Form N-Q for the period ended September 30, 2006
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, 2006,
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (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
9, 2006: 7,515,406.
The Exhibit Index appears on page 21.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
Sept 30, December 31,
2006 2005
Assets (Note 5)
Current assets:
Cash............................................. $144 $787
Accounts receivable, net of allowance
for doubtful accounts of $833
and $863 respectively........... 4,551 3,567
Inventories (Note 4)............................. 8,702 9,649
Prepaid and other current assets................. 497 490
Deferred income taxes ........................... 651 651
------------- --------------
------------- --------------
Total current assets........................... 14,545 15,144
Inventories, non-current (net) (Note 4)............ 4,996 4,866
Property, plant and equipment, net of
accumulated depreciation and amortization ....... 5,790 6,184
Patents, net ...................................... 1,583 1,864
Rights-of-Entry, net (Note 6)...................... 611 720
Other assets, net.................................. 1,303 1,388
Investment in Blonder Tongue Telephone
LLC (Note 6)..................................... - 993
Deferred income taxes ............................. 1,705 1,705
------------- --------------
------------- --------------
$30,533 $32,864
============= ==============
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
(Note 5)....................................... $2,859 $4,249
Accounts payable................................. 2,449 2,231
Accrued compensation............................. 498 598
Accrued benefit liability....................... 185 185
Income taxes payable.......................... 462 491
Other accrued expenses ......................... 211 282
------------- --------------
------------- --------------
Total current liabilities..................... 6,664 8,036
------------- --------------
------------- --------------
Long-term debt (Note 5)........................... 3,124 3,329
Commitments and contingencies..................... - -
Stockholders' equity:
Preferred stock, $.001 par value;
authorized 5,000 shares; no shares outstanding - -
Common stock, $.001 par value;
authorized 25,000 shares, 8,465 shares Issued.. 8 8
Paid-in capital.................................. 24,371 24,202
Retained earnings................................ 3,528 3,565
Accumulated other comprehensive loss............. (821) (821)
Treasury stock, at cost, 949 and 449 shares...... (6,341) (5,455)
------------- --------------
------------- --------------
Total stockholders' equity....................... 20,745 21,499
------------- --------------
------------- --------------
$30,533 $32,864
============= ==============
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 Nine Months
Ended Sept 30, Ended Sept 30,
------------------- ------------------
2006 2005 2006 2005
--------- --------- ---------- -------
Net sales............................... $9,578 $9,666 $29,977 $28,343
Cost of goods sold...................... 5,823 9,719 19,305 23,010
--------- --------- ---------- -------
Gross profit (loss).................. 3,755 (53) 10,672 5,333
--------- --------- ---------- -------
Operating expenses:
Selling.............................. 1,211 1,207 3,564 3,397
General and administrative........... 1,810 1,639 5,306 4,973
Research and development............. 389 372 1,190 1,178
--------- --------- ---------- -------
3,410 3,218 10,060 9,548
--------- --------- ---------- -------
Earnings (loss) from operations......... 345 (3,271) 612 (4,215)
--------- --------- ---------- -------
Other Expense:
Interest expense (net)............... (170) (190) (542) (586)
Equity in loss of Blonder Tongue
Telephone, LLC.................... - (55) (107) (246)
--------- --------- ---------- --------
(170) (245) (649) (832)
--------- --------- ---------- --------
Net income (loss)...................... $175 $(3,516) $(37) $(5,047)
========= ========= ========== ========
Basic and diluted income
(loss) per share.................... $0.02 $ (0.44) $ - $ (0.63)
========= ========= ========== ========
Basic and diluted weighted average
sharesoutstanding................... 7,515 8,015 7,845 8,015
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 Sept 30,
-----------------------------
2006 2005
----------- ---------
Cash Flows From Operating Activities:
Net loss........................................ $(37) $(5,047)
Adjustments to reconcile net loss to cash
provided by operating activities:
Stock compensation expense.................. 169 -
Equity in loss from Blonder
Tongue Telephone, LLC.................... 107 246
Depreciation................................ 755 746
Amortization ............................... 481 477
Allowance for doubtful accounts............. 270 -
Provision for inventory reserves............ - 4,372
Changes in operating assets and liabilities:
Accounts receivable......................... 1,254) (975)
Inventories................................. 817 744
Prepaid and other current assets............ (7) 57
Other assets................................ 85 (192)
Income taxes................................ (29) 872
Accounts payable, accrued compensation
and other accrued expenses. 47 437
----------- -----------
Net cash provided by operating activities... 1,404 1,737
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures............................ (361) (731)
Acquisition of rights-of-entry.................. (91) (3)
----------- -----------
Net cash used in investing activities....... (452) (734)
----------- -----------
Cash Flows From Financing Activities:
Borrowings of debt.............................. 26,521 10,740
Repayments of debt..............................(28,116) (11,709)
----------- -----------
Net cash used in financing activities....... (1,595) (969)
----------- -----------
Net increase (decrease) in cash............. (643) 34
----------- -----------
Cash, beginning of period.......................... 787 70
----------- -----------
Cash, end of period................................ $144 $104
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest.......................... $501 $ 586
Cash paid for income taxes...................... $ 29 $ -
See accompanying notes to consolidated financial statements.
4
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 (including BDR Broadband, LLC). Significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company's investment in Blonder Tongue Telephone, LLC ("BTT") and
NetLinc Communications, LLC ("NetLinc") are accounted for on the equity method
since the Company does not have control over these entities. Information
relating to the Company's rights and obligations with regard to BTT and NetLinc
are summarized in Note 1(a) to the Company's Form 10-K for the year ended
December 31, 2005. However, on June 30, 2006, the Company sold its ownership
interest in BTT. See Note 6.
On November 11, 2005, the Company and its wholly-owned subsidiary, Blonder
Tongue Far East, LLC, a Delaware limited liability company, entered into a joint
venture agreement ("JV Agreement") with Master Gain International Industrial
Limited, a Hong Kong corporation ("Master Gain"), to manufacture products in the
People's Republic of China. This joint venture was formed to compete with the
Far East manufactured products and to expand market coverage outside North
America. On June 9, 2006, the Company decided to terminate the JV Agreement due
to the joint venture's failure to meet certain quarterly financial milestones as
set forth in the JV Agreement. The inability to meet such financial milestones
was caused, in part, by the failure of Master Gain to contribute the $5,850 of
capital to the joint venture as required by the JV Agreement and the joint
venture's failure to obtain certain governmental approvals and licenses
necessary for the operation of the joint venture.
