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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, 1996, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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: (908) 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__
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 19, 1997, as
reported by the American Stock Exchange): $20,323,969.
Number of shares of common stock, par value $.001, outstanding as of
March 19, 1997: 8,211,608.
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on April 24, 1997 (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.
The Exhibit Index appears on page 21.
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. Blonder Tongue 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. (the "Company") is a designer,
manufacturer and supplier of a comprehensive line of electronics and systems
equipment for the non-franchised cable television industry, commonly referred to
as the private cable industry ("Private Cable") and the franchised cable
industry ("CATV") which now potentially includes the regional and long distance
telephone service providers. The Company's products are used in the acquisition,
conversion, distribution and protection of television signals transmitted via
satellite, coaxial cable, terrestrial broadcast, terrestrial multi-channel,
multi-point distribution systems and low power television. These products are
sold to customers which provide an array of communications services, including
television, to single family dwellings, multiple dwelling units ("MDU")
consisting mainly of apartment complexes and condominiums, the lodging industry
("Lodging") consisting mainly of hotels, motels and resorts, and other
facilities such as schools, hospitals, prisons 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 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 used to control access to programming at the subscriber's location and
to split and amplify incoming signals for transmission to multiple sites and for
multiple television sets within a site ("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 13 GHz (for CATV) and
18 GHz (for Private Cable) range of frequencies ("Microwave Products").
The Company's principal customers are system integrators which design,
package, install and in most instances operate the cable system.
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Industry Overview
The television signal distribution industry is dominated by broadcast
television and CATV. Private Cable, wireless cable and direct broadcast
satellite, although smaller in market size, are becoming more significant
players and are growing more rapidly. The regional telephone companies and long
distance carriers are also emerging as television providers, through telephone
lines, coaxial cable, fiber optics and/or wireless transmission. Recently
enacted governmental deregulation of the communications industry has eliminated
many remaining barriers to entry by alternative service providers, fostering an
environment of greater competition and change.
CATV service is typically provided through a coaxial cable network or a
combination of optical fiber and coaxial cable that originates from a central
headend and is carried to the subscriber's television set on telephone poles or
underground along utility rights-of-way. Since the installation and maintenance
of this network requires substantial initial and ongoing investment, a local
governmental body typically awards a CATV operator rights to provide cable
service to a defined geographic area. These rights or franchises were awarded on
an exclusive basis prior to the adoption of the Telecommunications Act of 1996.
Presently, additional franchises within geographical areas are encouraged, in
order to increase competition. In contrast, Private Cable operates within the
boundaries of private property, does not require any governmental license or
franchise (other than the FCC license for transmission of television signals in
the 18 GHz frequency band), and does not need access to public or private
rights-of-way to deliver service. In Private Cable, television signals are
acquired and transmitted from property to property via wireless transmission or
using common carrier services (i.e. fiber networks operated by telephone service
providers) rather than coaxial cable.
The traditional CATV customer is a homeowner who is likely to remain in
the same home as a long-term subscriber. For a wide variety of reasons,
including the transient nature of apartment dwellers and the high cost of
replacing lost or damaged set-top converters in apartment units when the tenants
change, CATV has failed to adequately service the MDU market. This failure,
together with the ability of Private Cable operators to link multiple properties
to a central headend system, have greatly expanded the potential market for
Private Cable. Present franchise cable operators recognizing the competition of
private cable, anticipating direct competition by telephone service providers,
and faced with employing even more costly in-house converters (i.e. as digital
service is added) realize the vulnerability of the set top concept and the need
to expand services to retain subscribers.
CATV
Many CATV operators and telephone service providers 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 only 10% to 20% of
existing systems. Deployment of the latest technology is in the test system
stage. The system architecture being employed to accomplish the combined
provision of television and telephone service is either hybrid fiber coax
("HFC") or fiber to the curb ("FTTC"). In HFC systems, fiber optic trunk lines
connect to nodes which feed 200 to 400 subscribers, using coaxial cable. In FTTC
systems fiber optic cable is used deeper into the network, with as few as 4 to 8
subscribers fed by coaxial cable from each node. In either case, extensive
rebuilding of a CATV system is required to provide the services anticipated.
Consequently, not only are the regional and long distance telephone service
providers faced with enormous capital expenditures to enter the video signal
delivery business, but CATV is faced with similar expenditures to compete with
them (or to discourage them from entering the race) to be the provider of the
information superhighway.
The Company believes that most major metropolitan areas will eventually
have complex networks of one or two independent operators interconnecting the
homes and private cable operators will have large
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networks interconnecting many multi-dwelling complexes. All these networks are
potential users of Blonder Tongue Headend and interdiction products.
MDU
Until February, 1991, the ability of Private Cable operators to
penetrate the MDU market was substantially limited by FCC rules which
specifically prohibited the Private Cable operator from using coaxial cable
connections between properties. CATV operators had a significant competitive
advantage because they could connect properties within their franchised areas
with coaxial cable. In an effort to level the playing field, the FCC 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. This new 18 GHz service is wide enough to support the
transmission of 72 channels of television programming, has been the catalyst
fueling the growth and product investment of MDU system operators, and has
caused a substantial increase in the demand for quality Headend Products. In
addition, provisions of the Telecommunications Act of 1996, adopted in February,
1996, now permit Private Cable system operators to use coaxial cable 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 Microwave Products and common carrier fiber optic
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 microwave 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 several
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 channels free-to-guest, video-on-demand for a
broad selection of movie titles and even interactive services such as remote
check-out and concierge services. This is in contrast to the systems which
preceded them which had typically 10 to 12 receivers and modulators and provided
6 to 10 channels free-to-guest and 2 to 5 channels of VCR-based movies running
at published scheduled times.
There is a trend to substitute video file servers for VCRs, which the
Company believes will eventually replace VCR's in video-on-demand systems. The
timing and speed of this transition is dependent on availability of lower cost
servers.
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Most of the systems with video-on-demand service are in larger 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 have had limited video-on-demand penetration to date,
principally because of the headend cost associated with each system and the
limited revenues generated by the smaller number of rooms.
International
For much of the world, television service is in its infancy, but is
expected to rapidly expand 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 which 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.
Additional Considerations
The technological revolution taking place in the communications
industry, which includes direct broadcast satellite, is providing digital
television to an increasing number of homes. Wireless cable systems also utilize
digital compression to provide channel capacity which is competitive with CATV
and other television delivery systems. In addition, franchised cable companies
and telephone companies, as stated earlier, 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 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 evolve. 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 the heart of Blonder Tongue's business and except for systems deploying
digital decoders at each television set (which is very expensive), the Company
believes VideoMask(TM) 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, CATV and the television
industry generally will need to design and manufacture new products for that
environment.
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,
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
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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. Blonder Tongue is a
licensee of General Instrument Corporation's VideoCipher(R) and
DigiCipher(R) encryption technologies and EchoStar Communication
Corp.'s digital technologies and integrates their decoders into
integrated receiver/decoder products, where required. The Company is
negotiating with additional companies which are delivering digital
television signal transmission to acquire licenses to incorporate their
proprietary digital decoders into the Company's receivers. The Company
estimates that Headend Products accounted for approximately 90% of the
Company's revenues in 1994 and 1995 and 84% of revenues in 1996.
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 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, splitters, couplers and multiplexers.
The Company believes that the most significant product within this
category is its new 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"), which limits, through jamming of particular
channels, the availability of programs to subscribers. Interdiction
products such as VideoMask(TM) enable an integrator to control
subscriber access to premium channels and other enhanced services
through a computer located off-premises. Such interdiction products
eliminate the necessity of an operator having to make a service call to
install or remove passive traps and eliminates the costs associated
with damage or loss of set-top converters in the subscribers'
locations. While it is not possible to predict the market acceptance
for this product, the Company believes the potential is substantial in
the MDU market. Moreover, the product could be sold to the CATV
industry as an alternative to set-top converters and is a viable option
for telephone companies which may seek a cost effective way to compete
with CATV.
o Microwave Products used to transmit the output of a cable system
headend to multiple locations using point-to-point communication links
in the 13 GHz (for CATV) and 18 GHz (for Private Cable) 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 believes that this class
of products will be a major catalyst for growth in the Private Cable
MDU market and will be a strategic element in developing the Company's
CATV market penetration.
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
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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), 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 20 employees in the
research and development department of the Company at December 31, 1996.
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 years 1994, 1995 and 1996 to regional and long distance
telephone service providers, and to CATV integrators. Sales are made through a
network of approximately 15 independent sales representatives with 20 offices
throughout the United States and Canada, through numerous domestic and
international stocking distributors, and directly to certain large end-users
through the Company's sales force.
The Company has contractual relationships with numerous independent
sales representatives and distributors. Such agreements are generally terminable
upon thirty days written notice by either party.
The Company maintains its own sales staff of approximately 23
employees, which currently includes four salespersons (one salesperson in each
of Cincinnati, Ohio, Timonium, Maryland, Plano, Texas and Moreno, California)
and 19 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.
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 OEM 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.
