
will be a significant factor in further product penetration into the
franchise cable market. While it is not possible to predict the breadth
of market acceptance for these products, the Company believes the
potential is substantial in both the MDU market and franchise cable
market as alternatives to, or in conjunction with, set-top converters
and as a viable option for companies and municipalities, who are
overbuilding existing cable infrastructures and are seeking a more
consumer-friendly and more cost-effective way to compete with the
incumbent franchise cable operator.
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o Microwave Products used to transmit the output of a cable system
headend to multiple locations using point-to-point communication links
in the 18 GHz range of frequencies. Among the products offered by the
Company in this category are power amplifiers, repeaters, receivers,
transmitters and compatible accessories. These products convert the
headend output up to the microwave band and transmit this signal using
parabolic antennas. At each receiver site, a parabolic antenna-receiver
combination converts the signal back to normal VHF frequencies for
distribution to subscribers at the receiver site.
The Company will modify its products to meet specific customer
requirements. Typically, these modifications are minor and do not materially
alter the functionality of the products. Thus the inability of the customer to
accept such products does not generally result in the Company being otherwise
unable to sell such products to other customers.
Research and Product Development
The markets served by Blonder Tongue are characterized by technological
change, new product introductions, and evolving industry standards. To compete
effectively in this environment, the Company must engage in continuous research
and development in order to (i) create new products, (ii) expand the frequency
range of existing products in order to accommodate customer demand for greater
channel capacity, (iii) license new technology (such as digital satellite
receiver decoders, high-speed cable modems and telephony modems), and (iv)
acquire products incorporating technology which could not otherwise be developed
quickly enough using internal resources, to suit the dynamics of the evolving
marketplace. Research and development projects are often initially undertaken at
the request of and in an effort to address the particular needs of its customers
and customer prospects with the expectation or promise of substantial future
orders from such customers or customer prospects. Additional research and
development efforts are also continuously underway for the purpose of enhancing
product quality and engineering to lower production costs. For the acquisition
of new technologies, the Company may rely upon technology licenses from third
parties when the Company believes that it can obtain such technology more
quickly and/or cost-effectively from such third parties than the Company could
otherwise develop on its own, or when the desired technology is proprietary to a
third party. There were 23 employees in the research and development department
of the Company at December 31, 1999.
Recent research and development initiatives include a new line of fiber
optics distribution equipment, a transcoder line to convert satellite digital
signals to QAM digital signals, a single subscriber interdiction product for
single family dwellings and an internet connectivity device for use in cable
systems to allow MDU subscribers to access the internet using DirecTV's
DirecPC(TM) technology to download data through their cable connection at speeds
of up to 400 KBPS, almost 10 times the speed of the traditional 56 KBPS
telephone modem.
Marketing and Sales
Blonder Tongue markets and sells its products worldwide to private cable
integrators (which accounted for approximately 80% of the Company's revenues for
fiscal year 1999, approximately 65% for fiscal year 1998 and approximately 80%
for fiscal year 1997), to overbuilders, and to franchise cable integrators.
Sales are made directly to customers by the Company's internal sales force, as
well as through numerous domestic and international stocking distributors.
The Company's sales and marketing function is predominantly performed by
its internal sales force. Should it be deemed necessary, the Company may retain
independent sales representatives in particular geographic areas or targeted to
specific customer prospects. The Company's internal sales force consists of
approximately 29 employees, which currently includes eleven salespersons (six
salespersons in Old Bridge, New Jersey, one salesperson in each of Cincinnati,
Ohio, Cudahy, Wisconsin, Castle Rock, Colorado, Folsom, California, and Miami,
Florida) and 18 sales-support personnel at the Company headquarters in Old
Bridge, New Jersey.
The Company's standard customer payment terms are 2%-10, net 30 days. From
time to time where the Company determines that circumstances warrant, such as
when a customer agrees to commit to a large blanket purchase order, the Company
extends payment terms beyond its standard payment terms.
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The Company has several marketing programs to support the sale and
distribution of its products. Blonder Tongue participates in industry trade
shows and conferences. The Company also publishes technical articles in trade
and technical journals, distributes sales and product literature and has an
active public relations plan to ensure complete coverage of Blonder Tongue's
products and technology by editors of trade journals. The Company provides
system design engineering for its customers, maintains extensive ongoing
communications with many original equipment manufacturer customers and provides
one-on-one demonstrations and technical seminars to potential new customers.
Blonder Tongue supplies sales and applications support, product literature and
training to its sales representatives and distributors. The management of the
Company travels extensively, identifying customer needs and meeting potential
customers.
The Company had approximately $17.3 million and $5.4 million in purchase
orders as of December 31, 1999 and December 31, 1998, respectively. All of the
purchase orders outstanding as of December 31, 1999 are expected to be shipped
prior to December 31, 2000. The purchase orders are for the future delivery of
products and are subject to cancellation by the customer.
Customers
Blonder Tongue has a broad customer base, which in 1999 consisted of more
than 1,000 active accounts. Approximately 26%, 33% and 40% of the Company's
revenues in fiscal years 1999, 1998 and 1997, respectively, were derived from
sales of products to the Company's five largest customers. In 1999, sales to
Toner Cable Equipment, Inc. accounted for approximately 14% of the Company's
revenues. There can be no assurance that any sales to these entities,
individually or as a group, will reach or exceed historical levels in any future
period. However, the Company anticipates that these customers will continue to
account for a significant portion of the Company's revenues in future periods,
although none of them is obligated to purchase any specified amount of products
(beyond outstanding purchase orders) or to provide the Company with binding
forecasts of product purchases for any future period.
The complement of leading customers may shift as the most efficient and
better financed integrators grow more rapidly than others. The Company believes
that many integrators will grow rapidly, and as such the Company's success will
depend in part on the viability of those customers and on the Company's ability
to maintain its position in the overall marketplace by shifting its emphasis to
those customers with the greatest growth and growth prospects. Any substantial
decrease or delay in sales to one or more of the Company's leading customers,
the financial failure of any of these entities, or the Company's inability to
develop and maintain solid relationships with the integrators which may replace
the present leading customers, would have a material adverse effect on the
Company's results of operations and financial condition.
During 1999, several of the Company's customers experienced financial
difficulties and demonstrated the inability to pay. As of December 31, 1999,
these customers had outstanding accounts with the Company of approximately $1.6
million, which remained outstanding for more than ninety (90) days. Accordingly,
the Company provided for this exposure.
The Company's revenues are derived primarily from customers in the
continental United States, however, the Company also derives revenues from
customers outside the continental United States, primarily in underdeveloped
countries. Television service is less developed in many international markets,
particularly Latin America and Asia, creating opportunity for those participants
who offer quality products at a competitive price. Sales to customers outside of
the United States represented approximately 2%, 2% and 3% of the Company's
revenues in fiscal years 1999, 1998 and 1997, respectively. All of the Company's
transactions with customers located outside of the continental United States are
denominated in U.S. dollars, therefore, the Company has no material foreign
currency transactions.
Manufacturing and Suppliers
Blonder Tongue's manufacturing operations are located at the Company's
headquarters in Old Bridge, New Jersey. The Company's manufacturing operations
are vertically integrated and consist principally of the assembly and testing of
electronic assemblies built from fabricated parts, printed circuit boards and
electronic devices and the fabrication from raw sheet metal of chassis and
cabinets for such assemblies. Management
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continues to implement a significant number of changes to the manufacturing
process to increase production volume and reduce product cost, including
logistics modifications on the factory floor, an increased use of surface mount,
axial lead and radial lead robotics to place electronic components on printed
circuit boards, a continuing program of circuit board redesign to make more
products compatible with robotic insertion equipment and an increased
integration in machining and fabrication. All of these efforts are consistent
with and part of the Company's strategy to provide its customers with high
performance-to-cost ratio products.
Outside contractors supply standard components and etch printed circuit
boards to the Company's specifications. While the Company generally purchases
electronic parts which do not have a unique source, certain electronic component
parts used within the Company's products are available from a limited number of
suppliers and can be subject to temporary shortages because of general economic
conditions and the demand and supply for such component parts. If the Company
were to experience a temporary shortage of any given electronic part, the
Company believes that alternative parts could be obtained or system design
changes implemented. However, in such situations the Company may experience
temporary reductions in its ability to ship products affected by the component
shortage. The Company purchases several products from sole suppliers for which
alternative sources are not available, such as the VideoCipher(R) and
DigiCipher(R) encryption systems manufactured by General Instrument Corporation,
which are standard encryption methodologies employed on U.S. C-Band and Ku-Band
transponders, EchoStar digital satellite receiver decoders, which are
specifically designed to work with the DISH Network(TM), and Hughes Network
Systems digital satellite receivers for delivery of DIRECTV(TM) programming. An
inability to timely obtain sufficient quantities of these components could have
a material adverse effect on the Company's operating results. The Company does
not have a supply agreement with General Instrument Corporation or any other
supplier. The Company submits purchase orders to its suppliers on an as-needed
basis.
Blonder Tongue maintains a quality assurance program which tests samples of
component parts purchased, as well as its finished products, on an ongoing basis
and also conducts tests throughout the manufacturing process using commercially
available and in-house built testing systems that incorporate proprietary
procedures. Blonder Tongue performs final product tests on 100% of its products
prior to shipment to customers.
Competition
All aspects of the Company's business are highly competitive. The Company
competes with national, regional and local manufacturers and distributors,
including companies larger than Blonder Tongue which have substantially greater
resources. Various manufacturers who are suppliers to the Company sell directly
as well as through distributors into the franchise and private cable
marketplaces. Because of the convergence of the cable, telecommunications and
computer industries and rapid technological development, new competitors may
seek to enter the principal markets served by the Company. Many of these
potential competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than Blonder Tongue. The
Company expects that direct and indirect competition will increase in the
future. Additional competition could result in price reductions, loss of market
share and delays in the timing of customer orders. The principal methods of
competition are product differentiation, performance and quality, price and
terms, service, and technical and administrative support.
Intellectual Property
The Company currently holds 30 United States patents and 14 foreign patents
covering a wide range of electronic systems and circuits, of which 19 United
States patents and 10 foreign patents were obtained in the acquisition of
Scientific's interdiction business. Other than certain of the patents acquired
from Scientific, none of the Company's patents are considered material to the
Company's present operations because they do not relate to high volume
applications. Because of the rapidly evolving nature of the CATV industry, the
Company believes that its market position as a leading supplier to private cable
integrators derives primarily from its ability to develop a continuous stream of
new products which are designed to meet its customers' needs and which have a
high performance-to-cost ratio.
The Company is a licensee of Philips Electronics North America Corporation
and its affiliate Philips Broadband Networks, Inc., General Instrument
Corporation ("GI"), Houston Tracker Systems, Inc., a
9
subsidiary of EchoStar Communications Corp. ("EchoStar"), Hughes Network
Systems, a Hughes Electronics Corporation ("Hughes"), GAD Line, Ltd., and
several smaller software development companies.
Under the Philips License Agreements, the Company is granted a
non-exclusive license for a term which expires in 2010, concurrently with the
last to expire of the relevant patents. The Philips License Agreements provide
for the payment by the Company of a one-time license fee and for the payment by
the Company of royalties based upon unit sales of licensed products.