The results for the third quarter and the first nine months of 2006 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, 2006. Certain information and footnote disclosures
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, 2005.
Note 2 - New Accounting Policies
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Accounting for Fair Value Measurements." SFAS No. 157 defines
fair value, and establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosure about fair value
measurements. SFAS No. 157 is effective for the Company for financial statements
issued subsequent to November 15, 2007. The Company does not believe adoption of
SFAS No. 157 will have a material impact on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans." Among other items, SFAS
No. 158 requires recognition of the overfunded or underfunded status of an
entity's defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer's fiscal year, and
requires recognition of the funded status of defined benefit postretirement
plans in other comprehensive income. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company will adopt SFAS 158 in the fourth
quarter of 2006 on a prospective basis. The Company currently measures the
funded status of its plan as of the date of its year-end statement of financial
position.
Based on the Company's unfunded obligation as of December 31, 2005, the
adoption of SFAS 158 would increase total liabilities by approximately $50 and
reduce total stockholders' equity by approximately $50. The adoption will not
have a material impact on the Company's results of operations and cash flows. In
5
addition, the adoption of SFAS No. 158 will not impact compliance with the
Company's loan covenants. By the time of adoption at December 31, 2006, plan
performance and actuarial assumptions could have a significant impact on the
actual amounts recorded.
Note 3 - Stock Options
The Company implemented FAS 123(R) in the first quarter of 2006. The
statement requires companies to expense the value of employee stock options and
similar awards. Under FAS 123(R) share-based payment awards result in a cost
that will be measured at fair value on the awards' grant date based on the
estimated number of awards that are expected to vest. Compensation cost for
awards that vest will not be reversed if the awards expire without being
exercised. Stock compensation expense under FAS 123(R) was $169 during the nine
months ended September 30, 2006.
The Company estimates the fair value of each stock option grant by using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants made during the nine months ended September 30, 2006
and 2005, respectively: expected lives of 6.3 and 9.5 years, no dividend yield,
volatility at 72% and 73%, and risk free interest rate of 4.65% and 3.2%.
The following tables summarize information about stock options outstanding for
the nine months ended September 30, 2006
Weighted- Weighted- Weighted- Weighted- Weighted-
Average Average Average 2005 Average 2005 Average
1994 Exercise 1995 Exercise 1996 Exercise Employee Exercise Director Exercise
Plan(#) Price($) Plan(#) Price($) Plan(#) Price ($) Plan (#) Price($) Plan(#) Price ($)
------- -------- ------- -------- -------- --------- -------- -------- -------- ----------
Shares under option:
Outstanding at
January 1, 2006 23 3.40 1,026 5.24 153 4.28 80 3.76 - -
Granted - - - - - - 327 1.905 50 1.905
Exercised - - - - - - - - -
Forfeited (3) 3.48 (22) 5.24 - - (2) 3.76 - -
Options outstanding
at September 30, 20 3.48 1,004 5.23 153 4.28 405 2.26 50 1.905
2006
Options exercisable
at 20 3.48 983 5.25 153 4.28 78 3.76 - -
September 30, 2006
Weighted-average
fair value of
options granted - - - $1.39 $1.23
during 2006
Weighted-average
remaining
contractual life 4.0 3.7 5.7 9.6 9.7
At January 1, 2006, all options were 100% vested. There were no unvested
forfeited options during the nine months ended September 30, 2006. The weighted
average fair value of the 377 options granted during the nine months ended
September 30, 2006 was $1.32. All of the options are non-vested.
At September 30, 2006, there was $433 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Plans. That cost is expected to be recognized over a weighted average period
of 3 years.
6
Under accounting provisions of FAS 123(R), the Company's net loss to common
stockholders and net loss per common share would have been adjusted to the pro
forma amounts indicated below during the three and nine months ended September
30, 2005 (in thousands, except per share data):
(unaudited) (unaudited)
Three Months Nine Months
Ended Ended
Sept 30, Sept 30,
2005 2005
---------------- ------------------
---------------- ------------------
Net loss as reported ...................... $(3,516) $(5,047)
Adjustment for fair value of stock options. 160 478
---------------- ------------------
---------------- ------------------
Pro forma............................. $(3,676) $(5,525)
================ ==================
================ ==================
Net loss per share basic and diluted:
As reported........................... $(0.44) $(0.63)
================ ==================
================ ==================
Pro forma............................. $(0.46) $(0.69)
================ ==================
Note 4 - Inventories
Inventories net of reserves are summarized as follows:
(unaudited)
Sept 30, Dec. 31,
2006 2005
--------------- -------------
--------------- -------------
Raw Materials.................................. $10,303 $10,071
Work in process................................ 2,102
1,425
Finished Goods................................. 10,686 11,058
--------------- -------------
22,414 23,231
Less current inventory......................... (8,702) (9,649)
--------------- -------------
--------------- -------------
13,712 13,582
Less Reserve primarily for excess inventory.... (8,716) (8,716)
--------------- -------------
--------------- -------------
$4,996 $4,866
=============== =============
Inventories are stated at the lower of cost, determined by the first-in,
first-out ("FIFO") method, or market.
The Company periodically analyzes anticipated product sales based on
historical results, current backlog and marketing plans. Based on these
analyses, the Company anticipates that certain products will not be sold during
the next twelve months. Inventories that are not anticipated to be sold in the
next twelve months have been classified as non-current.
Over 60% of the non-current inventories are comprised of raw materials. The
Company has established a program to use interchangeable parts in its various
product offerings and to modify certain of its finished goods to better match
customer demands. In addition, the Company has instituted additional marketing
programs to dispose of the slower moving inventories.
The Company continually analyzes its slow-moving, excess and obsolete
inventories. Based on historical and projected sales volumes and anticipated
selling prices, the Company establishes reserves. Products that are determined
to be obsolete are written down to net realizable value. If the Company does not
meet its sales expectations, these reserves are increased. The Company believes
reserves are adequate and inventories are reflected at net realizable value.
