SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002,
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1611421
- ---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
ONE JAKE BROWN ROAD, OLD BRIDGE, NEW JERSEY 08857
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 679-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ------
Number of shares of common stock, par value $.001, outstanding as of November
14, 2002: 7,584,526
The Exhibit Index appears on page 17.
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September December
30, 2002 31, 2001
-------- --------
(unaudited)
ASSETS (Note 4)
Current assets:
Cash ............................................................. $ 68 $ 942
Accounts receivable, net of allowance for doubtful
accounts of $1,991 and $1,833, respectively ...................... 6,744 8,564
Inventories, net (Note 3) ........................................ 27,741 30,216
Notes receivable (Note5) ......................................... 459 --
Other current assets ............................................. 642 932
Deferred income taxes ............................................ 1,964 1,746
-------- --------
Total current assets ......................................... 37,618 42,400
Notes receivable (Note 5) ............................................. 988 --
Property, plant and equipment, net .................................... 6,402 7,137
Patents, net .......................................................... 3,134 3,454
Rights-of-entry (Note 6) .............................................. 1,880 --
Goodwill, net ......................................................... -- 10,760
Other assets .......................................................... 816 585
Deferred income taxes ................................................. 4,430 50
-------- --------
$ 55,268 $ 64,386
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4) ....................... $ 2,635 $ 2,917
Accounts payable ................................................. 2,543 6,672
Accrued compensation ............................................. 788 867
Accrued benefit liability ........................................ 270 270
Other accrued expenses ........................................... 1,978 218
Income taxes ..................................................... 1,254 202
-------- --------
Total current liabilities .................................... 9,468 11,146
-------- --------
Long-term debt (Note 4) ............................................... 11,993 13,278
Commitments and contingencies ......................................... -- --
Minority interest ..................................................... 3 --
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000 shares;
no shares outstanding ............................................ -- --
Common stock, $.001 par value; authorized 25,000 shares,
8,444 shares issued .............................................. 8 8
Paid-in capital .................................................. 24,145 24,143
Retained earnings ................................................ 16,314 22,448
Accumulated other comprehensive loss ............................. (351) (351)
Treasury stock at cost, 846 shares ............................... (6,312) (6,286)
-------- --------
Total stockholders' equity ................................... 33,804 39,962
-------- --------
$ 55,268 $ 64,386
======== ========
See accompanying notes to consolidated financial statements.
2
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales .................................. $ 13,171 $ 16,064 $ 35,318 $ 39,561
Cost of goods sold ......................... 9,394 10,813 25,174 26,087
-------- -------- -------- --------
Gross profit ............................ 3,777 5,251 10,144 13,474
-------- -------- -------- --------
Operating expenses:
Selling ................................. 951 1,209 3,150 3,883
General and administrative .............. 1,108 1,514 3,476 4,720
Research and development ................ 500 530 1,466 1,662
-------- -------- -------- --------
2,559 3,253 8,092 10,265
-------- -------- -------- --------
Earnings from operations ................... 1,218 1,998 2,052 3,209
-------- -------- -------- --------
Interest expense ........................ (277) (391) (763) (1,133)
-------- -------- -------- --------
Earnings before minority interest and income
taxes ...................................... 941 1,607 1,289 2,076
Minority interest .......................... 3 -- 3 --
Provision for income taxes ................. 402 573 534 750
-------- -------- -------- --------
Earnings before cumulative effect .......... 536 1,034 752 1,326
Cumulative effect of change in accounting
principle, net of tax (Note 2) .......... -- -- (6,886) --
-------- -------- -------- --------
Net (loss) earnings ........................ $ 536 $ 1,034 ($ 6,134) $ 1,326
======== ======== ======== ========
Basic earnings per share before
cumulative effect ....................... $ 0.07 $ 0.14 $ 0.10 $ 0.17
