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, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1611421
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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: (732) 679-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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COMMON STOCK, PAR VALUE $.001 AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes No X
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The aggregate market value of voting stock held by non-affiliates of the
registrant at December 31, 2002 (based on the number of shares of voting stock
outstanding on December 31, 2002 and the closing stock price on June 28, 2002,
as reported by the American Stock Exchange): $8,719,244.
Number of shares of common stock, par value $.001, outstanding as of March 21,
2003: 7,525,229.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 8, 2003 (which is expected to be filed
with the Commission not later than 120 days after the end of the registrant's
last fiscal year) are incorporated by reference into Part III of this report.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the sections entitled Item 1 - Business, Item 3 - Legal
Proceedings, and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. The words "believe", "expect",
"anticipate", "project" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described
herein and in other documents the Company files from time to time with the
Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Blonder Tongue Laboratories, Inc. ("BLONDER TONGUE" or the "COMPANY")
is a designer, manufacturer and supplier of a comprehensive line of electronics
and systems equipment for the cable television ("CATV") industry (both franchise
and non-franchise, or "private," cable). The Company's products are used to
acquire, distribute and protect the broad range of communications signals
carried on fiber optic, coaxial cable and wireless distribution systems. These
products are sold to customers providing an array of communications services,
including television, high-speed data (Internet) and telephony, to single family
dwellings, multiple dwelling units ("MDUs"), the lodging industry and
institutions such as hospitals, prisons, schools and marinas.
Staying at the forefront of the communications broadband technology
revolution is a continuing challenge. The Company continues to add products to
respond to the changes taking place. Blonder Tongue's most recent addition is a
line of telephony products for the purpose of offering primary telephone service
to MDUs. Other product additions over the past few years include digital
satellite receivers, high-speed data solutions, fiber communications network
components, QPSK to QAM transcoders (for DirecTV, Echostar and Digicipher II
MPEG-2 Satellite Services), Digicipher II-compatible QAM set top converters, and
a broad range of interdiction products.
The Company's principal customers are cable system integrators (both
franchise and private cable operators, as well as contractors) that design,
package, install and in most instances operate, upgrade and maintain the systems
they build.
The Company has historically enjoyed, and continues to enjoy, a
dominant market position in the private cable industry, while progressively
making inroads into the franchise cable market. As the Company has expanded its
market coverage, however, the distinctions between private cable and franchise
cable have become blurred. For example, the most efficient, highest
revenue-producing private cable systems and small franchise cable systems are
built with the same electronic building blocks. Most of the electronics required
are available from Blonder Tongue. In fact, some of the most financially
successful cable systems in the United States employ Blonder Tongue interdiction
equipment.
The Company continues to expand its core product lines (headend and
distribution), to maintain the capability of providing all the electronic
equipment needed to build small cable systems and much of the equipment needed
in larger systems for the most efficient operation and highest profitability in
high density areas.
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The Company has recently expanded beyond its core business by
acquiring a majority stake in a private cable television system (BDR Broadband,
LLC ) and by acquiring a minority interest in a company engaged in a private
telephone program (Blonder Tongue Telephone, LLC).
BDR Broadband, LLC ("BDR Broadband"), an 80% owned subsidiary of the
Company, acquired the rights-of-entry for certain MDU cable television systems
in August 2002. The systems are comprised of approximately 3,270 existing MDU
cable television subscribers and approximately 7,340 passings. BDR Broadband is
a venture between the Company, Priority Systems, LLC and Paradigm Capital
Investments, LLC. Priority Systems, LLC and Paradigm Capital Investments, LLC
have expertise in marketing and operating MDU cable television systems. The
Company believes that the model it has devised for acquiring and operating these
systems will be successful and can be replicated. 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 the date hereof, however, the Company does not
have any binding commitments or agreements for any such acquisitions.
In March, 2003, the Company entered into a series of agreements,
pursuant to which it acquired a 20% minority interest in NetLinc Communications,
LLC and a 35% minority interest in Blonder Tongue Telephone, LLC (to which the
Company has licensed its name). As a result of these acquisitions, the Company
is now involved in providing a proprietary telephone system ideally suited for
MDU deployment in both products and services. Also through these agreements, the
Company has obtained exclusive worldwide distribution rights, subject to certain
limited exceptions, to NetLinc's telephony products for sale to private and
franchise cable operators as well as to any buyers for use in MDU applications.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" for a more detailed description of the investments in the
private cable operation and telephone program and the underlying operations.
The Company was incorporated under the laws of the State of Delaware
in November, 1988.
INDUSTRY OVERVIEW
The broadband signal distribution industry (involving the high-speed
transmission of television, telephony and internet signals) is currently
dominated by CATV. The markets for wireless, direct-broadcast satellite ("DBS")
and digital subscriber line ("DSL") used for this purpose continue to grow.
Within the CATV market there are an increasing number of metropolitan areas that
have awarded second CATV franchises to create competition with the existing
franchisee. The government has been in favor of competition in this market and
has passed regulations to encourage it. Franchise cable companies carefully
monitor DBS penetration in their franchise areas and react rapidly to
competition, all to the eventual benefit of the consumer. To fight competition,
the operators offer more services and more television channels as well as
discounted prices. The lineup of services typically includes an analog block of
channels from 54 to 550 MHz, high speed data service using high-speed cable
modems, cable telephony either interfacing with switched networks or internet
protocol networks, and digital television in the 550 to 750 MHz range. These
upgraded services are possible in every system that has been rebuilt to 750 MHz
of bandwidth. The standard architecture for these enhanced systems contemplates
a hybrid distribution network with a combination of fiber optic cable to nodes
of 100 to 500 subscribers, with coaxial cable from the node to the customer and
full reverse-path capability for the pay-per-view, data and phone services.
The traditional customer targeted for these expanded services is a
homeowner likely to remain in the same home as a long-term subscriber. For a
variety of reasons, including the transient nature of the residents of many
areas, high levels of theft of service and excessive cost of replacing lost or
stolen converters and modems, approximately 35% of CATV subscribers not only are
not offered the new services, but are never offered the full analog lineup of
channels. Since converters, DBS receivers, digital converters and modems are
offered at very low prices to stimulate sales, the operational costs in these
demographic areas are too high to justify offering the advanced services. To
retain customers in these areas, a technology must be used that minimizes the
operational losses due to theft and "churn" while providing a level of video,
data and phone service that compares favorably with DBS, DSL and wireless
providers. The Company believes that its lineup of products, which includes
interdiction as well as high-speed data and telephone service, is the ideal
solution for deployment in these areas.
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The Company is a value-added distributor for Motorola's QAM decoder to
the United States private cable and Canadian franchise cable markets. Coupling
this product with the Company's Digicipher(R) II compatible QQQT transcoder
provides a low-cost hardware solution for small system operators that want to
offer digital programming from sources such as HITS(R) and Cancom. The
transcoder line has been further enhanced to include a Modular QPSK to QAM
transcoder MQQT that builds upon Blonder Tongue's innovative original design
approach, but incorporates a scalable modular design.
CATV
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Most CATV operators have built 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 many existing systems. The system
architecture being employed to accomplish the combined provision of television
and telephone service is a hybrid fiber coaxial ("HFC") network. In an HFC
network, fiber optic trunk lines connect to nodes which feed 100 to 500
subscribers, using coaxial cable.
The Company believes that most major metropolitan areas will
eventually have complex networks of two or more independent operators
interconnecting homes, while private cable operators will have large networks
interconnecting many multi-dwelling complexes. All of these networks are
potential users of Blonder Tongue headend, digital and interdiction products.
Multiple Dwelling Units (MDUs)
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MDUs, because they represent a large percentage of the private cable
market, have historically been responsible for a large percentage of the
Company's sales. In the early days of cable television MDUs were served by
franchise cable operators. In 1991, when the FCC allocated a designated
frequency band for private cable, the private cable industry became a major
supplier of TV services to MDUs since they could interconnect buildings with 18
GHz over-the-air links and reduce the cost-per-subscriber in building MDU
networks. This type of networking, albeit at a slightly lower frequency,
continues today, however, presently many MDU private cable systems are connected
using fiber optics since it is more reliable, has much greater bandwidth, and
can handle two-way communication which is needed for voice, data and
video-on-demand.
A typical private cable MDU provides 60 to 70 channels of analog
signals utilizing Blonder Tongue core headend (receivers, modulators,
processors, etc.) and distribution products. MDUs served by franchise cable are
also a large revenue source for Blonder Tongue since they generally fall into
the category of customers where churn, theft of service and converter loss are
extremely high. This makes these areas prime candidates for Blonder Tongue's
interdiction products.
Lodging
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Since the early 1990's, private cable integrators have competed to
expand the lodging market by offering systems with more channels,
video-on-demand and interactivity. These systems have been and continue to be
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 systems that provide true video-on-demand movies with a large
selection of titles. To meet these demands, the typical lodging system headend
will include as many as 20 to 40 receivers and as many as 60 to 80 modulators,
and will be capable of providing the guest with more free channels,
video-on-demand for a broad selection of movie titles, and interactive services
such as remote check-out and concierge services. This is in contrast to the
systems which preceded them, which typically had 10 to 12 receivers and
modulators and provided six to ten free channels and two to five channels of
VCR-based movies running at published scheduled times.
Most of the systems with video-on-demand service were initially in
large hotels, where the economics of high channel capacity systems are more
easily justified. The conversion of hotel pay-per-view systems into
video-on-demand is increasing. Smaller hotels and motels are being provided with
video-on-demand as technology results in reduced headend costs, keeping the
market growth reasonably steady.
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International
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For much of the world, CATV service lags the United States, but is expanding as
technological advancement reduces the cost to consumers. In addition, economic
development in Latin America and Asia has allowed first time construction of
integrated delivery systems that utilize a variety of electronics and broadband
hardware. The pace of growth is difficult to predict, but as more alternatives
become available and television service becomes increasingly affordable, it is
anticipated that more equipment will be placed in the field. The Company
utilizes several distributors in Florida and within Latin America.
Additional Considerations
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The technological revolution taking place in the communications
industry, which includes DBS, is providing digital television to an increasing
number of homes. Wireless cable systems and DSL over twisted pair phone lines
also utilize digital compression to provide channel capacity which is
competitive with CATV and other television delivery systems. In addition,
franchise cable companies and alternative suppliers 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 for the most part analog (not
digital), direct satellite television and other digitally compressed programming
requires headend products or expensive set-top decoding receivers or converters
to convert the digitally transmitted satellite signals back to analog. The
replacement of all television sets with digital sets will be costly and take
many years to complete. The Company believes that for many years to come,
program providers will be required to deliver an analog television signal on
standard channels to subscribers' television sets using headend products at some
distribution point in their networks or employ decoding receivers at each
television set. Headend products are a large segment of Blonder Tongue's
business and the Company believes interdiction is an ideal product for a system
operator to use to control access to the multitude of programming that will be
available.
PRODUCTS
Blonder Tongue's products can be separated, according to function,
into the several categories described below:
o HEADEND PRODUCTS used by a system operator for signal acquisition,
processing and manipulation for further transmission. Among the products
offered by the Company in this category are satellite receivers (digital
and analog), integrated receiver/decoders, transcoders, demodulators,
modulators, antennas and antenna mounts, amplifiers, equalizers, and
processors. The headend of a television signal distribution system is the
"brain" of the system, the central location where the multi-channel signal
is initially received, converted and allocated to specific channels for
distribution. In some cases, where the signal is transmitted in encrypted
form or digitized and compressed, the receiver will also be required to
decode the signal. Blonder Tongue is a licensee of Motorola, Inc.'s
("Motorola") VideoCipher(R) and DigiCipher(R) encryption technologies and
integrates their decoders into integrated receiver/decoder products, where
required. Another alternative is to transcode the signal's modulation from
QPSK (quadrature phase shift key) to QAM (quadrature amplitude modulation)
since one is optimum for satellite transmission and the other optimum for
fiber/coaxial distribution. The Company estimates that Headend Products
accounted for approximately 66% of the Company's revenues in 2002, 58% in
2001, and 40% in 2000.
o DATA PRODUCTS used to provide Internet access and data transfer over a
hybrid fiber/coaxial cable system. Products in this category include
standard cable modems and routers, and the new MegaPort solution for
providing broadband Internet access to MDUs. The MegaPort solution consists
of two main components, the Gateway and the Intelligent Outlets. The
Gateway is a broadband ethernet router or bridge that establishes a network
within a building or community. The Intelligent Outlet serves as the modem,
but
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is permanently installed in the home to eliminate loss of equipment
associated with churn. Each Gateway can accommodate 64 enabled Outlets.