The Company is a licensee of GI relating to GI's VideoCipher(R) encryption
technology and is also a party to a private label agreement with GI relating to
its DigiCipher(R) technology. Under the VideoCipher(R) license agreement, the
Company is granted a non-exclusive license under certain proprietary know-how,
to design and manufacture certain licensed products to be compatible with the
VideoCipher(R) commercial descrambler module for a term of ten years, expiring
in August, 2000. The VideoCipher(R) license agreement provides for the payment
by the Company of a one-time license fee for the Company's first model of
licensed product and additional one-time license fees for each additional model
of licensed product. The VideoCipher(R) license agreement also provides for the
payment by the Company of royalties based upon unit sales of licensed products.
Under the DigiCipher(R) private label agreement, the Company is granted the
non-exclusive right to sell DigiCipher(R) II integrated receiver decoders
bearing the Blonder Tongue name for use in the commercial market for a term
expiring in December, 2000. The DigiCipher(R) private label agreement provides
for the payment by the Company of a one-time license fee for the Company's first
model of licensed product and additional one-time license fees for each
additional model of licensed product.
In November, 1996, the Company entered into a license agreement with
EchoStar, pursuant to which the Company is licensed to manufacture and sell
digital satellite receiver systems which are compatible with digital programming
transmitted by EchoStar's DISH Network(TM), for use in the commercial market.
The agreement is for a term of five years, expiring in November, 2001. The
EchoStar license agreement provides for the payment by the Company of a one-time
license fee and for the payment of royalties based upon unit sales of licensed
products.
During 1996, the Company also entered into several software development and
license agreements for specifically designed controller and interface software
necessary for the operation of the Company's Video Central(TM) remote
interdiction control system, which is used for remote operation of VideoMask(TM)
signal jammers installed at subscriber locations. These licenses are perpetual
and require the payment of a one-time license fee and in one case additional
payments, the aggregate of which are not material.
In February, 1998, the Company entered into an exclusive license agreement
with Hughes, pursuant to which the Company is licensed to design, manufacture,
and market commercial digital satellite receivers which are compatible with
DIRECTV(TM) programming, for use in headend applications in both the franchised
and private cable markets. The agreement is for a term of five (5) years,
expiring in February 2003.
In January, 2000, the Company entered into distributorship and licensing
agreements with GAD Line, Ltd., a designer and manufacturer of advanced
telephony-over-cable and high-speed data system products used in HFC networks.
Under the agreements, the Company will obtain immediate distribution rights for
the sale of switched telephony-over-cable products and high-speed cable modems,
followed by access to certain proprietary technology and a license to
manufacture cable modems under the Company's private label. This license is
perpetual (subject to the payment of royalties) and provides for the payment by
the Company of royalties based upon unit sales of licensed products.
The Company relies on a combination of contractual rights and trade secret
laws to protect its proprietary technologies and know-how. There can be no
assurance that the Company will be able to protect its technologies and know-how
or that third parties will not be able to develop similar technologies and
know-how independently. Therefore, existing and potential competitors may be
able to develop products that are competitive with the Company's products and
such competition could adversely affect the prices for the Company's products or
the Company's market share. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining its leadership position.
10
Regulation
Private cable, while in some cases subject to certain FCC licensing
requirements, is not presently burdened with extensive government regulations.
Franchise cable operators had been subject to extensive government regulation
pursuant to the Cable Television Consumer Protection and Competition Act of
1992, which among other things provided for rate rollbacks for basic tier cable
service, further rate reductions under certain circumstances and limitations on
future rate increases. The Telecommunications Act of 1996 has deregulated many
aspects of franchise cable system operation and has opened the door to
competition among cable operators and telephone companies in each of their
respective industries. The Company believes that this legislation will increase
the base of potential customers for the Company's products.
In September, 1998, the FCC issued a Notice of Proposed Rulemaking
proposing to grant primary status for use of the 18 GHz frequency band to Fixed
Satellite Service Operators. If adopted, this rule would adversely affect sales
of 18 GHz microwave products to private cable operators. Pending release of the
FCC's Report and Order with respect to this matter, any applications filed by
private cable operators for use of the 18 GHz frequency band will be
grandfathered.
Environmental Regulations
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
processes. The Company did not incur in 1999 and does not anticipate incurring
in 2000 material capital expenditures for compliance with federal, state and
local environmental laws and regulations. There can be no assurance, however,
that changes in environmental regulations will not result in the need for
additional capital expenditures or otherwise impose additional financial burdens
on the Company. Further, such regulations could restrict the Company's ability
to expand its operations. Any failure by the Company to obtain required permits
for, control the use of, or adequately restrict the discharge of, hazardous
substances under present or future regulations could subject the Company to
substantial liability or could cause its manufacturing operations to be
suspended.
The Company presently holds a permit from the New Jersey Department of
Environmental Protection ("NJDEP"), Division of Environmental Quality, Air
Pollution Control Program relating to its operation of certain process
equipment, which permit expires in June, 2001. The Company has held such a
permit for this equipment on a substantially continuous basis since
approximately April, 1989. The Company also has authorization under the New
Jersey Pollution Discharge Elimination System/Discharge to Surface Waters
General Industrial Stormwater Permit, Permit No. NJ0088315. This permit will
expire January 2002.
Employees
The Company employs approximately 588 people, including 451 in
manufacturing, 23 in research and development, 17 in quality assurance, 46 in
production services, 29 in sales and marketing, and 22 in a general and
administrative capacity. 372 of the Company's employees are members of the
International Brotherhood of Electrical Workers Union, Local 2066, which has a
three year labor agreement with the Company expiring in February, 2002.
ITEM 2. PROPERTIES
The Company's principal manufacturing, engineering, sales and
administrative facilities consist of one building totaling approximately 130,000
square feet located on approximately 20 acres of land in Old Bridge, New Jersey
(the "Old Bridge Facility") which is owned by the Company. The Company also
leases office space in Cincinnati, Ohio and Cudahy, Wisconsin for which it pays
rent of approximately $260 and $300 per month, respectively.
Management believes that the Old Bridge Facility is adequate to support the
Company's anticipated needs in 2000. Subject to compliance with applicable
zoning and building codes, the Old Bridge real
11
property is large enough to double the size of the plant to accommodate
expansion of the Company's operations should the need arise.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain proceedings incidental to the ordinary
course of its business, none of which, in the current opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded on the American Stock Exchange
since the Company's initial public offering on December 14, 1995. The following
table sets forth for the fiscal quarters indicated, the high and low sale prices
for the Company's Common Stock on the American Stock Exchange.
Market Information
Fiscal Year Ended December 31, 1999: High Low
---- ---
First Quarter ................................................ 7 7/8 5
Second Quarter................................................ 7 3/8 4 7/8
Third Quarter ................................................ 9 3/4 5 11/16
Fourth Quarter ............................................... 8 5/8 4 3/4
Fiscal Year Ended December 31, 1998: High Low
---- ---
First Quarter................................................. 16 1/8 12 3/8
Second Quarter................................................ 14 1/4 9 3/8
Third Quarter................................................. 11 3/4 5 3/8
Fourth Quarter................................................ 9 1/4 5 1/4
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "BDR".
Holders
As of March 21, 2000, the Company had approximately 68 holders of record of
the Common Stock. Since a portion of the Company's common stock is held in
"street" or nominee name, the Company is unable to determine the exact number of
beneficial holders.
Dividends
The Company currently anticipates that it will retain all of its earnings
to finance the operation and expansion of its business, and therefore does not
intend to pay dividends on its Common Stock in the foreseeable future. Other
than in connection with certain "S" corporation distributions, the Company has
never declared or paid
12
any cash dividends on its Common Stock. Any determination to pay dividends in
the future is at the discretion of the Company's Board of Directors and will
depend upon the Company's financial condition, results of operations, capital
requirements, limitations contained in loan agreements and such other factors as
the Board of Directors deems relevant. The Company's loan agreement with First
Union National Bank prohibits the payment of dividends by the Company on its
Common Stock, unless at the time of and after giving effect to any proposed
dividend payment, the Company is not in default under the loan agreement and is
in compliance with certain financial covenants relating to, among other things,
tangible net worth and debt service coverage.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of earnings data presented below for
each of the years ended December 31, 1999, 1998 and 1997, and the selected
consolidated balance sheet data as of December 31, 1999 and 1998, are derived
from, and are qualified by reference to, the audited consolidated financial
statements of the Company and notes thereto included elsewhere in this Form
10-K. The selected consolidated statement of earnings data for the years ended
December 31, 1996 and 1995 and the selected consolidated balance sheet data as
of December 31, 1997, 1996 and 1995 are derived from audited consolidated
financial statements not included herein. The data set forth below is qualified
in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, notes thereto and other financial and
statistical information appearing elsewhere herein.
Year Ended December 31,
----------------------------------------------------------------------
1999 1998(1) 1997 1996 1995
---- ------- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Earnings Data:
Net sales............................... $56,805 $70,792 $62,057 $48,862 $51,982
Cost of goods sold...................... 39,074 45,344 39,656 30,613 32,528
------- ------- ------- ------- -------
Gross profit.......................... 17,731 25,448 22,401 18,249 19,454
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative... 13,598 10,755 9,938 9,135 9,791
Research and development.............. 2,070 2,156 1,954 1,972 2,011
------- ------- ------- ------- -------
Total operating expenses.............. 15,668 12,911 11,892 11,107 11,802
------- ------- ------- ------- -------
Earnings from operations................ 2,063 12,537 10,509 7,142 7,652
Interest expense........................ 2,008 1,596 414 658 1,296
Other (income) expense, net............. (6) (40) (595) -- (60)
------- ------- ------- ------- -------
Earnings before income taxes ........... 61 10,981 10,690 6,484 6,416
Provisions for income taxes............. 2 3,868 4,276 2,601
------- ------- ------- -------
Net earnings............................ $ 59 $ 7,113 $ 6,414 $ 3,883
======= ======= ======= =======
Basic earnings per share................ $ 0.01 $ 0.86 $ 0.78 $ 0.48
Basic weighted average shares
outstanding(2).......................... 7,916 8,292 8,227 8,144
Diluted earnings per share.............. $ 0.01 $ 0.84 $ 0.77 $ 0.47
Diluted weighted average shares
outstanding(2)........................ 7,958 8,471 8,375 8,300
Pro Forma Data:
Pro forma provision for income taxes(3) 2,566
-------
Pro forma net earnings.................. $ 3,850
=======
Pro forma basic net earnings per share.. $ 0.66
Basic weighted average shares
outstanding(2)........................ 5,823
Pro forma diluted earnings per share.... $ 0.64
Diluted weighted average shares
outstanding(2)........................ 6,054
Other Data:
S Corporation distributions declared.... $ -- $ -- $ -- $ -- $ 7,896
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Working capital....................... $25,456 $17,049 $26,055 $23,015 $14,407
Total assets.......................... 66,076 69,651 42,272 36,165 31,804
Long-term debt (including
current maturities) .................. 20,607 22,359 5,054 6,347 2,145
Stockholders' equity.................. 35,247 40,496 31,795 25,576 19,740
- ------------------
(1) On March 26, 1998, the Company acquired all of the assets and technology
rights of Scientific-Atlanta, Inc.'s interdiction business. See Note 11 to
the Company's consolidated financial statements.
