SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
Commission file number 1-14120
BLONDER TONGUE LABORATORIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1611421
---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Jake Brown Road, Old Bridge, New Jersey 08857
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 679-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Number of shares of common stock, par value $.001, outstanding as of November
14, 2003: 7,995,406
The Exhibit Index appears on page 15.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September December
30, 2003 31, 2002
-------- --------
Assets (Note 4)
Current assets:
Cash ................................................................ $ 46 $ 258
Accounts receivable, net of allowance for doubtful
accounts of $1,003 and $715 respectively ............................ 5,595 6,713
Inventories, net (Note 3) ........................................... 22,189 24,760
Notes receivable (Note 6) ........................................... 459 459
Income tax receivable ............................................... 796 170
Prepaid and other current assets .................................... 726 556
Deferred income taxes ............................................... 1,982 1,858
-------- --------
Total current assets ............................................ 31,793 34,774
Notes receivable (Note 6) ................................................ 542 1,019
Property, plant and equipment, net of accumulated
depreciation and amortization ........................................ 6,837 6,831
Patents, net ............................................................. 2,765 3,120
Rights-of-Entry, net (Note 5) ............................................ 1,352 1,396
Other assets, net ........................................................ 914 951
Investment in Blonder Tongue Telephone LLC (Note 7) ...................... 2,005 --
Deferred income taxes .................................................... 3,746 3,911
-------- --------
$ 49,954 $ 52,002
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (Note 4) .......................... $ 13,758 $ 2,632
Accounts payable .................................................... 1,574 888
Accrued compensation ................................................ 759 514
Accrued benefit liability ........................................... 196 196
Other accrued expenses .............................................. 343 227
-------- --------
Total current liabilities ....................................... 16,630 4,457
-------- --------
Long-term debt (Note 4) .................................................. 356 14,278
Stockholders' equity:
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 24,145
Retained earnings ................................................... 14,778 15,991
Accumulated other comprehensive loss ................................ (508) (508)
Treasury stock, at cost, 449 shares and 879 shares, respectively .... (5,455) (6,369)
-------- --------
Total stockholders' equity ...................................... 32,968 33,267
-------- --------
$ 49,954 $ 52,002
======== ========
See accompanying notes to consolidated financial statements.
2
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales .................................. $ 9,195 $ 13,171 $ 26,331 $ 35,318
Cost of goods sold ......................... 6,230 9,394 18,532 25,174
-------- -------- -------- --------
Gross profit ............................ 2,965 3,777 7,799 10,144
-------- -------- -------- --------
Operating expenses:
Selling ................................. 947 951 2,898 3,150
General and administrative .............. 1,397 1,108 4,568 3,476
Research and development ................ 433 500 1,449 1,466
-------- -------- -------- --------
2,777 2,559 8,915 8,092
-------- -------- -------- --------
Earnings (loss) from operations ............ 188 1,218 (1,116) 2,052
-------- -------- -------- --------
Interest expense ........................... (272) (277) (827) (763)
-------- -------- -------- --------
Earnings (loss) before minority interest and
income taxes ............................... (84) 941 (1,943) 1,289
Minority interest .......................... -- 3 -- 3
Provision (benefit) for income taxes ....... (19) 402 (730) 534
-------- -------- -------- --------
Earnings (loss) before cumulative effect ... (65) 536 (1,213) 752
Cumulative effect of change in accounting
principle, net of tax ................... -- -- -- (6,886)
-------- -------- -------- --------
Net (loss) earnings ........................ $ (65) $ 536 $ (1,213) $ (6,134)
======== ======== ======== ========
Basic earnings (loss) per share before
cumulative effect ....................... $ (0.01) $ 0.07 $ (0.16) $ 0.10
Cumulative effect of change in accounting
principle, net of tax ................... -- -- -- (0.90)
-------- -------- -------- --------
Basic earnings (loss) per share ............ $ (0.01) $ 0.07 $ (0.16) $ (0.80)
======== ======== ======== ========