Cumulative effect of change in accounting
principle, net of tax ................... -- -- (0.90) --
-------- -------- -------- --------
Basic earnings (loss) per share ............ $ 0.07 $ 0.14 $ (0.80) $ 0.17
======== ======== ======== ========
Basic weighted average shares outstanding .. 7,608 7,613 7,611 7,613
======== ======== ======== ========
Diluted earnings per share before
cumulative effect ....................... $ 0.07 $ 0.14 $ 0.10 $ 0.17
Cumulative effect of change in accounting
principle, net of tax ................... -- -- (0.90) --
-------- -------- -------- --------
Diluted earnings (loss) per share .......... $ 0.07 $ 0.14 $ (0.80) $ 0.17
======== ======== ======== ========
Diluted weighted average shares
outstanding .............................. 7,613 7,650 7,611 7,633
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
---------------------
2002 2001
-------- --------
Cash Flows From Operating Activities:
Net earnings (loss) ................................. $ (6,134) $ 1,326
Adjustments to reconcile net earnings (loss) to cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle 6,886 --
Depreciation ...................................... 954 976
Amortization ...................................... 320 1,127
Provision for doubtful accounts ................... 158 320
Deferred income taxes ............................. (93) (12)
Minority interest ................................. 3 --
Changes in operating assets and liabilities:
Accounts receivable ............................... 1,662 (2,769)
Inventories ....................................... 1,028 (3,025)
Other current assets .............................. 290 --
Other assets ...................................... (231) 1,700
Income taxes ...................................... 421 135
Accounts payable and accrued expenses ............. (4,078) (2,707)
-------- --------
Net cash provided by operating activities ....... 1,186 2,485
-------- --------
Cash Flows From Investing Activities:
Capital expenditures ................................ (219) (585)
Acquisition of rights-of-entry ...................... (250) --
-------- --------
Net cash used in investing activities ............. (469) (585)
-------- --------
Cash Flows From Financing Activities:
Net borrowings under revolving line of credit ....... -- 2,081
Borrowings of long-term debt ........................ 29,204 --
Repayments of long-term debt ........................ (30,771) (3,267)
Proceeds from exercise of stock options ............. 2 --
Acquisition of treasury stock ....................... (26) --
-------- --------
Net cash used in financing activities ............. (1,591) (1,186)
-------- --------
Net increase (decrease) in cash ....................... (874) 714
Cash, beginning of period ............................. 942 363
-------- --------
Cash, end of period ................................... $ 68 $ 1,077
======== ========
Supplemental Cash Flow Information:
Cash paid for interest .............................. $ 746 $ 1,194
Cash paid for income taxes .......................... 206 628
Non-Cash Investing and Financing Activities:
Inventory sold for notes receivable ................. $ 1,447 --
See accompanying notes to consolidated financial statements.
4
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1 - COMPANY AND BASIS OF PRESENTATION
Blonder Tongue Laboratories, Inc. (the "COMPANY") is a designer,
manufacturer and supplier of electronics and systems equipment for the cable
television industry, primarily throughout the United States. The consolidated
financial statements include the accounts of Blonder Tongue Laboratories, Inc.
and subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
The results for the third quarter and nine months of 2002 are not
necessarily indicative of the results to be expected for the full fiscal year
and have not been audited. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of normal recurring accruals, necessary for a fair statement of the results
of operations for the period presented and the consolidated balance sheet at
September 30, 2002. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. These financial statements should be read in conjunction with
the financial statements and notes thereto that were included in the Company's
latest annual report on Form 10-K for the year ended December 31, 2001.
NOTE 2 - EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." FAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. FAS 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets. FAS
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. FAS 142 was adopted
by the Company on January 1, 2002. The adoption of this pronouncement resulted
in the Company recording a $6,886 one-time, non-cash charge, net of tax, to
reduce the carrying value of its goodwill. Such charge is non-operational in
nature and is reflected as a cumulative effect of a change in accounting
principle. The Company's previous business combinations were accounted for using
the purchase method.