(2) Weighted average shares are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
(3) On December 11, 1995, the Company's status as an S Corporation terminated
and as a result the Company is now subject to corporate income taxes.
Accordingly, pro forma net earnings reflect a pro forma adjustment for
income taxes which would have been recorded had the Company been a C
Corporation.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's historical results
of operations and liquidity and capital resources should be read in conjunction
with "Selected Consolidated Financial Data" and the consolidated financial
statements of the Company and notes thereto appearing elsewhere herein.
Overview
The Company was incorporated in November, 1988, under the laws of Delaware
as GPS Acquisition Corp. for the purpose of acquiring the business of
Blonder-Tongue Laboratories, Inc., a New Jersey corporation which was founded in
1950 by Ben H. Tongue and Isaac S. Blonder (the "former Blonder-Tongue") to
design, manufacture and supply a line of electronics and systems equipment
principally for the Private Cable industry. Following the acquisition, the
Company changed its name to Blonder Tongue Laboratories, Inc.
The Company's success is due in part to management's efforts to leverage
the Company's reputation by broadening its product line to offer one-stop shop
convenience to private cable and franchise cable system integrators and to
deliver products having a high performance-to-cost ratio.
In December 1995, the Company successfully concluded an initial public
offering of 2,200,000 shares of its Common Stock. Thereafter, in January 1996,
the Company's underwriters exercised their over-allotment option, as a result of
which an additional 181,735 shares of the Company's Common Stock were sold. The
proceeds received by the Company from the sale of its Common Stock in the
offering (including shares sold pursuant to the over-allotment option), net of
expenses of the offering and certain S Corporation distributions to the
Company's principal stockholders, were approximately $14,045,000. These funds
were used to acquire the Company's Old Bridge Facility and to reduce the
Company's outstanding bank debt. The Company has further enhanced its liquidity
through a long-term loan secured by a mortgage against the Old Bridge Facility.
On March 26, 1998, the Company acquired all of the assets and technology
rights, including the SMI Interdiction product line, of the interdiction
business (the "Interdiction Business") of Scientific-Atlanta, Inc.
("Scientific") for a purchase price consisting of (i) $19 million in cash, (ii)
67,889 shares of the Company's common stock, (iii) a warrant to purchase 150,000
additional shares of the Company's common stock at an exercise price of $14.25
per share and (iv) assumption by the Company of certain obligations under
executory contracts with vendors and customers and certain warranty obligations
and other current liabilities of the Interdiction Business. The Company is
utilizing the SMI Interdiction product line acquired from Scientific, which has
been engineered primarily to serve the franchise cable market, as a supplement
to the Company's VideoMask(TM) Interdiction products, which are primarily
focused on the private cable market. In addition, the Company expects that the
technology acquired as part of the Interdiction Business will enhance its
ability to design products that meet the specific needs of all cable providers,
while improving its position in the franchise cable market.
In June, 1999, the Company purchased 750,000 shares of its outstanding
common stock from the holders thereof for a purchase price of $7.00 per share in
a "Dutch Auction" style issuer tender offer. The Company obtained the funds
necessary to purchase common stock in the issuer tender offer with a combination
of cash on hand and borrowings under its line of credit.
On September 13, 1999, the Company executed an agreement with CSC Holdings,
Inc., a wholly owned subsidiary of Cablevision Systems Corporation, to supply
HomeControl Interdiction units for an aggregate of approximately $16 million to
100,000 basic cable subscribers in the New York metropolitan area. The unit
being supplied is the latest HomeControl SLIU (Single Living Interdiction Unit).
Management believes that this contract is a significant contribution to the
Company's penetration of the franchise cable market and anticipates that current
efforts towards further penetration will favorably impact the Company's
operating results during fiscal year 2000.
15
Results of Operations
The following table sets forth, for the fiscal periods indicated, certain
consolidated statement of earnings data as a percentage of net sales:
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................ 100.0% 100.0% 100.0%
Costs of goods sold...................................... 68.8 64.1 63.9
Gross profit............................................. 31.2 35.9 36.1
Selling expenses......................................... 10.6 6.8 8.0
General and administrative expenses...................... 13.3 8.4 8.0
Research and development expenses........................ 3.6 3.0 3.2
Earnings from operations................................. 3.6 17.7 16.9
Other (income) expense, net.............................. 3.5 2.2 (.3)
Earnings before income taxes............................. 0.1 15.5 17.2
1999 Compared with 1998
Net Sales. Net sales decreased $13,987,000, or 19.8%, to $56,805,000 in
1999 from $70,792,000 in 1998. The decrease in sales is primarily attributed to
the decrease in demand for the Company's products in the private cable market,
due in part to the consolidation of private cable systems operators in this
market which took place during 1999. In addition, the Company experienced a
decrease in sales of interdiction equipment to both the franchise and private
cable markets. Net sales included approximately $11,006,000 of interdiction
equipment for 1999 compared to approximately $15,938,000 for 1998. The decrease
in sales of interdiction equipment was related to a delay in fourth quarter
shipments as a result of the development of the SLIU-II interdiction product.
Cost of Goods Sold. Cost of goods sold decreased to $39,074,000 for 1999
from $45,344,000 for 1998, primarily due to decreased volume, and increased as a
percentage of sales to 68.8% in 1999 from 64.1% in 1998. The increase as a
percentage of sales was caused primarily by a greater proportion of sales during
the period being comprised of lower margin products, including the additional
start-up costs related to the Company's new SLIU-II interdiction product.
Selling Expenses. Selling expenses increased to $6,025,000 in 1999 from
$4,823,000 in 1998, and increased as a percentage of sales to 10.6% in 1999 from
6.8% in 1998. The $1,202,000 increase was primarily due to an increase in costs
incurred for advertising and marketing materials along with an increase in
salaries and employee benefit expenses as a result of an increase in headcount.
The increase in selling expenses is directly related to the Company's efforts to
increase market penetration within the franchise cable market and the promotion
of new product lines such as fiber optic products and interdiction. The Company
anticipates that these efforts will favorably impact operating results during
fiscal year 2000.
General and Administrative Expenses. General and administrative expenses
increased to $7,573,000 in 1999 from $5,932,000 for 1998 and increased as a
percentage of sales to 13.3% in 1999 from 8.4% in 1998. The $1,641,000 increase
can be attributed to an increase in the bad debt expense, an increase in the
amortization of intangibles related to the acquisition of Scientific's
Interdiction Business and an increase in expenditures for professional services
rendered, offset by a decrease in the accrual for executive bonuses. The
increase in the bad debt expense was directly attributable to customer accounts
experiencing financial difficulties related to the consolidation of the private
cable market during 1999.
Research and Development Expenses. Research and development expenses
decreased 4.0% to $2,070,000 in 1999 from $2,156,000 in 1998. The $86,000
decrease is primarily due to a reduction in the amortization of license and
patent agreements. Research and development expenses increased as a percentage
of sales to 3.6% from 3.0%.
16
Operating Income. Operating income decreased 83.5% to $2,063,000 for 1999
from $12,537,000 for 1998. Operating income as a percentage of sales decreased
to 3.6% in 1999 from 17.7% in 1998.
Interest and Other Expenses. Other expenses in 1999 consisted of $2,008,000
of interest expense offset by $6,000 of interest income. Other expenses in 1998
consisted of $1,596,000 of interest expense offset by $40,000 of interest
income. The increase in interest expense is primarily attributed to increased
borrowings under the Company's acquisition loan commitment (converted to a term
loan with the bank during 1999).
Income Taxes. The provision for income taxes for 1999 decreased to $2,000
from $3,868,000 for 1998 as a result of a decrease in taxable income. The
Company's effective tax rate decreased to 3% for 1999 from 35% for 1998 as a
result of state tax credits available to the Company not previously recognized,
along with the decrease in taxable income.
1998 Compared with 1997
Net Sales. Net sales increased $8,735,000, or 14.1%, to $70,792,000 in 1998
from $62,057,000 in 1997. International sales accounted for $1,137,000 (1.6% of
total sales) for 1998 compared to $1,620,000 (2.6% of total sales) for 1997.
The increase in sales is primarily attributed to the increase in sales of
interdiction equipment including sales to the franchise cable market. Net sales
included approximately $15,938,000 of interdiction equipment for 1998 compared
to approximately $7,567,000 for 1997.
Cost of Goods Sold. Cost of goods sold increased to $45,344,000 for 1998
from $39,656,000 for 1997, primarily due to increased volume, and increased as a
percentage of sales to 64.1% from 63.9%. The increase as a percentage of sales
was caused primarily by a greater proportion of sales during the period being
comprised of lower margin products.
Selling Expenses. Selling expenses decreased to $4,823,000 in 1998 from
$4,964,000 in 1997, and decreased as a percentage of sales to 6.8% in 1998 from
8.0% in 1997. The decrease was primarily due to a decrease in commissions and
promotional goods offset by an increase in shipping materials.
General and Administrative Expenses. General and administrative expenses
increased to $5,932,000 in 1998 from $4,974,000 for 1997 and increased as a
percentage of sales to 8.4% in 1998 from 8.0% for 1997. The $958,000 increase
can be attributed to an increase in the allowance for doubtful accounts along
with an increase in the amortization of intangibles related to the acquisition
of Scientific's Interdiction Business offset by a decrease in the accrual for
executive bonuses. The increase in the allowance for doubtful accounts is
primarily attributable to one account demonstrating the inability to pay within
the third quarter.
Research and Development Expenses. Research and development expenses
increased 10.3% to $2,156,000 in 1998 from $1,954,000 in 1997. The $202,000
increase is primarily due to an increase in purchased materials for research and
development and the reimbursement of costs incurred as a result of the
termination of the Pacific Bell contract in 1997. Research and development
expenses decreased as a percentage of sales to 3.0% from 3.2%.
Operating Income. Operating income increased 19.3% to $12,537,000 for 1998
from $10,509,000 for 1997. Operating income as a percentage of sales increased
to 17.7% in 1998 from 16.9% in 1997.
Interest and Other Expenses. Other expenses in 1998 consisted of $1,596,000
of interest expense offset by $40,000 of interest income. Other income in 1997
consisted of $535,000 related to the final payment received from Pacific Bell as
a result of the contract termination in July 1997, along with $60,000 of
interest income offset by $414,000 of interest expense. The increase in interest
expense is primarily attributed to increased borrowings under the Company's
acquisition loan commitment.
17
Income Taxes. The provision for income taxes for 1998 decreased to
$3,868,000 from $4,276,000 for 1997 as a result of state tax credits available
to the Company related to 1997 activity which also reduced the Company's
effective tax rate to 35% from 40%.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on the results of
operations of the Company. Fourth quarter sales in 1999 were slightly impacted
by fewer production days. The Company expects sales each year in the fourth
quarter to be impacted by fewer production days.
Year 2000
The Company previously assigned certain individuals to identify and correct
Year 2000 compliance issues. Information technology ("IT") systems with
non-compliant code were modified or replaced with systems that are Year 2000
compliant as they were identified. Similar actions were taken with respect to
non-IT systems, primarily systems embedded in manufacturing equipment and the
Company's products. The individuals were also responsible for investigating the
readiness of suppliers, customers and other third parties along with the
development of contingency plans where necessary.