Basic weighted average shares outstanding .. 7,577 7,608 7,539 7,611
======== ======== ======== ========
Diluted earnings (loss) per share before
cumulative effect ....................... $ (0.01) $ 0.07 $ (0.16) $ 0.10
Cumulative effect of change in accounting
principle, net of tax ................... -- -- -- $ (0.90)
-------- -------- -------- --------
Diluted earnings (loss) per share .......... $ (0.01) $ 0.07 $ (0.16) $ (0.80)
======== ======== ======== ========
Diluted weighted average shares outstanding 7,577 7,613 7,539 7,611
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------
2003 2002
-------- --------
Cash Flows From Operating Activities:
Net loss ....................................................... $ (1,213) $ (6,134)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle .......... -- 6,886
Depreciation ................................................. 872 954
Amortization ................................................. 564 320
Provision for doubtful accounts .............................. 277 158
Provision for inventory reserves ............................. 39 --
Deferred income taxes ........................................ 41 (93)
Minority interest ............................................ -- 3
Changes in operating assets and liabilities:
Accounts receivable .......................................... 841 1,662
Inventories .................................................. 2,532 1,028
Other current assets ......................................... (170) 290
Other assets ................................................. 37 (231)
Income taxes ................................................. (626) 421
Accounts payable, accrued compensation and accrued expenses .. 1,047 (4,078)
-------- --------
Net cash provided by operating activities expenses ......... 4,241 1,186
-------- --------
Cash Flows From Investing Activities:
Capital expenditures ........................................... (878) (219)
Acquisition of rights-of-entry ................................. (165) (250)
Receipt from note receivable ................................... 477 --
Investment in Blonder Tongue Telephone, LLC .................... (975) --
-------- --------
Net cash used in investing activities .......................... (1,541) (469)
-------- --------
Cash Flows From Financing Activities:
Borrowings of long-term debt ................................... 8,186 29,204
Repayments of long-term debt ................................... (10,982) (30,771)
Proceeds from exercise of stock options ........................ -- 2
Acquisition of treasury stock .................................. (116) (26)
-------- --------
Net cash used in financing activities .......................... (2,912) (1,591)
-------- --------
Net decrease in cash ........................................... (212) (874)
-------- --------
Cash, beginning of period ........................................ 258 942
-------- --------
Cash, end of period .............................................. $ 46 $ 68
======== ========
Supplemental Cash Flow Information:
Cash paid for interest ......................................... $ 753 $ 746
Cash paid for income taxes ..................................... -- $ 206
Non-Cash Investing and Financing Activities:
Inventory sold for note receivable ............................. -- $ 1,447
Investment in Blonder Tongue Telephone, LLC
using treasury stock .......................................... $ 1,030 --
See accompanying notes to consolidated financial statements.
4
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
Note 1 - Company and Basis of Presentation
Blonder Tongue Laboratories, Inc. (the "Company") is a designer,
manufacturer and supplier of electronics and systems equipment for the cable
television industry, primarily throughout the United States. The consolidated
financial statements include the accounts of Blonder Tongue Laboratories, Inc.
and subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
The results for the third quarter and nine months of 2003 are not
necessarily indicative of the results to be expected for the full fiscal year
and have not been audited. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
primarily of normal recurring accruals, necessary for a fair statement of the
results of operations for the period presented and the consolidated balance
sheet at September 30, 2003. Certain information and footnote disclosure
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC rules and regulations. These financial statements should be read in
conjunction with the financial statements and notes thereto that were included
in the Company's latest annual report on Form 10-K for the year ended December
31, 2002.
Note 2 - 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 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%, and risk free interest rate of 3.2% for the nine months ended
September 30, 2002; expected lives of 9.2 years, no dividend yield, volatility
at 73%, and risk free interest rate of 3.67% for the nine months ended September
30, 2003.
