$458,000 of sales attributable to the note receivable described above. As a result, the Company experienced higher headend product sales. Included in net sales are revenues from BDR Broadband of $355,000 and $303,000 for the third three months of 2004 and 2003, respectively.
of 2004 from 11.0% for the first nine months of 2003. This $287,000 increase is primarily attributable to an increase in wages and fringe benefits of $266,000,due to an increase in headcount.
General and Administrative Expenses. General and administrative expenses decreased to $4,444,000 for the first nine months of 2004 from $4,568,000 for the first nine months of 2003 and decreased as a percentage of sales to 14.5% for the first nine months of 2004 from 17.4% for the first nine months of 2003. The $126,000 decrease can be primarily attributed to a decrease in the allowance for bad debts of $268,000 as a result of improved collection efforts, a decrease in salary and fringe benefits of $129,000 due to the temporary reduction of salaries for certain executive officers, offset by an increase in operating expenses of BDR Broadband of $208,000.
Research and Development Expenses. Research and development expenses decreased to $1,187,000 in the first nine months of 2004 from $1,449,000 in the first nine months of 2003. This $262,000 decrease was primarily due to a decrease in wages and fringe benefits of $170,000 due to a reduction in headcount. Research and development expenses, as a percentage of sales, decreased to 3.9% in the first nine months of 2004 from 5.5% in the first nine months of 2003.
Operating Income (Loss). Operating income was $785,000 for the first nine months of 2004 compared to a loss of $1,116,000 for the first nine months of 2003.
Other Expense. Interest expense decreased to $713,000 in the first nine months of 2004 from $827,000 in the first nine months of 2003. The decrease is the result of lower average borrowing. Other income increased to $299,000 in the first nine months of 2004 compared to zero for the first nine months of 2003 primarily due to the recognition of $222,000 of interest income on the note receivable described above.
Income Taxes. The benefit for income taxes for the first nine months of 2004 was zero compared to a benefit of $730,000 for the first nine months of 2003 due to a valuation allowance of $93,000 since the realization of the deferred tax benefit is not considered more likely than not.
Liquidity and Capital Resources
As of September 30, 2004 and December 31, 2003, the Company’s working capital was $8,814,000 and $11,591,000, respectively. The decrease in working capital is attributable primarily to an increase in the current portion of debt of $3,331,000 due to the reclassification of the revolving line of credit to current.
The Company’s net cash provided by operating activities for the nine-month period ended September 30, 2004 was $2,548,000, compared to net cash provided by operating activities for the nine-month period ended September 30, 2003, which was $4,241,000.
Cash provided by investing activities was $585,000, which was primarily attributable to an $834,000 collection of a note receivable offset by capital expenditures for new equipment and upgrades to the BDR Broadband Systems of $388,000.
Cash used in financing activities was $3,182,000 for the first nine months of 2004 primarily comprised of $13,602,000 of repayments of debt offset by $10,400,000 of borrowings.
On March 20, 2002, the Company entered into a credit agreement with Commerce Bank, N.A. for a $19,500,000 credit facility, comprised of (i) a $7,000,000 revolving line of credit under which funds may be borrowed at LIBOR, plus a margin ranging from 1.75% to 2.50%, in each case depending on the calculation of certain financial covenants, with a floor of 5% through March 19, 2003, (ii) a $9,000,000 term loan which bore interest at a rate of 6.75% through September 30, 2002, and thereafter at a fixed rate ranging from 6.50% to 7.25% to reset quarterly depending on the calculation of certain financial covenants 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 initial maturity date of the line of credit with Commerce Bank was March 20, 2004. The term loan required equal monthly principal
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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.
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 began to accrue interest at the prime rate plus 1.5%, with a floor of 5.5% (6.0% at September 30, 2004), and the term loan began to accrue 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.
In March 2004, the Company's credit agreement with Commerce Bank was amended to (i) extend the maturity date of the line of credit until April 1, 2005, (ii) reduce the maximum amount that may be borrowed under the line of credit to $6,000,000, (iii) suspend the applicability of the cash flow coverage ratio covenant until March 31, 2005, (iv) impose a new financial covenant requiring the Company to achieve certain levels of consolidated pre-tax income on a quarterly basis commencing with the fiscal quarter ended March 31, 2004, and (v) require that the Company make a prepayment against its outstanding term loan to the Bank equal to 100% of the amount of any prepayment received by the Company on its outstanding note receivable from a customer, up to a maximum amount of $500,000. The full $500,000 was paid during the six months ended June 30, 2004.
The Company is in compliance with all such covenants under its credit agreement, as amended. The Company anticipates that it will either conclude negotiations with its bank and obtain a renewal of its current credit facilities, or enter into new credit facilities with another bank prior to April 1, 2005.
At September 30, 2004, there was $3,331,000, $3,013,000 and $2,936,000 outstanding under the revolving line of credit, term loan and mortgage loan, respectively.
The Company has from time to time experienced short-term cash requirement issues. In 2002, 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, during 2004, the Company will incur additional obligations related to royalties, if any, in connection with its $1,167,000 cash 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 using its line of credit, such lender did not agree to increase the maximum amount available under such line of credit. These expenditures, coupled with the March 2004 amendment to the Company’s credit agreement with Commerce Bank described above, and certain near-term funding requirements relating to the purchase of a large quantity of high-speed data products, will reduce the Company’s working capital. The Company is exploring various alternatives to enhance its working capital, including inventory-related pricing and product reengineering efforts, as well as restructuring its long-term debt with Commerce Bank or seeking alternative financing. During 2003, BDR Broadband had positive cash flow, which has continued in the first nine months of 2004. As such, BDR Broadband is not presently anticipated to adversely impact the Company’s working capital.