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The Company had approximately $34,209,000 and $3,248,000 in purchase
orders as of December 31, 1995 and December 31, 1996, respectively. At December
31, 1995 the outstanding purchase orders included orders from ICS aggregating
$25,068,000, of which only approximately $700,000 was actually shipped in 1996,
with the balance of the orders being cancelled. All of the purchase orders
outstanding as of December 31, 1996 are expected to be shipped prior to December
31, 1997. The outstanding purchase orders as of December 31, 1996 do not include
any amount for shipments anticipated as of December 31, 1996 under the Company's
contract with Pacific Bell, due to the nature of the contract. 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 1996 consisted of
more than 1,000 active accounts. Approximately 42%, 46% and 39% of the Company's
revenues in fiscal years 1994, 1995 and 1996, respectively, were derived from
sales of products to the Company's five largest customers. In 1996 sales to
LodgeNet Entertainment Corporation accounted for approximately 17% of the
Company's revenues. Sales to the five largest customers consisted principally of
Headend Products. 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.
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 in its infancy 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 11%, 9% and 5% of the Company's
revenues in fiscal years 1994, 1995 and 1996, 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 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
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and part of the Company's strategy to provide its customers with products with a
high performance-to-cost ratio.
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 methodology 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). 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 CATV 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 11 United States patents and 4 foreign
patents covering a wide range of electronic systems and circuits. None of these
patents, however, 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 Private Cable and CATV industries, the Company believes
that its market position as a leading supplier to Private Cable 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., Cable Home
Communications Corp., a subsidiary of General Instrument Corporation ("GI"),
Houston Tracker Systems, Inc., a subsidiary of EchoStar Communications Corp.
("EchoStar"), and several smaller software development companies.
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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, 1997. 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.
The Company relies on a combination of contractual rights and trade
secret laws to protect its proprietary technology and know-how. There can be no
assurance that the Company will be able to protect its technology and know-how
or that third parties will not be able to develop similar technology 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.
Regulation
Private Cable (estimated by the Company to represent approximately 80%
of its business), while in some cases subject to certain FCC licensing
requirements, is not presently burdened with extensive government regulations.
CATV operators (estimated by the Company to represent approximately 20% of its
business) 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, enacted early last year, will
deregulate many aspects of CATV system operation and open the door to
competition among cable operators and telephone companies in each of their
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respective industries. The Company believes that this legislation will increase
the base of potential customers for the Company's products.
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 1996 and does not anticipate incurring
in 1997 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 November 1, 1997. The Company anticipates that such permit will be
renewed.
Employees
The Company employs approximately 481 persons, including 365 in
manufacturing, 20 in research and development, 17 in quality assurance, 34 in
production services, 23 in sales and marketing, and 22 in a general and
administrative capacity. 307 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, 1999.
ITEM 2. PROPERTIES
The Company's principal manufacturing, engineering, sales and
administrative facilities, consist of one building totalling approximately
130,000 square feet located on approximately 20 acres of land in Old Bridge, New
Jersey (the "Old Bridge Facility"). The Company also leases approximately 8,100
square feet of space in San Diego, California for which it pays base rent of
approximately $4,100 per month. In 1995, the Company's Board of Directors
adopted resolutions authorizing the consolidation of the Company's operations
from California to the Old Bridge facility. The Company concluded this
consolidation prior to the end of 1996. The Company will continue to incur
charges for rent in San Diego through June 30, 1997, the expiration date of the
lease. The Company has sublet the San Diego facility in an effort to mitigate
such expense.
Management believes that the Old Bridge Facility is adequate to support
the Company's anticipated needs in 1997. Subject to compliance with applicable
zoning and building codes, the Old Bridge real property is large enough to
double the size of the plant to accommodate expansion of the Company's
operations should the need arise.
-11-
ITEM 3. LEGAL PROCEEDINGS
On October 18, 1996, the Company was served with a complaint in a
lawsuit filed by Scientific-Atlanta, Inc., in the United States District Court
for the Northern District of Georgia alleging patent infringement by the
Company's VideoMask(TM) interdiction product. The complaint requests an
unspecified amount of damages and injunctive relief. On November 13, 1996 a
procedural default (unrelated to the merits of the case) was entered against the
Company due to the late filing of the Company's answer. Motions have been made
and briefed regarding the setting aside of that entry and the Company is
presently awaiting the Court's ruling. The Company's outside patent counsel has
advised the Company that the equities of the case, public policy and multiple
meritorious defenses weigh in favor of setting the entry aside. Although the
outcome of any litigation cannot be predicted with certainty, the Company
believes the complaint is without merit and that the ultimate disposition of
this matter will not have a material effect on the Company's business.
Regardless of the validity or the successful assertion of the claims set forth
in the Scientific complaint or infringement claims made by others, the Company
could incur significant costs and diversion of resources with respect to the
defense thereof which could have a material adverse effect on the Company's
financial condition and results of operations. Damages for violation of third
party proprietary rights could be substantial, in some instances are trebled,
and could have a material adverse effect on the Company financial condition and
results of operations. If the Company is unsuccessful in setting aside the entry
of default on the procedural matter or in defending the lawsuit filed by
Scientific or any other claims or actions are asserted against the Company or
its customers, the Company may seek to obtain a license under third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms or at
all. The failure to obtain a license to a third party's intellectual property
rights on commercially reasonable terms could have a material adverse effect on
the Company's results of operations and financial condition.
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, 1996 through the solicitation of proxies or
otherwise.
-12-
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, 1995: High Low
----- ----
Fourth Quarter (December 14-31, 1995)............ 10 5/8 9 1/2
Fiscal year ended December 31, 1996 High Low
----- ----
First Quarter ................................... 13 3/4 9
Second Quarter................................... 19 1/2 9 7/8
Third Quarter ................................... 15 7 3/4
Fourth Quarter .................................. 10 7/8 8 1/8
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "BDR".
Holders
As of March 19, 1997, the Company had approximately 101 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 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 CoreStates 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, working capital, tangible net worth and debt
service coverage.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of earnings data presented below
for each of the years ended December 31, 1994, 1995 and 1996, and the selected
consolidated balance sheet data as of December 31, 1995 and 1996 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
-13-
earnings data for the years ended December 31, 1992 and 1993 and the selected
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 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,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Earnings Data:
Net sales ............................................ $ 22,681 $ 24,136 $ 35,804 $ 51,982 $ 48,862
Cost of goods sold ................................... 14,257 14,472 21,791 32,528 30,613
-------- -------- -------- -------- --------
Gross profit ....................................... 8,424 9,664 14,013 19,454 18,249
-------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative ................ 6,050 5,565 7,060 9,791 9,135
Research and development ........................... 722 963 1,477 2,011 1,972
-------- -------- -------- -------- --------
Total operating expenses ........................... 6,772 6,528 8,537 11,802 11,107
-------- -------- -------- -------- --------
Earnings (loss) from operations ...................... 1,652 3,136 5,476 7,652 7,142
Interest expense ..................................... 180 183 439 1,296 658
Other (income) expense, net .......................... 207 (15) (89) (60) --
-------- -------- -------- -------- --------
Earnings (loss) before income taxes .................. $ 1,265 $ 2,968 $ 5,126 $ 6,416 $ 6,484
Provisions for income taxes .......................... 2,601
--------
Net earnings ......................................... $ 3,883
========
Net earnings per share ............................... $ 0.47
Weighted average shares outstanding .................. 8,300
Pro Forma Data:
Pro forma provision for income taxes(1) .............. 506 1,187 2,050 2,566
-------- ------- ------- -------
Pro forma net earnings ............................... $ 759 $ 1,781 $ 3,076 $ 3,850
======== ======= ======= =======
Pro forma net earnings per share ..................... $ 0.09 $ 0.23 $ 0.48 $ 0.64
Weighted average shares outstanding(2) ............... 8,097 7,772 6,475 6,054
Other Data:
S Corporation distributions declared ................. $ -- $ 964 $ 4,425 $ 7,896 $ --
Year Ended December 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands)
Consolidated Balance
Sheet Data:
Working capital ...................................... $ 3,124 $ 3,920 $ 5,786 $ 14,407 $ 23,015
Total assets ......................................... 7,273 11,197 15,832 31,804 36,165
Long-term debt (including current maturities) ........ 406 1,552 5,196 2,145 6,347
Stockholders' equity ................................. 2,702 4,204 3,509 19,740 25,576
- ------------------
(1) 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.
(2) Weighted average shares are based on shares outstanding for the respective
period, adjusted as required by SAB 83. Supplemental pro forma weighted
average shares outstanding are based on the weighted average number of
shares of common stock and common stock equivalents used in the calculation
of pro forma earnings per share, plus the estimated number of shares
(621,000 and 592,000 at December 31, 1994 and 1995, respectively) that would
need to be sold by the Company in order to fund the estimated cash
distribution to stockholders of $5,895,000 paid out of the net proceeds of
the offering. Supplemental pro forma earnings per share was $0.43 and $0.58
at December 31, 1994 and 1995, respectively. See Note 1(m) of notes to the
Company's consolidated financial statements.