Under accounting provisions of FAS 123, the Company's net loss to common
shareholders and net loss per common share would have been adjusted to the pro
forma amounts indicated below (in thousands, except per share data):
Nine Months Ended
September 30
------------------
2003 2002
------- -------
Net loss as reported ................................. $(1,213) $(6,134)
Adjustment for fair value of stock options,
net of tax ......................................... 243 443
------- -------
Pro forma ....................................... $(1,456) $(6,577)
======= =======
Net loss per share basic and diluted:
As reported ..................................... $ (0.16) $ (0.80)
======= =======
Pro forma ....................................... $ (0.19) $ (0.86)
======= =======
5
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
Note 3 - Inventories
Inventories net of reserves are summarized as follows:
Sept. 30, Dec. 31,
2003 2002
------- -------
Raw Materials .............. $10,552 $11,054
Work in process ............ 1,519 1,660
Finished Goods ............. 10,118 12,046
------- -------
$22,189 $24,760
======= =======
Note 4 - Debt
On March 20, 2002 the Company executed a credit agreement with Commerce
Bank, N.A. for a $19,500 credit facility, comprised of (i) a $7,000 revolving
line of credit under which funds may be borrowed at LIBOR, plus a margin ranging
from 1.75% to 2.50%, in each case depending on the calculation of certain
financial covenants, with a floor of 5% through March 19, 2003 (5% at September
30, 2003), (ii) a $9,000 term loan which bore interest at a rate of 6.75%
through September 30, 2002, and thereafter bears interest at a fixed rate
ranging from 6.50% to 7.25% to reset quarterly depending on the calculation of
certain financial covenants (6.75% at September 30, 2003) 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 April
1, 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.
At September 30, 2003, there was $4,621, $5,813 and $3,169 outstanding
under the revolving line of credit, term loan and mortgage loan, respectively.
In November 2003, the Company's credit agreement with Commerce Bank was
amended to modify the interest rate and amortization schedule for certain of the
loans thereunder, as well as to modify one of the financial covenants. Beginning
November 1, 2003, the revolving line of credit will bear interest at the prime
rate plus 1.5%, with a floor of 5.5%, and the term loan will bear interest at a
fixed rate of 7.5%. Beginning December 1, 2003, the term loan requires equal
monthly principal payments of $193 plus interest with a final payment on April
1, 2006 of all remaining unpaid principal and interest.
At March 31, 2003, June 30, 2003, and September 30, 2003 the Company was
unable to meet one of its financial covenants required under its credit
agreement with Commerce Bank, which non-compliance was waived by the Bank
effective as of each such date. The Company anticipates that it will either
obtain a renewal of its current line of credit, or enter into new credit
facilities with another bank, prior to April 1, 2004.
6
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
Note 5 - Rights of Entry Acquisition
During June, 2002, the Company formed a venture with Priority Systems, LLC
and Paradigm Capital Investments, LLC for the purpose of acquiring the
rights-of-entry for certain multiple dwelling unit cable television systems (the
"Systems") owned by affiliates of Verizon Communications, Inc. The venture
entity, BDR Broadband, LLC ("BDR Broadband"), 80% of the outstanding capital
stock of which is owned by the Company, acquired the Systems, comprised of
approximately 3,270 then-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. Excluding capital expenditures associated with System upgrades,
the Systems were cash flow positive beginning in the first year. To date, the
Systems have been upgraded with approximately $833 of interdiction and other
products of the Company. It is planned that the Systems will be further upgraded
with approximately $433 of additional interdiction and other products of the
Company over the course of operation.
The purchase price (excluding transaction costs) was allocated $1,489 to
rights-of-entry and $391 to fixed assets. The rights-of-entry are being
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 had also agreed to
guaranty payment of the aggregate purchase price for the Systems by BDR
Broadband.
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 6 - 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 7 - Acquisition
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 consisted 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 was contingent upon BTT
achieving specified targeted monthly earnings objectives.
During September, 2003, the parties agreed to restructure the terms of
their business arrangement entered into in March, 2003 by amending certain of
the agreements previously entered into and entering into certain new agreements.
Some of the principal terms of the restructured arrangement include increasing
Blonder Tongue's economic ownership in NetLinc from 20% to 50% and in BTT from
35% to 50%, all at no additional cost to Blonder Tongue. The cash portion of the
purchase price in the venture was decreased from $3,500 to $1,167, and
7
the then-outstanding balance of $342 was paid in installments of $50 per week
until paid in full in October, 2003. As of September 30, 2003, $975 of the
purchase price had been paid. In addition, of the 500,000 shares of Blonder
Tongue common stock issued to BTT as the non-cash component of the purchase
price (fair valued at $1,030), one-half (250,000 shares) have been pledged to
Blonder Tongue as collateral to secure BTT's obligation to repay the $1,167 cash
component of the purchase price to Blonder Tongue via preferential distributions
of cash flow under BTT's limited liability company operating agreement. Under
the restructured arrangement, the requirement to purchase equipment exclusively
from NetLinc has been eliminated. Blonder Tongue will also pay certain future
royalties to NetLinc and BTT upon the sale of telephony products.