If FAS 142 had been in effect in 2001, the Company's nine-month earnings
would have been improved because of reduced amortization, as described below:
Basic Net Diluted Net
Net Earnings Earnings Per Share Earnings Per Share
------------ ------------------ ------------------
Reported Net Earnings............ $1,326 $0.17 $0.17
Add Amortization, Net of Tax..... 466 0.06 0.06
------ ----- -----
Adjusted Net Earnings............ $1,792 $0.23 $0.23
====== ===== =====
The Company continues to amortize its patents over their estimated useful lives
with no significant residual value. Amortization expense for intangible assets
excluding goodwill was $320 and $399 for the nine-month period ending June 30,
2002 and 2001, respectively. Intangibles amortization is projected to be
approximately $400 to $500 per year for the next five years.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The new guidance resolves significant
implementation issues related to FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." FAS 144
supersedes FAS 121, but it retains its fundamental provisions. It also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidate a subsidiary for which control is likely
5
to be temporary. FAS 144 retains the requirement of FAS 121 to recognize an
impairment loss only if the carrying amount of a long-lived asset within the
scope of FAS 144 is not recoverable from its undiscounted cash flows and exceeds
its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The provisions of FAS 144 generally are to be applied prospectively.
The adoption of FAS 144 did not have a material impact on the Company's
financial position or results of operations.
In July 2002, the FASB issued FAS No. 146, "Accounting for Restructuring
Costs." FAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts, and relocating plant facilities or personnel. Under FAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. FAS
146 will require a company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. FAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under FAS
146, a company may not restate its previously issued financial statements and
FAS 146 grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.
NOTE 3 - INVENTORIES
Inventories net of reserves are summarized as follows:
September Dec. 31,
30, 2002 2001
------- -------
Raw Materials ................ $11,795 $13,071
Work in process .............. 1,089 2,797
Finished Goods ............... 14,857 14,348
------- -------
27,741 $30,216
======= =======
NOTE 4 - DEBT
On March 20, 2002 the Company entered into a credit agreement with Commerce
Bank, N.A. for a $19,500 credit facility, comprised of (i) a $7,000 revolving
line of credit under which funds may be borrowed at LIBOR, plus a margin ranging
from 1.75% to 2.50%, in each case depending on the calculation of certain
financial covenants, with a floor of 5% through March 19, 2003 (5% at September
30, 2002), (ii) a $9,000 term loan which bears interest at a rate of 6.75%
through September 30, 2002, and thereafter at a fixed rate ranging from 6.50% to
7.25% to reset quarterly depending on the calculation of certain financial
covenants (6.75% at September 30, 2002) and (iii) a $3,500 mortgage loan bearing
interest at 7.5%. Borrowings under the revolving line of credit are limited to
certain percentages of eligible accounts receivable and inventory, as defined in
the credit agreement. The credit facility is collateralized by a security
interest in all of the Company's assets. The agreement also contains
restrictions that require the Company to maintain certain financial ratios as
well as restrictions on the payment of cash dividends. The maturity date of the
line of credit with Commerce Bank is March 20, 2004. The term loan requires
equal monthly principal payments of $187 and matures on April 1, 2006. The
mortgage loan requires equal monthly principal payments of $19 and matures on
April 1, 2017. The mortgage loan is callable after five years at the lender's
option.
Upon execution of the credit agreement with Commerce Bank, $14,954 was
advanced to the Company, of which $14,827 was used to pay all unpaid principal
and accrued interest under the Company's prior line of credit and term loans
with First Union National Bank ("FIRST UNION").
At September 30, 2002, there was $2,500, $8,063 and $3,403 outstanding
under the revolving line of credit, term loan and mortgage loan, respectively.
6
Prior to March 20, 2002, the Company had a $5,500 revolving line of credit
with First Union on which funds could be borrowed at either the bank's base rate
plus a margin ranging from 0% to .625%, or LIBOR, plus a margin ranging from
1.50% to 2.625%, in each case depending upon the calculation of certain
financial covenants. The agreement contained restrictions that required the
Company to maintain certain financial ratios as well as restrictions on the
payment of dividends. The Company also had, prior to March 20, 2002, two
outstanding term loans with First Union, which accrued interest at a variable
interest rate.