Plus, when multiple outlets are installed in a residence, they can be
configured for home networking for an additional revenue stream for the
operator.
o TELEPHONY PRODUCTS used to provide expanded telephone service to MDU
subscribers. The products are designed to offer carrier class telephone
service to residences using existing twisted pair wires. Service will be
fully transparent to subscribers with advanced calling features such as
911, Caller ID, Call Waiting Plus, and Three-way Calling available and
bundled at a flat rate to subscribers. The Blonder Tongue telephony family
of products includes a T1 concentrator and a multiplexer. The system starts
at a telephone company class 5 switch located at their local central
office. A T1 line is routed from the switch and brought to the LoopXpress
Concentrator. The telephone information is then routed to the LineXpress
Multiplexer which converts the digital format into analog voice frequencies
for transmission to up to 12 independent resident telephone lines. The
existing twisted-pair telephone wiring infrastructure is utilized to
provide dial tone at a resident's premises using any standard telephone.
System operation, including activating and deactivating phone lines, is
achieved through a point-and-click software package. Communication to the
equipment can be performed locally or remotely for increased operating
efficiency and simplified system management. While the Company does not
have a history of sales of telephony products as it only recently acquired
the distribution rights, the Company believes that sales of these telephony
products will grow into a significant source of revenue for the Company.
o MICROWAVE PRODUCTS used to transmit the output of a cable system
headend to multiple locations using point-to-point communication links in
the 18 GHz range of frequencies. Products offered 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. Due to a Second Order on Reconsideration adopted by the Federal
Communications Commission ("FCC") in November 2002, coupled with the
availability and inherent superiority of fiber optics in linking adjacent
properties in MDU applications, sales of microwave products have
diminished. While microwave products will continue to be sold to maintain
existing systems, the Company does not anticipate that these products will
contribute significantly to the Company's revenues.
o FIBER PRODUCTS used to transmit the output of a cable system headend
to multiple locations using fiber optic cable. Among the products offered
are optical transmitters, receivers, couplers, splitters and compatible
accessories. These products convert RF frequencies to light (or infrared)
frequencies and launch them on optical fiber. At each receiver site, an
optical receiver is used to convert the signals back to normal VHF
frequencies for distribution to subscribers. Sales of products in this
category continue to increase as they have become the product of choice in
applications formerly suitable to the use of microwave products.
o DISTRIBUTION PRODUCTS used to permit signals to travel from the
headend to their ultimate destination in a home, apartment unit, hotel
room, office or other terminal location along a distribution network of
fiber optic or coaxial cable. Among the products offered by the Company in
this category are optical transmitters, optical receivers, line extenders,
broadband amplifiers, directional taps, splitters and wall taps. In CATV
systems, the distribution products are either mounted on exterior telephone
poles or encased in pedestals, vaults or other security devices. In private
cable systems the distribution system is typically enclosed within the
walls of the building (if a single structure) or added to an existing
structure using various techniques to hide the coaxial cable and devices.
The non-passive devices within this category are designed to ensure that
the signal distributed from the headend is of sufficient strength when it
arrives at its final destination to provide high quality audio/video
images.
o INTERDICTION PRODUCTS used to control access to programming at the
subscriber's location. Among the products offered by the Company in this
category are (i) its VideoMask(TM) addressable signal jammer, licensed from
Philips Electronics North America Corporation and its affiliate Philips
Broadband Networks, Inc. (ii) the SMI Interdiction product line acquired
from Scientific-Atlanta, Inc. as part of its interdiction business, and
(iii) the recently introduced Addressable Multi-Tap (AMT). Interdiction
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products limit the availability of programs to subscribers, through jamming
of particular channels. Such products enable an operator to control
subscriber access to premium channels and other enhanced services through a
computer located off-premises. They also eliminate the necessity of an
operator having to make a service call to install or remove passive traps
and eliminate the costs associated with damage or loss of analog set-top
converters in the subscribers' locations. The Company believes that the
reduction in operating costs, programming piracy, and converter loss which
can be obtained through the use of interdiction can be a significant factor
in further product penetration into the franchise cable market in MDU
applications. While it is not possible to predict the breadth of market
acceptance for these products, the Company believes the potential is
substantial in both the private cable market and franchise cable market as
alternatives to, or in conjunction with, set-top converters and as a viable
option for companies and municipalities who are overbuilding existing cable
infrastructures and are seeking a more consumer-friendly and cost-effective
way to compete with the incumbent franchise cable operator. The Company
estimates that Interdiction products accounted for approximately 8% of the
Company's revenues in 2002, 15% in 2001, and 42% in 2000.
o TEST PRODUCTS used for measuring signals in the Headend and
Distribution. Among the products offered by the Company in this category
are analog and digital Spectrum Analyzers, QPSK Analyzers, and hand held
Palm Analyzers. While the Company expects to continue selling test products
to meet the needs of customers, the Company does not anticipate that these
products will contribute significantly to the Company's revenues.
The Company will modify its products to meet specific customer
requirements. Typically, these modifications are minor and do not materially
alter the functionality of the products. Thus the inability of the customer to
accept such products does not generally result in the Company being otherwise
unable to sell such products to other customers.
RESEARCH AND PRODUCT DEVELOPMENT
The markets served by Blonder Tongue are characterized by
technological change, new product introductions, and evolving industry
standards. To compete effectively in this environment, the Company must engage
in continuous research and development in order to (i) create new products, (ii)
expand the frequency range of existing products in order to accommodate customer
demand for greater channel capacity, (iii) license new technology (such as
digital satellite receiver decoders and high-speed cable modems), and (iv)
acquire products incorporating technology that 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 the Company's
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 21 employees in the research and development department
of the Company at December 31, 2002.
MARKETING AND SALES
Blonder Tongue markets and sells its products worldwide to private
cable operators and system contractors (which accounted for approximately 45% of
the Company's revenues for fiscal 2002, approximately 48% of the Company's
revenues for fiscal year 2001 and approximately 56% for fiscal year 2000), to
alternative providers, to franchise cable operators, and to the lodging
industry. Sales are made directly to customers by the Company's internal sales
force, as well as through numerous domestic and international stocking
distributors.
The Company's sales and marketing function is predominantly performed
by its internal sales force. Should it be deemed necessary, the Company may
retain independent sales representatives in particular geographic areas or
targeted to specific customer prospects. The Company's internal sales force
consists of 25 employees, which currently includes 11 salespersons (7
salespersons in Old Bridge, New Jersey, one salesperson
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in each of North Myrtle Beach, South Carolina, Cudahy, Wisconsin, Folsom,
California, and Miami, Florida) and 14 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 original equipment manufacturer customers and provides
one-on-one demonstrations and technical seminars to potential new customers.
Blonder Tongue supplies sales and applications support, product literature and
training to its sales representatives and distributors. The management of the
Company travels extensively, identifying customer needs and meeting potential
customers.
The Company had approximately $1.0 million in purchase orders as of
December 31, 2002. All of the purchase orders outstanding as of December 31,
2002 are expected to be shipped prior to December 31, 2003. 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 2002 consisted of
more than 600 active accounts. Approximately 50%, 39%, and 56% of the Company's
revenues in fiscal years 2002, 2001, and 2000, respectively, were derived from
sales of products to the Company's five largest customers. In 2002 and 2001,
sales to Toner Cable Equipment, Inc. accounted for approximately 20% and 14%
respectively of the Company's revenues. There can be no assurance that any sales
to these entities, individually or as a group, will reach or exceed historical
levels in any future period. However, the Company anticipates that these
customers will continue to account for a significant portion of the Company's
revenues in future periods, although none of them is obligated to purchase any
specified amount of products 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 Canada as well as
in underdeveloped countries. Television service is less developed in many
international markets, particularly Latin America and Asia, creating opportunity
for those participants who offer quality products at a competitive price. Sales
to customers outside of the United States represented approximately 8%, 2% and
2% of the Company's revenues in fiscal years 2002, 2001 and 2000 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
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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 and part of the Company's strategy to provide its customers
with high performance-to-cost ratio products.
Outside contractors supply standard components, etch-printed circuit
boards and electronic subassemblies 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. On an as-needed basis, 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 Motorola, which are standard encryption methodologies employed
on U.S. C-Band and Ku-Band transponders and Hughes digital satellite receivers
for delivery of DIRECTV(TM) programming. An inability to timely obtain
sufficient quantities of these components could have a material adverse effect
on the Company's operating results. The Company does not have an agreement with
any sole source supplier requiring the supplier to sell a specified volume of
components to the Company.
Blonder Tongue maintains a quality assurance program which tests
samples of component parts purchased, as well as its finished products, on an
ongoing basis and also conducts tests throughout the manufacturing process using
commercially available and in-house built testing systems that incorporate
proprietary procedures. Blonder Tongue performs final product tests on 100% of
its products prior to shipment to customers.
COMPETITION
All aspects of the Company's business are highly competitive. The
Company competes with national, regional and local manufacturers and
distributors, including companies larger than Blonder Tongue which have
substantially greater resources. Various manufacturers who are suppliers to the
Company sell directly as well as through distributors into the franchise and
private cable marketplaces. Because of the convergence of the cable,
telecommunications and computer industries and rapid technological development,
new competitors may seek to enter the principal markets served by the Company.
Many of these potential competitors have significantly greater financial,
technical, manufacturing, marketing, sales and other resources than Blonder
Tongue. The Company expects that direct and indirect competition will increase
in the future. Additional competition could result in price reductions, loss of
market share and delays in the timing of customer orders. The principal methods
of competition are product differentiation, performance and quality, price and
terms, service, and technical and administrative support.
INTELLECTUAL PROPERTY
The Company currently holds 30 United States patents and 14 foreign
patents covering a wide range of electronic systems and circuits, of which 19
United States patents and 10 foreign patents were obtained in the Company's
acquisition of Scientific-Atlanta, Inc.'s interdiction business during 1998.
Other than certain of the patents acquired from Scientific-Atlanta, Inc., none
of the Company's patents are considered material to the Company's present
operations because they do not relate to high volume applications. Because of
the rapidly evolving nature of the CATV industry, the Company believes that its
market position as a supplier to cable integrators derives primarily from its
ability to develop a continuous stream of new products which are designed to
meet its customers' needs and which have a high performance-to-cost ratio.
The Company has a registered trademark on "Blonder Tongue(R)" and also
on a "BT(R)" logo. In connection with the transactions pursuant to which the
Company acquired an ownership interest in NetLinc and
9
Blonder Tongue Telephone, the Company granted Blonder Tongue Telephone a
non-exclusive, revocable and royalty-free license to use these trademarks and
certain variations of such names.
The Company is a licensee of Philips Electronics North America
Corporation and its affiliate Philips Broadband Networks, Inc., Motorola, Hughes
and several smaller software development companies.
Under the Philips License Agreements, the Company is granted a
non-exclusive license for a term which expires in 2010, concurrently with the
last to expire of the relevant patents. The Philips License Agreements provide
for the payment by the Company of a one-time license fee and for the payment by
the Company of royalties based upon unit sales of licensed products.
The Company is a licensee of Motorola relating to Motorola's
VideoCipher(R) encryption technology and is also a party to a private label
agreement with Motorola 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.
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. 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.