Through this telephony venture, BTT offers primary voice service to MDUs
and Blonder Tongue offers for sale a line of telephony equipment to complement
the voice service. In addition to receiving incremental revenues and profits
associated with its direct sales of the telephony products, Blonder Tongue also
expects to receive a portion of BTT's voice-service revenues through its 50%
stake in BTT.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the section entitled Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. The words "believe",
"expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including without limitation, the Company's Annual Report
on Form 10-K for the year ended December 31, 2002 (See Item 1 - Business; Item 3
- - Legal Proceedings; and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations).
General
During June, 2002, the Company formed a venture with Priority Systems, LLC
and Paradigm Capital Investments, LLC for the purpose of acquiring the
rights-of-entry for certain multiple dwelling unit cable television systems (the
"Systems") owned by affiliates of Verizon Communications, Inc. The venture
entity, BDR Broadband, 80% of the outstanding capital stock of which is owned by
the Company, acquired the Systems, comprised of approximately 3,270
then-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. Excluding capital
expenditures associated with System upgrades, the Systems were cash flow
positive beginning in the first year. To date, the Systems have been upgraded
with approximately $833,000 of interdiction and other products of the Company.
It is planned that the Systems will be upgraded with approximately $433,000 of
additional 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
8
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.
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 the 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 consisted 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. NetLinc owns patents,
proprietary technology and know-how for certain telephony products that allow
Competitive Local Exchange Carriers ("CLECs") to competitively provide voice
service to MDUs. Certain distributorship agreements were also concurrently
entered into among NetLinc, BTT and the Company pursuant to which the Company
ultimately acquired the right to distribute NetLinc's telephony products to
private and franchise cable operators as well as to all buyers for use in MDU
applications. BTT partners with CLECs to offer primary voice service to MDUs,
receiving a portion of the line charges due from the CLECs' telephone customers,
and the Company offers for sale a line of telephony equipment to complement the
voice service.
As a result of NetLinc's inability to retain a contract manufacturer to
manufacture and supply the products in a timely and consistent manner in
accordance with the requisite specifications, in September, 2003 the parties
agreed to restructure the terms of their business arrangement entered into in
March, 2003. The restructured business arrangement was accomplished by amending
certain of the agreements previously entered into and entering into certain new
agreements. Some of the principal terms of the restructured arrangement include
increasing the Company's economic ownership in NetLinc from 20% to 50% and in
BTT from 35% to 50%, all at no additional cost to the Company. The cash portion
of the purchase price in the venture was decreased from $3,500,000 to $1,166,667
and the then outstanding balance of $342,000 was paid in installments of $50,000
per week until paid in full in October, 2003. As of September 30, 2003, the
Company had paid $975,000 of the purchase price. In addition, of the 500,000
shares of common stock issued to BTT as the non-cash component of the purchase
price (fair valued at $1,030,000), one-half (250,000 shares) have been pledged
to the Company as collateral to secure BTT's obligation to repay the $1,167,667
cash component of the purchase price to the Company via preferential
distributions of cash flow under BTT's limited liability company operating
agreement. Under the restructured arrangement, the Company can purchase similar
telephony products directly from third party suppliers other than NetLinc and,
in connection therewith, the Company would pay certain future royalties to
NetLinc and BTT from the sale of these products by the Company. While the
distributorship agreements among NetLinc, BTT and the Company have not been
terminated, the Company does not anticipate purchasing products from NetLinc in
the near term. NetLinc, however, continues to own intellectual property, which
may be further developed and used in the future to manufacture and sell
telephony products under the distributorship agreements.
In addition to receiving incremental revenues and profits associated with
its direct sales of the telephony products, the Company also expects to receive
a portion of BTT's voice-service revenues through its 50% stake in BTT. While
the events related to the restructuring have resulted in a delay in the
Company's anticipated revenue stream from the sale of telephony products, the
Company believes that these revised terms are beneficial and will result in the
Company enjoying higher gross margins on telephony equipment unit sales as well
as an incrementally higher proportion of telephony service revenues. Material
incremental revenues associated with the sale of telephony products are not
presently anticipated to be received until at least the fourth quarter of 2003.