NOTE 5- NOTES RECEIVABLE
At the end of the third quarter 2002, the Company sold inventory at a cost
of approximately $1,447 to a private cable operator for approximately $1,929 in
exchange for which the Company received notes receivable in the principal amount
of approximately $1,929. The notes are payable by the customer in 48 monthly
principal and interest (at 11.5%) installments of approximately $51 commencing
January 1, 2003. The customer's payment obligations under the notes are
collateralized by purchase money liens on the inventory sold and blanket second
liens on all other assets of the customer. The Company has recorded the notes
receivable at the inventory cost and will not recognize any revenue or gross
profit on the transaction until a substantial amount of the cost has been
recovered.
NOTE 6 - ACQUISITION
During June, 2002, the Company formed a venture with Priority Systems, LLC
and Paradigm Capital Investments, LLC for the purpose of acquiring the
rights-of-entry for certain multiple dwelling unit cable television systems (the
"SYSTEMS") owned by affiliates of Verizon Communications, Inc. The venture
entity, Priority Systems Group, LLC ("PSG"), acquired the Systems, which are
comprised of approximately 3,270 existing MDU cable television subscribers and
approximately 7,341 passings. PSG paid approximately $1,880 for the Systems,
subject to adjustment, which constitutes a purchase price of $.575 per
subscriber. The final closing date for the transaction was on October 1, 2002.
The Systems are expected to be cashflow positive beginning in the first year. It
is planned that the Systems will be upgraded with approximately $1,300 of
interdiction and other products of the Company over the course of operation.
In consideration for its majority interest in PSG, the Company advanced to
PSG $250 which was paid to the sellers as a down payment against the final
purchase price for the Systems. The Company also agreed to guaranty payment of
the aggregate purchase price for the Systems by PSG. The approximately $1,630
balance of the purchase price must be paid by PSG on or before November 30, 2002
pursuant to the terms of certain promissory notes (the "SELLER NOTES") executed
by PSG in favor of the sellers.
The Company is assisting PSG in obtaining long term financing to
replace the Seller Notes and believes PSG will eventually be able to obtain such
replacement financing, although not before the maturity date of the Seller
Notes. The Company anticipates that until such time as alternative long-term
financing is obtained, that it will be able to lend PSG sufficient funds to
satisfy the Seller Notes through a combination of cashflow from operations,
financing from its existing lender and/or financing from other lenders. The
Company's existing lenders have agreed to allow the Company to lend PSG such
funds.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly 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
7
business include, but are not limited to, those matters discussed herein in the
section entitled Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. The words "believe", "expect",
"anticipate", "project" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including without limitation, the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 (See Item 10 - Business; Item
3 - Legal Proceedings; and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations).
GENERAL
During June, 2002, the Company formed a venture with Priority Systems, LLC
and Paradigm Capital Investments, LLC for the purpose of acquiring the
rights-of-entry for certain multiple dwelling unit cable television systems (the
"SYSTEMS") owned by affiliates of Verizon Communications, Inc. The venture
entity, Priority Systems Group, LLC ("PSG"), acquired the Systems, which are
comprised of approximately 3,270 existing MDU cable television subscribers and
approximately 7,341 passings. PSG paid approximately $1,880,000 for the Systems,
subject to adjustment, which constitutes a purchase price of $575 per
subscriber. The final closing date for the transaction was on October 1, 2002.
The Systems are expected to be cashflow positive beginning in the first year. It
is planned that the Systems will be upgraded with approximately $1,300,000 of
interdiction and other products of the Company over the course of operation.
In consideration for its majority interest in PSG, the Company advanced to
PSG $250,000, which was paid to the sellers as a down payment against the final
purchase price for the Systems. The Company also agreed to guaranty payment of
the aggregate purchase price for the Systems by PSG. The approximately
$1,630,000 balance of the purchase price must be paid by PSG on or before
November 30, 2002 pursuant to the terms of certain promissory notes (the "SELLER
NOTES") executed by PSG in favor of the sellers.