7
Note 5 - Debt
On December 29, 2005 the Company entered into a Credit and Security
Agreement ("Credit Agreement") with National City Business Credit, Inc. ("NCBC")
and National City Bank (the "Bank"). The Credit Agreement provides for (i) a
$10,000 asset based revolving credit facility ("Revolving Loan") and (ii) a
$3,500 term loan facility ("Term Loan"), both of which have a three year term.
The amounts which may be borrowed under the Revolving Loan are based on certain
percentages of Eligible Receivables and Eligible Inventory; as such terms are
defined in the Credit Agreement. The obligations of the Company under the Credit
Agreement are secured by substantially all of the assets of the Company.
Under the Credit Agreement, the Revolving Loan bears interest at a rate per
annum equal to the Libor Rate Plus 2.25%, or the "Alternate Base Rate," being
the higher of (i) the prime lending rate announced from time to time by the Bank
or (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement),
plus 0.50%. The Term Loan bears interest at a rate per annum equal to the Libor
Rate plus 2.75% or the Alternate Base Rate plus 0.50%. In connection with the
Term Loan, the Company entered into an interest rate swap agreement ("Swap
Agreement") with the Bank, which exchanges the variable interest rate of the
Term Loan for a fixed interest rate of 5.13% per annum effective January 10,
2006 through the maturity of the Term Loan.
In March 2006, the Credit Agreement was amended to (i) modify the
definition of "EBITDA" to exclude certain non-cash items from the calculation
thereof, (ii) increase the applicable interest rates for the Revolving Loan and
Term Loan thereunder by 25 basis points until such time as the Company has met
certain financial covenants for two consecutive fiscal quarters, (iii) impose an
availability block of $500 under the Company's borrowing base until such time as
the Company has met certain financial covenants for two consecutive fiscal
quarters, and (iv) retroactively modify the agreement to defer applicability of
the fixed charge coverage ratio until June 30, 2006 and increase the required
ratio from 1.00:1.00 to 1.10:1.00 thereunder.
The Revolving Loan terminates on December 28, 2008, at which time all
outstanding borrowings under the Revolving Loan are due. The Term Loan requires
equal monthly principal payments of $19 each, plus interest, with the remaining
balance due at maturity. Both loans are subject to a prepayment penalty if
satisfied in full prior to the second anniversary of the effective date of the
loans.
The Credit Agreement contains customary representations and warranties as
well as affirmative and negative covenants, including certain financial
covenants. The Credit Agreement contains customary events of default, including,
among others, non-payment of principal, interest or other amounts when due.
Proceeds from the Credit Agreement were used to refinance the Company's
then existing credit facility with Commerce Bank, N.A. ("Commerce Bank"), to pay
transaction costs, to provide working capital and for other general corporate
purposes.
The Company's former credit facility with Commerce Bank was originally
entered into on March 20, 2002. The Commerce Bank credit facility was for an
aggregate amount of $18,500 comprised of (i) a $6,000 revolving line of credit
under which funds could be borrowed at the prime rate plus 2.0% with a floor of
5.5%, (ii) a $9,000 term loan which bore interest at a rate of 7.5% and which
required equal monthly principal payments of $193 plus interest with a final
payment on April 1, 2006 of all of the remaining unpaid principal and interest,
and (iii) a $3,500 mortgage loan bearing interest at 7.5% and which required
equal monthly principal payments of $19, with a final payment on April 1, 2017,
subject to a call provision after five years.
Note 6 - Cable Systems and Telephone Products (Subscribers and passings in whole
numbers)
During June, 2002, BDR Broadband, a subsidiary of the Company, acquired
certain rights-of-entry for multiple dwelling unit cable television and
high-speed data systems (the "Systems"). As a result of the Company acquiring
additional rights-of-entry, the Systems are currently comprised of approximately
8
3,300 existing MDU cable television subscribers and approximately 8,400
passings. In addition, the Systems were upgraded with approximately $799 and
$331 of interdiction and other products of the Company during 2005 and 2004,
respectively. During 2004, two Systems located outside the region where the
remaining Systems are located, were sold. It is planned that the Systems will be
upgraded with approximately $400 of additional products of the Company during
2006. In October 2006, the Company purchased the 10% interest in BDR Broadband
that had been originally owned by Priority Systems, LLC ("Priority") for nominal
consideration and agreed to pay Priority a fee equal to ten percent (10%) of the
amount, if any, by which the net proceeds derived by the Company from a
divestiture of BDR Broadband occurring on or before April 19, 2007, exceeds the
Company's aggregate investment in BDR Broadband (which includes amounts advanced
to or paid on behalf of BDR Broadband by the Company and the value of goods and
services received by BDR Broadband from the Company, plus interest at 10% per
annum) since inception.
The Company's consolidated financial statements include the accounts of BDR
Broadband.
During 2003, the Company entered into a series of agreements pursuant to
which the Company ultimately acquired a 50% economic ownership interest in
NetLinc Communications, LLC ("NetLinc") and Blonder Tongue Telephone, LLC
("BTT") (to which the Company had licensed its name). The aggregate purchase
price consisted of (i) the cash portion of $1,167, plus (ii) 500 shares of the
Company's common stock. BTT had an obligation to redeem the $1,167 cash
component of the purchase price to the Company via preferential distributions of
cash flow under BTT's limited liability company operating agreement. In
addition, of the 500 shares of common stock issued to BTT as the non-cash
component of the purchase price (fair valued at $1,030), one-half (250 shares)
were pledged to the Company as collateral.
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 multiple dwelling units ("MDUs"). 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.
Certain distributorship agreements were 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. However, the Company can
also 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 presently anticipate purchasing
products from NetLinc. 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. The Company accounts
for its investments in NetLinc and BTT using the equity method.