During 1996, the Company 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 technologies and know-how. There can be
no assurance that the Company will be able to protect its technologies and
know-how or that third parties will not be able to develop similar technologies
and know-how independently. Therefore, existing and potential competitors may be
able to develop products that are competitive with the Company's products and
such competition could adversely affect the prices for the Company's products or
the Company's market share. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining its leadership position.
REGULATION
Private cable, while in some cases subject to certain FCC licensing
requirements, is not presently burdened with extensive government regulations.
Franchise cable operators had been subject to extensive government regulation
pursuant to the Cable Television Consumer Protection and Competition Act of
1992, which among other things provided for rate rollbacks for basic tier cable
service, further rate reductions under certain circumstances and limitations on
future rate increases. The Telecommunications Act of 1996 deregulated many
aspects of franchise cable system operation and opened the door to competition
among cable operators and telephone companies in each of their respective
industries.
In June, 2000, the FCC adopted and issued a Final Rule and Order
relating to the re-designation of portions of the 18GHz-frequency band among the
various currently allocated services. The Final Rules regarding this issue
provided for the grandfathering, for a period of ten years, of certain
pre-existing (installed) terrestrial fixed service operators ("TFSOs") and TFSOs
that had made application for a license prior to a certain date. The FCC
segmented the 18GHz-frequency band into several sub-bands and provided for
varying obligations and rights as between the TFSOs and Fixed Satellite Service
Operators ("FSSOs"). Overall, the Final Rules were complex and placed a measure
of uncertainty upon TFSOs considering the use of microwave gear in new systems.
In November
10
2002, the FCC issued a Second Order on Reconsideration (the "SECOND ORDER"),
which redefines the use of the 18 GHz microwave band. Among other things, the
Second Order changes the permissible band of transmission for future microwave
links from the 18.42 to 18.58 GHz band to the 17.7 GHz to 18.3 GHz band. As a
result of the Second Order, the Company's existing microwave inventory would
have to be modified to function within the new frequency band. While the new
18GHz band provides additional channel capacity to the private cable operator,
because specialized and expensive equipment will be required to take advantage
of this additional bandwidth , the impact on future sales is uncertain at this
time. These issues, coupled with the recent advances in the use of fiber optic
cable and the inherent superiority in fiber due to its greater bandwidth
capability, have resulted in a shift in customer purchases away from microwave
gear and toward fiber optics.
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 2002 and does not anticipate incurring
in 2003 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, 2003. 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 May 31, 2007.
EMPLOYEES
As of March 7, 2003, the Company employed approximately 344 people,
including 249 in manufacturing, 21 in research and development, 15 in quality
assurance, 15 in production services, 25 in sales and marketing, and 19 in a
general and administrative capacity. 162 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, 2005.
The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal manufacturing, engineering, sales and
administrative facilities consist of one building totaling approximately 130,000
square feet located on approximately 20 acres of land in Old Bridge, New Jersey
(the "OLD BRIDGE FACILITY") which is owned by the Company. The Old Bridge
Facility is encumbered by a mortgage held by Commerce Bank in the principal
amount of $3,325,000 as of December 31, 2002. The Company also leases office
space in Cudahy, Wisconsin for which it pays rent of approximately $300 per
month.
Management believes that the Old Bridge Facility is adequate to
support the Company's anticipated needs in 2003. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain proceedings incidental to the
ordinary course of its business, none of which, in the current opinion of
management, is likely to have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows.
11
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, 2002, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded on the American Stock
Exchange since the Company's initial public offering on December 14, 1995. The
following table sets forth for the fiscal quarters indicated, the high and low
sale prices for the Company's Common Stock on the American Stock Exchange.
MARKET INFORMATION
Fiscal Year Ended December 31, 2002: High Low
---- ---
First Quarter .................... $3.86 $3.20
Second Quarter.................... 3.62 2.70
Third Quarter .................... 2.70 1.10
Fourth Quarter.................... 2.25 1.09
Fiscal Year Ended December 31, 2001: High Low
---- ---
First Quarter .................... 4.13 2.12
Second Quarter.................... 4.00 2.16
Third Quarter .................... 4.23 2.96
Fourth Quarter ................... 4.29 3.00
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "BDR".
HOLDERS
As of March 21, 2003, the Company had approximately 65 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 prior to its
initial public offering, 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 Commerce Bank, N.A.
prohibits the payment of cash dividends by the Company on its Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below
for each of the years ended December 31, 2002, 2001 and 2000, and the selected
consolidated balance sheet data as of December 31, 2002 and 2001, are derived
from, and are qualified by reference to, the audited consolidated financial
statements of
12
the Company and notes thereto included elsewhere in this Form 10-K. The selected
consolidated statement of operations data for the years ended December 31, 1999
and 1998 and the selected consolidated balance sheet data as of December 31,
2000, 1999 and 1998 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,
-------------------------------------------------------
2002 2001 2000 1999 1998(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales .................................. $ 46,951 $ 53,627 $ 70,196 $ 56,805 $ 70,792
Cost of goods sold ......................... 34,195 36,928 46,974 39,074 45,344
-------- -------- -------- -------- --------
Gross profit ............................. 12,756 16,699 23,222 17,731 25,448
-------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative ...... 9,060 11,209 13,572 13,598 10,755
Research and development ................. 1,972 2,200 2,125 2,070 2,156
-------- -------- -------- -------- --------
Total operating expenses ................. 11,032 13,409 15,697 15,668 12,911
-------- -------- -------- -------- --------
Earnings from operations ................... 1,724 3,290 7,525 2,063 12,537
Interest expense ........................... 1,074 1,369 1,948 2,008 1,596
Other income, net .......................... -- -- (10) (6) (40)
-------- -------- -------- -------- --------
Earnings before income taxes ............... 650 1,921 5,587 61 10,981
Provision for income taxes ................. 221 704 2,011 2 3,868
-------- -------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle ............. 429 1,217 3,576 59 7,113
Cumulative effect of change in accounting
principle, net of tax (2) .................. (6,886) -- -- -- --
-------- -------- -------- -------- --------
Net (loss) earnings ........................ $ (6,457) $ 1,217 $ 3,576 $ 59 $ 7,113
======== ======== ======== ======== ========
Basic earnings per share before cumulative
effect of change in accounting principle ... $ 0.06 $ 0.16 $ 0.47 $ 0.01 $ 0.86
Cumulative effect of change in accounting
principle, net of tax ...................... (0.90) -- -- -- --
-------- -------- -------- -------- --------
Basic earnings (loss) per share ............ $ (0.84) $ 0.16 $ 0.47 $ 0.01 $ 0.86
======== ======== ======== ======== ========
Basic weighted average shares outstanding
Diluted earnings per share before .......... 7,604 7,613 7,620 7,916 8,292
cumulative effect of change in accounting
principle .................................. $ 0.06 $ 0.16 $ 0.47 $ 0.01 $ 0.84
Cumulative effect of change in accounting
principle, net of tax ...................... (0.90) -- -- -- --
-------- -------- -------- -------- --------
Diluted earnings (loss) per share .......... $ (0.84) $ 0.16 $ 0.47 $ 0.01 $ 0.84
======== ======== ======== ======== ========
Diluted weighted average shares outstanding 7,604 7,637 7,632 7,958 8,471
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998(1)
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital ........................... $ 30,317 $ 31,254 $ 27,154 $ 25,456 $ 17,049
Total assets .............................. 52,002 64,386 62,834 66,076 69,651
Long-term debt (including
current maturities) ....................... 16,910 16,195 16,184 20,607 22,359
Stockholders' equity ...................... 33,267 39,962 39,096 35,247 40,496
- ------------------
(1) On March 26, 1998, the Company acquired all of the assets and technology
rights of Scientific-Atlanta, Inc.'s interdiction business.
(2) Effective January 1, 2002, the Company implemented FAS 142, which resulted
in the write off of $10,760 of the net book value of goodwill, offset by the
future tax benefit thereof in the amount of $3,874.
13
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 to design, manufacture and supply a
line of electronics and systems equipment principally for the Private Cable
industry. Following the acquisition, the Company changed its name to Blonder
Tongue Laboratories, Inc.
The Company's success is due in part to management's efforts to
leverage the Company's reputation by broadening its product line to offer
one-stop shop convenience to private cable and franchise cable system
integrators and to deliver products having a high performance-to-cost ratio.
In December, 1995, the Company successfully concluded an initial
public offering of 2,200,000 shares of its Common Stock. Thereafter, in January
1996, the Company's underwriters exercised their over-allotment option, as a
result of which an additional 181,735 shares of the Company's Common Stock were
sold. The proceeds received by the Company from the sale of its Common Stock in
the offering (including shares sold pursuant to the over-allotment option), net
of expenses of the offering and certain S Corporation distributions to the
Company's principal stockholders, were approximately $14,045,000. These funds
were used to acquire the Company's Old Bridge Facility and to reduce the
Company's outstanding bank debt. The Company has further enhanced its liquidity
through a long-term loan secured by a mortgage against the Old Bridge Facility.
On March 26, 1998, the Company acquired all of the assets and
technology rights, including the SMI Interdiction product line, of the
interdiction business (the "INTERDICTION BUSINESS") of Scientific-Atlanta, Inc.
("SCIENTIFIC") for a purchase price consisting of (i) $19 million in cash, (ii)
67,889 shares of the Company's common stock, (iii) a warrant to purchase 150,000
additional shares of the Company's common stock at an exercise price of $14.25
per share and (iv) assumption by the Company of certain obligations under
executory contracts with vendors and customers and certain warranty obligations
and other current liabilities of the Interdiction Business. The Company is
utilizing the SMI Interdiction product line acquired from Scientific, which has
been engineered primarily to serve the franchise cable market, as a supplement
to the Company's VideoMask(TM) Interdiction products, which are primarily
focused on the private cable market.
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, BDR Broadband, 80% of the outstanding capital stock of which is owned by
the Company, acquired the Systems, which are comprised of approximately 3,270
existing MDU cable television subscribers and approximately 7,340 passings. BDR
Broadband 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
cash flow 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 BDR Broadband, the
Company advanced to BDR Broadband $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
BDR Broadband. The approximately $1,630,000 balance of the purchase price was
paid by the Company on behalf of BDR Broadband on November 30, 2002 pursuant to
the terms and in satisfaction of certain promissory notes (the "SELLER NOTES")
executed by BDR Broadband in favor of the sellers.
14
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.
In March, 2003, the Company entered into a series of agreements,
pursuant to which the Company acquired a 20% minority interest in NetLinc
Communications, LLC ("NETLINC") and a 35% minority interest in Blonder Tongue
Telephone, LLC ("BTT") (to which the Company has licensed its name). The
aggregate purchase price consists of (i) up to $3,500,000 payable over a minimum
of two years, plus (ii) 500,000 shares of the Company's common stock. Of the
$3,500,000 payable under the agreements, Blonder Tongue's obligation to pay
$2,500,000 is contingent upon BTT achieving specified targeted monthly earnings
objectives.
NetLinc is the owner of patents, proprietary technology and know-how
for certain telephony products that allow Competitive Local Exchange Carriers
("CLECs") to competitively provide voice service to MDUs. Pursuant to a
distributorship agreement between NetLinc and BTT, BTT has the exclusive
worldwide distribution rights, subject to certain limited exceptions, to
NetLinc's products. In turn, pursuant to a distribution agreement between BTT
and Blonder Tongue, Blonder Tongue has obtained from BTT exclusive worldwide
distribution rights, subject to certain limited exceptions, to those same
products for sale to private and franchise cable operators as well as to all
buyers for use in MDU applications. See "Business - Products - Telephony
Products" for a description of these products. As part of the overall series of
agreements, Blonder Tongue has licensed the right to use the name "Blonder
Tongue" to BTT, thereby allowing the venture to capitalize upon the goodwill
that the Company has developed over its 50+ years in business. It is
contemplated that BTT will partner with CLECs to offer the telephony solution,
receiving a portion of the line charges due from the CLECs' telephone customers.