-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 CATV system integrators and to
deliver products having a high performance-to-cost ratio. The Company has
experienced significant growth since the acquisition of the former
Blonder-Tongue, both internally and through strategic acquisitions.
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, was 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.
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,
---------------------------------
1994 1995 1996
---- ---- ----
Net sales................................ 100.0% 100.0% 100.0%
Costs of goods sold...................... 60.9 62.6 62.7
Gross profit............................. 39.1 37.4 37.3
Selling expenses......................... 9.0 9.3 9.8
General and administrative expenses...... 10.8 9.5 8.9
Research and development expenses........ 4.1 3.9 4.0
Earnings from operations................. 15.3 14.7 14.6
Other expense, net....................... 1.0 2.4 1.3
Earnings before income taxes............. 14.3 12.3 13.3
-15-
1996 Compared with 1995
Net Sales. Net sales decreased $3,120,000, or 6.0%, to $48,862,000 in
1996 from $51,982,000 in 1995. International sales accounted for $2,655,000
(5.4% of total sales) for 1996 compared to $4,809,000 (9.3% of total sales) for
1995. Net sales included approximately $2,939,000 of VideoMask(TM) interdiction
equipment. Net sales also included $2,192,000 under the Company's agreement to
supply interdiction equipment to Pacific Bell.
Sales in the lodging market remained strong during 1996 but MDU sales
were impacted by the uncertainty surrounding the installation of private cable
systems in properties under contract to Interactive Cable Systems, Inc. ("ICS"),
one of the Company's largest customers in 1995. Net sales to ICS were
approximately $684,000 in 1996 compared to approximately $9,266,000 in 1995. It
is anticipated that these properties will be upgraded in future time periods
either by ICS or by other private cable operators, although no assurances in
this regard can be given. Approximately $655,000 of accounts receivable
outstanding at December 31, 1996 was due from ICS for more than 60 days,
compared with approximately $933,000 outstanding for more than 60 days at
December 31, 1995.
Longer than anticipated accelerated life testing of the Company's, new
VideoMask(TM) interdiction product delayed production until early March, 1996.
Thereafter, volume interdiction sales were further delayed due to the inability
of ICS to complete the installation of private cable systems in properties under
contract to them and the shift in demand to other users of interdiction whose
requirements were for product configurations not yet in production. Volume
interdiction sales may be affected due to uncertainties relating to the pending
Scientific-Atlanta litigation. See Item 3 - Legal Proceedings.
Cost of Goods Sold. Cost of goods sold decreased to $30,613,000 in 1996
from $32,528,000 in 1995 but increased as a percentage of sales to 62.7% from
62.6%. 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.
Reconfiguration costs and low volume production of VideoMask(TM) during 1996
affected gross margins of the product. As VideoMask(TM) volume increases,
margins on such products should improve, although there can be no assurance that
additional delays will not occur or that volume will increase.
Selling Expenses. Selling expenses decreased to $4,780,000 in 1996 from
$4,824,000 in 1995, primarily due to decreased costs incurred for commissions as
a result of the termination of certain sales representatives offset by increased
expenditures for marketing materials, royalties related to certain license
agreements and increased operational costs of the BTI sales office along with
additional costs incurred in connection with the closure of such office.
General and Administrative Expenses. General and administrative
expenses decreased to $4,355,000 in 1996 from $4,967,000 for 1995 and also
decreased as a percentage of sales to 8.9% in 1996 from 9.5% in 1995. The
$612,000 decrease can be attributed to a reduction in rent expense, net of
increased depreciation, as a result of the Company's purchase of its
manufacturing facility located in Old Bridge, New Jersey and a decline in
salaries due to a reduction in personnel, offset by an increase in expenditures
for professional services and insurance.
Research and Development Expenses. Research and development expenses
decreased 1.9% to $1,972,000 in 1996 from $2,011,000 in 1995, primarily due to a
decrease in consulting services incurred, which were primarily attributable to
the development of the VideoMask(TM) interdiction product line during 1995 and
the first half of 1996, offset by an increase in purchased materials for
research and development. Research and development expenses increased as a
percentage of sales to 4.0% from 3.9%.
-16-
Operating Income. Operating income decreased 6.7% to $7,142,000 in
1996 from $7,652,000 in 1995. Operating income as a percentage of sales
decreased to 14.6% in 1996 from 14.7% in 1995.
Interest and Other Expenses. Other expenses, net, decreased to $658,000
in 1996 from $1,236,000 in 1995. These expenses in 1996 consisted of interest
expense in the amount of $658,000. Other expenses in 1995 consisted of interest
expense of $1,296,000, offset by $60,000 of other income. The reduction in
interest expense is primarily attributed to reduced borrowings under the
Company's credit line.
Income Taxes. The Company with the consent of its stockholders elected
to be taxed as an S Corporation for federal income tax purposes since its
organization. As a consequence, the taxable net earnings of the Company were
taxed as income to the Company's stockholders in proportion to their individual
stockholdings, and the payment of federal income taxes on such proportionate
share of the Company's taxable earnings is the personal obligation of each
stockholder. The Company's status as an S Corporation terminated on December 11,
1995, and as a result the Company is now a C Corporation for income tax
purposes. As a C Corporation, the Company is currently taxed at a combined
effective rate of approximately 40% based upon current federal and state income
tax regulations. Had the Company been taxable as a C Corporation for the entire
year of 1995, pro forma income taxes and pro forma net earnings after taxes for
the year ended December 31, 1995 would have been $2,566,000 and $3,850,000,
respectively, compared with a provision for income taxes and net earnings after
taxes for the year ended December 31, 1996 of $2,601,000 and $3,883,000,
respectively.
1995 Compared with 1994
Net Sales. Net sales increased $16,178,000, or 45.2%, to $51,982,000 in
1995 from $35,804,000 in 1994. International sales accounted for $4,809,000
(9.3% of total sales) in 1995 compared to $4,034,000 (11.3% of total sales) in
1994. The increase in sales primarily reflected increased demand for the
Company's Headend Products in the MDU market and relatively strong sustained
sales to the Lodging market.
Cost of Goods Sold. Cost of goods sold increased to $32,528,000 in 1995
from $21,791,000 in 1994 and also increased as a percentage of sales to 62.6%
from 60.9%. The increase was caused primarily by changes in product mix and
discounts afforded to certain high volume customers, the impact of which was
mitigated by a reduction of factory overhead costs as a percentage of labor
costs.
Selling Expenses. Selling expenses increased to $4,824,000 in 1995 from
$3,210,000 in 1994 and increased as a percentage of sales to 9.3% from 9.0%. The
increase was primarily due to increased costs incurred for advertising,
marketing materials, travel and trade shows.
General and Administrative Expenses. General and administrative
expenses increased to $4,967,000 in 1995 from $3,850,000 in 1994 but decreased
as a percentage of sales to 9.5% in 1995 from 10.8% in 1994. The $1,117,000
increase can be attributed primarily to increased expenditures for professional
services and general expenses which rose due to the increase in sales volume.
Research and Development Expenses. Research and development expenses
increased 36.2% to $2,011,000 in 1995 from $1,477,000 in 1994, primarily due to
an increase in purchased engineering services, but decreased as a percentage of
sales to 3.9% from 4.1%. The Company anticipates continuing to increase its
research and development expenditures.
Operating Income. Operating income increased 39.7% to $7,652,000 in
1995 from $5,476,000 in 1994. Operating income as a percentage of sales
decreased to 14.7% in 1995 from 15.3% in 1994.
-17-
Interest and Other Expenses. Other expenses, net, increased to
$1,236,000 in 1995 from $350,000 in 1994. These expenses in 1995 consisted of
interest expense in the amount of $1,296,000, offset by $60,000 of other income.
Other expenses in 1994 consisted of interest expense of $439,000, offset by
$89,000 of other income. The increase in interest expense in 1995 was the result
of increased borrowings under the Company's line of credit and the incurrence of
approximately $4,250,000 of additional term indebtedness during the third and
fourth quarters of 1994, relating to certain S Corporation distributions to the
stockholders and the purchase of shares of Common Stock from a stockholder.
Income Taxes. The Company with the consent of its stockholders elected
to be taxed as an S Corporation for federal income tax purposes since its
organization. As a consequence, the taxable net earnings of the Company were
taxed as income to the Company's stockholders in proportion to their individual
stockholdings, and the payment of federal income taxes on such proportionate
share of the Company's taxable earnings is the personal obligation of each
stockholder. The Company's status as an S Corporation terminated on December 11,
1995, and as a result the Company is now a C Corporation for income tax
purposes. As a C Corporation, the Company is currently taxed at a combined
effective rate of approximately 40% based upon current federal and state income
tax regulations. Had the Company been taxable as a C Corporation in 1994 and for
the entire year of 1995, pro forma income taxes for the year ended December 31,
1994 and 1995 would have been $2,050,000 and $2,566,000, respectively, and the
pro forma net earnings after taxes for such periods would have been $3,076,000
and $3,850,000, respectively.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on the results
of operations of the Company. Fourth quarter sales in 1996 were slightly
impacted by fewer production days. The Company expects sales each year in the
fourth quarter to be impacted by fewer production days.