On June 30, 2006, the Company entered into a Share Exchange and Settlement
Agreement ("Share Exchange Agreement") with BTT and certain related parties of
BTT. Pursuant to the Share Exchange Agreement, in exchange for all of the
membership shares of BTT owned by the Company (the "BTT Shares"), BTT
transferred back to the Company the 500 shares of the Company's common stock
that were previously contributed by the Company to the capital of BTT (the
"Company Common Stock"). Under the terms of the Share Exchange Agreement, the
parties also agreed to the following:
o the Company granted BTT a non-transferable equipment purchase credit in the
aggregate amount of $400 (subject to certain off-sets as set forth in the
Share Exchange Agreement); two-thirds (2/3rds) of which ($270) must be used
solely for the purchase of telephony equipment and the remaining one-third
(1/3rd) of which ($130) may be used for either video/data equipment or
telephony equipment;
o the equipment credit would have expired automatically on December 31, 2006,
but it was exercised in full by September 30, 2006;
o certain non-material agreements were terminated, including the Amended and
Restated Operating Agreement of BTT among the Company, BTT and remaining
9
member of BTT, the Joint Venture Agreement among the Company, BTT, and
certain related parties, the Royalty Agreement between the Company and BTT,
and the Stock Pledge Agreement between the Company and BTT, each dated
September 11, 2003 (collectively, the "Prior Agreements");
o BTT agreed, within ninety (90) days, to change its corporate name and cease
using any intellectual property of the Company, including, without
limitation, the names "Blonder", "Blonder Tongue" or "BT"; and
o the mutual release among the parties of all claims related to (i) the
ownership, purchase, sale or transfer of the BTT Shares or the Company
Common Stock, (ii) the Joint Venture (as defined in the Joint Venture
Agreement) and (iii) the Prior Agreements.
Note 7 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement with James H. Williams who was a director of the
Company until May 24, 2006 and who is also the largest stockholder. Under the
agreement, Mr. Williams 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. Mr. Williams also agreed to keep
all Company information confidential and not to 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 expired 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). This agreement automatically renewed for a one-year extension
until December 31, 2006.
As of September 30, 2006, the Chief Executive Officer was indebted to the
Company in the amount of $169, 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 and is included in other assets at September 30, 2006
and December 31, 2005.
As described in Note 6 above, the Company entered into a series of
agreements in 2003 pursuant to which it acquired a 50% economic ownership
interest in NetLinc and BTT. As the non-cash component of the purchase price,
the Company issued 500 shares of its common stock to BTT, resulting in BTT
becoming the owner of greater than 5% of the outstanding common stock of the
Company. As further described in Note 6 above, on June 30, 2006 the Company
entered into the Share Exchange Agreement with BTT and certain related parties
pursuant to which, among other things, the Company received back these 500
shares in exchange for the Company's membership interest in BTT and the grant to
BTT of an equipment purchase credit of $400. The Company will continue to pay
future royalties to NetLinc upon the sale of certain telephony products.
10
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 Part I, Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and Part II, Item 1A - Risk
Factors. 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, 2005 (See Item 1 - Business; Item 1A - Risk Factors; Item 3 - Legal
Proceedings and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations).
General
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 completed the initial public offering of
its shares of common stock in December, 1995.
The Company is principally a designer, manufacturer and supplier of a
comprehensive line of electronics and systems equipment, primarily for the cable
television industry (both franchise and private cable). Over the past few years,
the Company has also introduced equipment and innovative solutions for the
high-speed transmission of data and the provision of telephony services in
multiple dwelling unit applications. The Company's products are used to acquire,
distribute and protect the broad range of communications signals carried on
fiber optic, twisted pair, 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. 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.
A key component of the Company's strategy is 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. The Company continues to expand its
core product lines (headend and distribution), to maintain its ability to
provide all of 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 applications.
In March, 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"). The Company utilizes the Scientific SMI Interdiction product
line, which has been engineered primarily to serve the franchise cable market,
as a supplement to the Company's VideoMask(TM)Interdiction products, which are
primarily focused on the private cable market.
In September 2006, the Company's wholly owned subsidiary, Blonder Tongue
Investment Company, signed an agreement to sell selected patents to Moonbeam
L.L.C., for net proceeds of approximately $2,000,000. In connection with the
sale, the Company will retain a non-exclusive, royalty free, worldwide license
11
to continue to develop, manufacture, use, sell, distribute and otherwise exploit
all of the Company's products currently protected under these patents. The
products to which these patents relate include some of the Interdiction lines
that were acquired from Scientific. The closing of the sale under this agreement
is subject to customary closing conditions and is anticipated to occur prior to
the end of 2006.
Over the past several years, the Company expanded beyond its core business
by acquiring a private cable television system (BDR Broadband, LLC). During 2003
the Company also acquired an interest in a company offering a private telephone
program for multiple dwelling unit applications (Blonder Tongue Telephone, LLC),
however, on June 30, 2006, the Company sold its ownership interest in Blonder
Tongue Telephone, LLC. These acquisitions are described in more detail below.
During June, 2002, BDR Broadband, a subsidiary of the Company, acquired
certain rights-of-entry for multiple dwelling unit cable television and
high-speed data systems (the "Systems"). As a result of the Company acquiring
additional rights-of-entry, the Systems are currently comprised of approximately
3,300 existing MDU cable television subscribers and approximately 8,400
passings. In addition, the Systems were upgraded with approximately $799,000 and
$331,000 of interdiction and other products of the Company during 2005 and 2004,
respectively. During 2004, two Systems located outside the region where the
remaining Systems are located, were sold. It is planned that the Systems will be
upgraded with approximately $400,000 of additional products of the Company
during 2006. The Company believes that BDR Broadband's model for acquiring and
operating the Systems has been successful and can be replicated for other
transactions. The Company also believes that opportunities currently exist to
acquire additional rights-of-entry for multiple dwelling unit cable television,
high-speed data and/or telephony systems. BDR Broadband is seeking and is
presently negotiating several such opportunities, although there is no assurance
that it will be successful in consummating these transactions. While the Company
continues to invest in and expand BDR Broadband's business, the Company has
recently determined to seek a buyer for BDR Broadband and exit the business of
operating Systems in Texas. This decision was made for a variety of reasons. The
typical financial model and valuation methodology for businesses such as BDR
Broadband is based primarily upon cash flow, as opposed to net income. Since
such businesses are capital intensive, their net income is adversely affected by
the substantial depreciation expense associated with high levels of capital
assets. The Company is pleased with the performance of BDR Broadband, however as
it is a growing business, all of its cash flow plus additional capital has
historically been reinvested in System installations and upgrades. Further, BDR
Broadband's depreciation expense causes its business to operate at a net loss,
which adversely affects the results of operations of the Company. As the Company
is refocusing its efforts on its core manufacturing business and the shift of
production of certain of its products to the Far East (as more fully described
below), the divestiture of BDR Broadband should provide the Company with
substantial liquidity in the form of cash and will eliminate the adverse effect
of BDR Broadband on the Company's results of operations. In October 2006, the
Company purchased the 10% interest in BDR Broadband that had been originally
owned by Priority Systems, LLC ("Priority") for nominal consideration and agreed
to pay Priority a fee equal to ten percent (10%) of the amount, if any, by which
the net proceeds derived by the Company from a divestiture of BDR Broadband
occurring on or before April 19, 2007, exceeds the Company's aggregate
investment in BDR Broadband (which includes amounts advanced to or paid on
behalf of BDR Broadband by the Company and the value of goods and services
received by BDR Broadband from the Company, plus interest at 10% per annum)
since inception.