9
Third three months of 2003 Compared with third three months of 2002.
Net Sales. Net sales decreased $3,976,000, or 30.2%, to $9,195,000 in the
third three months of 2003 from $13,171,000 in the third three months of 2002.
The decrease in sales is primarily attributed to a decrease in capital spending
by cable system operators and weak overall economic conditions. As a result, the
Company experienced lower digital product sales. Net sales included
approximately $999,000 and $874,000 of interdiction and digital equipment for
the third three months of 2003 compared to approximately $770,000 and $1,780,000
for the third three months of 2002.
Cost of Goods Sold. Cost of goods sold decreased to $6,230,000 for the
third three months of 2003 from $9,394,000 for the third three months of 2002
and decreased as a percentage of sales to 67.8% from 71.3%. The decrease as a
percentage of sales was caused primarily by a higher proportion of sales during
the period being comprised of higher margin products.
Selling Expenses. Selling expenses decreased to $947,000 for the third
three months of 2003 from $951,000 in the third three months of 2002 but
increased as a percentage of sales to 10.3% for the third three months of 2003
from 7.2% for the third three months of 2002. The $4,000 decrease was primarily
due to a $27,000 decrease in consulting fees, a $27,000 decrease in travel and
entertainment, both due to cost containment initiatives, offset by an increase
in salaries and fringe benefits of $67,000.
General and Administrative Expenses. General and administrative expenses
increased to $1,397,000 for the third three months of 2003 from $1,108,000 for
the third three months of 2002 and increased as a percentage of sales to 15.2%
for the third three months of 2003 from 8.4% for the third three months of 2002.
The $289,000 increase can be primarily attributed to a $198,000 increase in
expenses related to BDR Broadband and a $90,000 increase in bad debt expense.
Research and Development Expenses. Research and development expenses
decreased to $433,000 in the third three months of 2003 from $500,000 in the
third three months of 2002, a decrease of $67,000 primarily due to a decrease in
salaries and fringe benefits of $65,000. Research and development expenses, as a
percentage of sales, increased to 4.7% in the third three months of 2003 from
3.8% in the third three months of 2002.
Operating Income. Operating income of $188,000 for the third three months
of 2003 represents a decrease of $1,030,000 from operating income of $1,218,000
for the third three months of 2002. Operating income as a percentage of sales
decreased to 2.0% in the third three months of 2003 from 9.2% in the third three
months of 2002.
Interest Expense. Interest expense decreased to $272,000 in the third three
months of 2003 from $277,000 in the third three months of 2002. The decrease is
the result of lower average borrowing.
Income Taxes. The provision for income taxes for the third three months of
2003 decreased to a benefit of $19,000 from a provision of $402,000 for the
third three months of 2002 as a result of a decrease in taxable income.
First nine months of 2003 Compared with first nine months of 2002
Net Sales. Net sales decreased $8,987,000, or 25.5%, to $26,331,000 in the
first nine months of 2003 from $35,318,000 in the first nine months of 2002. The
decrease is attributed to a decrease in capital spending by cable system
operators and weak overall economic conditions. As a result, the Company
experienced lower digital product sales. Net sales included approximately
$2,896,000 and $2,428,000 of interdiction and digital equipment for the first
nine months of 2003 compared to approximately $2,650,000 and $5,091,000 for the
first nine months of 2002.
Cost of Goods Sold. Cost of goods sold decreased to $18,532,000 for the
first nine months of 2003 from $25,174,000 for the first nine months of 2002 and
decreased as a percentage of sales to 70.4% from 71.2%. The decrease as a
percentage of sales was caused primarily by a higher portion of sales during the
period being comprised of higher margin products.
10
Selling Expenses. Selling expenses decreased to $2,898,000 for the first
nine months of 2003 from $3,150,000 in the first nine months of 2002 but
increased as a percentage of sales to 11.0% for the first nine months of 2003
from 8.9% for the first nine months of 2002. This $252,000 decrease is primarily
attributable to a reduction in advertising of $73,000 achieved through
implementation of expense control programs and a reduction of freight of $84,000
and commissions of $61,000 due to reduced sales levels.