Liquidity and Capital Resources
As of December 31, 1996 and 1995, the Company's working capital was
$23,015,000 and $14,407,000, respectively. The increase in working capital is
attributable to a $2,638,000 increase in inventory, a $3,003,000 decrease in
accounts payable and a $1,176,000 reclassification of the revolving line of
credit as a long-term liability due to its maturity date extending beyond one
year. In addition, the Company received a $1,606,000 equity capital infusion as
a result of the exercise by the Company's underwriters of their over-allotment
option in connection with the Company's initial public offering of Common Stock
and proceeds from a $2,800,000 loan secured by a mortgage against the Company's
principal office/manufacturing facility located in Old Bridge, New Jersey. These
additional proceeds were applied against the outstanding balance under the
Company's revolving line of credit. 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 used in operating activities for the period
ended December 31, 1996 was $534,000, including $2,638,000 to fund the increase
in inventory, compared to cash provided by operating activities for the period
ended December 31, 1995, which was $495,000. Cash flows from operating
activities have been negative, due primarily to the increase in inventory of
$2,638,000, and a reduction in accounts payable of $3,003,000.
Cash used in investing activities was $1,963,000. $492,000 was utilized
for fees associated with the acquisition of certain license agreements, and
$1,471,000 of which is attributable to capital expenditures for new equipment.
The Company purchased several high speed robotic insertion machines which are
used primarily in the manufacture of circuit boards for the Company's new
VideoMask(TM) product line and the balance was used for the purchase of other
automated assembly and test equipment. The Company does not have any present
plans or commitments for material capital expenditures for fiscal year 1997.
-18-
Cash provided by financing activities was $3,360,000 for the period
ended December 31, 1996, comprised primarily of debt proceeds, net of
repayments, of $3,026,000, net proceeds from the Company's sale of an additional
181,735 shares of Common Stock pursuant to an over-allotment option relating to
the Company's initial public offering of $1,606,000 and an additional $261,000
relating to the exercise of stock options.
On September 26, 1996, the Company executed a new $15 million revolving
line of credit with a bank on which funds may be borrowed at the bank's prime
rate (8.25% at December 31, 1996) or LIBOR plus .95% (6.58% at December 31,
1996) for a specified period of time at the election of the Company. As of
December 31, 1996, the Company had drawn down $1,176,000 at the bank's prime
rate under the line of credit for working capital needs. The line of credit is
collateralized by a security interest in all of the Company's assets. The
agreement contains restrictions that require the Company to maintain certain
financial ratios. In addition, the Company obtained a $10 million acquisition
loan commitment which may be drawn upon by the Company to finance acquisitions
in accordance with certain terms. At December 31, 1996, there was no balance
outstanding under the acquisition loan commitment. The line of credit and the
acquisition loan commitment expire on June 30, 1998.
On May 24, 1996, the Company borrowed $2.8 million from its bank for a
ten-year term. The loan bears interest at the fixed rate of 7.25% through May
1999 and may be negotiated to another fixed rate or remain variable for the
remaining seven years of the loan. The term loan is secured by a mortgage
against the Company's manufacturing and administrative facility located in Old
Bridge, New Jersey.
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.
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 Private Cable 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 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.
Effect of New Accounting Pronouncements
In October, 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company adopted this pronouncement by making the
required pro forma footnote disclosures only. Therefore, the adoption of SFAS
No. 123 did not have an effect on the Company's results of operations or
financial condition.
-19-
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 25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 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 Shareholders
scheduled to be held April 24, 1997, 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
S-K Item 402(a)(9) are not deemed "soliciting material" or "filed" as part of
this report.
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....................................26
Consolidated Balance Sheets as of December 31, 1995 and 1996 ...........................................27
Consolidated Statements of Earnings for the Years Ended December 31, 1994, 1995 and 1996................28
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994,
1995 and 1996 .........................................................................................29
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 .............30
Notes to Consolidated Financial Statements..............................................................31
(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.
-20-
(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,
1996.
(c) Exhibits:
Exhibit # Description Sequential Page Number
--------- ----------- ----------------------
3.1 Restated Certificate of Incorporation of Blonder Incorporated by reference from Exhibit
Tongue Laboratories, Inc. 3.1 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
Inc. 3.2 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 Agreement of Sale between Blonder Tongue Incorporated by reference from Exhibit
Laboratories, Inc. and American Real Estate 10.2 to Registrant's S-1 Registration
Investment and Development Co. and Statement No. 33-98070 originally filed
Amendment. October 12, 1995, as amended.
10.2 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.
10.3 Key Employee Salary Bonus Plan. Incorporated by reference from Exhibit
10.4 to Registrant's S-1 Registration
Statement No. 33-98070 originally filed
October 12, 1995, as amended.
10.4 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.
10.5 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.
10.6 1996 Director Option Plan. Incorporated by reference from Exhibit
10.7 to Registrant's S-1 Registration
Statement No. 33-98070 originally filed
October 12, 1995, as amended.
-21-
Exhibit # Description Sequential Page Number
--------- ----------- ----------------------
10.7 Second Amended and Restated Loan Agreement, Incorporated by reference from Exhibit
dated as of September 26, 1996, between Blonder 10.1 to Registrant's Quarterly Report on
Tongue Laboratories, Inc. and CoreStates Bank, Form 10-Q for the period ended
N.A., successor to Meridian Bank. September 30, 1996, filed November 14,
1996.
10.8 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.
10.9 Form of Indemnification Agreement entered into Incorporated by reference from Exhibit
by Blonder Tongue Laboratories, Inc. in favor of 10.10 to Registrant's S-1 Registration
each of its Directors and Officers. Statement No. 33-98070 originally filed
October 12, 1995, as amended.
10.10 VideoCipher(R)IICM Commercial Descrambler Incorporated by reference from Exhibit
Module Master Purchase and License Agreement, 10.11 to Registrant's S-1 Registration
dated August 23, 1990, between Blonder Tongue Statement No. 33-98070 originally filed
Laboratories, Inc. and Cable/Home October 12, 1995, as amended.
Communication Corp.
+ 10.11 Patent License Agreement, dated August 21, Incorporated by reference from Exhibit
1995, between Blonder Tongue Laboratories, Inc. 10.12 to Registrant's S-1 Registration
and Philips Electronics North America Statement No. 33-98070 originally filed
Corporation. October 12, 1995, as amended.
+ 10.12 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 Statement No. 33-98070 originally filed
Networks, Inc. October 12, 1995, as amended.
10.13 Promissory Note dated December 19, 1995 from Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. in favor of 10.13 to Registrant's Annual Report on
James H. Williams. Form 10-K for fiscal year ended December 31,
1995, filed March 21, 1996.
10.14 Promissory Note dated December 19, 1995 from Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. in favor of 10.14 to Registrant's Annual Report on
Robert J. Palle, Jr. Form 10-K for fiscal year ended
December 31, 1995, filed March 21, 1996.
10.15 Promissory Note dated December 19, 1995 from Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. in favor of 10.15 to Registrant's Annual Report on
James A. Luksch. Form 10-K for fiscal year ended
December 31, 1995, filed March 21, 1996.
10.16 Stock Purchase Agreement, dated July 22, 1993, Incorporated by reference from Exhibit
between Blonder Tongue Laboratories, Inc. and 10.17 to S-1 Registration Statement No.
James A. Luksch. 33-98070 originally filed October 12,
1995, as amended.
-22-
Exhibit # Description Sequential Page Number
--------- ----------- ----------------------
10.17 Promissory Note, dated July 22, 1995 from Incorporated by reference from Exhibit
James A. Luksch in favor of Blonder Tongue 10.18 to S-1 Registration Statement No.
Laboratories, Inc. 33-98070 originally filed October 12,
1995, as amended.
10.18 Special Bonus Agreement, dated July 22, 1993, Incorporated by reference from Exhibit
between Blonder Tongue Laboratories, Inc. and 10.19 to S-1 Registration Statement No.
James A. Luksch. 33-98070 originally filed October 12,
1995, as amended.
10.19 Letter Agreement, dated April 26, 1995 between Incorporated by reference from Exhibit
Blonder Tongue Laboratories, Inc. and James A. 10.20 to S-1 Registration Statement No.
Luksch. 33-98070 originally filed October 12,
1995, as amended.
10.20 401(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.
10.21 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.
10.22 Subordination Agreement dated December 19, Incorporated by reference from Exhibit
1995 among Blonder Tongue Laboratories, Inc., 10.22 to Registrant's Annual Report on
Meridian Bank and James A. Luksch Form 10-K for fiscal year ended
December 31, 1995, filed March 21, 1996.
10.23 Subordination Agreement dated December 19, Incorporated by reference from Exhibit
1995 among Blonder Tongue Laboratories, Inc., 10.23 to Registrant's Annual Report on
Meridian Bank and Robert J. Palle, Jr. Form 10-K for fiscal year ended
December 31, 1995, filed March 21, 1996.