During 2003, the Company entered into a series of agreements pursuant to
which the Company ultimately acquired a 50% economic ownership interest in
NetLinc Communications, LLC ("NetLinc") and Blonder Tongue Telephone, LLC
("BTT") (to which the Company had licensed its name). The aggregate purchase
price consisted of (i) the cash portion of $1,166,667 plus (ii) 500,000 shares
of the Company's common stock. BTT had an obligation to redeem the $1,166,667
cash component of the purchase price to the Company via preferential
distributions of cash flow under BTT's limited liability company operating
agreement. 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) were pledged to the Company as collateral.
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 multiple dwelling units ("MDUs"). 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.
Certain distributorship agreements were 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. However, the Company can
also 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
12
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.
On June 30, 2006, the Company entered into a Share Exchange and Settlement
Agreement ("Share Exchange Agreement") with BTT and certain related parties of
BTT, pursuant to which the Company transferred to BTT its 49 membership shares
of BTT, representing the Company's 50% ownership interest in BTT. In exchange,
BTT transferred back to the Company the 500,000 shares of the Company's common
stock that were previously contributed by the Company to the capital of BTT. In
addition, the Company granted BTT a non-transferable equipment purchase credit
in the aggregate amount of $400,000 (subject to certain off-sets as set forth in
the Share Exchange Agreement); two-thirds (2/3rds) of which ($270,000) must be
used solely for the purchase of telephony equipment and the remaining one-third
(1/3rd) of which ($130,000) may be used for either video/data equipment or
telephony equipment. The equipment credit expires automatically in six (6)
months, on December 31, 2006. The Company's equity in loss of BTT was
approximately $437,000 and $613,000 for the fiscal years ended December 31, 2005
and 2004, respectively. If the proposed sale of BDR Broadband occurs in 2006,
the Company estimates that the divestiture of these two businesses (BTT and BDR
Broadband) should result in an annualized improvement to the Company's net
income of approximately $600,000 in 2007.
It has been the Company's experience that the time frame from introduction
of a telephony service opportunity to consummation of the associated
right-of-entry agreement, is longer than had been anticipated when the Company
first entered into this segment of its business. This protracted time frame has
had an adverse impact on the growth of telephony system revenues and played a
role in the Company's decision to enter into the Share Exchange Agreement
described above. As a result of the transactions contemplated by the Share
Exchange Agreement, while the Company presently intends to continue to
independently pursue its existing and hereafter-developed leads for the
provision of telephony services and the sale of telephony equipment, the Company
anticipates that over the next year, sales derived from this business will not
be a significant source of revenues for the Company.
On November 11, 2005, the Company and its wholly-owned subsidiary, Blonder
Tongue Far East, LLC, entered into a Joint Venture Agreement ("JV Agreement")
with Master Gain International Industrial, Limited, a Hong Kong corporation
("Master Gain"), for the manufacturing of products in the People's Republic of
China (the "Joint Venture"), pursuant to which the parties subsequently caused
the formation of Blonder Tongue International Holdings, Ltd., a British Virgin
Islands company ("BTIH"). On June 9, 2006 (The "Termination Date"), the Company
sent notice to Master Gain of the Company's election to terminate the JV
Agreement and exercise its right to purchase Master Gain's fifty percent (50%)
ownership interest in BTIH, which the Company anticipates will be for nominal
consideration.
The Company decided to terminate the JV Agreement due to the Joint
Venture's failure to meet certain quarterly financial milestones set forth in
the JV Agreement. The inability to meet such financial milestones was caused, in
part, by the failure of Master Gain to contribute the $5,850,000 of capital to
the Joint Venture as required by the JV Agreement, and the Joint Venture's
failure to obtain certain governmental approvals and licenses necessary for the
operation of the Joint Venture.
The JV Agreement contemplated the formation of several new entities,
including a new Chinese manufacturing company to be owned (directly or
indirectly) by BTIH. In addition, the Joint Venture was, among other things, to
be granted a license from the Company to use certain of the Company's technology
and know-how ("License") in connection with the manufacture of certain products,
and was to be appointed as the exclusive distributor of such products in the
Asian, Southeast Asian, African, European, Middle Eastern and Australian
markets. It was further anticipated that the Joint Venture would seek out and
acquire other technology and rights from third parties, including all of Master
Gain's right, title and interest in and to the cable modem termination system
("CMTS") hardware and software technology and know-how (collectively, the "New
Technology"), and manufacture products developed from the New Technology, for
which the Company was to be appointed as the exclusive distributor in the North
American, South American and Caribbean markets. As of the Termination Date, BTIH
was the only entity that had been formed by the Joint Venture, the Company had
not granted the License to the Joint Venture and no New Technology had been
acquired by the Joint Venture.
Master Gain is an affiliate of Shenzhen Junao Technology Company Ltd.
("Shenzhen"), which purchased T.M.T. - Third Millennium Technologies Ltd.
("TMT"), the manufacturer and supplier of the Company's MegaPort(TM) line of
high-speed data communications products, from Octalica, Inc. ("Octalica") in
13
February 2006. Also in February 2006, the Company amended its distribution
agreement with TMT to expand its distribution territory, favorably amend certain
pricing and volume provisions, and extend by 10 years the term of the
distribution agreement for its MegaPort(TM) product line. As part of the
transaction, the Company was required to guaranty the payment by Shenzhen to
Octalica of the purchase price for TMT, equal to $383,150, plus an earn-out. In
exchange for the guaranty, the Company obtained assignable options to acquire
substantially all of the assets and assume certain liabilities of TMT, or
alternatively, to acquire from Shenzhen all of the outstanding capital stock of
TMT, on substantially the same terms as the acquisition of TMT by Shenzhen from
Octalica. These options expire on February 26, 2007, and are extendable by the
Company for an additional 90 days thereafter. The Company has not, as yet,
determined whether or when such options may be exercised. In addition, the
Company is involved in other ongoing transactions with Master Gain and Shenzhen
related to the CMTS technology.