All IT and non-IT systems were inventoried and assessed for compliance, and
remediation and testing activities completed with all systems compliant prior to
the end of 1999. The Company also identified critical suppliers, customers and
other third parties, surveyed their Year 2000 remediation programs, and
finalized risk assessments and contingency plans, where necessary, prior to the
end of 1999.
The Company's incremental costs directly related to Year 2000 compliance
issues were approximately $300,000. Approximately 90% of the total estimated
spending represented costs to modify existing systems.
To date, the Company has not experienced any material adverse effect on its
business resulting from Year 2000 compliance issues.
Liquidity and Capital Resources
As of December 31, 1999 and 1998, the Company's working capital was
$25,456,000 and $17,049,000, respectively. The increase in working capital is
attributable primarily due to the reclassification of the $19,000,000
acquisition loan commitment as long-term debt. Historically, the Company has
satisfied its cash requirements primarily from net cash provided by operating
activities and from borrowings under its line of credit.
The Company's net cash provided by operating activities for the period
ended December 31, 1999 was $7,383,000 as a result of the Company's net
earnings, increased by the $4,976,000 decrease in accounts receivable and the
$2,233,000 increase in accounts payable, offset by $2,576,000 to fund the
increase in inventory related to the new SLIU-II product, compared to cash
provided by operating activities for the period ended December 31, 1998 of
$921,000.
Cash used in investing activities was $1,197,000, which was attributable to
capital expenditures for new automated assembly and test equipment. The Company
does not have any present plans or commitments for material capital expenditures
for fiscal year 2000.
Cash used in financing activities was $6,680,000 for the period ended
December 31, 1999, comprised of $5,435,000 related to the acquisition of
treasury stock, $2,717,000 in repayments of long-term debt offset by $1,345,000
of borrowings under the revolving line of credit.
On November 12, 1999, the Company entered into a new $7.5 million revolving
line of credit with its bank, replacing its former revolving line of credit
("Former Credit Line"), on which funds may be borrowed at either the bank's base
rate plus a margin ranging from 0% to .625%, or LIBOR, plus a margin ranging
18
from 1.50% to 2.625%, in each case depending upon the calculation of certain
financial covenants (7.88% at December 31, 1999). At December 31, 1999, the
Company had $3,172,000 outstanding under the line of credit. Borrowings under
the new line of credit are limited to certain percentages of eligible accounts
receivable and inventory as defined in the credit agreement. The new line of
credit is collateralized by a security interest in all of the Company's assets.
The agreement also contains restrictions that require the Company to maintain
certain financial ratios as well as restrictions on the payment of dividends.
Also as of November 12, 1999, the Company's acquisition loan commitment under
its Former Credit Line was converted to a term loan with its bank (the "S-A Term
Loan"). The S-A Term Loan bears interest at either the bank's base rate plus a
margin ranging from 0% to .875%, or LIBOR plus a margin ranging from 1.75% to
2.875%, in each case depending upon the calculation of certain financial
covenants (8.18% at December 31, 1999). At December 31, 1999, there was
$16,783,000 outstanding under the S-A Term Loan. The principal balance of the
S-A Term Loan is being amortized in monthly installments of $366,667 with a
final balloon payment of all remaining unpaid principal and accrued interest due
on June 30, 2002.
As a result of the Company's financial performance in 1999, the Company was
unable to meet certain financial covenants with its bank at December 31, 1999,
compliance with which was waived by the bank as of such date. Coincident with
obtaining the waiver by the bank, the bank agreed to extend the line of credit
until September 30, 2000 and to waive compliance by the Company with certain
financial covenants as of March 31, 2000, subject to the Company meeting certain
alternative financial covenants as of such date, and the Company agreed to
periodic reductions in the line of credit commencing in March, 2000, until the
line of credit has been reduced from $7.5 million to $5.5 million as of August
1, 2000. The Company anticipates that it will either conclude negotiations with
its bank and obtain a renewal of its current credit facilities, or enter into
new credit facilities with another bank, prior to September 30, 2000.
On February 3, 1999, the Company entered into an interest rate swap
agreement with a notional amount of $10,000,000. The swap agreement has a
maturity date of June 3, 2002 and requires the Company to make fixed rate
interest payments on the notional amount of 8.01% per annum in exchange for
floating rate payments equal to LIBOR plus 2.55%. The Company is exposed to
credit risk in the unlikely event of the nonperformance by the counterparties.
Interest to be paid or received is accrued over the life of the agreement at the
net effective interest rate for the swap and corresponding debt instrument.
On May 17, 1999, the Company commenced a tender offer to purchase up to
750,000 shares of its common stock at a purchase price ranging from $6.00 to
$8.00 per share. As of June 22, 1999, approximately 1,600,000 shares were
tendered and the Company accepted 750,000 shares for purchase at a price of
$7.00 per share. The Company paid for the shares purchased with a combination of
cash on hand and borrowings under its line of credit.
The Company currently anticipates that the cash generated from operations,
existing cash balances and amounts available under its existing or a replacement
line of credit, will be sufficient to satisfy its foreseeable working capital
needs.
New Accounting Pronouncements
In June, 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 standardizes accounting and reporting for
derivative instruments and for hedging activities. This statement was amended by
SFAS 137, which delays the effective date until 2001. The Company will be
reviewing this pronouncement to determine its applicability to the Company, if
any.
Additional Factors That May Affect Future Results and Market Price of Stock
Blonder Tongue's business operates in a rapidly changing environment that
involves a number of risks, some of which are beyond the Company's control. The
following discussion highlights some of these risks which are not otherwise
addressed elsewhere in this Annual Report. There can be no assurance that the
Company will anticipate the evolution of industry standards in CATV or the
communications industry generally, changes in the market and customer needs, or
that technologies and applications under development by the Company will be
successfully developed, or if they are successfully developed, that they will
achieve market acceptance. The
19
competition to attract and retain highly-skilled engineering, manufacturing,
marketing and managerial personnel is intense. Capital spending by cable
operators for constructing, rebuilding, maintaining or upgrading their systems
(upon which the Company's sales and profitability are dependent) is dependent on
a variety of factors, including access to financing, demand for their cable
services, availability of alternative video delivery technologies, and general
economic conditions. Factors such as announcements of technological innovations
or new products by the Company, its competitors or third parties, quarterly
variations in the Company's actual or anticipated results of operations, market
conditions for emerging growth stocks or cable industry stocks in general, or
the failure of revenues or earnings in any quarter to meet the investment
community's expectations, may cause the market price of the Company's Common
Stock to fluctuate significantly. The stock price may also be affected by
broader market trends unrelated to the Company's performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and
positions represents the potential loss arising from adverse changes in interest
rates. At December 31, 1999 and 1998 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $22,086,333 and
$20,827,000, respectively. A hypothetical 10% adverse change in interest rates
would have had an annualized unfavorable impact of approximately $180,297 and
$156,000, respectively, on the Company's earnings and cash flows based upon
these year-end debt levels. To ameliorate these risks, in February, 1999, the
Company entered into an interest rate Swap Agreement with a notional amount of
$10,000,000. The specific terms of the Swap Agreement are more fully discussed
above in Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the consolidated financial statements and
notes thereto of the Company which are attached hereto beginning on page 24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10. through 13. INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of
the Registrant," Item 11 "Executive Compensation," Item 12 "Security Ownership
of Certain Beneficial Owners and Management" and Item 13 "Certain Relationships
and Related Transactions" is incorporated herein by reference to the Company's
definitive proxy statement for its Annual Meeting of Stockholders scheduled to
be held May 4, 2000, which definitive proxy statement is expected to be filed
with the Commission not later than 120 days after the end of the fiscal year to
which this report relates. Note that the sections in the definitive proxy
statement entitled "Report of Compensation Committee on Executive Compensation
Policies" and "Comparative Stock Performance" pursuant to Regulation S-K, Item
402(a)(9), are not deemed "soliciting material" or "filed" as part of this
report.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data.
Report of Independent Certified Public Accountants, BDO Seidman, LLP........................................... 25
Consolidated Balance Sheets as of December 31, 1999 and 1998................................................... 26
Consolidated Statements of Earnings for the Years Ended December 31, 1999, 1998 and 1997....................... 27
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997........... 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997..................... 29
Notes to Consolidated Financial Statements..................................................................... 30
(a)(2) Financial Statement Schedules.
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
(a)(3) Exhibits
The exhibits are listed in the Index to Exhibits appearing below and are
filed herewith or are incorporated by reference to exhibits previously filed
with the Commission.
(b) No reports on Form 8-K were filed in the quarter ended December 31,
1999.
(c) Exhibits:
Exhibit # Description Location
--------- ----------- --------
3.1 Restated Certificate of Incorporation of Blonder Incorporated by reference from Exhibit 3.1
Tongue Laboratories, Inc. to Registrant's S-1 Registration Statement
No. 33-98070 originally filed October 12,
1995, as amended.
3.2 Restated Bylaws of Blonder Tongue Laboratories, Incorporated by reference from Exhibit 3.2
Inc. to Registrant's S-1 Registration Statement
No. 33-98070 originally filed October 12,
1995, as amended.
4.1 Specimen of stock certificate Incorporated by reference from Exhibit 4.1
to Registrant's S-1 Registration Statement
No. 33-98070 originally filed October 12,
1995, as amended.
10.1 Consulting Agreement, dated January 1, 1995, Incorporated by reference from Exhibit
between Blonder Tongue Laboratories, Inc. and 10.3 to Registrant's S-1 Registration
James H. Williams. Statement No. 33-98070 originally filed
October 12, 1995, as amended.
10.2 1994 Incentive Stock Option Plan. Incorporated by reference from Exhibit
10.5 to Registrant's S-1 Registration
Statement No. 33-98070 originally filed
October 12, 1995, as amended.
21
Exhibit # Description Location
--------- ----------- --------
10.3 1995 Long Term Incentive Plan. Incorporated by reference from Exhibit
10.6 to Registrant's S-1 Registration
Statement No. 33-98070 originally filed
October 12, 1995, as amended.
10.4 Amended and Restated 1996 Director Option Plan. Incorporated by reference from Appendix B
to Registrant's Proxy Statement for its
1998 Annual Meeting of Stockholders
originally filed March 27, 1998.
10.5 Employment Agreement, dated August 1, 1995, Incorporated by reference from Exhibit
between Blonder Tongue Laboratories, Inc. and 10.9 to Registrant's S-1 Registration
Daniel J. Altiere. Statement No. 33-98070 originally filed
October 12, 1995, as amended.
10.6 Form of Indemnification Agreement entered into by Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. in favor of each 10.10 to Registrant's S-1 Registration
of its Directors and Officers. Statement No. 33-98070 originally filed
October 12, 1995, as amended.
10.7 VideoCipher(R)IICM Commercial Descrambler Module Incorporated by reference from Exhibit
Master Purchase and License Agreement, dated 10.11 to Registrant's S-1 Registration
August 23, 1990, between Blonder Tongue Statement No. 33-98070 originally filed
Laboratories, Inc. and Cable/Home Communication October 12, 1995, as amended.