10.24 Subordination Agreement dated December 19, Incorporated by reference from Exhibit
1995 among Blonder Tongue Laboratories, Inc., 10.24 to Registrant's Annual Report on
Meridian Bank and James H. Williams Form 10-K for fiscal year ended
December 31, 1995, filed March 21, 1996.
10.25 Subordination Agreement dated December 19, Incorporated by reference from Exhibit
1995 among Blonder Tongue Laboratories, Inc. 10.25 to Registrant's Annual Report on
and James A. Luksch for the benefit of any Form 10-K for fiscal year ended
lender. December 31, 1995, filed March 21,
1996.
10.26 Subordination Agreement dated December 19, Incorporated by reference from Exhibit
1995 among Blonder Tongue Laboratories, Inc. 10.26 to Registrant's Annual Report on
and Robert J. Palle, Jr. for the benefit of any Form 10-K for fiscal year ended
lender. December 31, 1995, filed March 21,
1996.
-23-
Exhibit # Description Sequential Page Number
--------- ----------- ----------------------
10.27 Subordination Agreement dated December 19, Incorporated by reference from Exhibit
1995 among Blonder Tongue Laboratories, Inc. 10.27 to Registrant's Annual Report on
and James H. Williams for the benefit of any Form 10-K for fiscal year ended
lender. December 31, 1995, filed March 21,
1996.
10.28 Mortgage, Assignment of Leases, and Security Incorporated by reference from Exhibit
Agreement dated May 23, 1996 by Blonder 10.2 to Registrant's Quarterly Report on
Tongue Laboratories, Inc. in favor of CoreStates Form 10-Q for the period ended June 30,
Bank, N.A., successor to Meridian Bank. 1996, filed August 14, 1996.
10.29 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 Form 10-Q for the period ended June 30,
Bank. 1996, filed August 14, 1996.
10.29(a) Allonge the Real Estate Loan Note, dated Incorporated by reference from Exhibit
September 26, 1996 from Blonder Tongue 10.3 to Registrant's Quarterly Report on
Laboratories, Inc., in favor of CoreStates Bank, Form 10-Q for the period ended
N.A., successor to Meridian Bank. September 30, 1996, filed November 14,
1996.
10.30 Second Amended and Restated Line of Credit Incorporated by reference from Exhibit
Note dated September 26, 1996 from Blonder 10.2 to Registrant's Quarterly Report on
Tongue Laboratories, Inc. in favor of CoreStates Form 10-Q for the period ended
Bank, N.A., successor to Meridian Bank. September 30, 1996, filed November 14,
1996.
++10.31 License Agreement dated November 12, 1996 Filed on Page 47 herein.
between Blonder Tongue Laboratories, Inc. and
Houston Tracker Systems, Inc.
11 Statement Regarding Computation of Per Share Filed on page 140 herein.
Earnings.
21 Subsidiaries of Blonder Tongue Laboratories, Inc. Filed on page 141 herein.
23 Consent of BDO Seidman, LLP Filed on page 142 herein.
27 Financial Data Schedule Electronic filing only.
- ------------------------------
+ Certain portions of exhibit have been afforded confidential treatment by
the Securities and Exchange Commission.
++ Certain portions of exhibit are the subject of a request for confidential
treatment and have been filed separately with 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 45 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.
-24-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants, BDO Seidman, LLP.............................................26
Consolidated Balance Sheets as of December 31, 1995 and 1996 ....................................................27
Consolidated Statements of Earnings for the Years Ended December 31, 1994, 1995 and 1996.........................28
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 ............29
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 ......................30
Notes to Consolidated Financial Statements.......................................................................31
-25-
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, 1996 and 1995 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the three years in the period ended December 31, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Woodbridge, New Jersey
March 3, 1997
-26-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
-----------------
1995 1996
------- -------
Assets (Note 4)
Current assets:
Cash .................................................................... $ 477 $ 1,340
Accounts receivable, net of allowance for doubtful
accounts of $205 and $280, respectively ............................... 9,155 8,987
Inventories (Note 2) .................................................... 13,390 16,028
Other current assets .................................................... 906 403
Deferred income taxes (Note 12) ......................................... 137 534
------- -------
Total current assets ........................................ 24,065 27,292
Property, plant and equipment, net of accumulated
depreciation and amortization (Note 3) ................................ 6,486 7,161
Other assets .............................................................. 1,253 1,712
------- -------
$31,804 $36,165
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit (Note 4) ....................................... $ 2,709 $ --
Current portion of long-term debt (Note 4) .............................. 221 445
Accounts payable ........................................................ 4,630 1,627
Accrued compensation .................................................... 843 993
Other accrued expenses .................................................. 729 589
Income taxes (Note 12) .................................................. 526 623
------- -------
Total current liabilities ................................... 9,658 4,277
------- -------
Deferred income taxes (Note 12) ........................................... 482 410
Revolving line of credit (Note 4) ......................................... -- 1,176
Long-term debt, including related party debt of $1,591
in 1996 and 1995 (Note 4) ............................................. 1,924 4,726
Commitments and contingencies (Notes 5, 6 and 7) .......................... -- --
Stockholders' equity (Notes 9, 10 and 11):
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares outstanding ................................................. -- --
Common stock, $.001 par value; authorized 25,000,000 shares, 7,919,285
shares issued and outstanding at December 31, 1995 and 8,193,509 shares
issued and outstanding at December 31, 1996 ........................... 8 8
Paid-in capital ......................................................... 19,546 21,499
Retained earnings ....................................................... 186 4,069
------- -------
Total stockholders' equity .................................. 19,740 25,576
------- -------
$31,804 $36,165
======= =======
See accompanying notes to consolidated financial statements.
-27-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Year Ended December 31,
------------------------------
1994 1995 1996
-------- -------- --------
Net sales ........................................ $ 35,804 $ 51,982 $ 48,862
Cost of goods sold ............................... 21,791 32,528 30,613
-------- -------- --------
Gross profit ................................. 14,013 19,454 18,249
-------- -------- --------
Operating expenses:
Selling expenses ............................. 3,210 4,824 4,780
General and administrative ................... 3,850 4,967 4,355
Research and development ..................... 1,477 2,011 1,972
-------- -------- --------
8,537 11,802 11,107
-------- -------- --------
Earnings from operations ......................... 5,476 7,652 7,142
-------- -------- --------
Other income (expense):
Interest expense ............................. (439) (1,296) (658)
Other income ................................. 89 60 --
-------- -------- --------
(350) (1,236) (658)
-------- -------- --------
Earnings before income taxes ..................... 5,126 6,416 6,484
Provision for income taxes (Note 12) ............. 92 884 2,601
-------- -------- --------
Net earnings ................................. $ 5,034 $ 5,532 $ 3,883
======== ======== ========
Net earnings per share ........................... $ 0.47
========
Weighted average shares outstanding .............. 8,300
========
Pro forma data (Note 1):
Historical earnings before income taxes ...... $ 5,126 $ 6,416
Pro forma provision for income taxes (Note 12) 2,050 2,566
-------- --------
Net earnings ............................. $ 3,076 $ 3,850
======== ========
Pro forma net earnings per share ................. $ 0.48 $ 0.64
======== ========
Weighted average shares outstanding .............. 6,475 6,054
======== ========
See accompanying notes to consolidated financial statements.