Blonder Tongue will receive incremental revenues and profits associated with
sales of the telephony products. In addition, through its 35% stake in BTT,
Blonder Tongue will also receive a portion of the voice service revenues earned
by BTT.
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,
------------------------
2002 2001 2000
------ ------ ------
Net sales ......................... 100.0% 100.0% 100.0%
Costs of goods sold ............... 72.8 68.9 66.9
Gross profit ...................... 27.2 31.1 33.1
Selling expenses .................. 8.7 9.3 8.5
General and administrative expenses 10.6 11.6 10.9
Research and development expenses . 4.2 4.1 3.0
Earnings from operations .......... 3.7 6.1 10.7
Other (income) expense, net ....... 2.3 2.5 2.8
Earnings before income taxes and
before cumulative effect of
change in accounting principle ... 1.4 3.6 7.9
2002 Compared with 2001
Net sales. Net sales decreased $6,676,000 or 12.5%, to $46,951,000 in
2002 from $53,627,000 in 2001. The decrease in sales is primarily attributed to
a decrease in capital spending by cable system operators and weak overall
economic conditions. The substantially higher sales recorded in the prior fiscal
year were primarily
15
attributable to higher interdiction sales. Net sales included approximately
$3,736,000 of interdiction equipment for 2002 compared to approximately
$7,962,000 in 2001.
Cost of Goods Sold. Cost of goods sold decreased to $34,195,000 for
2002 from $36,928,000 for 2001, primarily due to decreased volume, and increased
as a percentage of sales to 72.8% in 2002 from 68.9% in 2001. The increase as a
percentage of sales was caused primarily by a greater proportion of sales during
the period being comprised of lower margin products, including the Motorola QAM
decoder which was introduced in the fourth quarter of 2001.
Selling Expenses. Selling expenses decreased to $4,069,000 in 2002
from $5,009,000 in 2001, and decreased as a percentage of sales to 8.7% in 2002
from 9.3% in 2001. The $940,000 decrease is primarily attributable to a decrease
in wages and fringe benefits of $369,000 related to a decrease in headcount,
along with a decrease in advertising of $419,000 achieved through implementation
of expense control programs.
General and Administrative Expenses. General and administrative
expenses decreased to $4,991,000 in 2002 from $6,200,000 in 2001, and decreased
as a percentage of sales to 10.6% in 2002 from 11.6% in 2001. The $1,209,000
decrease is primarily attributable to a $970,000 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 $180,000.
Research and Development Expenses. Research and development expenses
decreased to $1,972,000 in 2002 from $2,200,000 in 2001, and increased as a
percentage of sales to 4.2% in 2002 from 4.1% in 2001. The $228,000 decrease is
primarily attributable to a $56,000 decrease in licensing fees, a $65,000
decrease in consulting fees, a $34,000 decrease in department supplies, and a
$30,000 decrease in salaries and fringe benefits due to a decrease in headcount.
Earnings from Operations. Earnings from operations decreased 48.4% to
$1,724,000 in 2002 from $3,290,000 in 2001. Earnings from operations as a
percentage of sales decreased to 3.7% in 2002 from 6.1% in 2001.
Other Income (Expense). Other income (expense) consisted of $1,074,000
of interest expense in 2002. Other income (expense) in 2001 consisted of
$1,369,000 of interest expense. The decrease in interest expense is primarily
attributable to a reduction in the Company's long term debt and lower average
interest rates.
Income Taxes. The provision for income taxes for 2002 decreased to
$221,000 from $704,000 in 2001, as a result of a decrease in taxable income. The
effective tax rate decreased to 34% in 2002 from 36.6% in 2001 due to a writeoff
of overaccrued federal and state taxes.
Cumulative Effect. During the year ended December 31, 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 non-recurring $6,886,000 charge against earnings in the first
three months of 2002.
2001 Compared with 2000
Net sales. Net sales decreased $16,569,000 or 23.6%, to $53,627,000 in
2001 from $70,196,000 in 2000. The substantially higher sales recorded in the
prior fiscal year were primarily attributable to shipments against a large
interdiction order booked in the fourth quarter of 1999. Net sales included
approximately $7,962,000 of interdiction equipment for 2001 compared to
approximately $29,400,000 in 2000.
Cost of Goods Sold. Cost of goods sold decreased to $36,928,000 for
2001 from $46,974,000 for 2000, primarily due to decreased volume, and increased
as a percentage of sales to 68.9% in 2001 from 66.9% in 2000. The increase as a
percentage of sales was caused primarily by a greater proportion of sales during
the period being comprised of lower margin products, including the Motorola QAM
decoder which was introduced in the fourth quarter of 2001, as well as an
increase in obsolescence reserves.
16
Selling Expenses. Selling expenses decreased to $5,009,000 in 2001
from $5,943,000 in 2000, and increased as a percentage of sales to 9.3% in 2001
from 8.5% in 2000. The $934,000 decrease is primarily attributable to a decrease
in wages and fringe benefits related to the decrease in headcount along with a
decrease in commissions and freight expense as a result of reduced sales.
General and Administrative Expenses. General and administrative
expenses decreased to $6,200,000 in 2001 from $7,629,000 in 2000, and increased
as a percentage of sales to 11.6% in 2001 from 10.9% in 2000. The $1,429,000
decrease is primarily attributable to a decrease in consulting fees, investor
relations fees, travel and entertainment, and bad debts.
Research and Development Expenses. Research and development expenses
increased to $2,200,000 in 2001 from $2,125,000 in 2000, and increased as a
percentage of sales to 4.1% in 2001 from 3.0% in 2000. The $75,000 increase is
primarily attributable to an increase in wages, fringe benefits and consulting
expenses.
Earnings from Operations. Earnings from operations decreased 56.3% to
$3,290,000 in 2001 from $7,525,000 in 2000. Earnings from operations as a
percentage of sales decreased to 6.1% in 2001 from 10.7% in 2000.
Other Income (Expense). Other income (expense) consisted of $1,369,000
of interest expense in 2001. Other income (expense) in 2000 consisted of
$1,948,000 of interest expense offset by $10,000 of interest income. The
decrease in interest expense is primarily attributable to a reduction in the
Company's long term debt and lower average interest rates.
Income Taxes. The provision for income taxes for 2001 decreased to
$704,000 from $2,011,000 in 2000, as a result of a decrease in taxable income.
INFLATION AND SEASONALITY
Inflation and seasonality have not had a material impact on the
results of operations of the Company. Fourth quarter sales in 2002 as compared
to other quarters 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, 2002 and 2001, the Company's working capital was
$30,317,000 and $31,254,000, respectively. The decrease in working capital is
attributable primarily to a decrease in inventory of $4,956,000 offset by a
decrease in accounts payable of $5,784,000.
The Company's net cash provided by operating activities for the year
ended December 31, 2002 was $1,257,000 primarily due to net income before the
cumulative effect of a change in accounting principles and depreciation and
amortization. This income coupled with a reduction of $3,509,000 in inventory
and $1,640,000 in accounts receivable were used to reduce accounts payable and
accrued expenses by $6,359,000, compared to cash provided by operating
activities for the year ended December 31, 2001 of $3,711,000.
Cash used in investing activities was $2,575,000, which was
attributable primarily to capital expenditures for new computers and test
equipment and the acquisition of rights-of-entry in connection with BDR
Broadband. The Company does not have any present plans or commitments for
material capital expenditures for fiscal year 2003, other than anticipated
expenditures of approximately $1,300,000 in connection with certain upgrades of
the BDR Broadband Systems and the net amount of approximately $1,244,000 in
connection with its investment in NetLinc/BTT.
Cash provided by financing activities was $634,000 for the period
ended December 31, 2002, comprised primarily of $35,624,000 in borrowings under
its new credit agreement offset by $34,909,000 of repayments of long-term debt.
17
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 December 31, 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 December 31, 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 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 December 31, 2002, there was $5,650,000 outstanding under the
revolving line of credit. At December 31, 2002, the Company was unable to meet
one of its financial covenants under its credit agreement with its bank,
compliance with which was waived by such bank as of December 31, 2002.
The average amount outstanding on the Company's lines of credit during
2002 was $3,208,000 at a weighted average interest rate of 5.0%. The maximum
amount outstanding on the line of credit during 2002 was $5,650,000.
Annual maturities of long-term debt at December 31, 2001 are:
2003 ......... $ 2,632,000
2004 ......... 8,291,000
2005 ......... 2,649,000
2006 ......... 947,000
2007 ......... 233,000
Thereafter.... 2,158,000
-----------
$16,910,000
===========
The Company has the ability to borrow $1,350,000 under its line of
credit, however only $650,000 was available at December 31, 2002, based on the
Company's current collateral. This commitment expires on March 20, 2004.
The Company leases certain factory and automotive equipment under
noncancellable operating leases and equipment under capital leases expiring at
various dates through December, 2006.
Future minimum rental payments, required for all noncancellable leases
are as follows:
Capital Operating
-------- ---------
2003 ............................................. $194,000 $158,000
2004 ............................................. 191,000 75,000
2005 ............................................. 186,000 20,000
2006 ............................................. 157,000 --
2007 ............................................. -- --
Thereafter ....................................... -- --
-------- --------
Total future minimum lease payments .............. 728,000 253,000
========
Less: amounts representing interest ............. 106,000
---------
Present value of minimum lease payments........... $622,000
=========
18
The Company paid approximately $1,880,000 in connection with acquiring
its majority interest in BDR Broadband and paying off the Seller Notes for BDR
Broadband. In addition, the Company will incur additional obligations in
connection with its investments in NetLinc and BTT. While the Company's existing
lender agreed to allow the Company to fund both the BDR Broadband obligations
and the NetLinc/BTT obligations, such lender did not agree to increase the
Company's line of credit. This has and may hereafter decrease the amount of
funds otherwise available to the Company for working capital purposes.
Accordingly, if alternative financing is not obtained for BDR Broadband and/or
NetLinc/BTT, the Company may eventually need to seek to increase the amount of
its line of credit or find an alternative financing source.
CRITICAL ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States. Preparing
financial statements in accordance with generally accepted accounting principles
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The following paragraphs
include a discussion of some critical areas where estimates are required. You
should also review Note 1 to the financial statements for further discussion of
significant accounting policies.
Revenue Recognition
The Company records revenue when products are shipped. Legal title and
risk of loss with respect to the products pass to customers at the point of
shipment. Customers do not have a right to return products shipped.
Inventory and Obsolescence
Inventory is valued at the lower of cost or market. The Company
continually ensures that slow-moving and obsolete inventory is written down to
its net realizable value by reviewing current quantities on hand, actual and
projected sales volumes and anticipated selling prices on products. Generally,
the Company does not experience issues with obsolete inventory due to the nature
of its products being interchangeable within various product offerings. If the
Company were not able to achieve its expectations of the net realizable value of
the inventory at its current value, the Company would have to adjust its
reserves accordingly.
Accounts Receivable and Allowance for Doubtful Accounts
Management periodically performs a detailed review of amounts due from
customers to determine if accounts receivable balances are impaired based on
factors affecting the collectibility of those balances. Management's estimates
of the allowance for doubtful accounts requires management to exercise
significant judgment about the timing, frequency and severity of collection
losses, which affects the allowances and net income.
Long-Lived Assets
On a periodic basis, management assesses whether there are any
indicators that the value of the Company's long-lived assets may be impaired. An
asset's value may be impaired only if management's estimate of the aggregate
future cash flows, on an undiscounted basis, to be generated by the asset are
less than the carrying value of the asset.
If impairment has occurred, the loss shall be measured as the excess
of the carrying amount of the asset over the fair value of the long-lived asset.
The Company's estimates of aggregate future cash flows expected to be generated
by each long-lived asset are based on a number of assumptions that are subject
to economic and market uncertainties. As these factors are difficult to predict
and are subject to future events that may alter management's assumptions, the
future cash flows estimated by management in their impairment analyses may not
be achieved.