Corp.
+10.8 Patent License Agreement, dated August 21, 1995, Incorporated by reference from Exhibit
between Blonder Tongue Laboratories, Inc. and 10.12 to Registrant's S-1 Registration
Philips Electronics North America Corporation. Statement No. 33-98070 originally filed
October 12, 1995, as amended.
+10.9 Interdiction Technology License Agreement, dated Incorporated by reference from Exhibit
August 21, 1995, between Blonder Tongue 10.13 to Registrant's S-1 Registration
Laboratories, Inc. and Philips Broadband Networks, Statement No. 33-98070 originally filed
Inc. October 12, 1995, as amended.
10.10 401(k) Savings & Investment Retirement Plan. Incorporated by reference from Exhibit
10.21 to S-1 Registration Statement No.
33-98070 originally filed October 12,
1995, as amended.
10.11 Bargaining Unit Pension Plan. Incorporated by reference from Exhibit
10.22 to S-1 Registration Statement No.
33-98070 originally filed October 12,
1995, as amended.
10.12 Mortgage, Assignment of Leases, and Security Incorporated by reference from Exhibit
Agreement dated May 23, 1996 by Blonder Tongue 10.2 to Registrant's Quarterly Report on
Laboratories, Inc. in favor of CoreStates Bank, Form 10-Q for the period ended June 30,
N.A., successor to Meridian Bank. 1996, filed August 14, 1996.
10.13 Real Estate Loan Note dated May 23, 1996 from Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. in favor of 10.3 to Registrant's Quarterly Report on
CoreStates Bank, N.A., successor to Meridian Bank. Form 10-Q for the period ended June 30,
1996, filed August 14, 1996.
10.14 Allonge to Real Estate Loan Note, dated September Incorporated by reference from Exhibit
26, 1996 from Blonder Tongue Laboratories, Inc., 10.3 to Registrant's Quarterly Report on
in favor of CoreStates Bank, N.A., successor to Form 10-Q for the period ended September
Meridian Bank. 30, 1996, filed November 14, 1996.
22
Exhibit # Description Location
--------- ----------- --------
+10.15 License Agreement dated November 12, 1996 between Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. and Houston 10.31 to Registrant's Annual Report on
Tracker Systems, Inc. Form 10-K for fiscal year ended December
31, 1996, filed March 27, 1997.
10.16 Executive Officer Bonus Plan Incorporated by reference from Exhibit
10.3 to Registrant's Quarterly Report on
Form 10-Q for the period ended March 31,
1997.
10.17 Second Amendment to 1995 Long Term Incentive Plan Incorporated by reference from Appendix A
to Registrant's Proxy Statement for its
1998 Annual Meeting of Stockholders
originally filed March 27, 1998.
10.18 Fifth Amended and Restated Loan Agreement dated Filed herewith.
November 12, 1999 between Blonder Tongue
Laboratories, Inc. and First Union National Bank
10.19 Fifth Amended and Restated Line of Credit Note Filed herewith.
dated November 12, 1999 by Blonder Tongue
Laboratories, Inc. in favor of First Union
National Bank
10.20 Third Allonge to Real Estate Note dated November Filed herewith.
12, 1999 from Blonder Tongue Laboratories, Inc. to
First Union National Bank
10.21 Term Note dated November 12, 1999 by Blonder Filed herewith
Tongue Laboratories, Inc. in favor of First Union
National Bank
21 Subsidiaries of Blonder Tongue Laboratories, Inc. Filed herewith.
23 Consent of BDO Seidman, LLP Filed herewith.
27 Financial Data Schedule Electronic filing only.
- ------------------------------
+ Certain portions of exhibit have been afforded confidential treatment
by the Securities and Exchange Commission.
(d) Financial Statement Schedules:
Report of BDO Seidman, LLP on financial statement schedule.
The following financial statement schedule is included on page 47 of this
Annual Report on Form 10-K: Schedule II. Valuation and Qualifying Accounts and
Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the applicable
instructions or are inapplicable and therefore have been omitted.
23
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants, BDO Seidman, LLP...................................... 25
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................................. 26
Consolidated Statements of Earnings for the Years Ended December 31, 1999, 1998 and 1997.................. 27
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997...... 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................ 29
Notes to Consolidated Financial Statements................................................................ 30
24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Blonder Tongue
Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Blonder
Tongue Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
February 18, 2000
25
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
----------------------
1999 1998
------- -------
Assets (Note 4)
Current assets:
Cash....................................................................... $ 48 $ 542
Accounts receivable, net of allowance for doubtful
accounts of $683 and $1,201, respectively.................................. 9,969 15,988
Inventories (Note 2)....................................................... 26,793 24,540
Other current assets ...................................................... 2,007 597
Deferred income taxes (Note 13)............................................ 1,182 1,445
------- -------
Total current assets................................................... 39,999 43,112
Property, plant and equipment, net of accumulated
depreciation and amortization (Notes 3 and 5)............................... 8,740 7,968
Patents, net (Note 11).......................................................... 4,242 4,115
Goodwill, net (Note 11)......................................................... 12,437 13,157
Other assets.................................................................... 658 1,299
------- -------
$66,076 $69,651
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit (Note 4).......................................... $3,172 $1,827
Current portion of long-term debt.......................................... 4,470 19,494
Accounts payable........................................................... 4,644 2,134
Accrued compensation....................................................... 1,040 1,287
Other accrued expenses..................................................... 903 933
Income taxes (Note 13)..................................................... 314 388
------- -------
Total current liabilities.............................................. 14,543 26,063
------- -------
Deferred income taxes (Note 13)................................................. 149 227
Long-term debt (Note 4)......................................................... 16,137 2,865
Commitments and contingencies (Notes 5, 6 and 7)................................ - -
Stockholders' equity (Notes 9, 10, 11 and 12):
Preferred stock, $.001 par value; authorized 5,000 shares;
no shares outstanding...................................................... - -
Common stock, $.001 par value; authorized 25,000 shares, 8,392 shares
issued at December 31, 1999 and 8,370 shares issued at December 31, 1998.. 8 8
Paid-in capital............................................................ 23,870 23,743
Retained earnings.......................................................... 17,655 17,596
Treasury stock at cost, 831 shares at December 31, 1999
and 81 shares at December 31, 1998 (Note 9)................................ (6,286) (851)
------- -------
Total stockholders' equity............................................. 35,247 40,496
------- -------
$66,076 $69,651
======= =======
See accompanying notes to consolidated financial statements
26
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Year Ended December 31,
=======================================
1999 1998 1997
------- ------- -------
Net sales.............................................................. $56,805 $70,792 $62,057
Cost of goods sold..................................................... 39,074 45,344 39,656
------- ------- -------
Gross profit....................................................... 17,731 25,448 22,401
------- ------- -------
Operating expenses:
Selling expenses................................................... 6,025 4,823 4,964
General and administrative......................................... 7,573 5,932 4,974
Research and development........................................... 2,070 2,156 1,954
------- ------- -------
15,668 12,911 11,892
------- ------- -------
Earnings from operations............................................... 2,063 12,537 10,509
------- ------- -------
Other income (expense):
Interest expense................................................... (2,008) (1,596) (414)
Other income....................................................... 6 40 595
------- ------- -------
(2,002) (1,556) 181
------- ------- -------
Earnings before income taxes........................................... 61 10,981 10,690
Provision for income taxes (Note 13)................................... 2 3,868 4,276
------- ------- -------
Net earnings....................................................... $ 59 $ 7,113 $ 6,414
======= ======= ========
Basic earnings per share (Note 10)..................................... $ 0.01 $ 0.86 $ 0.78
======= ======= ========
Basic weighted average shares outstanding (Note 10).................... 7,916 8,292 8,227
======= ======= ========
Diluted earnings per share (Note 10)................................... $ 0.01 $ 0.84 $ 0.77
======= ======= ========
Diluted weighted average shares outstanding (Note 10).................. 7,958 8,471 8,375
======= ======= ========
See accompanying notes to consolidated financial statements
27
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
Common Stock
-------------------
Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
-------- -------- -------- --------- -------- --------
Balance at January 1, 1997.................... 8,193 $ 8 $ 21,499 $ 4,069 $ - $ 25,576
Proceeds from exercise of stock options..... 80 - 303 - - 303
Acquisition of treasury stock............... - - - - (498) (498)
Net earnings................................ - - - 6,414 - 6,414
------- ------- -------- --------- ------- --------
Balance at December 31, 1997.................. 8,273 8 21,802 10,483 (498) 31,795
Proceeds from exercise of stock options.... 29 - 166 - - 166
Acquisition of treasury stock.............. - - - - (353) (353)
Issuance of common stock for acquired
business...................................... 68 - 1,000 - - 1,000
Issuance of warrant for acquired business.. - - 775 - - 775
Net earnings............................... - - - 7,113 - 7,113
------- ------- -------- --------- ------- --------
Balance at December 31, 1998.................. 8,370 8 23,743 17,596 (851) 40,496
Proceeds from exercise of stock options.... 22 - 127 - - 127
Acquisition of treasury stock.............. - - - - (5,435) (5,435)
Net earnings............................... - - - 59 - 59
------- ------- -------- --------- -------- --------
Balance at December 31, 1999.................. 8,392 $ 8 $ 23,870 $ 17,655 $ (6,286) $ 35,247
======= ======= ======== ========= ======== ========
See accompanying notes to consolidated financial statements
28
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
===================================
1999 1998 1997
------- -------- --------
Cash Flows From Operating Activities:
Net earnings................................................................. $ 59 $ 7,113 $ 6,414
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization............................................ 2,994 2,365 1,130
Provision for doubtful accounts.......................................... 1,043 598 327
Deferred income taxes.................................................... 67 (576) (518)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable.................................................... 4,976 (3,456) (4,470)
Inventories............................................................ (2,576) (4,147) (1,847)
Other current assets................................................... (1,410) (279) 85
Other assets........................................................... (47) (428) (10)
Income taxes........................................................... 44 217 (452)
Accounts payable and accrued expenses.................................. 2,233 (486) 1,631
------- -------- --------
Net cash provided by operating activities........................... 7,383 921 2,290
------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures......................................................... (1,197) (879) (1,424)
Acquisition of licenses...................................................... - - (163)
Acquisition of business...................................................... - (19,000) -
------- -------- --------
Net cash used in investing activities............................... (1,197) (19,879) (1,587)
------- -------- --------
Cash Flows From Financing Activities:
Net borrowings (repayments) under revolving line of credit................... 1,345 1,827 (1,176)
Repayments of borrowings from stockholders................................... - - (313)
Proceeds from long-term debt................................................. - 19,199 683
Repayments of long-term debt................................................. (2,717) (1,894) (487)
Proceeds from exercise of stock options...................................... 127 166 303
Acquisition of treasury stock................................................ (5,435) (353) (498)
------- -------- --------
Net cash (used in) provided by financing activities ................ (6,680) 18,945 (1,488)
------- -------- --------
Net Decrease In Cash.............................................................. (494) (13) (785)
Cash, beginning of year........................................................... 542 555 1,340
------- -------- --------
Cash, end of year................................................................. $ 48 $ 542 $ 555
======= ======== ========
Supplemental Cash Flow Information:
Cash paid for interest....................................................... $ 2,025 $ 1,261 $ 397
Cash paid for income taxes................................................... 660 4,276 5,251
======= ======== ========
Non-cash transactions:
Common stock issued for acquired business.................................... $ - $ 1,000 $ -
Warrant issued for acquired business......................................... - 775 -
Capital lease obligations.................................................... 965 - -
See accompanying notes to consolidated financial statements
29
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1 - Summary of Significant Accounting Policies
(a) Company and Basis of Presentation
Blonder Tongue Laboratories, Inc. (the "Company") is a designer,
manufacturer and supplier of electronics and systems equipment for the cable
television industry. The consolidated financial statements include the accounts
of Blonder Tongue Laboratories, Inc. and subsidiaries as discussed below.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out ("FIFO") method, or market.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation generally on the straight-line method based upon estimated useful
lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and
fixtures, 6 to 10 years for machinery and equipment, 10 to 15 years for building
improvements and 40 years for the manufacturing and administrative office
facility.