-28-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
Note
Common Stock Receivable
---------------------- From Sale of
Paid-in Retained Common
Shares Amount Capital Earnings Stock Total
-------- -------- -------- -------- -------- --------
Balance at January 1, 1994 ..................... 7,312 $ 7 $ 1,107 $ 4,002 $ (912) $ 4,204
Purchase and retirement of
treasury stock ............................. (1,659) (1) (50) (1,949) -- (2,000)
Collection of note receivable ................ -- -- -- -- 304 304
Distributions to stockholders ................ -- -- -- (4,425) -- (4,425)
Options granted pursuant to
acquisition (Note 10) ...................... -- -- 342 -- -- 342
Capital contribution ......................... -- -- 50 -- -- 50
Net earnings ................................. -- -- -- 5,034 -- 5,034
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ................... 5,653 6 1,449 2,662 (608) 3,509
Collection of note receivable ................ -- -- -- -- 608 608
S Corporation net earnings ................... -- -- -- 5,346 -- 5,346
Distributions to stockholders ................ -- -- -- (7,896) -- (7,896)
Issuance and simultaneous
purchase and retirement of
treasury stock pursuant to
acquisition (Note 10) ........................ 66 -- (347) -- -- (347)
Reclassification of S Corporation
retained earnings .......................... -- -- 112 (112) -- --
Proceeds from sale of stock .................. 2,200 2 19,285 -- -- 19,287
Costs of initial public offering ............. -- -- (953) -- -- (953)
C Corporation net earnings ................... -- -- -- 186 -- 186
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ................... 7,919 8 19,546 186 -- 19,740
Proceeds from sale of stock .................. 182 -- 1,606 -- -- 1,606
Proceeds from exercise of stock
options .................................... 84 -- 261 -- -- 261
Issuance of common stock in
exchange for investment .................... 8 -- 86 -- -- 86
Net earnings ................................. -- -- -- 3,883 -- 3,883
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ................... 8,193 $ 8 $ 21,499 $ 4,069 $ -- $ 25,576
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-29-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------------
1994 1995 1996
-------- -------- --------
Cash Flows From Operating Activities:
Net earnings .................................................................. $ 5,034 $ 5,532 $ 3,883
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities:
Depreciation and amortization ............................................. 242 431 1,099
Provision for doubtful accounts ........................................... 147 58 135
Deferred income taxes ..................................................... -- 345 (469)
Non cash compensation expense ............................................. 304 304 --
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (1,299) (4,727) 33
Inventories ............................................................. (2,037) (5,129) (2,638)
Other current assets .................................................... (455) (384) 503
Other assets ............................................................ 44 (7) (184)
Income taxes ............................................................ (71) 526 97
Accounts payable and accrued expenses ................................... (343) 3,546 (2,993)
-------- -------- --------
Net cash provided by (used in) operating activities .................... 1,566 495 (534)
Cash Flows From Investing Activities:
Capital expenditures .......................................................... (579) (5,502) (1,471)
Acquisitions of licenses ...................................................... -- (600) (492)
-------- -------- --------
Net cash used in investing activities .................................. (579) (6,102) (1,963)
-------- -------- --------
Cash Flows From Financing Activities:
Net borrowings (repayments) under revolving line of credit .................... 1,068 (532) (1,533)
Borrowings from stockholders .................................................. -- 1,591 --
Proceeds from long-term debt .................................................. 4,250 5,000 3,422
Repayments of long-term debt .................................................. (606) (9,642) (396)
Proceeds from sale of common stock ............................................ -- 18,334 1,606
Proceeds from exercise of stock options ....................................... -- -- 261
Purchase and retirement of treasury stock ..................................... (2,000) (347) --
Collection of note receivable from sale of common stock ....................... -- 304 --
Distributions paid to stockholders ............................................ (3,393) (9,126) --
Capital contribution (Note 1(b)) .............................................. 50 -- --
-------- -------- --------
Net cash (used in) provided by financing activities .................... (631) 5,582 3,360
-------- -------- --------
Net Increase (Decrease) In Cash ................................................. 356 (25) 863
Cash, beginning of period ....................................................... 146 502 477
-------- -------- --------
Cash, end of period ............................................................. $ 502 $ 477 $ 1,340
======== ======== ========
Supplemental Cash Flow Information:
Cash paid for interest ........................................................ $ 395 $ 1,329 $ 650
Cash paid for income taxes .................................................... 187 29 2,681
======== ======== ========
Non-cash transactions:
Issuance of common stock in exchange for investment ........................... $ -- $ -- $ 86
Options granted pursuant to acquisition ....................................... 342 -- --
Accrued dividends ............................................................. 1,230 -- --
======== ======== ========
See accompanying notes to consolidated financial statements.
-30-
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 manufacturer of
television and satellite signal distribution equipment supplied to the private
cable television and broadcast industries. 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) Reorganization and Recapitalization
On December 11, 1995, the Company acquired Blonder Tongue International,
Inc. (BTI). BTI was an S Corporation formed in 1994 by the stockholders of the
Company. The acquisition was consummated by contribution of BTI's shares to the
Company. The acquisition was accounted for at historical cost similar to a
pooling of interests, due to the common control exercised over the entities by
related parties. The 1994 accompanying consolidated financial statements have
been restated. As a result of the acquisition of BTI, the S Corporation
elections for both BTI and the Company automatically terminated on December 11,
1995. See Note 12.
In September 1996, BTI closed its sales office located in Barcelona, Spain.
The closure did not have a material impact on the Company's operating results.
On October 3, 1995, the Board of Directors and stockholders approved the
following actions in connection with the Company's initial public offering,
which actions were implemented on December 11, 1995:
Authorized capital consisting of 25 million shares of $.001 par value common
stock and 5 million shares of $.001 par value preferred stock. The preferred
stock may be issued in one or more series with such rights, preferences and
limitations as the Board of Directors of the Company may determine.
Declared a 2,011 for 1 stock split for the common stock. The consolidated
financial statements reflect the impact of the stock split for all periods
presented.
(c) Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
(d) 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.
(e) Income Taxes
Prior to December 11, 1995, the Company was treated as an S Corporation
under provisions of the Internal Revenue Code. Under these provisions, all
earnings and losses of the Company were reported on the federal income tax
returns of the stockholders. Accordingly, no provisions had been made for
federal income taxes. In January, 1994, the Company elected to be taxed as a
small business corporation in the state of New Jersey. The consolidated
financial statements for those respective periods, reflect state income tax
provisions only.
-31-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
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.
(f) Intangible Assets
Intangible assets totaling $1,241 and $1,706 as of December 31, 1995 and
1996, respectively, consist of goodwill, prepaid licensing fees, acquired patent
rights and deferred offering costs, 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. Amortization
expense was $19, $52 and $303 for 1994, 1995 and 1996, respectively. The
deferred offering costs were charged against the proceeds of the initial public
offering.
(g) Long-Lived Assets
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), was adopted as of January 1, 1996. SFAS 121 standardized the
accounting practices for the recognition and measurement of impairment losses on
certain long-lived assets. The adoption of SFAS 121 was not material to the
results of operations or financial position.
(h) 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, 1994, 1995 and 1996.
(i) Research and Development
Research and development expenditures for the Company's projects are
expenses as incurred.
(j) Revenue Recognition
The Company records revenues when products are shipped. Customers do not
have a right to return products shipped.
(k) Earnings Per Share
Earnings per share are based on the weighted average number of common stock
and common stock equivalent shares outstanding during the year. Common stock
equivalent shares consist of the dilutive effect of unissued shares under
options computed using the treasury stock method.
(l) Pro Forma Presentations
The pro forma income tax provision has been calculated as if the Company
were taxable as a C Corporation under the Internal Revenue Code for all periods
presented.
(m) Pro Forma Earnings Per Share
Pro forma net earnings per share is based on the weighted average number of
common stock shares and common stock equivalent shares outstanding during each
period, as adjusted for the effects of the application of
-32-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 83 (53
shares for all periods). Pursuant to SAB No. 83, options granted within one year
of the initial public offering which have an exercise price less than the
initial public offering price are treated as outstanding for all periods
presented. Pro forma net earnings per share is computed using the treasury stock
method, under which the number of shares outstanding reflects an assumed use of
the proceeds from the assumed exercise of such options to repurchase shares of
the Company's common stock at the initial public offering price.
Supplemental pro forma net earnings per share was $.43 and $.58 at December
31, 1994 and 1995, respectively. Supplemental pro forma net earnings per share
is based on the weighted average number of shares of common stock and common
stock equivalents used in the calculation of pro forma earnings per share (6,475
and 6,054 at December 31, 1994 and 1995, respectively) plus the estimated number
of shares (621 and 592 at December 31, 1994 and 1995, respectively) that would
need to be sold by the Company in order to fund the cash distribution of $5,895
paid out of the net proceeds of the initial public offering.
(n) 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 65% of the Company's employees are covered by a three year
collective bargaining agreement, which expires in February, 1999.
The Company estimates that Headend products accounted for approximately 90%
of the Company's revenues in 1994 and 1995 and 84% of revenues in 1996. 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 methodology 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). 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.
(o) Effect of New Accounting Pronouncements
In October, 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." The Company adopted this pronouncement by making the required pro
forma note disclosures only. Therefore, the adoption of SFAS No. 123 did not
have an effect on the Company's results of operations or financial condition.
(p) Reclassifications
Certain prior year reclassifications have been made to conform to 1996
classifications.
-33-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 2 - Inventories
Inventories are summarized as follows:
December 31,
-------------------------
1995 1996
------- -------
Raw materials.............................. $ 7,293 $ 7,746
Work in process............................ 2,786 2,451
Finished goods............................. 3,311 5,831
------- -------
$13,390 $16,028
======= =======
Note 3 - Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31,
---------------------
1995 1996
------- -------
Land............................................... $ 1,000 $ 1,000
Building........................................... 3,361 3,361
Machinery and equipment............................ 2,307 3,457
Furniture and fixtures............................. 285 292
Office equipment................................... 330 596
Building improvements.............................. 341 389
------- -------
7,624 9,095
Less: Accumulated depreciation and amortization... (1,138) (1,934)
------- -------
$ 6,486 $ 7,161
======= =======
Note 4 - Debt
On May 24, 1996, the Company borrowed $2.8 million for a ten year term
secured by a mortgage against the Company's manufacturing and administrative
facility located in Old Bridge, New Jersey. The interest rate is fixed at 7.25%
for three years and may be negotiated to another fixed rate or remain variable
for the remaining seven years of the mortgage.
On September 26, 1996, the Company executed a new $15 million line of credit
with a bank on which funds may be borrowed at the bank's prime rate (8.25% at
December 31, 1996) or at LIBOR plus .95% (6.58% at December 31, 1996) for a
specified period of time at the election of the Company. As of December 31,
1996, the Company had drawn down $1,176 under the line of credit for working
capital needs. The line of credit is collateralized by a security interest in
all of the Company's assets. The agreement contains restrictions that require
the Company to maintain certain financial ratios. In addition, the Company
obtained a $10 million acquisition loan commitment which may be tendered to the
bank to finance acquisitions in accordance with certain terms. The line of
credit and the acquisition loan commitment expire on June 30, 1998.