General and Administrative Expenses. General and administrative expenses
increased to $4,568,000 for the first nine months of 2003 from $3,476,000 for
the first nine months of 2002 and increased as a percentage of sales to 17.4%
for the first nine months of 2003 from 9.8% for the first nine months of 2002.
The $1,092,000 increase can be primarily attributed to an increase in
professional fees of $167,000, $90,000 in bad debt expense and $837,000 of
operating expenses related to BDR Broadband.
Research and Development Expenses. Research and development expenses
decreased to $1,449,000 in the first nine months of 2003 from $1,466,000 in the
first nine months of 2002. The $17,000 decrease is primarily due to a decrease
in salaries and fringe benefits of $72,000 due to a reduction in head count
offset by an increase in licensing fees of $35,000 and consulting fees of
$30,000. Research and development expenses as a percentage of sales, increased
to 5.5% in the first nine months of 2003 from 4.2% in the first nine months of
2002.
Operating Income (Loss). Operating loss of $1,116,000 for the first nine
months of 2003 represents a decrease of $3,168,000 from operating income of
$2,052,000 for the first nine months of 2002. Operating income (loss) as a
percentage of sales decreased to (4.2%) in the first nine months of 2003 from
5.8% in the first nine months of 2002.
Interest Expense. Interest expense increased to $827,000 in the first nine
months of 2003 from $763,000 in the first nine months of 2002. The increase is
the result of higher average borrowing .
Income Taxes. The provision for income taxes for the first nine months of
2003 decreased to a benefit of $730,000 from an expense of $534,000 for the
first nine months of 2002 as a result of a decrease in taxable income.
Cumulative Effect of Change in Accounting Principle. During the first three
months of 2002, the Company implemented FAS 142, which resulted in the write off
of $10,760,000 of the net book value of goodwill, offset by the future tax
benefit thereof in the amount of $3,874,000. The net cumulative effect of this
change in accounting principles was a one-time non-recurring $6,886,000 charge
against earnings in the first three months of 2002.
Liquidity and Capital Resources
As of September 30, 2003 and December 31, 2002, the Company's working
capital was $15,163,000 and $30,317,000, respectively. The decrease in working
capital is attributable primarily to an increase in borrowings under the
revolving line of credit and the corresponding reclassification of certain long
term debt to current liabilities due to its maturity date and failure to meet
certain financial covenants, along with reductions of inventory and accounts
receivable in the respective amounts of $2,532,000, and $841,000, and an
increase in accounts payable of $686,000.
The Company's net cash provided by operating activities for the nine-month
period ended September 30, 2003 was $4,241,000, compared to $1,186,000 for the
nine-month period ended September 30, 2002. The increase in net cash is
primarily due to a decrease in inventory of $2,532,000 along with an increase in
accounts payable and accrued expenses of $1,047,000.
Cash used in investing activities was $1,541,000 for the first nine months
of 2003, which was primarily attributable to capital expenditures for new
equipment and upgrades to the BDR Broadband Systems of $878,000 and a $975,000
investment in BTT.
Cash used in financing activities was $2,912,000 for the first nine months
of 2003 primarily comprised of $8,186,000 of borrowings offset by $10,982,000 of
repayments of long term debt.
11
On March 20, 2002 the Company executed a credit agreement with Commerce
Bank, N.A. for a $19,500,000 credit facility, comprised of (i) a $7,000,000
revolving line of credit under which funds may be borrowed at LIBOR, plus a
margin ranging from 1.75% to 2.50%, in each case depending on the calculation of
certain financial covenants, with a floor of 5% through March 19, 2003 (5% at
September 30, 2003), (ii) a $9,000,000 term loan which bore interest at a rate
of 6.75% through September 30, 2002, and thereafter bears interest at a fixed
rate ranging from 6.50% to 7.25% to reset quarterly depending on the calculation
of certain financial covenants (6.75% at September 30, 2003) 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 April
1, 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.
At September 30, 2003, there was $4,621,000, $5,813,000 and $3,169,000
outstanding under the revolving line of credit, term loan and mortgage loan,
respectively.