The Company is assisting PSG in obtaining long term financing to replace
the Seller Notes and believes PSG will eventually be able to obtain such
replacement financing, although not before the maturity date of the Seller
Notes. The Company anticipates that until such time as alternative long-term
financing is obtained, it will be able to lend PSG sufficient funds to satisfy
the Seller Notes through a combination of cash flow from operations, financing
from its existing lender and/or financing from other lenders. The Company's
existing lenders have agreed to allow the Company to lend PSG such funds.
The Company believes that similar opportunities currently exist to acquire
additional rights-of-entry for multiple dwelling unit cable television systems
at historically low prices. The Company also believes that the model it devised
for acquiring and operating the Systems will be successful and can be replicated
for other transactions with the same or new venture partners. Accordingly, the
Company is currently seeking and assessing various opportunities to acquire
additional rights-of-entry via venture arrangements with third parties that
would market and operate the systems. As of date hereof, however, the Company
does not have any binding commitments or agreements for any such acquisitions.
Moreover, even if attractive opportunities arise, the Company may need financing
to acquire the rights-of-entry for such cable systems. Given that financing may
not be available on acceptable terms or at all, the Company may be unable to
pursue these opportunities.
WSNet, a provider of digital programming services to the private cable and
small franchise cable industries, recently filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code. This bankruptcy may result in
certain cable operators that were considering deployment of digital programming,
deferring such deployment and/or shifting their focus to expansion of their
analog programming. It is possible that these events could result in a decrease
in the Company's sales of digital products, but this decrease could be offset by
increased sales of the Company's analog products. Given that this bankruptcy
recently occurred, the long-term effects of this event on the Company's
financial condition, results of operations and cash flows cannot be reasonably
determined at this time.
8
Third three months of 2002 Compared with third three months of 2001
Net Sales. Net sales decreased $2,893,000, or 18.0%, to $13,171,000 in the
third three months of 2002 from $16,064,000 in the third three months of 2001.
The decrease in sales is primarily attributed to a decrease in capital spending
by cable system operators. Net sales included approximately $770,000 of
interdiction equipment for the third three months of 2002 compared to
approximately $1,621,000 for the third three months of 2001.
Cost of Goods Sold. Cost of goods sold decreased to $9,394,000 for the
third three months of 2002 from $10,813,000 for the third three months of 2001
and increased as a percentage of sales to 71.3% from 67.3%. The increase as a
percentage of sales was caused primarily by a higher proportion of sales during
the period being comprised of lower margin products, including the Motorola QAM
decoder which was introduced in the fourth quarter of 2001.
Selling Expenses. Selling expenses decreased to $951,000 for the third
three months of 2002 from $1,209,000 in the third three months of 2001 and
decreased as a percentage of sales to 7.2% for the third three months of 2002
from 7.5% for the third three months of 2001. The $258,000 decrease was
primarily due to a decrease in wages and fringe benefits related to a reduction
in headcount of $119,000 along with a decrease in advertising of $143,000
achieved through implementation of expense control programs.
General and Administrative Expenses. General and administrative expenses
decreased to $1,108,000 for the third three months of 2002 from $1,514,000 for
the third three months of 2001 and decreased as a percentage of sales to 8.4%
for the third three months of 2002 from 9.4% for the third three months of 2001.
The $406,000 decrease can be primarily attributed to a reduction in amortization
expense due to the adoption of FAS 142 which required the Company to discontinue
amortizing goodwill.
Research and Development Expenses. Research and development expenses
decreased to $500,000 in the third three months of 2002 from $530,000 in the
third three months of 2001, primarily due to a decrease in licensing fees of
$17,000 and wages and fringe benefits of $10,000 related to reduced headcount.
Operating Income. Operating income decreased 39.0% to $1,218,000 for the
third three months of 2002 from $1,998,000 for the third three months of 2001.