The average amount outstanding on the line of credit during 1996 was $2,550
at a weighted average interest rate of 8.20%. The maximum outstanding under this
facility was $5,576 in 1996. The Company had $13.8
-34-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
million available under the line of credit at December 31, 1996. There was no
balance outstanding under the acquisition loan commitment.
The average amount outstanding on the line of credit during 1995 was $7,639
at a weighted average interest rate of 10%. The maximum amount outstanding under
this facility was $10,398 in 1995. The Company had $7.4 million available under
the line of credit at December 31, 1995.
Long-term debt consists of the following:
December 31,
-------------------------
1995 1996
-------- -------
Term loan with a bank bearing interest at prime rate less
2%, payable in quarterly installments through June, 1998...... $ 523 285
Term loan with a bank bearing interest at 7.25%, payable
in monthly installments....................................... -- 2,691
Term loans with stockholders bearing interest at prime, due
December 19, 1998(a).......................................... 1,591 1,591
Capital leases (Note 5)....................................... 31 604
-------- -------
2,145 5,171
Less: Current portion........................................ (221) (445)
-------- -------
$ 1,924 $ 4,726
======== =======
(a) $1,591 of the S Corporation distributions made after September 30, 1995 was
lent back to the Company by the principal stockholders on an unsecured basis for
a term of three years at an interest rate equal to the rate on the Company's
line of credit. These loan agreements with the stockholders provide for payments
of accrued interest on a monthly basis with the principal balance due in
December 1998.
The fair value of the debt approximates the recorded value based on the
borrowing rates currently available for loans with similar terms and maturities.
Annual maturities of long-term debt at December 31, 1996 are:
1997...................... $ 445
1998...................... 2,003
1999...................... 314
2000...................... 319
2001...................... 276
Thereafter................ 1,814
-------
$ 5,171
=======
-35-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 5 - Commitments and Contingencies
Leases
The Company leases certain factory and automotive equipment under
noncancellable operating leases expiring at various dates through June, 2001.
The Company also leased its facility and was generally obligated under the
facility leases to pay additional amounts based on real estate taxes, utilities,
insurance and common area maintenance charges. The Company leased its primary
manufacturing and administrative office facility from a partnership whose only
operations consist of leasing this facility to the Company. The Company had a
49% interest in the partnership and the remaining 51% interest in the
partnership was held by an unrelated third party. The Company accounted for its
interest in the partnership using the equity method. Lease payments to this
partnership were approximately $592 and $605 in 1994 and 1995, respectively.
In 1995, the Company entered into an agreement to purchase the remaining 51%
interest of the partnership and thereby acquired the manufacturing and
administrative office facility for $633 in cash plus the payment of two
mortgages in the amount of $3,728. The Company made these payments from the
proceeds of the offering and accounted for the purchase of the partnership
interest as an acquisition of the building since it owns the building outright
upon purchase of the remaining partnership interest.
Future minimum rental payments, required for all noncancellable leases are as
follows:
Capital Operating
------- ---------
1997............................................... $149 $194
1998............................................... 149 140
1999............................................... 139 95
2000............................................... 139 21
2001............................................... 90 --
---- ----
Total future minimum lease payments................ 666 $450
====
Less: amounts representing interest............... (62)
----
Present value of minimum lease payments............ $604
====
Property, plant and equipment included capitalized leases of $266, less
accumulated amortization of $94, at December 31, 1995, and $648, less
accumulated amortization of $32, at December 31, 1996.
Rent expense, net of sublease income was $607, $709 and $77 for the years
ended December 31, 1994, 1995 and 1996 respectively. Rent expense was $685, $725
and $79 for the years ended December 31, 1994, 1995 and 1996, respectively.
Litigation
On October 18, 1996, the Company was served with a complaint in a lawsuit
filed by Scientific-Atlanta, Inc., in the United States District Court for the
Northern District of Georgia alleging patent infringement by the Company's
VideoMaskTM interdiction product. The complaint requests an unspecified amount
of damages and injunctive relief. On November 13, 1996 a procedural default
(unrelated to the merits of the case) was entered against the Company due to the
late filing of the Company's answer. Motions have been made and briefed
regarding the setting aside of that entry and the Company is presently awaiting
the Court's ruling. The Company's outside patent counsel has advised the Company
that the equities of the case, public policy and multiple meritorious defenses
weigh in favor of setting the entry aside. Although the outcome of any
litigation cannot be predicted with certainty, the Company believes the
complaint is without merit and that the ultimate
-36-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
disposition of this matter will not have a material effect on the Company's
business. Accordingly, no provision for this matter has been recorded in the
financial statements.
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 employees' salary deferral. The Company's
contributions to this plan were $28, $46 and $54 for the years ended December
31, 1994, 1995 and 1996, 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 pension expense
for this plan includes the following components:
December 31,
-----------------------------
1994 1995 1996
---- ---- ----
Service cost ............................... $ 36 $ 54 $ 78
Interest cost .............................. 39 42 49
Actual return on plan assets ............... 7 (78) (63)
Net amortization and deferral .............. (47) 51 29
---- ---- ----
Net pension expense ........................ $ 35 $ 69 $ 93
==== ==== ====
The funded status of the plan and the amounts recorded in the Company's
consolidated balance sheets are as follows:
December 31,
-------------
1995 1996
----- -----
Actuarial present value of benefit obligations:
Vested benefit obligation ........................ $ 518 $ 553
===== =====
Accumulated benefit obligation ................... $ 556 $ 644
===== =====
Projected benefit obligation ........................ 603 716
Plan assets at fair value ........................... 469 681
----- -----
Projected benefit obligation in excess of plan assets (134) (35)
Unrecognized net gain ............................... 174 201
Unrecognized net transition liability ............... (109) (99)
----- -----
(Accrued) prepaid pension costs ..................... $ (69) $ 67
===== =====
Key economic assumptions used in these determinations were:
December 31,
-------------
1995 1996
----- -----
Discount rate....................................... 7.5% 7.5%
Expected long-term rate of return................... 7.0% 7.0%
-37-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 7 - Related Party Transactions
On July 22, 1993, the Company issued a $912 note to a stockholder, who is
also the Company's President, Chief Executive Officer and Chairman of the Board,
pertaining to the purchase of 2,040 shares of common stock. Principal payments
on this note are due annually through July, 1996 with interest at 3.62%. Upon
completion of the offering, the final payment of this note was prepaid.
In addition, the Company had a special bonus agreement whereby the
stockholder was paid net after-tax bonuses of $291, $281 and $272 over a three
year period due annually, through July, 1996.
On January 1, 1995, the Company entered in a consulting and non-competition
agreement for a period of five years with a director, who is also the largest
stockholder. During this period, the director shall provide consulting services
on various operational and financial issues and shall be paid at an annual rate
of $130 not to exceed $150. The director also agrees 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.
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.
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 65%
and 61% of the Company's outstanding trade accounts receivable at December 31,
1995 and 1996, respectively. These customers are distributors of
telecommunications and private cable television components, and providers of
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, 1996, the Company's largest customer
accounted for approximately 17% of the Company's sales. At December 31, 1996,
this customer accounted for approximately 20% of the Company's outstanding trade
accounts receivable. Management believes these amounts to be collectible. A
different customer accounted for approximately 18% of the Company's sales in
1995 while a third customer accounted for approximately 12% of the Company's
sales in 1994.
Note 9 - Stockholders' Equity
In December 1995, the Company sold in a public offering 2,200 shares of
Common Stock at a price of $9.50 per share which generated net proceeds of
approximately $18,334. The proceeds were used to repay bank debt outstanding,
purchase the manufacturing facility, make certain S Corporation distributions
and for working capital.
In January 1996, an additional 182 shares of Common Stock were sold at a
price of $9.50 per share pursuant to the exercise of the underwriters'
over-allotment option which generated net proceeds of approximately $1,606. In
addition, the Company received approximately $261 from the exercise of stock
options throughout the year. These proceeds were used for working capital.
-38-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 10 - Acquisition
In 1993, the Company acquired the assets of MAR Associates, a company engaged
in research, development, manufacturing, and sales of electronic components used
in low power television transmission and microwave-link signal transmission. The
purchase price of $360 was paid in cash and the assumption of certain
liabilities. Additionally, the Company agreed to grant the former owners options
to purchase 132 shares of the Company's stock, for a nominal amount, contingent
upon the acquired company's meeting certain performance targets. In October,
1994, the acquired company met the performance requirements, and the Company
granted the stock options and recorded goodwill of $342 as additional
consideration. The options were valued at the estimated fair market value at
date of grant. In March 1995, the former owners, notified the Company of their
intention to exercise the options by tendering the cash required under the
purchase agreement. However, the former stockholders did not execute the
stockholders agreement required by the purchase agreement until October 10,
1995. Upon execution of the agreement, the Company issued 132 shares of common
stock and simultaneously therewith repurchased and retired 66 shares of the
common stock for an aggregate purchase price of $347 ($5.31 per share).