(d) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred
income taxes are provided for temporary differences in the recognition of
certain income and expenses for financial and tax reporting purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
(e) Intangible Assets
Intangible assets totaling $17,337 and $18,571 as of December 31, 1999 and
1998, respectively, consist of goodwill, prepaid licensing fees, and acquired
patent rights, and are carried at cost less accumulated amortization.
Amortization is computed utilizing the straight-line method over the estimated
useful life of the respective asset, 3 to 15 years. Accumulated amortization was
$3,589 and $1,985 for 1999 and 1998, respectively.
(f) Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 standardized the accounting practices for
the recognition and measurement of impairment losses on certain long-lived
assets based on non-discounted cash flows. No impairment losses have been
recorded through December 31, 1999.
(g) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity of less than three
months at purchase to be cash equivalents. The Company did not have any cash
equivalents at December 31, 1999, 1998 and 1997.
(h) Research and Development
Research and development expenditures for the Company's projects are
expensed as incurred.
30
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(i) Revenue Recognition
The Company records revenues when products are shipped. Customers do not
have a right to return products shipped.
(j) Earnings Per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
provides for the calculation of "basic" and "diluted" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net earnings
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise of stock options.
(k) Treasury Stock
Treasury Stock is recorded at cost. Gains and losses on disposition are
recorded as increases or decreases to additional paid-in capital with losses in
excess of previously recorded gains charged directly to retained earnings.
(l) Derivative Financial Instruments
The Company utilizes interest rate swaps to manage interest rate exposures.
The Company specifically designates interest rate swaps as hedges of debt
instruments and recognizes interest differentials as adjustments to interest
expense in the period they occur. The Company does not hold or issue financial
instruments for trading purposes.
(m) Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Approximately 63% of the Company's employees are covered by a three year
collective bargaining agreement, which expires in February, 2002.
The Company estimates that headend products accounted for approximately 60%
of the Company's revenues in 1999, 70% in 1998 and 80% in 1997. Any substantial
decrease in sales of headend products could have a material adverse effect on
the Company's results of operations and financial condition.
The Company purchases several products from sole suppliers for which
alternative sources are not available, such as the VideoCipher(R) and
DigiCipher(R) encryption systems manufactured by General Instrument Corporation,
which are standard encryption methodologies employed on U.S. C-Band and Ku-Band
transponders and EchoStar digital satellite receiver decoders, which are
specifically designed to work with the DISH Network(TM) and Hughes Network
Systems digital satellite receivers for delivery of DIRECTV(TM) programming. An
inability to timely obtain sufficient quantities of these components could have
a material adverse effect on the Company's operating results. The Company does
not have a supply agreement with General Instrument Corporation or any other
supplier. The Company submits purchase orders to its suppliers on an as-needed
basis.
31
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(n) New Accounting Pronouncements
In June, 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 standardizes accounting and reporting for
derivative instruments and for hedging activities. This statement was amended by
SFAS 137, which delays the effective date to 2001. The Company will be reviewing
this pronouncement to determine its applicability to the Company, if any.
Note 2 - Inventories
Inventories are summarized as follows:
December 31,
-------------------------
1999 1998
------- -------
Raw materials.................................. $11,484 $ 9,550
Work in process................................ 5,058 2,463
Finished goods................................. 10,251 12,527
------- -------
$26,793 $24,540
======= =======
Note 3 - Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31,
-----------------------
1999 1998
-------- -------
Land................................................ $ 1,000 $ 1,000
Building............................................ 3,361 3,361
Machinery and equipment............................. 6,534 5,158
Furniture and fixtures.............................. 398 395
Office equipment.................................... 1,412 764
Building improvements............................... 601 466
-------- -------
13,306 11,144
Less: Accumulated depreciation and amortization.... (4,566) (3,176)
-------- -------
$ 8,740 $ 7,968
======== =======
Note 4 - Debt
On November 12, 1999, the Company entered into a new $7,500 revolving line
of credit with its bank replacing its former revolving line of credit ("Former
Credit Line"), on which funds may be borrowed at either the bank's base rate
plus a margin ranging from 0% to .625%, or LIBOR, plus a margin ranging from
1.50% to 2.625%, in each case depending upon the calculation of certain
financial covenants (7.88% at December 31, 1999). At December 31, 1999, the
Company had $3,172 outstanding under the line of credit. Borrowings under the
new line of credit are limited to certain percentages of eligible accounts
receivable and inventory as defined by the credit agreement. The new line of
credit is collateralized by a security interest in all of the Company's assets.
The agreement also contains restrictions that require the Company to maintain
certain financial ratios as well as restrictions on the payment of dividends.
The average amount outstanding on the line of credit during 1999 was $1,832 at a
weighted average interest rate of 7.69%. The maximum amount outstanding on the
line of credit during 1999 was $4,531.
As a result of the Company's financial performance in 1999, the Company was
unable to meet certain financial covenants with its bank at December 31, 1999,
compliance with which was waived by the bank as of such date. Coincident with
obtaining the waiver by the bank, the bank agreed to extend the line of credit
until
32
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
September 30, 2000 and to waive compliance by the Company with certain financial
covenants as of March 31, 2000, subject to the Company meeting certain
alternative financial covenants as of such date, and the Company agreed to
periodic reductions in the line of credit commencing in March, 2000, until the
line of credit has been reduced from $7,500 to $5,500 as of August 1, 2000. The
Company anticipates that it will either conclude negotiations with its bank and
obtain a renewal of its current credit facilities, or enter into new credit
facilities with another bank, prior to September 30, 2000.
As of November 12, 1999, the Company's acquisition loan commitment under
its Former Credit Line was converted to a term loan with its bank (the "S-A Term
Loan"). The S-A Term Loan bears interest at either the bank's base rate plus a
margin ranging from 0% to .875%, or LIBOR plus a margin ranging from 1.75% to
2.875%, in each case depending upon the calculation of certain financial
covenants (8.18% at December 31, 1999). At December 31, 1999, there was $16,783
outstanding under the S-A Term Loan. The principal balance of the S-A Term Loan
is being amortized in monthly installments of $367 with a final balloon payment
of all remaining unpaid principal and accrued interest due on June 30, 2002.
On May 24, 1996, the Company borrowed $2,800 for a ten year term secured by
a mortgage against the Company's Old Bridge Facility. The loan accrued interest
at a fixed rate of 7.25% through May 1999. Effective June 1, 1999, the loan was
converted to a variable interest rate based upon the bank's base rate (8.5% at
December 31, 1999).
Long-term debt consists of the following:
December 31,
---------------------------
1999 1998
-------- --------
Term loan with a bank bearing interest at 7.25% until
May 30, 1999, converted on June 1, 1999 to a variable
interest rate based on the bank's base rate, payable
in monthly installments....................................... $ 2,131 $ 2,318
Loan with a bank bearing interest at LIBOR plus 2.875%........ 16,783 19,000
Capital leases (Note 5)....................................... 1,693 1,041
-------- --------
20,607 22,359
Less: Current portion........................................ (4,470) (19,494)
--------- --------
$ 16,137 $ 2,865
========= ========
The fair value of the debt approximates the recorded value based on the
borrowing rates currently available to the Company for loans with similar terms
and maturities.
33
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Annual maturities of long-term debt at December 31, 1999 are:
2000....................... $ 4,470
2001....................... 4,384
2002....................... 11,157
2003....................... 143
2004....................... 153
Thereafter................. 300
-------
$20,607
=======
Note 5 - Commitments and Contingencies
Leases
The Company leases certain factory and automotive equipment under
noncancellable operating leases expiring at various dates through December,
2006.
Future minimum rental payments, required for all noncancellable leases are
as follows:
Capital Operating
------- ---------
2000............................................... $ 563 $ 160
2001............................................... 486 48
2002............................................... 318 14
2003............................................... 185 2
2004............................................... 183 -
Thereafter......................................... 337 -
------- ---------
Total future minimum lease payments................ 2,072 $ 224
=========
Less: amounts representing interest............... (379)
-------
Present value of minimum lease payments............ $ 1,693
=======
Property, plant and equipment included capitalized leases of $2,514, less
accumulated amortization of $758, at December 31, 1999, and $1,533, less
accumulated amortization of $449, at December 31, 1998.
Rent expense was $217, $295 and $194 for the years ended December 31, 1999,
1998 and 1997, respectively.
Litigation
The Company is a party to certain proceedings incidental to the ordinary
course of its business, none of which, in the current opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition, or results of operations.
34
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 6 - Benefit Plans
Defined Contribution Plan
The Company has a defined contribution plan covering all full time
non-union employees qualified under Section 401(k) of the Internal Revenue Code,
in which the Company matches a portion of an employee's salary deferral. The
Company's contributions to this plan were $254, $122 and $59 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Defined Benefit Pension Plan
Substantially all union employees who meet certain requirements of age,
length of service and hours worked per year are covered by a Company sponsored
non-contributory defined benefit pension plan. Benefits paid to retirees are
based upon age at retirement and years of credited service. Net periodic pension
cost for this plan includes the following components:
December 31,
-------------------------------------
Components of net periodic pension cost: 1999 1998 1997
------ ------ ------
Service cost.............................. $ 121 $ 118 $ 81
Interest cost............................. 76 64 56
Actual return on plan assets.............. (29) (57) (90)
Recognized net actuarial (gain) loss...... (33) 6 42
------ ------ ------
Net periodic pension cost................. $ 135 $ 131 $ 89
====== ====== ======
35
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The funded status of the plan and the amounts recorded in the Company's
consolidated balance sheets are as follows:
December 31,
-----------------------
1999 1998
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year.......................... $ 1,106 $ 862
Service cost..................................................... 121 118
Interest cost.................................................... 76 64
Amendment to discount rate....................................... - 86
Actuarial (gain) loss............................................ (15) --
Benefits paid.................................................... (40) (24)
-------- --------
Benefit obligation at end of year................................ 1,248 1,106
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year................... 915 762
Actual return on plan assets..................................... 29 57
Employer contribution............................................ 254 120
Benefits paid.................................................... (40) (24)
-------- --------
Fair value of plan assets at end of year......................... 1,158 915
-------- --------
Funded status.................................................... (90) (191)
Unrecognized net actuarial loss.................................. 369 360
Unrecognized net transition liability............................ (69) (79)
-------- --------
Prepaid benefit cost............................................. $ 210 $ 90
======== ========
Key economic assumptions used in these determinations were:
December 31,
-----------------------
1999 1998
-------- --------
Discount rate.................................................... 7.0% 7.0%
Expected long-term rate of return................................ 7.0% 7.0%
Note 7 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement for a period of five years with a director, who is
also the second largest stockholder. During this period, the director will
provide consulting services on various operational and financial issues and is
currently paid at an annual rate of $136 but in no event is such amount
permitted to exceed $150. The director also agreed to keep all Company
information confidential and will not compete directly or indirectly with the
Company for the term of the agreement and for a period of two years thereafter.