Operating income as a percentage of sales decreased to 9.3% in the third three
months of 2002 from 12.4% in the third three months of 2001.
Interest Expense. Interest expense decreased to $277,000 in the third three
months of 2002 from $391,000 in the third three months of 2001. The decrease is
the result of lower average borrowings and lower average interest rates.
Income Taxes. The provision for income taxes for the third three months of
2002 decreased to $402,000 from $573,000 for the third three months of 2001 as a
result of a decrease in taxable income offset by an increase in the effective
rate for state taxes.
First nine months of 2002 Compared with first nine months of 2001
Net Sales. Net sales decreased $4,243,000, or 10.7%, to $35,318,000 in the
first nine months of 2002 from $39,561,000 in the first nine months of 2001. The
decrease is attributed to a reduction in interdiction sales, offset by sales of
the Motorola QAM decoder, which was introduced in the fourth quarter of 2001.
Net sales included approximately $2,650,000 of interdiction equipment for the
first nine months of 2002 compared to approximately $6,930,000 for the first
nine months of 2001.
Cost of Goods Sold. Cost of goods sold decreased to $25,174,000 for the
first nine months of 2002 from $26,087,000 for the first nine months of 2001 and
increased as a percentage of sales to 71.3% from 65.9%. The increase as a
percentage of sales was caused primarily by a higher portion of sales during the
period being comprised of lower margin products, including the Motorola QAM
decoder, which was introduced in the fourth quarter of 2001.
9
Selling Expenses. Selling expenses decreased to $3,150,000 for the first
nine months of 2002 from $3,883,000 in the first nine months of 2001 and
decreased as a percentage of sales to 8.9% for the first nine months of 2002
from 9.8% for the first nine months of 2001. This $733,000 decrease is primarily
attributable to a decrease in wages, fringe benefits, and commissions of
$256,000 due to a reduction in headcount, along with a reduction in
telecommunications of $68,000, advertising of $242,000 and travel expenses of
$130,000 achieved through implementation of expense control programs.
General and Administrative Expenses. General and administrative expenses
decreased to $3,476,000 for the first nine months of 2002 from $4,720,000 for
the first nine months of 2001 and decreased as a percentage of sales to 9.8% for
the first nine months of 2002 from 11.9% for the first nine months of 2001. The
$1,244,000 decrease can be primarily attributed to a $728,000 reduction in
amortization expense due to the adoption of FAS 142, which required the Company
to discontinue amortizing goodwill, as well as a reduction in bad debts of
$90,000, maintenance expenses of $30,000 and professional fees of $150,000.
Research and Development Expenses. Research and development expenses
decreased to $1,466,000 in the first nine months of 2002 from $1,662,000 in the
first nine months of 2001 primarily due to a decrease in consulting expenses of
$67,000, licensing fees of $45,000 and departmental supplies of $29,000.
Operating Income. Operating income decreased 36.1% to $2,052,000 for the
first nine months of 2002 from $3,209,000 for the first nine months of 2001.
Interest Expense. Interest expense decreased to $763,000 in the first nine
months of 2002 from $1,133,000 in the first nine months of 2001. The decrease is
the result of lower average borrowing and lower average interest rates.
Income Taxes. The provision for income taxes for the first nine months of
2002 decreased to $534,000 from $750,000 for the first nine months of 2001 as a
result of a decrease in taxable income offset by an increase in the effective
tax rate for state taxes.
Cumulative Effect. During the first nine months of 2002, the Company
implemented FAS 142, which resulted in the write off of $10,760,000 of the net
book value of goodwill, offset by the future tax benefit thereof in the amount
of $3,874,000. The net cumulative effect of this change in accounting principles
was a one-time non-recurring $6,886,000 charge against earnings in the first
three months of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities for the first nine
months of 2002 was $1,186,000 primarily due to a decrease in accounts receivable
and inventory offset by a decrease in accounts payable and accrued expenses.
