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 MARCH 31, 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 May 12,
2006: 8,015,406.
The Exhibit Index appears on page 15.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
March 31, December 31,
2006 2005
Assets (Note 4)
Current assets:
Cash........................................... $117 $787
Accounts receivable,
net of allowance for
doubtful accounts of $ 927
and $863 respectively...................... 5,403 3,567
Inventories (Note 3)........................... 8,604 9,649
Prepaid and other current assets............... 744 490
Deferred income taxes ......................... 651 651
--------- ---------
Total current assets....................... 15,519 15,144
Inventories, non-current (net) (Note 3)........... 4,721 4,866
Property, plant and equipment,
net of accumulated
depreciation and amortization .................. 6,103 6,184
Patents, net ..................................... 1,770 1,864
Rights-of-Entry, net (Note 5)..................... 654 720
Other assets, net................................. 1,507 1,388
Investment in Blonder Tongue
Telephone LLC (Note 5).......................... 928 993
Deferred income taxes ............................ 1,705 1,705
----------- ---------
$32,907 $32,864
=========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
(Note 4).................................... $4,944 $4,249
Accounts payable............................... 1,414 2,231
Accrued compensation........................... 614 598
Accrued benefit liability...................... 185 185
Income taxes payable........................ 487 491
Other accrued expenses ........................ 307 282
----------- ---------
Total current liabilities................... 7,951 8,036
----------- ---------
Long-term debt (Note 4)........................... 3,262 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................................ 24,205 24,202
Retained earnings.............................. 3,757 3,565
Accumulated other comprehensive loss........... (821) (821)
Treasury stock, at cost, 449 shares............ 5,455) 5,455)
----------- ---------
Total stockholders' equity.............. 21,694 21,499
----------- ---------
$32,907 $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 Ended
March 31,
--------------------------------------
2006 2005
---------------- ----------------
Net sales........................... $10,387 $9,269
Cost of goods sold.................. 6,817 6,742
---------------- ----------------
Gross profit.................... 3,570 2,527
---------------- ----------------
Operating expenses:
Selling......................... 1,112 1,066
General and administrative...... 1,629 1,653
Research and development........ 392 411
---------------- ----------------
3,133 3,130
---------------- ----------------
Earnings (loss) from operations...... 437 (603)
---------------- ----------------
Other expense
Interest expense (net).......... (180) (193)
Equity in loss of Blonder Tongue
Telephone, LLC............... (65) (94)
---------------- ----------------
(245) (287)
Earnings (loss ) before income taxes 192 (890)
Benefit for income taxes............ - -
---------------- ----------------
Net earnings (loss )................. $192 $(890)
================ ================
Basic and diluted earnings (loss)
per share $0.02 $(0.11)
Basic and diluted weighted average ================ ================
shares outstanding 8,015 8,015
================ ================
See accompanying notes to consolidated financial statements.
3
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(In thousands)
(unaudited)
Three Months Ended March 31,
------------------------------
2006 2005
------------ --------
Cash Flows From Operating Activities:
Net earnings (loss)........................... $ 192 $ (890)
Adjustments to reconcile net earnings
(loss) to cash used in operating activities:
Stock compensation expense.................. 3 -
Equity in loss from Blonder Tongue
Telephone, LLC........................... 65 94
Depreciation................................ 243 253
Amortization ............................... 160 160
Allowance for doubtful accounts............. 64 -
Provision for inventory reserves............ - 603
Changes in operating assets and liabilities:
Accounts receivable......................... (1,900) (1,648)
Inventories................................. 1,190 833
Prepaid and other current assets............ (254) (87)
Other assets................................ (119) -
Income taxes................................ (4) (2)
Accounts payable, accrued compensation
and other accrued expenses............... (776) 500
------------ ---------
Net cash used in operating activities..... (1,136) (184)
------------ ---------
Cash Flows From Investing Activities:
Capital expenditures.......................... (162) (125)
Acquisition of rights-of-entry................ - (3)
------------ ---------
Net cash used in investing activities..... (162) (128)
------------ ---------
Cash Flows From Financing Activities:
Borrowings of debt............................ 736 3,640
Repayments of debt............................ (108) (3,152)
------------ ---------
Net cash provided by financing activities.. 628 488
------------ ---------
Net increase (decrease) in cash............ (670) 176
------------ ---------
Cash, beginning of period....................... 787 70
------------ ---------
Cash, end of period............................. $117 $ 246
============ =========
Supplemental Cash Flow Information:
Cash paid for interest........................ $128 $ 140
Cash paid for income taxes.................... $4 $ 2
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.