Although the termination of the JV Agreement has delayed the Company's
efforts to shift production of its products to the Far East, the Company
continues to believe that shifting production of its products to the Far East is
in the best interests of the Company. The Company believes that the production
and procurement of its core products in the Far East will reduce the Company's
costs, thereby improving its gross margins and allowing a more aggressive
marketing program in the private cable market. The shift to the Far East will
also provide the Company access to, and potential acquisition of, advanced
technologies, including technology in the hybrid fiber coax (HFC) transmission,
the IPTV core passive component and high speed data fields, and will facilitate
the Company's ability to sell to private and franchised cable operators in the
Pacific Rim. The Company intends to continue actively pursuing opportunities in
the Far East, either independently or through a joint venture relationship with
alternative joint venture partners.
Results of Operations
Third three months of 2006 compared with third three months of 2005
Net Sales. Net sales decreased $88,000, or 0.9%, to $9,578,000 in the third
three months of 2006 from $9,666,000 in the third three months of 2005. The
decrease in sales is primarily attributed to a decrease in interdiction product
sales offset by an increase in fiber product sales. Interdiction product sales
were $319,000 and $733,000 and fiber product sales were $647,000 and $274,000 in
the third three months of 2006 and 2005, respectively.
Cost of Goods Sold. Cost of goods sold decreased to $5,823,000 for the
third three months of 2006 from $9,719,000 for the third three months of 2005
and decreased as a percentage of sales to 60.8% from 100.6%. The decrease was
attributed primarily to cost of goods sold for the third three months of 2005
included a $3,494,000 increase in the provision for inventory reserves.
Comparatively, there was no increase in such reserves for the third three months
of 2006. Of the 39.8 % improvement in cost of goods sold as a percentage of
sales, approximately 36.1% was associated with the increase in inventory
reserves in the third three months of 2005, which adversely affected the
Company's cost of goods sold for such period. The remaining decrease was
attributed to a higher portion of sales in the third three months of 2006 being
comprised of higher margin products.
Selling Expenses. Selling expenses increased to $1,211,000 for the third
three months of 2006 from $1,207,000 in the third three months of 2005 and
increased as a percentage of sales to 12.6% for the third three months of 2006
from 12.5% for the third three months of 2005. The $4,000 increase was primarily
the result of an increase in freight expense of $35,000 offset by a decrease in
departmental supplies of $41,000.
General and Administrative Expenses. General and administrative expenses
increased to $1,810,000 for the third three months of 2006 from $1,639,000 for
the third three months of 2005 and increased as a percentage of sales to 18.9%
for the third three months of 2006 from 16.9% for the third three months of
2005. The $171,000 increase was primarily the result of an increase in BDR
Broadband operating expenses of $214,000 offset by a decrease in professional
fees of $44,000.
Research and Development Expenses. Research and development expenses
increased to $389,000 in the third three months of 2006 from $372,000 in the
third three months of 2005 and increased as a percentage of sales to 4.1% for
the third three months of 2006 from 3.9% for the third three months of 2005.
This $17,000 increase is primarily due to an increase in consulting fees of
$5,000, an increase of departmental supplies of $5,000 and an increase of
maintenance expenses of $5,000.
14
Operating Income (Loss). Operating income of $345,000 for the third three
months of 2006 represents an increase from an operating loss of $3,271,000 for
the third three months of 2005. Operating income as a percentage of sales
increased to 3.6% in the third three months of 2006 from a loss of (33.8%) in
the third three months of 2005.
Other Expense. Interest expense decreased to $170,000 in the third three
months of 2006 from $190,000 in the third three months of 2005. The decrease is
the result of lower average borrowings.
Income Taxes. The provision for income taxes for the third three months of
2006 and 2005 was zero. A valuation allowance has been recorded on the 2006 and
2005 deferred tax assets. As a result of the Company's historical losses, there
is no change in the remaining deferred tax asset in 2006 or 2005.
First nine months of 2006 compared with first nine months of 2005
Net Sales. Net sales increased $1,634,000, or 5.8%, to $29,977,000 in the
first nine months of 2006 from $28,343,000 in the first nine months of 2005. The
increase in sales is primarily attributed to an increase in digital, headend and
fiber product sales. Digital product sales were $3,714,000 and $3,374,000,
headend product sales were $14,536,000 and $14,006,000, and fiber product sales
were $1,403,000 and $812,000 in the first nine months of 2006 and 2005,
respectively.
Cost of Goods Sold. Cost of goods sold decreased to $19,305,000 for the
first nine months of 2006 from $23,010,000 for the first nine months of 2005 and
decreased as a percentage of sales to 64.4% from 81.2%. The decrease was
attributed primarily to cost of goods sold for the first nine months of 2005
included a $4,373,000 increase in the provision for inventory reserves.
Comparatively, there was no increase in such reserves for the first nine months
of 2006. Of the 16.8% improvement in cost of goods sold as a percentage of
sales, approximately 1.4% was associated with a higher portion of sales in the
first nine months of 2006 being comprised of higher margin products and the
remaining 15.4% of such improvement was associated with the increase in
inventory reserves in the first nine months of 2005, which adversely affected
the Company's cost of goods sold for such period.
Selling Expenses. Selling expenses increased to $3,564,000 for the first
nine months of 2006 from $3,397,000 in the first nine months of 2005 but
remained constant as a percentage of sales of 11.9% for both the first nine
months of 2006 and for the first nine months of 2005. The $167,000 increase was
primarily the result of an increase in travel and entertainment of $77,000 and
an increase in freight expense of $72,000.
General and Administrative Expenses. General and administrative expenses
increased to $5,306,000 for the first nine months of 2006 from $4,973,000 for
the first nine months of 2005 and increased as a percentage of sales to 17.7%
for the first nine months of 2006 from 17.6% for the first nine months of 2005.
The $333,000 increase was primarily the result of an increase in BDR Broadband
operating expenses of $454,000 offset by a decrease in professional fees of
$225,000.
