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
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10-Q Filing
Blonder Tongue Laboratories (BDRL) 10-Q2006 Q1 Quarterly report
Filed: 12 May 06, 12:00am