On November 11, 2005, the Company and its recently formed, wholly-owned
subsidiary, Blonder Tongue Far East, LLC, a Delaware limited liability company,
entered into a joint venture agreement with Master Gain International Industrial
Limited, a Hong Kong corporation, 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. The
business operations have not yet commenced as of March 31, 2006.
The results for the first quarter 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 March 31, 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 - 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 $3 during the three
months ended March 31, 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 three months ended March 31, 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%.
Under accounting provisions of FAS 123R, the Company's net loss to common
shareholders and net loss per common share would have been adjusted to the pro
forma amounts indicated below during the three months ended March 31, 2005 (in
thousands, except per share data):
Net loss as reported ......................... $ (890)
Adjustment for fair value of stock options.... 160
--------------
Pro forma................................ $ (1,050)
==============
Net loss per share basic and diluted:
As reported.............................. $ (0.11)
==============
Pro forma................................ $ (0.13)
==============
5
Note 3 - Inventories
Inventories net of reserves are summarized as follows:
(unaudited)
March 31, Dec. 31,
2006 2005
--------------- -------------
Raw Materials............................... $9,900 $10,071
Work in process............................. 1,855 2,102
Finished Goods.............................. 10,286 11,058
--------------- -------------
22,041 23,231
Less current inventory...................... (8,604) (9,649)
--------------- -------------
13,437 13,582
Less Reserve primarily for excess inventory. (8,716) (8,716)
--------------- -------------
$4,721 $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.
Note 4 - 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
6
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
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 5 - Cable Systems and Telephone Products (Subscribers and passings in
whole numbers)
During June, 2002, BDR Broadband, a 90% owned 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
3,200 existing MDU cable television subscribers and approximately 7,800
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.
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 has 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 has 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)
have been pledged to the Company as collateral.
7
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 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. The Company
accounts for its investments in NetLinc and BTT using the equity method.
Note 6 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement with a director, who is also the largest stockholder.
Under the agreement, the director provides consulting services on various
operational and financial issues and is currently paid at an annual rate of $169
but in no event is such annual rate permitted to exceed $200. The director also
agreed to keep all Company information confidential and will not compete
directly or indirectly with the Company for the term of the agreement and for a
period of two years thereafter. The initial term of this agreement 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 March 31, 2006, the Chief Executive Officer was indebted to the
Company in the amount of $176, 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 March 31, 2006 and
December 31, 2005.
As described in Note 5 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. One half of such common stock (250 shares) has been pledged to the
Company as collateral to secure BTT's obligations to the Company. The Company
will receive preferential distributions equal to the $1,167 cash component of
the purchase price from the cash flows of BTT. The Company also pays future
royalties to NetLinc and BTT upon the sale of certain telephony products.
Through this telephony venture, BTT offers primary voice service to MDUs and the
Company offers for sale a line of telephony equipment to complement the voice
service.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the section entitled Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. The words "believe",
"expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including without limitation, the Company's Annual Report
on Form 10-K for the year ended December 31, 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 is utilizing the SMI Interdiction product line
acquired from Scientific, which has been engineered primarily to serve the
franchise cable market, as a supplement to the Company's
VideoMask(TM)Interdiction products, which are primarily focused on the private
cable market.
Over the past several years, the Company has expanded beyond its core
business by acquiring a private cable television system (BDR Broadband, LLC )
and by acquiring an interest in a company offering a private telephone program
9
ideally suited to multiple dwelling unit applications (Blonder Tongue Telephone,
LLC). These acquisitions are described in more detail below.
During June, 2002, BDR Broadband, a 90% owned 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
3,200 existing MDU cable television subscribers and approximately 7,800
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 the model it devised 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. The Company is seeking and is
presently negotiating several such opportunities, although there is no assurance
that the Company will be successful in consummating these transactions. In
addition, the Company may need financing to acquire additional rights-of-entry,
and financing may not be available on acceptable terms or at all.
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 has 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 has 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) have been 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 anticipate purchasing products
from NetLinc in the near term. NetLinc, however, continues to own intellectual
property, which may be further developed and used in the future to manufacture
and sell telephony products under the distributorship agreements.
In addition to receiving incremental revenues associated with its direct
sales of telephony products, the Company also anticipates receiving additional
revenues from telephony services provided by or through contracts for such
services obtained by BDR Broadband, BTT (through the Company's 50% stake
therein) as well as through joint ventures with third parties. 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 the time frame relating to obtaining rights-of-entry for the
provision of video and high-speed data services. This protracted time frame has
had an adverse impact on the growth of telephony system revenues. As a result,
sales volume has been lower than originally anticipated. While the Company
believes that sales will grow at a moderate pace, it is unclear whether such
sales will become a significant source of revenue for the Company.