19
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). 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. The adoption of FAS 146 will not have a material impact
on the Company's financial position, results of operations or cash flows.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Blonder Tongue's business operates in a rapidly changing environment
that involves a number of risks, some of which are beyond the Company's control.
The following discussion highlights some of these risks which are not otherwise
addressed elsewhere in this Annual Report. There can be no assurance that the
Company will anticipate the evolution of industry standards in CATV or the
communications industry generally, changes in the market and customer needs, or
that technologies and applications under development by the Company will be
successfully developed, or if they are successfully developed, that they will
achieve market acceptance. The competition to attract and retain highly-skilled
engineering, manufacturing, marketing and managerial personnel is intense.
Capital spending by cable operators for constructing, rebuilding, maintaining or
upgrading their systems (upon which the Company's sales and profitability are
dependent) is dependent on a variety of factors, including access to financing,
demand for their cable services, availability of alternative video delivery
technologies, and general economic conditions. Factors such as announcements of
technological innovations or new products by the Company, its competitors or
third parties, quarterly variations in the Company's actual or anticipated
results of operations, market conditions for emerging growth stocks or cable
industry stocks in general, or the failure of revenues or earnings in any
quarter to meet the investment community's expectations, may cause the market
price of the Company's Common Stock to fluctuate significantly. The stock price
may also be affected by broader market trends unrelated to the Company's
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and
positions represents the potential loss arising from adverse changes in interest
rates. At December 31, 2002 and 2001 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $5,650,000 and $15,308,000,
respectively. A hypothetical 100 basis point adverse change in interest rates
would have had an annualized unfavorable impact of approximately $57,000 and
$153,000, respectively, on the Company's earnings and cash flows based upon
these year-end debt levels. At December 31, 2002, the Company did not have any
derivative financial instruments.
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 26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about the Company's directors and executive officers
is incorporated by reference from the discussion under the heading "Directors
and Executive Officers" in the Company's proxy statement for its 2003 Annual
Meeting of Stockholders. Information about compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the discussion
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's proxy statement for its 2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information about director and executive compensation is incorporated
by reference from the discussion under the headings "Directors' Compensation,"
"Executive Compensation," "Report of Compensation Committee on Executive
Compensation Policies" and "Comparative Stock Performance" in the Company's
proxy statement for its 2003 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information about security ownership of certain beneficial owners and
management is incorporated by reference from the discussion under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's proxy statement for its 2003 Annual Meeting of Stockholders.
Information about the Company's equity compensation plans is incorporated by
reference from the discussion under the heading "Equity Compensation Plans" in
the Company's proxy statement for its 2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and transactions with related
parties is incorporated by reference from the discussion under the heading
"Certain Relationships and Related Transactions" in the Company's proxy
statement for its 2003 Annual Meeting of Stockholders.
ITEM 14. 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.
21
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants................. 27
Consolidated Balance Sheets as of December 31, 2002 and 2001....... 28
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000................................... 29
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000....................... 30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000................................... 31
Notes to Consolidated Financial Statements......................... 32
(a)(2) FINANCIAL STATEMENT SCHEDULES.
Included in Part IV of this report:
Schedule II. Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
(a)(3) EXHIBITS
The exhibits are listed in the Index to Exhibits appearing below and
are filed herewith or are incorporated by reference to exhibits previously filed
with the Commission.
(b) No reports on Form 8-K were filed in the quarter ended December 31,
2002.
(c) Exhibits:
Exhibit # Description Location
--------- ----------- --------
3.1 Restated Certificate of Incorporated by reference from
Incorporation of Blonder Tongue Exhibit 3.1 to Registrant's S-1
Laboratories, Inc. Registration Statement No.
33-98070, filed October 12, 1995,
as amended.
3.2 Restated Bylaws of Blonder Tongue Incorporated by reference from
Laboratories, Inc. Exhibit 3.2 to Registrant's S-1
Registration Statement No.
33-98070, 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, filed October 12, 1995,
as amended.
22
Exhibit # Description Location
--------- ----------- --------
10.1 Consulting Agreement, dated January Incorporated by reference from
1, 1995, between Blonder Tongue Exhibit 10.3 to Registrant's S-1
Laboratories, Inc. and James H. Registration Statement No.
Williams. 33-98070, filed October 12, 1995,
as amended.
10.2 1994 Incentive Stock Option Plan. Incorporated by reference from
Exhibit 10.5 to Registrant's S-1
Registration Statement No.
33-98070, filed October 12, 1995,
as amended.
10.3 1995 Long Term Incentive Plan. Incorporated by reference from
Exhibit 10.6 to Registrant's S-1
Registration Statement No.
33-98070, filed October 12, 1995,
as amended.
10.4 First Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 10.5(a) to Registrant's
Quarterly Report on Form 10-Q for
the period ended March 31, 1997.
10.5 Second Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 4.3 to S-8 Registration
Statement No. 333-52519 originally
filed on May 13, 1998.
10.6 Third Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 4.4 to S-8 Registration
Statement No. 333-37670, originally
filed May 23, 2000.
10.7 Fourth Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 4.5 to S-8 Registration
Statement No. 33-96993, originally
filed July 24, 2002.
10.8 Amended and Restated 1996 Director Incorporated by reference from
Option Plan. Appendix B to Registrant's Proxy
Statement for its 1998 Annual
Meeting of Stockholders, filed
March 27, 1998.
10.9 Form of Indemnification Agreement Incorporated by reference from
entered into by Blonder Tongue Exhibit 10.10 to Registrant's S-1
Laboratories, Inc. in favor of each Registration Statement No.
of its Directors and Officers. 33-98070, filed October 12, 1995,
as amended.
10.10 VideoCipher(R) IICM Commercial Incorporated by reference from
Descrambler Module Master Purchase Exhibit 10.11 to Registrant's S-1
and License Agreement, dated August Registration Statement No.
23, 1990, between Blonder Tongue 33-98070, filed October 12, 1995,
Laboratories, Inc. and Cable/Home as amended.
Communication Corp.
+10.11 Patent License Agreement, dated Incorporated by reference from
August 21, 1995, between Blonder Exhibit 10.12 to Registrant's S-1
Tongue Laboratories, Inc. and Registration Statement No.
Philips Electronics North America 33-98070, filed October 12, 1995,
Corporation. as amended.
+10.12 Interdiction Technology License Incorporated by reference from
Agreement, dated August 21, 1995, Exhibit 10.13 to Registrant's S-1
between Blonder Tongue Registration Statement No.
Laboratories, Inc. and Philips 33-98070, filed October 12, 1995,
Broadband Networks, Inc. as amended.
10.13 Bargaining Unit Pension Plan. Incorporated by reference from
Exhibit 10.22 to Registrant's S-1
Registration Statement No.
33-98070, filed October 12, 1995,
as amended.
23
Exhibit # Description Location
--------- ----------- --------
10.14 Executive Officer Bonus Plan. Incorporated by reference from
Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for
the period ended March 31, 1997,
filed May 13, 1997.
10.15 Second Amendment to Consulting and Incorporated by reference from
Non-Competition Agreement between Exhibit 10.1 to Registrant's
Registrant and James H. Williams, Quarterly Report on Form 10-Q for
dated as of June 30, 2000. the period ended June 30, 2000,
filed August 14, 2000.
10.16 Loan and Security Agreement dated Incorporated by reference from
March 20, 2002 between Blonder Exhibit 10.1 to Registrant's
Tongue Laboratories, Inc. and Quarterly Report on Form 10-Q for
Commerce Bank, N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.17 Revolving Credit Note dated March Incorporated by reference from
20, 2002 by Blonder Tongue Exhibit 10.2 to Registrant's
Laboratories, Inc. in favor of Quarterly Report on Form 10-Q for
Commerce Bank, N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.18 Term Loan A Note dated March 20, Incorporated by reference from
2002 by Blonder Tongue Exhibit 10.3 to Registrant's
Laboratories, Inc. in favor of Quarterly Report on Form 10-Q for
Commerce Bank, N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.19 Term Loan B Note dated March 20, Incorporated by reference from
2002 by Blonder Tongue Exhibit 10.4 to Registrant's
Laboratories, Inc. in favor of Quarterly Report on Form 10-Q for
Commerce Bank, N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.20 Mortgage, Security Agreement and Incorporated by reference from
Fixture Filing dated March 20, Exhibit 10.5 to Registrant's
2002, between Blonder Tongue Quarterly Report on Form 10-Q for
Laboratories, Inc. and Commerce the period ending March 31, 2002,
Bank, N.A. filed May 15, 2002.
10.21 Assignment of Rents and Leases made Incorporated by reference from
by Blonder Tongue Laboratories, Exhibit 10.6 to Registrant's
Inc. in favor of Commerce Bank, Quarterly Report on Form 10-Q for
N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.22 Patent Security Agreement dated Incorporated by reference from
March 20, 2002 by Blonder Tongue Exhibit 10.7 to Registrant's
Laboratories, Inc. in favor of Quarterly Report on Form 10-Q for
Commerce Bank, N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.23 Trademark Security Agreement dated Incorporated by reference from
March 20, 2002 by Blonder Tongue Exhibit 10.8 to Registrant's
Laboratories, Inc. in favor of Quarterly Report on Form 10-Q for
Commerce Bank, N.A. the period ending March 31, 2002,
filed May 15, 2002.
10.24 Surety Agreement dated March 20, Incorporated by reference from
2002 by Blonder Tongue Investment Exhibit 10.9 to Registrant's
Company in favor of Commerce Bank, Quarterly Report on Form 10-Q for
N.A. the period ending March 31, 2002,
filed May 15, 2002.
21 Subsidiaries of Blonder Tongue Filed herewith.
Laboratories, Inc.
23 Consent of BDO Seidman, LLP. Filed herewith.
99.1 Certification pursuant to Section Filed herewith.
906 of the Sarbanes-Oxley Act of
2002.
- ------
+ Certain portions of exhibit have been afforded confidential treatment
by the Securities and Exchange Commission.
24
(d) FINANCIAL STATEMENT SCHEDULES:
Report of BDO Seidman, LLP on financial statement schedule is included
on page 46 of this Annual Report on Form 10-K.