Note 11 - Stock Option Plan
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.
Also, in 1994, the Company granted non-qualified options for 6 shares to an
employee of an affiliated company ("BTI"). These options expired during 1996 as
a result of the termination of the employee.
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
the granting of Incentive Stock Options and restricted stock awards 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 250. The options granted under the
plan expire 10 years from the date of grant and vest one-third each year
commencing on the first anniversary of the date of grant. Options granted to
individuals who own more than 10% of the voting stock of the Company are granted
at 110% of the fair market value at the date of grant and expire 5 years from
the date of grant. No restricted stock awards have been issued as of December
31, 1996. In February 1997, the Board of Directors approved an increase in the
number of shares available for issuance under the plan to 500. This proposed
increase will be subject to approval of the Company's stockholders at the
Company's Annual Meeting of Stockholders in April 1997.
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 .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 will be 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.
-39-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
In 1996, the Board of Directors granted a non-qualified option for 10 shares
to an individual, who is not an employee of the Company. The option is
exercisable at $10.25 and expires in 2006.
Weighted- Weighted- Weighted-
Average Average Average
1994 Exercise 1995 Exercise 1996 Exercise
Plan (#) Price ($) Plan (#) Price ($) Plan (#) Price ($)
-------------------------------------------------------------------------------------------
Shares under option:
Outstanding at
January 1, 1994
Granted 170,607 2.57 -- --
Exercised
Canceled
Outstanding at
December 31, 1994 170,607 2.57 -- --
Granted 98,169 4.33 -- --
Exercised
Canceled
Outstanding at
December 31, 1995 268,776 3.21 - -
Granted 34,000 10.38 226,500 9.72 1,500 8.50
Exercised (84,156) 3.10 - -
Canceled (6,033) 4.33 (1,500) 9.63 -
Outstanding at
December 31, 1996 212,587 4.36 225,000 9.72 1,500 8.50
Options exercisable at
December 31, 1996 113,489 2.77 -- -- -- --
Weighted-average fair
value of options granted
during 1995 $1.37 -- --
Weighted-average fair
value of options granted
during 1996 $6.36 $6.27 $5.53
-40-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------------------
Number of Weighted-
Options Average Weighted- Number
Range of Exercise Outstanding at Remaining Average Exercise Exercisable at Weighted-Average
Prices ($) 12/31/96 Contractual Life Price ($) 12/31/96 Exercise Price ($)
- ----------------------------------------------------------------------------------------------------------------------
1994 Plan:
2.57 112,107 8.7 years 2.57 100,301 2.57
4.33 66,480 8.4 4.33 13,188 4.33
9.38 to 10.59 34,000 5.6 10.38 - -
------- -------
2.57 to 10.59 212,587 8.1 4.36 113,489 2.77
======= =======
1995 Plan:
9.38 to 10.59 225,000 9.5 9.72 -- --
=======
1996 Plan:
8.50 1,500 6.0 8.50 -- --
=====
The Corporation has adopted the disclosures only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." 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:
December 31,
--------------------
1995(a) 1996
------- ----
Net earnings - as reported $3,850 $3,883
Net earnings - pro forma 3,827 3,686
Net earnings per share - as reported 0.64 0.47
Net earnings per share - pro forma 0.63 0.44
(a) 1995 net earnings and net earnings per share are presented on a pro forma
basis. See Note 1.
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: expected volatility of 65%, risk-free interest rate
of 6.45%; expected lives of 6 years; and no dividend yield.
Note 12 - Income Taxes
Prior to December 11, 1995, with the consent of its stockholders, the Company
elected to be treated as an S Corporation under the provisions of the Internal
Revenue Code. Under these provisions, all earnings and losses of the Company
were reported on the federal income tax returns of the stockholders.
Accordingly, no provision for federal income taxes had been made. In January
1994, the Company elected to be taxed as a small business corporation in the
State of New Jersey. The consolidated financial statements for those respective
periods, reflect state income tax provisions only.
The provision for income taxes was $92 for the year ended December 31, 1994.
The provision for income taxes for the period January 1 through December 10,
1995 was $177 as the Company was still treated as an S Corporation. On December
11, 1995, the Company's S election was terminated and, accordingly, the Company
-41-
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
was subject to Federal income taxes. Upon termination of the S election, the
Company recorded a $587 charge related to net deferred tax liabilities. The pro
forma income taxes represent the taxes that would have been reported as Federal,
State and local income taxes had the Company accounted for its income taxes
under FAS 109 as a C Corporation. The effective rate utilized for all periods
presented was 40%.
The following summarizes the provision for income taxes:
Year Ended December 31,
-----------------------------------------
(pro forma) (actual)
1994 1995 1995 1996
------- ------- ------- -------
Current:
Federal ....................... $ 1,574 $ 2,082 $ 279 $ 2,372
State and local ............... 464 613 260 698
------- ------- ------- -------
2,038 2,695 539 3,070
Deferred ......................... 12 (129) 345 (469)
------- ------- ------- -------
Provision for income taxes ....... $ 2,050 $ 2,566 $ 884 $ 2,601
======= ======= ======= =======
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,
-------------------------------------
(pro forma) (actual)
1994 1995 1995 1996
------- ------- ------- -------
Provision for Federal income taxes at the statutory rate . $ 1,743 $ 2,181 $ 2,181 $ 2,205
State and local income taxes, net of Federal benefit ..... 308 385 191 391
S Corporation earnings not subject to Federal income taxes -- -- (2,075) --
Recording of net deferred taxes for conversion to C
Corporation .............................................. -- -- 587 --
Research and development credits ......................... (26) (26) (2) (28)
Other, net ............................................... 25 26 2 33
------- ------- ------- -------
Provision for income taxes ............................... $ 2,050 $ 2,566 $ 884 $ 2,601
======= ======= ======= =======
Upon the completion of the offering, the Company declared a distribution
equal to the 1995 taxable S Corporation income which was paid from the proceeds
of the offering. At the date of the termination, the Company had approximately
$1,760 of previously untaxed income as a result of change in tax accounting
methods. The Company recorded a tax liability for the taxes due (which is
payable over 6 years) resulting from this change. The estimated tax liability
was approximately $704 (using an effective rate of 40%).
-42-
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,
-------------------
1995 1996
----- -----
Deferred tax assets:
Allowance for doubtful accounts ................. $ 82 $ 112
Inventory ....................................... 262 384
Accrued Vacation ................................ -- 99
Other ........................................... 87 125
----- -----
Total deferred tax assets ..................... 431 720
----- -----
Deferred tax liabilities:
Tax accounting method ........................... (476) (247)
Depreciation .................................... (300) (349)
----- -----
Total deferred tax liabilities ................ (776) (596)
----- -----
$(345) $ 124
===== =====
Note 13 - Export Sales
The Company exports its products to countries in North and South America,
Europe, and Asia. The Company's export sales were approximately 11% in 1994, 9%
in 1995, and 5% in 1996. In 1994, the Company's export sales were concentrated
to customers in Asia and North and South America and in 1995 and 1996 to
customers in North and South America.
Note 14 - Quarterly financial information - unaudited
1995 Quarters 1996 Quarters
---------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
----------------------------------------------------------------------------
Net sales $11,864 $15,394 $11,328 $13,396 $11,572 $11,693 $13,154 $12,443
Gross profit 4,542 5,860 3,953 5,099 3,957 4,540 5,020 4,732
Pro forma net earnings 980 1,478 551 841
Pro forma net earnings per share 0.16 0.25 0.09 0.14
Net earnings 590 807 1,253 1,233
Net earnings per share 0.07 0.10 0.15 0.15
The 1995 quarterly results are presented on a pro forma basis as if the Company
were a C corporation under the Internal Revenue Code for the entire period. See
Note 1.
-43-
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
The audits referred to in our report dated March 3, 1997 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
March 3, 1997
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BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1996, 1995 and 1994
(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, 1996: $205 $135 - ($60) $280
Year ended December 31, 1995: $147 $75 - ($17) $205
Year ended December 31, 1994: $95 $81 - ($29) $147
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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 25, 1997 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 March 25, 1997
- --------------------------- Chief Executive Officer
James A. Luksch (Principal Executive Officer)
/s/ PETER PUGIELLI Senior Vice President, March 25, 1997
- --------------------------- Chief Financial Officer,
Peter Pugielli Treasurer and Assistant
Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ ROBERT J. PALLE, JR. Director, Executive Vice March 25, 1997
- --------------------------- President and Chief Operating
Robert J. Palle, Jr. Officer
/s/ JAMES H. WILLIAMS Director March 25, 1997
- ---------------------------
James H. Williams
/s/ JAMES F. WILLIAMS Director March 25, 1997
- ---------------------------
James F. Williams
/s/ ROBERT B. MAYER Director March 25, 1997
- ---------------------------
Robert B. Mayer
/s/ JOHN E. DWIGHT Director March 25, 1997
- ---------------------------
John E. Dwight
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