On November 11, 2005, the Company and its recently formed, wholly-owned
subsidiary, Blonder Tongue Far East, LLC, a Delaware limited liability company,
entered into a Joint Venture Agreement (the "Joint Venture Agreement") with
Master Gain International Industrial Limited, a Hong Kong corporation ("Master
Gain"), to form a joint venture (the "Joint Venture") to manufacture products in
the Peoples Republic of China ("PRC") to compete with Far East manufactured
products and to expand the Company's market coverage outside North America. The
Joint Venture Agreement contemplates the formation of several new entities
including a new Chinese manufacturing company to be called Shenzhen China
Blonder Tongue ("SCBT"), fifty percent (50%) of which will be owned (directly or
indirectly) by each of the Company and Master Gain. The formation of SCBT and
10
the extent of its operations will be subject to approval and regulation by the
PRC. To date, the Joint Venture has formed a British Virgin Island entity which
is owned fifty percent (50%) by each of the Joint Venture parties, however, SCBT
has not yet been formed and the Joint Venture parties have not yet completed the
capitalization of the Joint Venture. The Joint Venture anticipates that the
formation of SCBT and funding of the Joint Venture will occur in the near
future. The Joint Venture has identified a manufacturing facility in the PRC for
acquisition and anticipates acquiring this facility and commencing production of
certain products sometime in the second half of 2006.
The Company will grant SCBT a license to use certain of the Company's
technology and know-how to manufacture and sell certain of the Company's
products, and an exclusive distributorship for SCBT to sell certain of the
Company's products in the Asian, Southeast Asian, African, European, Middle
Eastern and Australian markets. This arrangement will commence with less complex
products being licensed and manufactured during the early stages and progress to
the license, manufacturing and sale of more complex products over time.
The Joint Venture Agreement contemplates that the Joint Venture will
acquire from third parties, other technology and rights to manufacture, market
and sell products developed from these other technologies, including the Coresma
CMTS product ("CMTS Technology") which is being acquired by the Joint Venture
and is now manufactured by the Company. The Joint Venture will grant the Company
an exclusive distributorship to sell such products in the North American, South
American and Caribbean markets.
Master Gain will contribute $5,850,000 to the Joint Venture (the "Master
Gain Contribution"). The Company will, upon receipt by the Joint Venture of the
Master Gain Contribution and acquisition by the Joint Venture of the CMTS
Technology, contribute 1,000,000 shares of its unregistered common stock to the
Joint Venture and will grant Master Gain stock options to purchase up to 500,000
shares of the Company's unregistered common stock. The shares of unregistered
common stock contributed by the Company to the Joint Venture will be subject to
a voting trust agreement, whereby an officer of the Company will be designated
as the voting trustee. Both the shares issued to the Joint Venture as well as
the options granted to Master Gain will be subject to certain restrictions and
rights of cancellation. The exercise price, vesting schedule and expiration of
the options will be in accordance with the following: (i) options to purchase
50,000 shares at an exercise price of $5.00 per share will vest upon receipt by
the Joint Venture of the Master Gain Contribution and acquisition by the Joint
Venture of the CMTS Technology and expires on September 30, 2008; (ii) options
to purchase 150,000 shares at an exercise price of $7.00 per share will vest on
April 15, 2007 and expire on April 14, 2010; and (iii) options to purchase
300,000 shares at an exercise price of $10.00 per share will vest on April 15,
2008 and expire on April 14, 2011.
Consummation of the transactions contemplated by the Joint Venture
Agreement are subject to certain conditions as set forth in the Joint Venture
Agreement, including obtaining any consent, approval, permit, license or other
authorization required from any and all governmental authorities with proper
jurisdiction, including, without limitation, the PRC.
Results of Operations
First three months of 2006 Compared with first three months of 2005
Net Sales. Net sales increased $1,118,000, or 12.1%, to $10,387,000 in the
first three months of 2006 from $9,269,000 in the first three months of 2005.
The increase in sales is primarily attributed to an increase in digital and
headend product sales. Digital products were $1,433,000 and $942,000 and headend
products were $5,050,000 and $4,682,000 in the first three months of 2006 and
2005, respectively.
Cost of Goods Sold. Cost of goods sold increased to $6,817,000 for the
first three months of 2006 from $6,742,000 for the first three months of 2005
but decreased as a percentage of sales to 65.6% from 72.7%. The increase was
attributed primarily to an increase in sales in the first three months of 2006
as compared to 2005. Cost of goods sold for the first three months of 2005
included a $603,000 increase in the provision for inventory reserves.