Cash used in investing activities was $469,000 for the first nine months of
2002, which was attributable to capital expenditures for new equipment and an
investment in PSG. The Company anticipates additional capital expenditures
during calendar year 2002 aggregating approximately $100,000, which will be used
for the purchase of automated assembly and test equipment.
Cash used in financing activities was $1,591,000 for the first nine months
of 2002 primarily comprised of $29,204,000 of borrowings offset by $30,771,000
of repayments of long-term debt.
On March 20, 2002 the Company entered into a credit agreement with Commerce
Bank, N.A. for a $19,500,000 credit facility, comprised of (i) a $7,000,000
revolving line of credit under which funds may be borrowed at LIBOR, plus a
margin ranging from 1.75% to 2.50%, in each case depending on the calculation of
certain financial covenants, with a floor of 5% through March 19, 2003 (5% at
September 30, 2002), (ii) a $9,000,000 term loan which bears interest at a rate
of 6.75% through September 30, 2002, and thereafter at a fixed rate ranging from
6.50% to 7.25% to reset quarterly depending on the calculation of certain
financial covenants (6.75% at September 30, 2002) and (iii) a $3,500,000
mortgage loan bearing interest at 7.5%. Borrowings under the revolving line of
credit are limited to certain percentages of eligible accounts receivable and
inventory, as defined in
10
the credit agreement. The credit facility is collateralized by a security
interest in all of the Company's assets. The agreement also contains
restrictions that require the Company to maintain certain financial ratios as
well as restrictions on the payment of cash dividends. The maturity date of the
line of credit with Commerce Bank is March 20, 2004. The term loan requires
equal monthly principal payments of $187,000 and matures on April 1, 2006. The
mortgage loan requires equal monthly principal payments of $19,000 and matures
on April 1, 2017. The mortgage loan is callable after five years at the lender's
option.
Upon execution of the credit agreement with Commerce Bank, $14,954,000 was
advanced to the Company, of which $14,827,000 was used to pay all unpaid
principal and accrued interest under the Company's prior line of credit and term
loans with First Union National Bank ("FIRST UNION").
At September 30, 2002, there was $2,500,000, $8,063,000 and $3,403,000
outstanding under the revolving line of credit, term loan and mortgage loan,
respectively.
Prior to March 20, 2002, the Company had a $5,500,000 revolving line of
credit with First Union on which funds could be borrowed at either the bank's
base rate plus a margin ranging from 0% to .625%, or LIBOR, plus a margin
ranging from 1.50% to 2.625%, in each case depending upon the calculation of
certain financial covenants. The agreement contained restrictions that required
the Company to maintain certain financial ratios as well as restrictions on the
payment of dividends. The Company also had, prior to March 20, 2002, two
outstanding term loans with First Union, which accrued interest at a variable
interest rate.
The Company also agreed to guaranty payment of the aggregate purchase price
for the Systems by PSG, which includes approximately $1,630,000 of Seller Notes.
The Company is assisting PSG in obtaining long term financing to replace the
Seller Notes and believes PSG will eventually be able to obtain such replacement
financing, although not before the maturity date of the Seller Notes on November
30, 2002. The Company anticipates that until such time as alternative long-term
financing is obtained, it will be able to lend PSG sufficient funds to satisfy
the Seller Notes through a combination of cash flow from operations, financing
from its existing lender and/or financing from other lenders. However, no
assurance can be given that financing will be available to PSG or the Company on
acceptable terms or at all. While the Company's existing lenders have agreed to
allow the Company to lend PSG such funds, this will substantially decrease the
amount of funds available under the line of credit. Accordingly, if alternative
financing is not obtained for PSG, the Company would eventually need to seek to
increase the amount of its line of credit or find an alternative financing
source.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." FAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. FAS 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets. FAS
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. FAS 142 was adopted
by the Company on January 1, 2002. The adoption of this pronouncement resulted
in the Company recording a $6,886,000 one-time, non-cash charge, net of tax, to
reduce the carrying value of its goodwill. Such charge is non-operational in
nature and is reflected as a cumulative effect of a change in accounting
principle. The Company's previous business combinations were accounted for using
the purchase method.