The following financial statement schedule is included on page 47 of
this Annual Report on Form 10-K:
Schedule II. Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
25
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants........................... 27
Consolidated Balance Sheets as of December 31, 2002 and 2001................. 28
Consolidated Statements of Operations for the Years Ended December 31, 2002,
2001 and 2000................................................................ 29
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000............................................. 30
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000.......................................................... 31
Notes to Consolidated Financial Statements................................... 32
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
Old Bridge, New Jersey
We have audited the accompanying consolidated balance sheets of Blonder Tongue
Laboratories, Inc. and subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 2002, Blonder Tongue Laboratories, Inc., and subsidiaries adopted the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
BDO Seidman, LLP
Woodbridge, New Jersey
March 5, 2003, with the exception of Notes 4 and 15
for which the date is March 28, 2003
27
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
--------------------
2002 2001
-------- --------
ASSETS (NOTE 4)
Current assets:
Cash ................................................................ $ 258 $ 942
Accounts receivable, net of allowance for doubtful
accounts of $715 and $1,833 respectively (Note 8) ................... 6,713 8,564
Inventories, net (Note 2) ........................................... 24,760 30,216
Notes receivable (Note 14) .......................................... 459 --
Income tax receivable ............................................... 170 --
Other current assets ................................................ 556 932
Deferred income taxes (Note 12) ..................................... 1,858 1,746
-------- --------
Total current assets ............................................ 34,774 42,400
Notes receivable (Note 14) ............................................... 1,019 --
Property, plant and equipment, net of accumulated
depreciation and amortization (Notes 3 and 5) ........................ 6,831 7,137
Patents, net ............................................................. 3,120 3,454
Rights-of-Entry, net (Note 13) ........................................... 1,396 --
Goodwill, net ............................................................ -- 10,760
Other assets, net ........................................................ 951 585
Deferred income taxes (Note 12) .......................................... 3,911 50
-------- --------
$ 52,002 $ 64,386
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4) .......................... $ 2,632 $ 2,917
Accounts payable .................................................... 888 6,672
Accrued compensation ................................................ 514 867
Accrued benefit liability ........................................... 196 270
Other accrued expenses .............................................. 227 218
Income taxes ........................................................ -- 202
-------- --------
Total current liabilities ....................................... 4,457 11,146
-------- --------
Long-term debt (Note 4) .................................................. 14,278 13,278
Commitments and contingencies (Notes 5, 6 and 7) ......................... -- --
Stockholders' equity (Notes 6, 9 and 11):
Preferred stock, $.001 par value; authorized 5,000 shares;
no shares outstanding ............................................... -- --
Common stock, $.001 par value; authorized 25,000 shares, 8,445 shares
Issued .............................................................. 8 8
Paid-in capital ..................................................... 24,145 24,143
Retained earnings ................................................... 15,991 22,448
Accumulated other comprehensive loss ................................ (508) (351)
Treasury stock, at cost, 879 shares and 831 shares, respectively .... (6,369) (6,286)
-------- --------
Total stockholders' equity ...................................... 33,267 39,962
-------- --------
$ 52,002 $ 64,386
======== ========
See accompanying notes to consolidated financial statements
28
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Net sales (Note 8) .............................................. $ 46,951 $ 53,627 $ 70,196
Cost of goods sold .............................................. 34,195 36,928 46,974
-------- -------- --------
Gross profit ................................................ 12,756 16,699 23,222
-------- -------- --------
Operating expenses:
Selling expenses ............................................ 4,069 5,009 5,943
General and administrative (Notes 5, 6 and 7) ............... 4,991 6,200 7,629
Research and development .................................... 1,972 2,200 2,125
-------- -------- --------
11,032 13,409 15,697
-------- -------- --------
Earnings from operations ........................................ 1,724 3,290 7,525
-------- -------- --------
Other income (expense):
Interest expense ............................................ (1,074) (1,369) (1,948)
Other income ................................................ -- -- 10
-------- -------- --------
(1,074) (1,369) (1,938)
-------- -------- --------
Earnings before income taxes .................................... 650 1,921 5,587
Provision for income taxes (Note 12) ............................ 221 704 2,011
-------- -------- --------
Earnings before cumulative effect of change in accounting
principle, net of tax ....................................... 429 1,217 3,576
Cumulative effect of change in accounting
principle, net of tax (Note 1) ............................... (6,886) -- --
-------- -------- --------
Net (loss) earnings ............................................. $ (6,457) $ 1,217 $ 3,576
======== ======== ========
Basic earnings per share before
cumulative effect ............................................ $ 0.06 $ 0.16 $ 0.47
Cumulative effect of change in accounting
principle, net of tax ........................................ (0.90) -- --
-------- -------- --------
Basic earnings (loss) per share ................................. ($ 0.84) $ 0.16 $ 0.47
======== ======== ========
Basic weighted average shares outstanding ....................... 7,604 7,613 7,620
======== ======== ========
Diluted earnings per share before
cumulative effect ............................................ $ 0.06 $ 0.16 $ 0.47
Cumulative effect of change in accounting
principle, net of tax ........................................ (0.90) -- --
-------- -------- --------
Diluted earnings (loss) per share ............................... $ (0.84) $ 0.16 $ 0.47
======== ======== ========
Diluted weighted average shares outstanding ..................... 7,604 7,637 7,632
======== ======== ========
See accompanying notes to consolidated financial statements
29
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock Accumulated
-------------------- Other
Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Loss Stock Total
-------- -------- -------- -------- -------- -------- --------
Balance at January 1, 2000........... 8,392 $ 8 $ 23,870 $ 17,655 $ -- $ (6,286) $ 35,247
Proceeds from exercise of stock
options ......................... 52 -- 273 -- -- -- 273
Net earnings .................... -- -- -- 3,576 -- -- 3,576
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000......... 8,444 8 24,143 21,231 -- (6,286) 39,096
Net earnings..................... -- -- -- 1,217 -- -- 1,217
Unrecognized pension expense, net
of tax (Note 6).................. -- -- -- -- (351) -- (351)
--------
Comprehensive income............. 866
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2001......... 8,444 8 24,143 22,448 (351) (6,286) 39,962
Net loss......................... -- -- -- (6,457) -- -- (6,457)
Unrecognized pension expense, net
of tax (Note 6).................. -- -- -- -- (157) -- (157)
-------- -------- -------- -------- -------- -------- --------
Comprehensive loss............... (6,614)
Proceeds from exercise of stock
options.......................... 1 -- 2 -- -- -- 2
Acquisition of treasury stock.... -- -- -- -- -- (83) (83)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 ........ 8,445 $ 8 $ 24,145 $ 15,991 $ (508) $ (6,369) $ 33,267
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
30
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Cash Flows From Operating Activities:
Net earnings (loss) ........................................ $ (6,457) $ 1,217 $ 3,576
Adjustments to reconcile net earnings to cash
provided by operating activities:
Cumulative effect of change in accounting principle .... 6,886 -- --
Depreciation ........................................... 1,269 1,310 1,464
Amortization ........................................... 550 1,502 1,537
Provision for inventory reserves ....................... 500 540 211
Provision for doubtful accounts ........................ 180 307 741
Deferred income taxes .................................. 308 4 (570)
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable .................................. 1,640 (1,746) 2,103
Inventories .......................................... 3,509 (4,423) 249
Other current assets ................................. 376 2,054 (1,257)
Other assets ......................................... (366) 43 --
Income taxes ......................................... (779) (266) 154
Accounts payable and accrued expenses ................ (6,359) 3,169 (1,952)
-------- -------- --------
Net cash provided by operating activities ......... 1,257 3,711 6,256
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures ....................................... (695) (803) (368)
Acquisition of licenses .................................... -- -- (501)
Acquisition of BDR Broadband assets ........................ (1,880) -- --
-------- -------- --------
Net cash used in investing activities ............. (2,575) (803) (869)
-------- -------- --------
Cash Flows From Financing Activities:
Net borrowings (repayments) under revolving line of credit . -- 2,117 (922)
Repayments of long-term debt ............................... (34,909) (4,356) (4,423)
Borrowings of long-term debt ............................... 35,624 -- --
Deferred financing costs ................................... -- (90) --
Proceeds from exercise of stock options .................... 2 -- 273
Acquisition of treasury stock .............................. (83) -- --
-------- -------- --------
Net cash provided by (used in) financing
activities ...................................... 634 (2,329) (5,072)
-------- -------- --------
Net increase (decrease) in cash ................................. (684) 579 315
Cash, beginning of year ......................................... 942 363 48
-------- -------- --------
Cash, end of year ............................................... $ 258 $ 942 $ 363
======== ======== ========
Supplemental Cash Flow Information:
Cash paid for interest ..................................... $ 1,138 $ 1,447 $ 1,955
Cash paid for income taxes ................................. 537 966 2,070
======== ======== ========
Non-cash investing and financing activities:
Inventory sold for notes receivable ........................ $ 1,447 $ -- $ --
See accompanying notes to consolidated financial statements
31
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Company and Basis of Presentation
Blonder Tongue Laboratories, Inc. (the "COMPANY") is a designer,
manufacturer and supplier of electronics and systems equipment for the cable
television industry, primarily throughout the United States. 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) Accounts Receivable and Allowance for Doubtful accounts
Accounts receivable are customer obligations due under normal trade
terms. The Company sells its products primarily to distributors and private
label operators. The Company performs continuing credit evaluations of its
customers' financial condition and although the Company generally does not
require collateral, letters of credit may be required from its customers in
certain circumstances.
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables will potentially be uncollectible. The Company
includes any accounts receivable balances that are determined to be
uncollectible, along with a general reserve, in its overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information
available, the Company believes its allowance for doubtful accounts as of
December 31, 2002 is adequate. However, actual write-offs might exceed the
recorded allowance.
(c) Inventories
Inventories are stated at the lower of cost, determined by the
first-in, first-out ("FIFO") method, or market.
Inventory is valued at the lower of cost or market. The Company
continually ensures that slow-moving and obsolete inventory is written down to
its net realizable value by reviewing current quantities on hand, actual and
projected sales volumes and anticipated selling prices on products. Generally,
the Company does not experience issues with obsolete inventory due to the nature
of its products being interchangeable within various product offerings. If the
Company were not able to achieve its expectations of the net realizable value of
the inventory at its current value, the Company would have to adjust its
reserves accordingly.
(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
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, net totaling $4,516 and $14,214 as of December 31,
2002 and 2001, respectively, consist of goodwill, prepaid licensing fees,
acquired patent rights, and rights-of-entry, and are carried at cost less
accumulated amortization. Amortization is computed utilizing the straight-line
method over the estimated useful life
32
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
of the respective asset, 12 years for patents, 5 years for rights-of-entry, 3 to
15 years for licensing fees, and 15 years for goodwill. Accumulated amortization
was $2,553 and $6,628 for 2002 and 2001, respectively.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
FAS No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and
Other Intangible Assets" ("FAS 142"). 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 141 and FAS 142 were adopted by the Company on January 1, 2002.
The adoption of this pronouncement resulted in the Company recording a $6,886,
non-cash charge, net of tax, to reduce the carrying value of its goodwill. Such
charge 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 and 2000, the Company's earnings
would have been improved because of reduced amortization, as described below:
2001 Net Earnings Basic Earnings Per Share Diluted Earnings Per Share
---- ------------ ------------------------ --------------------------
Reported Net Earnings .................. $1,217 $ 0.16 $ 0.16
Add Amortization, Net of Tax ........... 621 0.08 0.08
------ -------- --------
Adjusted Net Earnings .................. $1,838 $ 0.24 $ 0.24
====== ======== ========
2000
----
Reported Net Earnings .................. $3,576 $ 0.47 $ 0.47
Add Amortization, Net of Tax ........... 644 0.08 0.08
------ -------- --------
Adjusted Net Earnings .................. $4,220 $ 0.55 $ 0.55
====== ======== ========
The Company continues to amortize its patents, rights-of-entry and licensing
fees over their estimated useful lives with no significant residual value.
Amortization expense for intangible assets excluding goodwill was $550, $532,
and $530 for the year ending December 31, 2002, 2001, and 2000 respectively.
Intangibles amortization is projected to be approximately $600 per year for the
next five years.
(g) Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 standardized the accounting practices for the recognition and
measurement of impairment losses on certain long-lived assets based on
non-discounted cash flows. No impairment losses have been recorded through
December 31, 2002.
(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, 2002, 2001 and 2000.
(i) Research and Development
Research and development expenditures for the Company's projects are
expensed as incurred.
33
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(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 calculated in accordance with FAS 128, which
provides for the calculation of "basic" and "diluted" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net earnings
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise of stock options.
(l) Treasury Stock
Treasury Stock is recorded at cost. Gains and losses on disposition
are recorded as increases or decreases to additional paid-in capital with losses
in excess of previously recorded gains charged directly to retained earnings.
(m) Derivative Financial Instruments
The Company utilizes interest rate swaps to manage interest rate
exposures. The Company specifically designates interest rate swaps as hedges of
debt instruments and recognizes interest differentials as adjustments to
interest expense in the period they occur. The Company does not hold or issue
financial instruments for trading purposes. The Company does not hold any
derivative financial instruments at December 31, 2002.
(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 47% of the Company's employees are covered by a three
year collective bargaining agreement, which expires in February 2005.
The Company estimates that headend products accounted for
approximately 66% of the Company's revenues in 2002, 58% in 2001 and 40% in
2000. Any substantial decrease in sales of headend products could have a
material adverse effect on the Company's results of operations, financial
condition, and cash flows.