Comparatively, there was no increase in such reserves for the first three months
of 2006. Of the 7.1 % apparent improvement in cost of goods sold as a percentage
of sales, approximately 0.6% was associated with a higher portion of sales in
the first three months of 2006 being comprised of higher margin products and the
remaining 6.5% of such improvement was associated with the increase in inventory
reserves in the first three months of 2005, which adversely affected the
Company's cost of goods sold for such period.
Selling Expenses. Selling expenses increased to $1,112,000 for the first
three months of 2006 from $1,066,000 in the first three months of 2005 but
decreased as a percentage of sales to 10.7% for the first three months of 2006
from 11.5% for the first three months of 2005. The $46,000 increase was
11
primarily the result of an increase in salaries and fringe benefits of $14,000
due to an increase in headcount, an increase in commissions of $9,000 due to
increased sales and an increase of consulting fees of $11,000.
General and Administrative Expenses. General and administrative expenses
decreased to $1,629,000 for the first three months of 2006 from $1,653,000 for
the first three months of 2005 and decreased as a percentage of sales to 15.7%
for the first three months of 2006 from 17.8% for the first three months of
2005. The $24,000 decrease was primarily the result of a decrease in
professional fees of $120,000 and in insurance costs of $18,000, offset by an
increase in BDR Broadband operating expenses of $113,000.
Research and Development Expenses. Research and development expenses
decreased to $392,000 in the first three months of 2006 from $411,000 in the
first three months of 2005 and decreased as a percentage of sales to 3.8% for
the first three months of 2006 from 4.4% for the first three months of 2005.
This $19,000 decrease is primarily due to a decrease in departmental supplies of
$19,000.
Operating Income (Loss). Operating income of $437,000 for the first three
months of 2006 represents an increase from an operating loss of $603,000 for the
first three months of 2005. Operating income as a percentage of sales increased
to 4.2% in the first three months of 2006 from (6.5%) in the first three months
of 2005.
Other Expense. Interest expense decreased to $180,000 in the first three
months of 2006 from $193,000 in the first three months of 2005. The decrease is
the result of lower average borrowing.
Income Taxes. The current provision for income taxes for the first 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.
Liquidity and Capital Resources
As of March 31, 2006 and December 31, 2005, the Company's working capital
was $7,568,000 and $7,108,000, respectively. The increase in working capital is
attributable primarily to an increase of accounts receivable of $1,900,000
offset by a decrease in current inventory of $1,045,000.
The Company's net cash used in operating activities for the three-month
period ended March 31, 2006 was $1,136,000, compared to $184,000 for the
three-month period ended March 31, 2005. The increase is attributable primarily
to a reduction in accounts payable, accrued compensation and other accrued
expenses of $776,000.
Cash used in investing activities was $162,000 which was primarily
attributable to capital expenditures for new equipment and upgrades to the BDR
Broadband Systems of $136,000.
Cash provided by financing activities was $628,000 for the first three
months of 2006 primarily comprised of $736,000 of net borrowings offset by
$108,000 of repayments 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
12
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.
At March 31, 2006, there was $4,538,000 and $3,442,000 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.
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 March 31, 2006 and 2005 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $7,980,000 and $3,911,000,
respectively. A hypothetical 100 basis point increase in interest rates would
have had an annualized unfavorable impact of approximately $80,000 and $39,000,
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 March 31, 2006.
13
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
There has not been any material change in the disclosure of risk factors
contained in the Company's Form 10-K for the fiscal year ended December 31,
2005.
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
Exhibits
The exhibits are listed in the Exhibit Index appearing at page 15 herein
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: May 12, 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)
14
EXHIBIT INDEX
Exhibit # Description Location
3.1 Restated Certificate of
Incorporation of Blonder Tongue Incorporated by reference
Laboratories, Inc. from 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
Laboratories, Inc. from Exhibit 3.2 to S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.1 First Amendment to Credit Filed herewith.
and Security Agreement between
Blonder Tongue Laboratories, Inc.,
BDR Broadband, LLC, Blonder Tongue
Investment Company,National City
Business Credit, Inc.and National
City Bank, dated March 29, 2006.
10.2 Side Letter Agreement between Filed herewith.
Blonder Tongue Laboratories, Inc.
and Octalica, Inc., dated
February 27, 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 Section Filed herewith.
906 of Sarbanes-Oxley Act of 2002.
15