In November 2003, the Company's credit agreement with Commerce Bank was
amended to modify the interest rate and amortization schedule for certain of the
loans thereunder, as well as to modify one of the financial covenants. Beginning
November 1, 2003, the revolving line of credit will bear interest at the prime
rate plus 1.5%, with a floor of 5.5%, and the term loan will bear interest at a
fixed rate of 7.5%. Beginning December 1, 2003, the term loan requires equal
monthly principal payments of $193,000 plus interest with a final payment on
April 1, 2006 of all remaining unpaid principal and interest.
At March 31, 2003, June 30, 2003, and September 30, 2003 the Company was
unable to meet one of its financial covenants required under its credit
agreement with Commerce Bank, which non-compliance was waived by the Bank
effective as of each such date. The Company anticipates that it will either
obtain a renewal of its current line of credit, or enter into new credit
facilities with another bank, prior to April 1, 2004.
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 paid $975,000 and 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and
positions represents the potential loss arising from adverse changes in interest
rates. At September 30, 2003 and 2002 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $4,621,000 and $2,500,000,
respectively. A hypothetical 100 basis point increase in interest rates would
have had an annualized unfavorable impact of approximately $46,000 and $25,000,
respectively, on the Company's earnings and cash flows based upon these
quarter-end debt levels. The Company did not have any derivative financial
instruments in the periods presented.
ITEM 4. CONTROLS AND PROCEDURES
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 as of the end of the period covered by this
report. 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; however, the Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures are effective at a reasonable
assurance level.
In addition, the Company reviewed its internal control over financial
reporting and there have been no changes during the fiscal quarter covered by
this report in the Company's internal control over financial reporting, to
12
the extent that elements of internal control over financial reporting are
subsumed within disclosure controls and procedures, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain proceedings incidental to the ordinary
course of its business, none of which, in the current opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition, or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Capital Contribution Agreement dated as of March 26, 2003
among Blonder Tongue Telephone, LLC ("BTT"), Resource Investment Group , LLC, H.
Tyler Bell, NetLinc Communications, LLC and Blonder Tongue Laboratories, Inc, as
amended on September 11, 2003, the Company issued 500,000 shares of its common
stock on September 16, 2003 to BTT as partial consideration for the Company's
50% economic ownership stake in BTT. These shares were issued in a private
transaction exempt from registration under Section 4(2) of the Securities Act of
1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits are listed in the Exhibit Index appearing at page 15 herein.
(b) Reports on Form 8-K
On August 14, 2003, the Company filed a Form 8-K relating to Item 9 of such
Form. The information under Item 9 related to the Company's August 14, 2003
press release announcing its unaudited financial results for the second
quarter ended June 30, 2003 (as required by Item 12 of Form 8-K).
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BLONDER TONGUE LABORATORIES, INC.
Date: November 14, 2003 By: /s/ James A. Luksch
-------------------------------------
James A. Luksch
Chief Executive Officer
By: /s/ Eric Skolnik
-------------------------------------
Eric Skolnik
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
14
EXHIBIT INDEX
Exhibit # Description Location
- --------- ----------- --------
3.1 Restated Certificate Incorporated by reference from Exhibit
of Incorporation of 3.1 to S-1 Registration Statement No.
Blonder Tongue 33-98070 originally filed October 12,
Laboratories, Inc. 1995, as amended.
3.2 Restated Bylaws of Incorporated by reference from Exhibit
Blonder Tongue 3.2 to S-1 Registration Statement No.
Laboratories, Inc. 33-98070 originally filed October 12,
1995, as amended.
10.1 Amendment to Capital Filed herewith.
Contribution Agreement
and Termination of
Letter Agreement
among Blonder Tongue
Telephone, LLC,
Resource Investment
Group, LLC, H. Tyler
Bell, NetLinc
Communications, LLC
and Blonder Tongue
Laboratories, Inc,
dated as of September
11, 2003.
31.1 Certification of Filed herewith.
James A. Luksch
pursuant to Section
302 of the
Sarbanes-Oxley Act
of 2002.
31.2 Certification of Filed herewith.
Eric Skolnik pursuant
to Section 302 of the
Sarbanes-Oxley Act
of 2002.
32.1 Certification Filed herewith.
pursuant to Section
906 of Sarbanes-Oxley
Act of 2002.
15