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, 2004 and 2003 the principal amount of the Company’s aggregate outstanding variable rate indebtedness was $3,331,000 and $4,621,000, respectively. A hypothetical 100 basis point increase in interest rates would have had an annualized unfavorable impact of approximately $33,000 and $46,000, respectively, on the Company’s earnings and cash flows based upon these quarter-end debt levels. At September 30, 2004, the Company did not have any derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of its principal executive officer and principal financial officer, the Company evaluated the design and operation of the Company’s disclosure controls and procedures as of September 30, 2004. Based upon the evaluation at the time it was performed, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information required to be included in the Company’s periodic SEC reports. In October, 2004, subsequent to such evaluation, the Company identified an error in
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accounting for inventories received that were not correctly recorded. This error resulted in a vendor’s account payable balance being understated and the related understatement of cost of goods sold. As a result, the Company concluded that its previously reported financial statements for each of the three years ended December 31, 2001, 2002 and 2003 should be restated to reflect the increase in accounts payable and related increase to cost of goods sold and deferred income taxes. Additionally, the Company concluded that the unaudited financial statements for the first quarter ended March 31, 2004 and second quarter ended June 30, 2004 should be restated to reflect the increase in accounts payable and decrease in stockholders’ equity.
In connection with the completion of its audit of the issuance of the Company’s restated consolidated financial statements for the fiscal years ended December 31, 2001, 2002 and 2003, the Company’s independent auditors, BDO Seidman, LLP (“BDO”), communicated to the Company’s Audit Committee that the following matters involving the Company’s internal controls and operations were considered to be “reportable conditions,” as defined under standards established by the American Institute of Certified Public Accountants or AICPA:
• Lack of reconciliation of accounts payable balances to vendor accounts.
• Inadequate review of details of accounts payable.
• Inadequate review of slow moving inventories.
Reportable conditions are matters coming to the attention of the independent auditors that in their judgment, relate to significant deficiencies in the design or operation of internal controls and could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider these matters, which are listed above, to be a “material weaknesses” that may increase the possibility that a material misstatement in the Company’s financial statements might not be prevented or detected by its employees in the normal course of performing their assigned functions.
To remediate these weaknesses, in August, 2004 the Company instituted procedures to review inventory quantities against sales projections and in November, 2004 the Company instituted procedures to reconcile accounts payable to vendor accounts and also modified certain accounts payable and inventory related policies and procedures, provided education regarding such policies and procedures to relevant staff members and has implemented enhanced monitoring of such policies and procedures and related accounting policies. In connection with restating the Company’s financial statements for the years ended December 31, 2001, 2002 and 2003, and the unaudited financial statements for the quarters ended March 31, 2004 and June 30, 2004, the Company, under the supervision and with the participation of its principal executive officer and principal financial officer, has concluded that, as a result of the foregoing modifications to certain policies and procedures, the Company believes the deficiencies have been remediated. The Company’s principal executive officer and principal financial officer did not note any other deficiencies in the Company’s disclosure controls and procedures during their evaluation. Other than the matters discussed above, the Company’s principal executive officer and principal financial officer have determined that the Company’s disclosure controls and procedures were effective as of September 30, 2004 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, other than as noted above, the Company’s disclosure controls and procedures were effective at a reasonable assurance level. The Company continues to monitor the effectiveness of its disclosure controls and procedures on an ongoing basis.
In addition, the Company reviewed its internal control over financial reporting during the fiscal quarter covered by this report. During this quarter, the Company instituted procedures to review inventory quantities against sales projections as described above. During this quarter, there have been no other 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 has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. After the end of the third fiscal quarter of 2004, in November, 2004 the Company made a change in the accounts payable reconciliation procedures as described above.
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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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits are listed in the Exhibit Index appearing at page 18 herein.
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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 22, 2004 | 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) |
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EXHIBIT INDEX
| Exhibit # | | Description | | Location |
| |
| |
|
| | | | | |
| 3.1 | | Restated Certificate of Incorporation of Blonder | | Incorporated by reference from Exhibit 3.1 |
| | | Tongue Laboratories, Inc. | | to S-1 Registration Statement No. 33-98070 |
| | | | | originally filed October 12, 1995, as |
| | | | | amended. |
| | | | | |
| 3.2 | | Restated Bylaws of Blonder Tongue Laboratories, | | Incorporated by reference from Exhibit 3.2 |
| | | Inc. | | to S-1 Registration Statement No. 33-98070 |
| | | | | originally filed October 12, 1995, as |
| | | | | amended. |
| | | | | |
| 31.1 | | Certification of James A. Luksch pursuant to | | Filed herewith. |
| | | Section 302 of the Sarbanes-Oxley Act of 2002. | | |
| | | | | |
| 31.2 | | Certification of Eric Skolnik pursuant to Section | | Filed herewith. |
| | | 302 of the Sarbanes-Oxley Act of 2002. | | |
| | | | | |
| 32.1 | | Certification pursuant to Section 906 of Sarbanes- | | Filed herewith. |
| | | Oxley Act of 2002. | | |
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