If FAS 142 had been in effect in 2001, the Company's nine month earnings
would have been improved because of reduced amortization, as described below:
Basic Net Diluted Net
Net Earnings Earnings Per Share Earnings Per Share
------------ ------------------ ------------------
Reported Net Earnings $1,326,000 $0.17 $0.17
Add Amortization, Net of Tax 466,000 0.06 0.06
---------- ----- -----
Adjusted Net Earnings $1,792,000 $0.23 $0.23
========== ===== =====
11
The Company continues to amortize its patents over their estimated useful lives
with no significant residual value. Amortization expense for intangible assets
excluding goodwill was $320,000 and $399,000 for the nine month period ending
September 30, 2002 and 2001, respectively. Intangibles amortization is projected
to be approximately $400,000 to $500,000 per year for the next five years.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The new guidance resolves significant
implementation issues related to FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." FAS 144
supersedes FAS 121, but it retains its fundamental provisions. It also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidate a subsidiary for which control is likely
to be temporary. FAS 144 retains the requirement of FAS 121 to recognize an
impairment loss only if the carrying amount of a long-lived asset within the
scope of FAS 144 is not recoverable from its undiscounted cash flows and exceeds
its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The provisions of FAS 144 generally are to be applied prospectively.
The adoption of FAS 144 did not have a material impact on the Company's
financial position or results of operations.
In July 2002, the FASB issued FAS No. 146, "Accounting for Restructuring
Costs." FAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
contracts, and relocating plant facilities or personnel. Under FAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value. FAS
146 will require a company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. FAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under FAS
146, a company may not restate its previously issued financial statements and
FAS 146 grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and
positions represents the potential loss arising from adverse changes in interest
rates. At September 30, 2002 and 2001 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $2,500,000 and $16,268,000
respectively. A hypothetical 100 basis point increase in interest rates would
have had an annualized unfavorable impact of approximately $25,000 and $163,000,
respectively, on the Company's earnings and cash flows based upon these
quarter-end debt levels. At September 30, 2002, the Company did not have any
derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
In addition, the Company reviewed its internal controls, and there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain proceedings incidental to the ordinary
course of its business, none of which, in the current opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition, or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits are listed in the Exhibit Index appearing at page 17 herein.
(b) No reports on Form 8-K were filed in the quarter ended September 30, 2002.
13
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: November 14, 2002 By: /s/ James A. Luksch
--------------------------------------------
James A. Luksch
President and Chief Executive Officer
By: /s/ Eric Skolnik
--------------------------------------------
Eric Skolnik
Vice President and Chief Financial Officer
(Principal Financial Officer)
14
CERTIFICATION
I, James A. Luksch, President and Chief Executive Officer of Blonder Tongue
Laboratories, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blonder Tongue
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ James A. Luksch
--------------------------------
James A. Luksch
President and
Chief Executive Officer
(Principal Executive Officer)
15
CERTIFICATION
I, Eric Skolnik, Vice President and Chief Financial Officer of Blonder
Tongue Laboratories, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blonder Tongue
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Eric Skolnik
--------------------------------
Eric Skolnik
Vice President and Chief
Financial Officer
(Principal Financial Officer)
16
EXHIBIT INDEX
Exhibit # Description Location
- --------- ----------- --------
3.1 Restated Certificate of Incorporated by reference from
Incorporation of Blonder Exhibit 3.1 to S-1 Registration
Tongue Laboratories, Inc. Statement No. 33-98070 originally
filed October 12, 1995, as amended.
3.2 Restated Bylaws of Blonder Incorporated by reference from
Tongue Laboratories, Inc. Exhibit 3.2 to S-1 Registration
Statement No. 33-98070 originally
filed October 12, 1995, as amended.
99.1 Certification pursuant to Filed herewith.
Section 906 of Sarbanes-Oxley
Act of 2002
17