Research and Development Expenses. Research and development expenses
increased to $1,190,000 in the first nine months of 2006 from $1,178,000 in the
first nine months of 2005 but decreased as a percentage of sales to 3.9% for the
first nine months of 2006 from 4.2% for the first nine months of 2005. This
$12,000 increase is primarily due to an increase in consulting fees of $43,000
offset by a decrease in departmental supplies of $8,000, a decrease in
depreciation expense of $9,000 and a decrease in salaries and fringe benefits of
$6,000 due to decreased headcount.
Operating Income (Loss). Operating income of $612,000 for the first nine
months of 2006 represents an increase from an operating loss of $4,215,000 for
the first nine months of 2005. Operating income as a percentage of sales
increased to 2.0% in the first nine months of 2006 from (14.9%) in the first
nine months of 2005.
Other Expense. Interest expense decreased to $542,000 in the first nine
months of 2006 from $586,000 in the first nine months of 2005. The decrease is
the result of lower average borrowings.
Income Taxes. The provision for income taxes for the first nine months of
2006 and 2005 was zero. A valuation allowance has been recorded on the 2006 and
2005 deferred tax assets. As a result of the Company's historical losses, there
is no change in the remaining deferred tax asset in 2006 or 2005.
Liquidity and Capital Resources
As of September 30, 2006 and December 31, 2005, the Company's working
capital was $7,881,000 and $7,108,000, respectively. The increase in working
capital is attributable primarily to a decrease of the current portion of
15
long-term debt of $1,390,000 and an increase in net accounts receivable of
$984,000 offset by a decrease in current inventory of $947,000 and a decrease in
cash of $643,000.
The Company's net cash provided by operating activities for the nine-month
period ended September 30, 2006 was $1,404,000, compared to $1,737,000 for the
nine-month period ended September 30, 2005. The decrease is attributable
primarily to an increase in accounts receivable of $1,254,000 during the
nine-month period ended September 30, 2006, as compared to an increase of
$975,000 during the nine-month period ended September 30, 2005.
Cash used in investing activities for the nine-month period ended September
30, 2006 was $452,000 which was primarily attributable to capital expenditures
for new equipment and upgrades to the BDR Broadband Systems of $361,000.
Cash used in financing activities was $1,595,000 for the first nine months
of 2006 primarily comprised of $28,116,000 of repayments offset by $26,521,000
of borrowings of debt.
On December 29, 2005 the Company entered into a Credit and Security
Agreement ("Credit Agreement") with National City Business Credit, Inc. ("NCBC")
and National City Bank (the "Bank"). The Credit Agreement provides for (i) a
$10,000,000 asset-based revolving credit facility ("Revolving Loan") and (ii) a
$3,500,000 term loan facility ("Term Loan"), both of which have a three year
term. The amounts which may be borrowed under the Revolving Loan are based on
certain percentages of Eligible Receivables and Eligible Inventory; as such
terms are defined in the Credit Agreement. The obligations of the Company under
the Credit Agreement are secured by substantially all of the assets of the
Company.
Under the Credit Agreement, the Revolving Loan bears interest at a rate per
annum equal to the Libor Rate Plus 2.25%, or the "Alternate Base Rate," being
the higher of (i) the prime lending rate announced from time to time by the Bank
or (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement),
plus 0.50%. The Term Loan bears interest at a rate per annum equal to the Libor
Rate plus 2.75% or the Alternate Base Rate plus 0.50%. In connection with the
Term Loan, the Company entered into an interest rate swap agreement ("Swap
Agreement") with the Bank which exchanges the variable interest rate of the Term
Loan for a fixed interest rate of 5.13% per annum effective January 10, 2006
through the maturity of the Term Loan.
In March 2006, the Credit Agreement was amended to (i) modify the
definition of "EBITDA" to exclude certain non-cash items from the calculation
thereof, (ii) increase the applicable interest rates for the Revolving Loan and
Term Loan thereunder by 25 basis points until such time as the Company has met
certain financial covenants for two consecutive fiscal quarters, (iii) impose an
availability block of $500,000 under the Company's borrowing base until such
time as the Company has met certain financial covenants for two consecutive
fiscal quarters, and (iv) retroactively modify the agreement to defer
applicability of the fixed charge coverage ratio until June 30, 2006 and
increase the required ratio from 1.00:1.00 to 1.10:1.00 thereunder.
The Revolving Loan terminates on December 28, 2008, at which time all
outstanding borrowings under the Revolving Loan are due. The Term Loan requires
equal monthly principal payments of $19,000 each, plus interest, with the
remaining balance due at maturity. Both loans are subject to a prepayment
penalty if satisfied in full prior to the second anniversary of the effective
date of the loans.
The Credit Agreement contains customary representations and warranties as
well as affirmative and negative covenants, including certain financial
covenants. The Credit Agreement contains customary events of default, including,
among others, non-payment of principal, interest or other amounts when due.
Proceeds from the Credit Agreement were used to refinance the Company's
former credit facility with Commerce Bank, N.A. ("Commerce Bank"), to pay
transaction costs, to provide working capital and for other general corporate
purposes.
The Company's former credit facility with Commerce Bank was originally
entered into on March 20, 2002. The Commerce Bank credit facility was for an
aggregate amount of $18,500,000, comprised of (i) a $6,000,000 revolving line of
credit under which funds could be borrowed at the prime rate plus 2.0% with a
floor of 5.5%, (ii) a $9,000,000 term loan which bore interest at a rate of 7.5%
and which required equal monthly principal payments of $193,000 plus interest
with a final payment on April 1, 2006 of all of the remaining unpaid principal
and interest, and (iii) a $3,500,000 mortgage loan bearing interest at 7.5% and
which required equal monthly principal payments of $19,000, with a final payment
on April 1, 2017, subject to a call provision after five years.
16
At September 30, 2006, there was $2,564,000 and $3,325,000 outstanding
under the NCBC Revolving Loan and Term Loan, respectively.
The Company anticipates that the cash generated from operations, existing
cash balances and amounts available under its credit facility with NCBC, will be
sufficient to satisfy its foreseeable working capital needs.