The termination date of this agreement has been extended until June 30, 2000.
Note 8 - Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits, and trade
accounts receivable, and an interest rate swap agreement.
36
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The Company maintains cash balances at several banks located in the
northeastern United States. As part of its cash management process, the Company
periodically reviews the relative credit standing of these banks.
Credit risk with respect to trade accounts receivable is concentrated with
ten of the Company's customers. These customers accounted for approximately 55%
and 48% of the Company's outstanding trade accounts receivable at December 31,
1999 and 1998, respectively. These customers are distributors of
telecommunications and private cable television components, and providers of
franchise and private cable television service. The Company performs ongoing
credit evaluations of its customers' financial condition, uses credit insurance
and requires collateral, such as letters of credit, to mitigate its credit risk.
The deterioration of the financial condition of one or more of its major
customers could adversely impact the Company's operations.
For the year ended December 31, 1999, the Company's largest customer
accounted for approximately 14% of the Company's sales. At December 31, 1999,
this customer accounted for approximately 3% of the Company's outstanding trade
accounts receivable. Management believes these amounts to be collectible. This
customer also accounted for approximately 10% of the Company's sales in 1998
while a different customer accounted for approximately 16% of the Company's
sales in 1997.
Note 9 - Stockholders' Equity
On May 17, 1999, the Company commenced a self tender offer to purchase 750
shares of its common stock at a purchase price ranging from $6.00 to $8.00 per
share. As of June 22, 1999, approximately 1,600 shares were tendered and the
Company accepted 750 shares for purchase at a price of $7.00 per share. The
stock repurchase was funded by a combination of the Company's cash on hand and
borrowings against its revolving line of credit.
Stock Repurchase Program
On April 1, 1997, the Company announced that its Board of Directors
authorized management to purchase up to 100 shares of its common stock.
Purchases were made from time to time in the open market, funded from operating
cash flow and then-existing bank facilities. As of December 31, 1999, the
Company had repurchased 81 shares under this program.
37
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 10 - Earnings Per Share
Basic and diluted earnings per share for each of the three years ended
December 31, 1999, 1998 and 1997 are calculated as follows:
Net Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
For the year ended December 31, 1999:
Basic earnings per share $ 59 7,916 $ 0.01
Effect of assumed conversion of employee
stock options - 42
---------------------------------------------
Diluted earnings per share $ 59 7,958 $ 0.01
=============================================
For the year ended December 31, 1998:
Basic earnings per share $ 7,113 8,292 $ 0.86
Effect of assumed conversion of employee
stock options - 179
---------------------------------------------
Diluted earnings per share $ 7,113 8,471 $ 0.84
=============================================
For the year ended December 31, 1997:
Basic earnings per share $ 6,414 8,227 $ 0.78
Effect of assumed conversion of employee
stock options - 148
---------------------------------------------
Diluted earnings per share $ 6,414 8,375 $ 0.77
=============================================
The diluted share base excludes incremental shares of 837, 199 and 64
related to stock options and a warrant for December 31, 1999, 1998 and 1997,
respectively. There shares were excluded due to their antidilutive effect.
Note 11 - Acquisition
On March 26, 1998, the Company acquired all of the assets and technology
rights of the interdiction business (the "Interdiction Business") of
Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i)
$19,000 in cash, (ii) 68 shares of the Company's common stock, (iii) a warrant
to purchase 150 additional shares of the Company's common stock at an exercise
price of $14.25 per share and (iv) assumption by the Company of certain
obligations under executory contracts with vendors and customers and certain
warranty obligations and current liabilities of the Interdiction Business. The
Interdiction Business generated approximately $16,000 in revenues for the prior
twelve month period. The Company believes that Scientific's interdiction
products, which have been engineered primarily to serve the franchise cable
market, will supplement the Company's VideoMask(TM) products, which are
primarily focused on the private cable market. In addition, the Company expects
38
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
that the technology acquired as part of the Interdiction Business will enhance
its ability to design products that meet the specific needs of all cable
providers, while improving its position in the franchise cable market.
The acquisition has been accounted for under the purchase method of
accounting in accordance with Accounting Principles Board No. 16 with the net
assets recorded at fair market value and operations included in the financial
statements from the date of acquisition. The allocation of the purchase price
was recorded to inventory $2,518, property, plant and equipment $472, patents
$4,200 and goodwill $13,585. In 1999, as a result of adjustments to inventory,
goodwill was increased by $323.
The following table presents the unaudited pro forma results of operations
as though the acquisition of Scientific-Atlanta, Inc.'s Interdiction Business
occurred on January 1, 1997:
Year Ended December 31,
-------------------------
1998 1997
------- -------
Net sales $76,782 $77,833
Earnings from operations 13,682 8,829
Net income 8,251 4,565
Basic earnings per share 1.00 0.55
Diluted earnings per share 0.97 0.55
Note 12 - Stock Option Plans
In 1994, the Company established the 1994 Incentive Stock Option Plan (the
"1994 Plan"). The 1994 Plan provides for the granting of Incentive Stock Options
to purchase shares of the Company's common stock to officers and key employees
at a price not less than the fair market value at the date of grant as
determined by the compensation committee of the Board of Directors. The maximum
number of shares available for issuance under the plan was 298. Options become
exercisable as determined by the compensation committee of the Board of
Directors at the date of grant. Options expire ten years from the date of grant.
In October, 1995, the Company's Board of Directors and stockholders
approved the 1995 Long Term Incentive Plan (the "1995 Plan"). The 1995 Plan
provides for grants of "incentive stock options" or nonqualified stock options,
and awards of restricted stock, to executives and key employees, including
officers and employee Directors. The 1995 Plan is administered by the
Compensation Committee of the Board of Directors, which determines the optionees
and the terms of the options granted under the 1995 Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof, as
well as the recipients and number of shares awarded for restricted stock awards;
provided, however, that no employee may receive stock options or restricted
stock awards which would result, separately or in combination, in the
acquisition of more than 100 shares of Common Stock of the Company under the
1995 Plan. The exercise price of incentive stock options granted under the 1995
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant. With respect to any optionee who owns stock representing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option must be equal to at
least 110% of the fair market value of the Common Stock on the date of grant,
and the term of the option may not exceed five years. The term of all other
incentive stock options granted under the 1995 Plan may not exceed ten years.
The aggregate fair market value of Common Stock (determined as of the date of
the option grant) for which an incentive stock option may for the first time
become exercisable in any calendar year may not exceed $100. The exercise price
for nonqualified stock options is established by the Compensation Committee, and
may be more or less than the fair market value of the Common Stock on the date
of grant.
Generally, options granted under the 1995 Plan are exercisable over the
term of the option, as provided by the Compensation Committee. Upon any merger
or consolidation, if the Company is not the surviving corporation, all
outstanding options granted shall terminate unless such options are assumed or
other options are
39
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
substituted therefor by the successor corporation, or the vesting of such shares
is accelerated by the Compensation Committee.
Under the 1995 Plan awards may be made to key executive employees of
restricted stock which is forfeitable unless the employee remains in the employ
of the Company for five years and does not violate other terms of the award,
such as non-transferability. Exceptions to forfeiture are provided for the cases
of retirement at age 65 or death while in employment. No restricted shares have
been awarded under the 1995 Plan.
Stockholders have previously approved a total of 750 shares of common stock
for issuance under the 1995 Plan, as amended to date.
In December, 1995, the stockholders of the Company approved the adoption of
the Company's 1996 Director Option Plan (the "1996 Plan"). Under the 1996 Plan,
Directors who within the preceding 12 months have not been employed by the
Company and have not served as a consultant to the Company where annual
compensation exceeds $100, are eligible to receive options to purchase 0.5
shares of the Company's Common Stock for each year of service on the Board. The
exercise price for such shares is the fair market value thereof on the date of
grant (which is December 31 of each year) and the options are subject to a
one-year vesting requirement. The options become exercisable, in whole or in
part, during the second through sixth years from the date of grant. Under the
1996 Plan the grant of options is automatic to each eligible Director serving on
December 31 of any year provided the Director had served in such capacity since
June 30 of such year. A maximum of 25 shares may be awarded under the 1996 Plan
which expires January 2, 2006. The plan is administered by a committee presently
comprised of James A. Luksch and Robert J. Palle, Jr.
During October, 1997, subject to stockholder approval, the Board of
Directors amended the 1996 Plan to provide that it would be administered by the
Board of Directors rather than the 1996 Plan Committee, and that rather than
providing for annual automatic grants of options for a specified number of
shares to all non-employee Directors, the Board would have the power to grant
options to non-employee Directors at its discretion from time to time to
purchase the number of shares of Common Stock determined by the Board; provided,
however, that no Director would be permitted to receive options to purchase more
than 2 shares of Common Stock in any one calendar year.
During December, 1997, the Board of Directors adopted the Amended and
Restated 1996 Director Option Plan (the "Amended 1996 Plan") subject to
stockholder approval. The Amended 1996 Plan incorporates the amendments to the
1996 Plan the Board had approved in October, 1997, as well as certain additional
amendments, and restates the 1996 Plan as amended. Under the Amended 1996 Plan,
Directors who are not currently employed by the Company or any subsidiary of the
Company and have not been so employed within the preceding six months are
eligible to receive options from time to time to purchase the number of shares
of Common Stock determined by the Board; provided, however, that no Director is
permitted to receive options to purchase more than 5 shares of Common Stock in
any one calendar year. The exercise price for such shares is the fair market
value thereof on the date of grant, and the options vest as determined in each
case by the Board of Directors. Options granted under the Amended 1996 Plan must
be exercised within 10 years from the date of grant. A maximum of 100 shares of
Common Stock are subject to issuance under the Amended 1996 Plan. The plan will
be administered by the Board of Directors. Also subject to stockholder approval
and in keeping with the terms of the Amended 1996 Plan, in 1997 no Director
received the grant of an option to purchase 0.5 shares of Common Stock at year
end provided for in the original 1996 Plan.
In 1996, the Board of Directors granted a non-plan, non-qualified option
for 10 shares to an individual, who was not an employee or director of the
Company at the time of the grant. The option was originally exercisable at
$10.25 per share and expires in 2006. This option was repriced to $6.88 per
share on September 17, 1998.