On an as-needed basis, 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 Motorola,
Inc., which are standard encryption methodologies employed on U.S. C-Band and
Ku-Band transponders and Hughes Network Systems digital satellite receivers for
delivery of DIRECTV(TM) programming. An inability to timely obtain sufficient
quantities of these components could have a material adverse effect on the
Company's operating results. The Company does not have an agreement with any
sole source supplier requiring the supplier to sell a specified volume of
components to the Company.
(o) Stock Options
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for
Stock-Based Compensation, requires the Company to provide pro forma information
regarding net income and net income per common share as if compensation cost for
stock options granted under the
34
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
plans, if applicable, had been determined in accordance with the fair value
based method prescribed in FAS 123. The Company does not plan to adopt the fair
value based method prescribed by FAS 123.
The Company estimates the fair value of each stock option grant by
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: expected lives of 9.5 years, no dividend yield,
volatility at 73%, risk free interest rate of 3.2% for 2002; expected lives of
9.5 years, no dividend yield, volatility at 71%, risk free interest rate of
5.03% for 2001, and expected lives of 6 years, no dividend yield, volatility at
68%, risk free interest rate of 6.2% for 2000.
Under accounting provisions of FAS 123, the Company's net income
(loss) to common shareholders and net income (loss) per common share would have
been adjusted to the pro forma amounts indicated below (in thousands, except per
share data):
Years Ended December 31
2002 2001 2000
------- ------- -------
Net income (loss) as reported ................ $(6,457) $ 1,217 $ 3,576
Adjustments for fair value of stock options,
net of tax .................................. 590 469 473
------- ------- -------
Pro forma ............................... ($7,047) $ 748 $ 3,103
======= ======= =======
Net income (loss) per share basic and diluted:
As reported ............................. $ (0.84) $ 0.16 $ 0.47
======= ======= =======
Pro forma ............................... $ (0.93) $ 0.10 $ 0.41
======= ======= =======
(p) Shipping and Handling Costs
Shipping and handling costs are recorded as a component of selling
expenses. Revenues from shipping and handling are not significant. Shipping and
handling costs were $181, $120 and $275 for the years ended December 31, 2002,
2001 and 2000, respectively.
(q) New Accounting Pronouncements
In July 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). 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. The adoption of FAS 146 will not have a material impact
on the Company's financial position, results of operations or cash flows.
NOTE 2 - INVENTORIES
Inventories, net of reserves, are summarized as follows:
December 31,
-----------------------
2002 2001
------- -------
Raw materials ......... $11,054 $13,071
Work in process ....... 1,660 2,797
Finished goods ........ 12,046 14,348
------- -------
$24,760 $30,216
======= =======
35
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
December 31,
--------------------
2002 2001
-------- --------
Land ........................................... $ 1,000 $ 1,000
Building ....................................... 3,361 3,361
Machinery and equipment ........................ 7,473 7,365
Cable systems .................................. 811 --
Furniture and fixtures ......................... 401 398
Office equipment ............................... 1,754 1,713
Building improvements .......................... 640 640
-------- --------
15,440 14,477
Less: Accumulated depreciation and
amortization ........................... (8,609) (7,340)
-------- --------
$ 6,831 $ 7,137
======== ========
NOTE 4 - DEBT
On March 20, 2002 the Company entered into a credit agreement with
Commerce Bank, N.A. ("Commerce Bank") 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 December 31, 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 December 31, 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.
The average amount outstanding on the Company's line of credit during
2002 was $3,208 at a weighted average interest rate of 5.0%. The maximum amount
outstanding on the line of credit during 2002 was $5,650. At December 31, 2002,
$650 was available under the line of credit.
At December 31, 2002, the Company was unable to meet one of its
financial covenants under its credit agreement with its bank, compliance with
which was waived by such bank as of December 31, 2002.
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 Company also had, prior to March 20, 2002, two
outstanding term loans with First Union, which accrued interest at a variable
interest rate.
36
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The fair value of the debt approximates the recorded value based on
the borrowing rates currently available to the Company for loans with similar
terms and maturities.
Long-term debt consists of the following:
December 31,
--------------------------
2002 2001
-------- --------
Revolving Line of Credit ................... $ 5,650 $ 4,367
Term Loan .................................. 7,313 9,000
Mortgage loan .............................. 3,325 1,941
Capital leases (Note 5) .................... 622 887
-------- --------
16,910 16,195
Less: Current portion ..................... (2,632) (2,917)
-------- --------
$ 14,278 $ 13,278
======== ========
Annual maturities of long-term debt at December 31, 2001 are:
2003 ........... $ 2,632
2004 ........... 8,291
2005 ........... 2,649
2006 ........... 947
2007 ........... 233
Thereafter ..... 2,158
-------
$16,910
=======
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain factory and automotive equipment under
noncancellable operating leases and equipment under capital leases expiring at
various dates through December, 2006.
Future minimum rental payments, required for all noncancellable leases
are as follows:
Capital Operating
---------- -----------
2003 ................................................. $194 $158
2004 ................................................. 191 75
2005 ................................................. 186 20
2006 ................................................. 157 --
2007 ................................................. -- --
Thereafter ........................................... -- --
---- ----
Total future minimum lease payments .................. 728 $253
====
Less: amounts representing interest ................. 106
----
Present value of minimum lease payments............... $622
====
Property, plant and equipment included capitalized leases of $2,552 at
December 31, 2002 and 2001, less accumulated amortization of $1,786 and $1,477
at December 31, 2002 and 2001, respectively.
Rent expense was $155, $111 and $160 for the years ended December 31,
2002, 2001 and 2000, respectively.
37
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Litigation
The Company is a party to certain proceedings incidental to the
ordinary course of its business, none of which, in the current opinion of
management, is likely to have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows.
NOTE 6 - BENEFIT PLANS
Defined Contribution Plan
The Company has a defined contribution plan covering all full time
non-union employees qualified under Section 401(k) of the Internal Revenue Code,
in which the Company matches a portion of an employee's salary deferral. The
Company's contributions to this plan were $213, $208, and $185 for the years
ended December 31, 2002, 2001 and 2000, respectively.
Defined Benefit Pension Plan
Substantially all union employees who meet certain requirements of
age, length of service and hours worked per year are covered by a Company
sponsored non-contributory defined benefit pension plan. Benefits paid to
retirees are based upon age at retirement and years of credited service. Net
periodic pension cost for this plan includes the following components:
December 31,
-------------------------
Components of net periodic pension cost: 2002 2001 2000
------- ------- --------
Service cost ............................ $ 137 $ 155 $ 121
Interest cost ........................... 127 116 80
Actual return on plan assets ............ (124) (105) (148)
Recognized net actuarial (gain) loss .... 29 27 63
----- ----- -----
Net periodic pension cost ............... $ 169 $ 193 $ 116
===== ===== =====
38
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The funded status of the plan and the amounts recorded in the
Company's consolidated balance sheets are as follows:
December 31,
------------------
2002 2001
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year ...... $ 1,905 $ 1,299
Service cost ................................. 137 155
Interest cost ................................ 127 116
Actuarial (gain) loss ........................ (64) 369
Benefits paid ................................ (100) (34)
------- -------
Benefit obligation at end of year ............ 2,005 1,905
------- -------
Change in plan assets:
Fair value of plan assets at beginning
of year .................................... 1,575 1,427
Actual return on plan assets ................. (203) (9)
Employer contribution ........................ 479 191
Benefits paid ................................ (100) (34)
------- -------
Fair value of plan assets at end of year ..... 1,751 1,575
------- -------
Funded status ................................ (254) (329)
Unrecognized net actuarial loss .............. 919 694
Unrecognized net transition liability ........ (40) (50)
------- -------
Prepaid benefit cost ......................... $ 625 $ 315
======= =======
Key economic assumptions used in these determinations were:
December 31,
----------------------
2002 2001
--------- -------
Discount rate............................. 7.0% 7.0%
Expected long-term rate of return......... 7.0% 7.0%
The Company recorded an unrecognized pension expense of $508 and $351,
net of tax as an accumulated other comprehensive loss adjustment to
stockholders' equity in 2002 and 2001 respectively. This amount represents a
portion of the unrecognized net actuarial loss for the years ending December 31,
2002 and 2001, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
On January 1, 1995, the Company entered into a consulting and
non-competition agreement with a director, who is also the second largest
stockholder. Under the agreement, the director provides consulting services on
various operational and financial issues and is currently paid at an annual rate
of $169 but in no event is such annual rate permitted to exceed $200. The
director also agreed to keep all Company information confidential and will not
compete directly or indirectly with the Company for the term of the agreement
and for a period of two years thereafter. The initial term of this Agreement
expires on December 31, 2004 and automatically renews thereafter for successive
one-year terms (subject to termination at the end of the initial term or any
renewal term on at least 90 days' notice).
39
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
As of December 31, 2002, the Chief Executive Officer was
indebted to the Company in the amount of $201, for which no interest has been
charged. This indebtedness arose from a series of cash advances, the latest of
which was advanced in February 2002.
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 five of the Company's customers. These customers accounted for
approximately 52% and 29% of the Company's outstanding trade accounts receivable
at December 31, 2002 and 2001, respectively. These customers are distributors of
telecommunications and private cable television components, and providers of
franchise and private cable television service. The Company performs ongoing
credit evaluations of its customers' financial condition, uses credit insurance
and requires collateral, such as letters of credit, to mitigate its credit risk.
The deterioration of the financial condition of one or more of its major
customers could adversely impact the Company's operations. 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.
For the year ended December 31, 2002, the Company's largest customer
accounted for approximately 20% of the Company's sales. This customer also
accounted for approximately 14% of the Company's sales in 2001 and for
approximately 11% of the Company's sales in 2000. At December 31, 2002, three
other customers accounted for 10%, 11% and 11%, respectively, of the Company's
outstanding trade accounts receivable. Management believes these amounts to be
collectible. For the year ending December 31, 2000, the Company's largest
customer accounted for approximately 29% of the Company's sales.
NOTE 9 - STOCKHOLDERS' EQUITY
On July 24, 2002, the Company commenced a stock repurchase program to
acquire up to $300 of its outstanding common stock. The stock repurchase was
funded by a combination of the Company's cash on hand and borrowings against its
revolving line of credit. During 2002, 48 shares were repurchased.
NOTE 10 - EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share for each of the three
years ended December 31, 2002, 2001 and 2000 are calculated as follows:
40
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Net Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
For the year ended December 31, 2002:
Basic and Diluted earnings (loss)
per share............................... $ (6,457) 7,604 $ (0.84)
==============================================
For the year ended December 31, 2001:
Basic earnings per share................. $1,217 7,613 $ 0.16
Effect of assumed conversion of employee
stock options............................ -- 24 --
----------------------------------------------
Diluted earnings per share............... $ 1,217 7,637 $ 0.16
==============================================
For the year ended December 31, 2000:
Basic earnings per share................. $ 3,576 7,620 $ 0.47
Effect of assumed conversion of employee
stock options............................ -- 12 --
----------------------------------------------
Diluted earnings per share............... $ 3,576 7,632 $ 0.47
==============================================
The diluted share base excludes incremental shares of 1,301, 888 and
850 related to stock options and a warrant for December 31, 2002, 2001 and 2000,
respectively. These shares were excluded due to their antidilutive effect.
NOTE 11 - STOCK OPTION PLANS
In 1994, the Company established the 1994 Incentive Stock Option Plan
(the "1994 PLAN"). The 1994 Plan provides for the granting of Incentive Stock
Options to purchase shares of the Company's common stock to officers and key
employees at a price not less than the fair market value at the date of grant as
determined by the compensation committee of the Board of Directors. The maximum
number of shares available for issuance under the plan was 298. Options become
exercisable as determined by the compensation committee of the Board of
Directors at the date of grant. Options expire ten years from the date of grant.