New Accounting Policies
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Accounting for Fair Value Measurements." SFAS No. 157 defines
fair value, and establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosure about fair value
measurements. SFAS No. 157 is effective for the Company for financial statements
issued subsequent to November 15, 2007. The Company does not believe adoption of
SFAS No. 157 will have a material impact on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans." Among other items, SFAS
No. 158 requires recognition of the overfunded or underfunded status of an
entity's defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer's fiscal year, and
requires recognition of the funded status of defined benefit postretirement
plans in other comprehensive income. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company will adopt SFAS 158 in the fourth
quarter of 2006 on a prospective basis. The Company currently measures the
funded status of its plan as of the date of its year-end statement of financial
position.
Based on the Company's unfunded obligation as of December 31, 2005, the
adoption of SFAS 158 would increase total liabilities by approximately $50,000
and reduce total stockholders' equity by approximately $50,000. The adoption
will not have a material impact on the Company's results of operations and cash
flows. In addition, the adoption of SFAS No. 158 will not impact compliance with
the Company's loan covenants. By the time of adoption at December 31, 2006, plan
performance and actuarial assumptions could have a significant impact on the
actual amounts recorded.
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, 2006 and 2005 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $5,889,000 and $4,041,000,
respectively. A hypothetical 100 basis point increase in interest rates would
have had an annualized unfavorable impact of approximately $59,000 and $40,000,
respectively, on the Company's earnings and cash flows based upon these
quarter-end debt levels. With regard to the Company's $3,500,000 Term Loan with
NCBC, the Company entered into an interest rate swap with the Bank which
exchanges the variable interest rate of the Term Loan for a fixed interest rate
of 5.13% per annum. This interest rate swap, which became effective January 10,
2006 and runs through the maturity of the three year Term Loan, will reduce the
unfavorable impact of any increase in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures
designed to provide reasonable assurance that information required to be
disclosed in the Company's reports filed or submitted pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
such information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The
Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, 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 Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective at September 30, 2006.
17
There have been no changes in the Company's internal control over financial
reporting, to the extent that elements of internal control over financial
reporting are subsumed within disclosure controls and procedures, that have
materially affected, or are 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 1A. RISK FACTORS
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2005 ("2005 Form 10-K") includes a detailed discussion of the risk factors
that could cause the Company's actual results to differ materially from those
stated in forward-looking statements contained in this Quarterly Report on Form
10-Q. The risk factors described below are only those risk factors that have
materially changed since the Company filed the 2005 Form 10-K. Accordingly, the
risk factors presented below should be read in conjunction with the risk factors
and information disclosed in the Company's 2005 Form 10-K. Additional risks not
currently known to the Company or that the Company now deems immaterial may also
affect the Company and the value of its common stock.
Our anticipated international operations in the PRC or elsewhere in the Far East
may subject us to the risks of unfavorable political, regulatory, legal, and
labor conditions in the PRC or elsewhere in the Far East.
We intend to continue actively pursuing opportunities to shift production
of certain products to the Far East and perhaps also establish a manufacturing
facility for our products in the Peoples' Republic of China (or PRC) or
elsewhere in the Far East. If successful, this may increase the amount of
revenues we derive from sales to customers outside the United States, including
sales in the PRC. Our future operations and earnings may be adversely affected
by the risks related to, or any other problems arising from, operating in the
PRC or in other countries located in the Far East, including the risks of
changes in foreign currency exchange rates, changes in foreign
telecommunications standards, and unfavorable political, regulatory, labor and
tax conditions in other countries. Although the PRC has a large and growing
economy, its potential economic, political, legal and labor developments entail
uncertainties and risks. Similar risks exist in most if not all of the other
countries in the Far East where we would consider shifting production of certain
of our products. While the PRC and other Far Eastern countries have been
receptive to foreign investment, we cannot be certain that their current
policies will continue indefinitely into the future. In the event we establish a
manufacturing facility in the PRC or other country in the Far East, any changes
that adversely affect our ability to conduct our operations may cause our
business to suffer.
Shifting our operations between regions may entail considerable expense.
If we were to establish a manufacturing facility in the PRC or elsewhere in
the Far East and ultimately commence production of certain products at this
facility, such action could require us, over time, to shift a material portion
of our operations to the Far East in order to maximize manufacturing and
operational efficiency. This could result in reducing our domestic operations in
the future, which in turn could entail significant one-time earnings charges to
account for severance, equipment write offs or write downs and moving expenses.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
The exhibits are listed in the Exhibit Index appearing at page 21 herein
19
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 9, 2006 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)
20
EXHIBIT INDEX
Exhibit # Description Location
3.1 Restated Certificate of Incorporation Incorporated by reference from
of Blonder Tongue Laboratories, Inc. Exhibit 3.1 to S-1 Registration
Statement No. 33-98070 originally
filed October 12, 1995, as amended.
3.2 Restated Bylaws of Blonder Tongue Incorporated by reference from
Laboratories, Inc. Exhibit 3.2 to S-1 Registration
Statement No. 33-98070 originally
filed October 12, 1995, as amended.
10.1 Patent Purchase Agreement Incorporated by reference from
between Blonder Tongue Investment Exhibit 99.1 to the Current Report
Company and Moonbeam L.L.C. dated on Form 8-K filed on September 18,
as of September 12, 2006. 2006.
31.1 Certification of James A. Luksch Filed herewith.
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Eric Skolnik Filed herewith.
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Filed herewith.
Section 906 of Sarbanes-Oxley
Act of 2002.
21
Exhibit 31.1
CERTIFICATION
I, James A. Luksch, Chief Executive Officer of Blonder Tongue Laboratories,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blonder Tongue
Laboratories, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 9, 2006
/s/ James A. Luksch
James A. Luksch
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Eric Skolnik, Senior Vice President and Chief Financial Officer of
Blonder Tongue Laboratories, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blonder
Tongue Laboratories, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 9, 2006
/s/ Eric Skolnik
Eric Skolnik
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
To the knowledge of each of the undersigned, this Report on Form 10-Q
for the quarter ended September 30, 2006 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, and the information contained in this Report fairly
presents, in all material respects, the financial condition and results of
operations of Blonder Tongue Laboratories, Inc. for the applicable
reporting period.
Date: November 9, 2006 By: /s/ James A. Luksch
James A. Luksch, Chief Executive Officer
By: /s/ Eric Skolnik
Eric Skolnik, Chief Financial Officer