40
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Stock Option Repricing
During the third quarter of 1998, the Compensation Committee of the Board
of Directors observed that, despite the strong financial performance of the
Company over the past several months attributable to the contributions of the
Company's employees, officers and Directors, the market price of the Company's
Common Stock had recently declined significantly due to market forces and other
outside factors. The decline in the Company's stock price caused many of its
outstanding stock options granted to employees, officers and Directors to have
exercise prices above (in many cases significantly above) the current market
price for the Common Stock. The Compensation Committee was of the view that
stock options with exercise prices well above the market value of the Company's
Common Stock do not serve any incentive function and do not serve to retain
employees of the Company. Accordingly, in an effort to ensure that the Company
continues to provide meaningful, long-term incentive compensation to and retains
its employees, officers and Directors through stock option grants, on September
4, 1998, the Compensation Committee recommended and the Board approve a
repricing (the "Repricing") of all outstanding, unexercised stock options held
by the Company's employees, officers and Directors having exercise prices
exceeding the fair market value of the Common Stock as of September 17, 1998
(the "Affected Options"), provided, that no options would be repriced if the
fair market value for the Common Stock exceeded $7.50 per share on September 17,
1998 (the "Effective Date"). The fair market value for the Common Stock as of
the Effective Date was determined by the Board to be $6.88 per share (the "New
Exercise Price"), which was the average of the high and low sales prices for the
Common Stock on the American Stock Exchange on the Effective Date.
All of the Company's optionholders were required to elect whether or not
they wished to have their Affected Options repriced as of the Effective Date.
Those who elected not to reprice their options retained their existing options
without change. Those who elected to have their Affected Options repriced had
such options cancelled as of the Effective Date, with new options (the "New
Options") being granted as of such date on the same terms and in the same
amounts except (i) all New Options have an exercise price equal to the New
Exercise Price and (ii) the New Options retained the same vesting schedule as
the options they replaced, except that (x) options which were already vested as
of the Effective Date were treated as first becoming vested on the Effective
Date and (y) in certain cases the vesting of a portion of the New Options was
delayed in order to preserve the "incentive stock option" status of such options
under the Internal Revenue Code.
Neither James A. Luksch nor Robert J. Palle, Jr. elected to reprice any of
their stock options in the Company. The Company has not conducted any other
repricings of stock options during the last ten fiscal years.
41
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Weighted-
Average Weighted-Average
1994 Exercise 1995 Exercise 1996 Weighted-Average
Plan (#) Price ($) Plan (#) Price ($) Plan (#) Exercise Price ($)
---------------------------------------------------------------------------------------------
Shares under option:
Outstanding at
January 1, 1997 213 4.36 225 9.72 2 8.50
Granted - - 254(a) 9.27 -(b) -
Exercised (67) 2.77 (12) 9.63 - -
Canceled (5) 4.33 (33) 9.35 - -
Outstanding at
December 31, 1997 141 5.13 434 9.49 2 8.50
Granted 6 6.88 903 7.86 49 9.41
Exercised (19) 3.23 (11) 9.63 - -
Canceled (6) 9.38 (665) 9.74 (25) 11.90
Outstanding at
December 31, 1998 122 5.30 661 7.00 26 6.91
Granted - - 51 6.54 8 6.53
Exercised (8) 3.97 (14) 6.88 - -
Canceled (3) 4.33 (42) 6.88 - -
Outstanding at
December 31, 1999 111 5.42 656 6.97 34 6.82
Options exercisable
at December 31, 1999 111 5.42 356 7.09 26 6.91
Weighted-average fair
value of options granted
during: 1997 -- $5.81 --
1998 $4.67 $5.42 $4.88
1999 -- $4.93 $4.97
- ------------
(a) Does not include options to purchase an aggregate of 30 shares of common
stock which were conditionally granted by the Compensation Committee of the
Board of Directors, subject to stockholder approval of an increase in the
number of shares of common stock subject to issuance under the 1995 Plan.
(b) Does not include options to purchase an aggregate of 4 shares of common
stock which were conditionally granted by the Board of Directors, subject
to stockholder approval of the Amended 1996 Plan.
42
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Number of
Options Weighted-Average Weighted-Average Number Weighted-
Range of Exercise Outstanding at Remaining Exercise Price Exercisable at Average
Prices ($) 12/31/99 Contractual Life ($) 12/31/99 Exercise Price ($)
- ---------------------------------------------------------------------------------------------------------------------
1994 Plan:
2.57 39 4.6 years 2.57 39 2.57
4.33 38 5.4 4.33 38 4.33
6.88 6 6.9 6.88 6 6.88
10.59 28 1.6 10.59 28 10.59
--- ---
2.57 to 10.59 111 4.2 5.42 111 5.42
=== ===
1995 Plan:
5.88 3 9.4 5.88 - -
6.34 43 9.6 6.34 - -
6.88 584 8.1 6.88 335 6.88
8.63 5 9.7 8.63 - -
10.59 21 2.6 10.59 21 10.59
--- ---
6.88 to 10.59 656 7.3 6.97 356 7.09
=== ===
1996 Plan:
6.53 8 9.5 6.53 - -
6.88 25 7.5 6.88 25 6.88
8.50 1 3.0 8.50 1 8.50
- -
34 8.0 6.82 26 6.91
== ===
The Corporation has adopted the disclosures only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost been recognized for the stock option plans been
determined based on the fair value at the date of grant consistent with the
provisions of SFAS No. 123, the Corporation's net earnings and net earnings per
share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
------------------------------------
1999 1998 1997
------ ------ ------
Net earnings - as reported $ 59 $7,113 $6,414
Net (loss) earnings - pro forma (625) 6,851 5,957
Basic earnings per share - as reported 0.01 0.86 0.78
Basic (loss) earnings per share - pro forma (0.08) 0.83 0.72
Diluted earnings per share - as reported 0.01 0.84 0.77
Diluted (loss) earnings per share - pro forma (0.08) 0.81 0.71
43
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants:
Year Ended December 31,
-------------------------------------
1999 1998 1997
Expected volatility 63% 61% 60%
Risk-free interest rate 5.7% 5.6% 6.0%
Expected lives 10 8 6
Dividend yield none none none
Note 13 - Income Taxes
The following summarizes the provision for income taxes:
Year Ended December 31,
--------------------------------
1999 1998 1997
----- ------- ------
Current:
Federal..................................................... $ 59 $ 3,844 $3,707
State and local............................................. 10 600 1,087
----- ------- ------
69 4,444 4,794
Deferred:
Federal..................................................... (58) (495) (399)
State and local............................................. (9) (81) (119)
----- ------- ------
(67) (576) (518)
----- ------- ------
Provision for income taxes..................................... $ 2 $ 3,868 $4,276
===== ======= ======
The provision for income taxes on adjusted historical income differs from
the amounts computed by applying the applicable Federal statutory rates due to
the following:
Year Ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
Provision for Federal income taxes at the statutory rate............... $21 $3,734 $3,630
State and local income taxes, net of Federal benefit................... 6 549 641
Research and development credits....................................... - - (28)
Adjustment of prior year's accruals.................................... (25) (415) -
Other, net............................................................. - - 33
------ ------ ------
Provision for income taxes............................................. $2 $3,868 $4,276
====== ====== ======
44
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
----------------------
1999 1998
------ -------
Deferred tax assets:
Allowance for doubtful accounts $252 $468
Inventory 686 785
Accrued vacation 265 233
Other 145 117
------ -------
Total deferred tax assets 1,348 1,603
------ -------
Deferred tax liabilities:
Tax accounting method - (80)
Depreciation (315) (305)
------ -------
Total deferred tax liabilities (315) (385)
------ -------
$1,033 $ 1,218
====== =======
Note 14 - Export Sales
The Company exports its products to countries in North and South America,
Europe, and Asia. The Company's export sales were approximately 2% in 1999, 2%
in 1998, and 3% in 1997. The Company's export sales were concentrated to
customers in North and South America for all periods presented.
Note 15 - Quarterly Financial Information - Unaudited
1999 Quarters 1998 Quarters
-------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
-------------------------------------------------------------------------------
Net sales $13,756 $14,656 $17,307 $11,086 $15,119 $20,525 $18,929 $16,219
Gross profit 4,766 4,766 5,620 2,579 5,095 6,739 7,362 6,252
Net earnings (loss) 443 333 691 (1,408) 1,005 1,776 2,274 2,058
Basic earnings (loss) per share .05 .04 .09 (.19) .12 .21 .27 .25
Diluted earnings (loss) per share .05 .04 .09 (.19) .12 .21 .27 .25
Note 16 - Financial Instruments
On February 3, 1999, the Company entered into an interest rate swap
agreement with a notional amount of $10,000. The swap agreement has a maturity
date of June 3, 2002 and requires the Company to make fixed rate interest
payments on the notional amount of 8.01% per annum in exchange for floating rate
payments equal to LIBOR plus 2.55%. The Company is exposed to credit risk in the
unlikely event of the nonperformance by the counterparties. Interest to be paid
or received is accrued over the life of the agreement at the net effective
interest rate for the swap and corresponding debt instrument. At December 31,
1999, the notional amount was $8,333 and $15 was included in interest expense
related to the swap agreement.
45
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
The audits referred to in our report dated February 18, 2000 relating to the
consolidated financial statements of Blonder Tongue Laboratories, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit
of the financial statement schedule listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
February 18, 2000
46
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged Charged
Allowance for Doubtful Beginning to to Other Deductions Balance at
Accounts of Period Expenses Accounts Write-Offs End of Period
-------- --------- -------- -------- ---------- -------------
Year ended December 31, 1999: $1,201 $1,043 - ($1,561) $683
Year ended December 31, 1998: $607 $598 - ($4) $1,201
Year ended December 31, 1997: $280 $366 - ($39) $607
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BLONDER TONGUE LABORATORIES, INC.
Date: March 27, 2000 By: /S/ JAMES A. LUKSCH
------------------------------------------------
James A. Luksch
President and Chief Executive Officer
By: /S/ PETER PUGIELLI
------------------------------------------------
Peter Pugielli, Senior Vice President - Finance,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/S/ JAMES A. LUKSCH Director, President and Chief March 27, 2000
- ------------------------------------ Executive Officer (Principal
James A. Luksch Executive Officer)
/S/ PETER PUGIELLI Senior Vice President, Chief March 27, 2000
- ------------------------------------ Financial Officer, Treasurer and
Peter Pugielli Assistant Secretary (Principal
Financial Officer and Principal
Accounting Officer)
/S/ ROBERT J. PALLE, JR. Director, Executive Vice March 27, 2000
- ------------------------------------ President, Chief Operating
Robert J. Palle, Jr. Officer and Secretary
/S/ JOHN E. DWIGHT Director and Senior Vice March 27, 2000
- ------------------------------------ President
John E. Dwight
/S/ JAMES H. WILLIAMS Director March 27, 2000
- ------------------------------------
James H. Williams
/S/ JAMES F. WILLIAMS Director March 27, 2000
- ------------------------------------
James F. Williams
48
/S/ ROBERT B. MAYER Director March 27, 2000
- ------------------------------------
Robert B. Mayer
/S/ GARY P. SCHARMETT Director March 27, 2000
- ------------------------------------
Gary P. Scharmett
/S/ ROBERT E. HEATON Director March 27, 2000
- ------------------------------------
Robert E. Heaton
49