In October, 1995, the Company's Board of Directors and stockholders
approved the 1995 Long Term Incentive Plan (the "1995 PLAN"). The 1995 Plan
provides for grants of "incentive stock options" or nonqualified stock options,
and awards of restricted stock, to executives and key employees, including
officers and employee Directors. The 1995 Plan is administered by the
Compensation Committee of the Board of Directors, which determines the optionees
and the terms of the options granted under the 1995 Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof, as
well as the recipients and number of shares awarded for restricted stock awards;
provided, however, that no employee may receive stock options or restricted
stock awards which would result, separately or in combination, in the
acquisition of more than 100 shares of Common Stock of the Company under the
1995 Plan. The exercise price of incentive stock options granted under the 1995
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant. With respect to any optionee who owns stock representing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option must be equal to at
least 110% of the fair market value of the Common Stock on the date of grant,
and the term of the option may not exceed five years. The term of all other
incentive stock options granted under the 1995 Plan may not exceed ten years.
The aggregate fair market value of Common Stock (determined as of the date of
the option grant) for which an incentive stock option may for the first time
become exercisable in any calendar year may not exceed $100. The exercise price
for nonqualified stock options is established by the Compensation Committee, and
may be more or less than the fair market value of the Common Stock on the date
of grant.
41
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Stockholders have previously approved a total of 1,150 shares of
common stock for issuance under the 1995 Plan, as amended to date.
In May, 1998, the stockholders of the Company approved the Amended and
Restated 1996 Director Option Plan (the "AMENDED 1996 PLAN"). Under the plan,
Directors who are not currently employed by the Company or any subsidiary of the
Company and have not been so employed within the preceding six months are
eligible to receive options from time to time to purchase the number of shares
of Common Stock determined by the Board in its discretion; provided, however,
that no Director is permitted to receive options to purchase more than 5 shares
of Common Stock in any one calendar year. The exercise price for such shares is
the fair market value thereof on the date of grant, and the options vest as
determined in each case by the Board of Directors. Options granted under the
Amended 1996 Plan must be exercised within 10 years from the date of grant. A
maximum of 100 shares of Common Stock are subject to issuance under the Amended
1996 Plan. The plan is administered by the Board of Directors.
In 1996, the Board of Directors granted a non-plan, non-qualified
option for 10 shares to an individual, who was not an employee or director of
the Company at the time of the grant. The option was originally exercisable at
$10.25 per share and expires in 2006. This option was repriced to $6.88 per
share on September 17, 1998.
The following tables summarize information about stock options
outstanding for each of the three years ended December 31, 2000, 2001 and 2002:
Weighted- Weighted-
Average Average
1994 Exercise 1995 Exercise 1996 Weighted-Average
Plan (#) Price ($) Plan (#) Price ($) Plan (#) Exercise Price ($)
---------------------------------------------------------------------------------------------
Shares under option:
Outstanding at
January 1, 2000 111 5.42 656 6.97 34 6.82
Granted -- -- 156 6.78 20 7.03
Exercised (23) 3.44 (28) 6.88 -- --
Forfeited -- -- (55) 6.82 -- --
Outstanding at
December 31, 2000 88 5.93 729 6.94 54 6.90
Granted 34 2.88 130 2.95 20 2.88
Exercised -- -- -- -- -- --
Forfeited (35) 9.19 (92) 7.72 -- --
Outstanding at
December 31, 2001 87 3.42 767 6.18 74 5.80
Granted -- -- 302 3.42 20 3.40
Exercised (1) 2.88 -- -- -- --
Forfeited (6) 3.16 (30) 6.70 -- --
Outstanding at
December 31, 2002 80 3.45 1,039 5.36 94 5.29
Options exercisable
at December 31, 2002 65 3.58 576 6.55 74 5.80
Weighted-average fair
value of options granted
during: 2000 -- $4.49 $4.51
2001 $2.22 $2.28 $2.22
2002 -- $2.70 $2.60
Total options available for grant were 68 and 105 at December 31, 2002
and December 31, 2001, respectively.
42
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Options Outstanding Options Exercisable
--------------------------------------- ----------------------------------
Range of Number of Options Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding at Remaining Exercise Price Exercisable Exercise Price
Prices ($) 12/31/02 Contractual Life ($) at 12/31/02 ($)
- ---------------------------------------- --------------------------------------------------------------------------
1994 Plan:
2.57 to 2.88 49 4.6 2.73 34 2.66
4.33 28 2.4 4.33 28 4.33
6.88 3 3.9 6.88 3 6.88
----- -----
2.57 to 6.88 80 3.8 3.45 65 3.58
===== =====
1995 Plan:
2.79 to 3.19 125 8.2 2.89 40 2.89
3.43 to 3.64 306 9.2 3.44 3 3.64
5.88 to 6.75 155 7.3 6.64 116 6.61
6.88 to 7.38 448 4.3 6.89 412 6.89
8.63 5 6.7 8.63 5 8.63
----- -----
1,039 6.7 5.36 576 6.55
===== ===
1996 Plan:
2.88 20 8.1 2.88 20 2.88
3.40 20 9.1 3.40 -- --
6.53 8 6.5 6.53 8 6.53
6.88 to 7.03 45 5.9 6.95 45 6.95
8.50 1 .5 8.50 1 8.50
----- -----
94 7.1 5.29 74 5.80
===== =====
NOTE 12 - INCOME TAXES
The following summarizes the provision (benefit) for income taxes:
Year Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
Current:
Federal ....................... $ (56) $ 660 $ 2,438
State and local ............... (31) 40 143
------- ------- -------
(87) 700 2,581
Deferred:
Federal ....................... 275 3 (554)
State and local ............... 33 1 (16)
------- ------- -------
308 4 (570)
------- ------- -------
Provision for income taxes ....... $ 221 $ 704 $ 2,011
======= ======= =======
43
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The provision for income taxes differs from the amounts computed by
applying the applicable Federal statutory rates due to the following:
Year Ended December 31,
-------------------------
2002 2001 2000
------ ------ ------
Provision for Federal income taxes at the statutory rate .... $ 221 $ 653 $1,900
State and local income taxes, net of Federal benefit ........ 46 26 75
Adjustment of prior year's accruals ......................... (55) -- --
Other, net .................................................. 9 25 36
------ ------ ------
Provision for income taxes .................................. $ 221 $ 704 $2,011
====== ====== ======
Significant components of the Company's deferred tax assets
and liabilities are as follows:
December 31,
-----------------------
2002 2001
-------- ---------
Deferred tax assets:
Allowance for doubtful accounts ............... $ 385 $ 660
Inventory ..................................... 1,289 946
Other ......................................... 184 140
Other - Long Term ............................. 409 316
Other - Goodwill .............................. 3,723 --
------- -------
Total deferred tax assets ................... 5,990 2,062
------- -------
Deferred tax liabilities:
Depreciation .................................. (221) (266)
------- -------
Total deferred tax liabilities .............. (221) (266)
------- -------
$ 5,769 $ 1,796
======= =======
NOTE 13 - ACQUISITION (DOLLARS IN THOUSANDS)
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, BDR Broadband, LLC ("BDR BROADBAND"), 80% of the outstanding capital
stock of which is owned by the Company, acquired the Systems, which are
comprised of approximately 3,270 existing MDU cable television subscribers and
approximately 7,340 passings. BDR Broadband 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
and BDR Broadband has been reflected in the consolidated results of the Company
since that date. The Systems are expected to be cash flow 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.
The purchase price was allocated $1,489 to rights-of-entry and $391 to
fixed assets. The rights-of-entry will be amortized over a five year period.
In consideration for its majority interest in BDR Broadband, the
Company advanced to BDR Broadband $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
BDR Broadband.
44
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The approximately $1,630 balance of the purchase price was paid by the Company
on behalf of BDR Broadband on November 30, 2002 pursuant to the terms and in
satisfaction of certain promissory notes executed by BDR Broadband in favor of
the sellers.
NOTE 14 - NOTES RECEIVABLE
During September 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 15 - SUBSEQUENT EVENT
In March, 2003, the Company entered into a series of agreements,
pursuant to which the Company acquired a 20% minority interest in NetLinc
Communications, LLC ("NETLINC") and a 35% minority interest in Blonder Tongue
Telephone, LLC ("BTT") (to which the Company has licensed its name). The
aggregate purchase price consists of (i) up to $3,500 payable over a minimum of
two years, plus (ii) 500 shares of the Company's common stock. Of the $3,500
payable under the agreements, the Company's obligation to pay $2,500 is
contingent upon BTT achieving specified targeted monthly earnings objectives.
NOTE 16 - QUARTERLY FINANCIAL INFORMATION - UNAUDITED
2002 Quarters 2001 Quarters
------------- ------------------
First Second Third Fourth First Second Third Fourth
---------------------------------------------------------------------------------------
Net sales........................... $10,890 $11,257 $13,171 $11,633 $10,745 $12,752 $16,064 $14,066
Gross profit........................ 3,316 3,051 3,777 2,612 3,646 4,577 5,251 3,225
Net earnings (loss)................. (6,703) 33 536 (323) (207) 498 1,034 (108)
Basic earnings (loss) per share..... (0.88) .01 .07 (.04) (.03) .07 .14 (.02)
Diluted earnings (loss) per share... (0.88) .01 .07 (.04) (.03) .07 .14 (.02)
45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
The audits referred to in our report dated March 5, 2003, 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 5, 2003
46
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(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 Year Expenses Accounts Write-Offs End of Year
-------- --------- -------- -------- ---------- -------------
Year ended December 31, 2002 $1,833 $180 ($1,298) $ 715
Year ended December 31, 2001: $1,424 $409 -- -- $1,833
Year ended December 31, 2000: $ 683 $741 -- -- $1,424
Inventory Reserve
-----------------
Year ended December 31, 2002 $1,943 $500 -- -- $2,443
Year ended December 31, 2001: $1,403 $540 -- -- $1,943
Year ended December 31, 2000: $1,192 $211 -- -- $1,403
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BLONDER TONGUE LABORATORIES, INC.
Date: March 31, 2003 By: /S/ JAMES A. LUKSCH
-----------------------------------
James A. Luksch
President and Chief Executive Officer
By: /S/ ERIC SKOLNIK
--------------------------------------
Eric Skolnik, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/S/ JAMES A. LUKSCH Director, President and Chief March 31, 2003
- ------------------------------------ Executive Officer (Principal
James A. Luksch Executive Officer)
/S/ ERIC SKOLNIK Chief Financial Officer March 31, 2003
- ------------------------------------ (Principal Financial Officer and
Eric Skolnik Principal Accounting Officer)
/S/ ROBERT J. PALLE, JR. Director, Executive Vice March 31, 2003
- ------------------------------------ President, Chief Operating
Robert J. Palle, Jr. Officer, Secretary and Treasurer
/S/ JOHN E. DWIGHT Director March 31, 2003
- ------------------------------------
John E. Dwight
/S/ JAMES H. WILLIAMS Director March 31, 2003
- ------------------------------------
James H. Williams
/S/ JAMES F. WILLIAMS Director March 31, 2003
- ------------------------------------
James F. Williams
48
/S/ ROBERT B. MAYER Director
- ------------------------------------
Robert B. Mayer March 31, 2003
/S/ GARY P. SCHARMETT Director March 31, 2003
- ------------------------------------
Gary P. Scharmett
/S/ ROBERT E. HEATON Director March 31, 2003
- ------------------------------------
Robert E. Heaton
49
CERTIFICATION
I, James A. Luksch, President and Chief Executive Officer of Blonder
Tongue Laboratories, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Blonder Tongue
Laboratories, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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 of directors (or persons performing the equivalent
functions):
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
annual report whether 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: March 31, 2003
/s/ James A. Luksch
----------------------------------------
James A. Luksch
President and Chief Executive Officer
(Principal Executive Officer)
50
CERTIFICATION
I, Eric Skolnik, Vice President and Chief Financial Officer of Blonder
Tongue Laboratories, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Blonder Tongue
Laboratories, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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 of directors (or persons performing the equivalent
functions):
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
annual report whether 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: March 31, 2003
/s/ Eric Skolnik
------------------------------------------
Eric Skolnik
Vice President and Chief Financial Officer
(Principal Financial Officer)
51