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 JUNE 30, 2007,
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 of (I.R.S. Employer Identification No.)
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 August 10,
2007: 6,222,252
The Exhibit Index appears on page 20.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
June 30, December 31,
--------------------------------
2007 2006
Assets (Note 4)
Current assets:
Cash...................................... $58 $ 84
Accounts receivable, net of allowance
for doubtful
accounts of $824 and $652 respectively ... 3,369 3,874
Inventories (Note 3)...................... 9,174 9,708
Prepaid and other current assets.......... 1,004 708
Deferred income taxes .................... 568 568
--------------- --------------
Total current assets.................. 14,173 14,942
Inventories, net non-current (Note 3)....... 5,052 5,052
Property, plant and equipment, net
of accumulated depreciation
and amortization ........................ 4,375 4,537
Patents, net ............................... 91 107
Other assets, net .......................... 547 796
Deferred income taxes ...................... 1,788 1,788
--------------- --------------
$26,026 $27,222
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term
debt (Note 4)............................. $2,856 $2,469
Accounts payable.......................... 1,404 1,397
Accrued compensation...................... 838 742
Accrued benefit liability................. 103 103
Income taxes payable...................... 49 461
Other accrued expenses.................... 241 259
--------------- --------------
Total current liabilities............. 5,491 5,431
--------------- --------------
Long-term debt (Note 4)..................... 1,437 1,559
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........................... 24,642 24,454
Retained earnings......................... 2,585 3,907
Accumulated other
comprehensive loss........................ (826) (826)
Treasury stock, at cost,
2,242 shares,............................. (7,311) (7,311)
--------------- --------------
Total stockholders' equity.............. 19,098 20,232
--------------- --------------
$26,026 $27,222
=============== ==============
See accompanying notes to consolidated financial statements
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Net sales......................$8,091 $9,522 $15,590 $19,479
Cost of goods sold............. 5,712 6,510 10,716 13,169
--------- --------- --------- ---------
Gross profit ............... 2,379 3,012 4,874 6,310
--------- --------- --------- ---------
Operating expenses:
Selling..................... 1,303 1,241 2,610 2,353
General and administrative.. 1,340 1,460 2,792 2,692
Research and development.... 440 409 900 801
--------- --------- --------- ---------
3,083 3,110 6,302 5,846
--------- --------- --------- ---------
Earnings (loss) from operations (704) (98) (1,428) 464
--------- --------- --------- ---------
Other Expense:
Interest expense (net)...... (118) (192) (236) (372)
Equity in loss of Blonder
Tongue Telephone, LLC..... - (42) - (107)
--------- --------- --------- ---------
(118) (234) (236) (479)
--------- --------- --------- ---------
Loss from continuing
operations before income taxes. (822) (332) (1,664) (15)
Provision (benefit) for income
taxes........................ - - - -
--------- --------- --------- ---------
Loss from continuing operations (822) (332) (1,664) (15)
--------- --------- --------- ---------
Discontinued operations:
Loss from discontinued
operations (net of tax).... - (72) - (197)
Loss on disposal of
subsidiary................. (59) - (59) -
--------- --------- --------- ---------
Net loss....................... $(881) $(404) $(1,723) $(212)
========= ========= ========= =========
Basic and diluted loss per
share from continuing
operations...................$(0.13) $(0.04) $(0.27) $(0.02)
Basic and diluted loss per
share from discontinued
operations..................... - $(0.01) - $(0.01)
Basic and diluted loss per
share on disposal.............$(0.01) - $(0.01) -
--------- --------- --------- ---------
Basic and diluted net loss per
share.........................$(0.14) $(0.05) $(0.28) $(0.03)
========= ========= ========= =========
Basic and diluted weighted
average shares
outstanding................... 6,222 8,010 6,222 8,013
========= ========= ========= =========
See acces to consolidated financial statements.
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended June 30,
-------------------------------
2007 2006
--------------- -------------
Cash Flows From Operating Activities:
Net loss.................................. $(1,723) $(212)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Stock compensation expense............... 188 84
Equity in loss from Blonder Tongue
Telephone, LLC........................... - 107
Depreciation............................. 242 489
Amortization ............................ 16 319
Allowance for doubtful accounts.......... 172 180
Provision for inventory reserves......... 558 -
Changes in operating assets and liabilities:
Accounts receivable...................... 333 (2,293)
Inventories.............................. (24) 1,812
Prepaid and other current assets......... (296) 54
Other assets............................. 249 (124)
Income taxes............................. (11) (19)
Accounts payable, accrued compensation
and other accrued expenses............... 85 (100)
--------------- -------------
Net cash provided by (used in)
operating activities................... (211) 297
-------------- -------------
Cash Flows From Investing Activities:
Capital expenditures..................... (80) (270)
Acquisition of rights-of-entry........... - (51)
--------------- -------------
Net cash used in investing activities.. (80) (321)
--------------- -------------
Cash Flows From Financing Activities:
Borrowings of debt....................... 16,395 17,031
Repayments of debt....................... (16,130) (17,471)
--------------- -------------
Net cash provided by (used in) financing
activities............................. 265 (440)
--------------- -------------
Net decrease in cash................... (26) (464)
--------------- -------------
Cash, beginning of period.................... 84 787
--------------- -------------
Cash, end of period.......................... $58 $323
=============== =============
Supplemental Cash Flow Information:
Cash paid for interest.................... $246 $323
Cash paid for income taxes................ $11 $19
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, "BDR"). On December 15, 2006,
BDR was sold. As a result, the Company reflected the sale of BDR as a
discontinued operation. 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") were accounted for on the equity method
since the Company did not have control over these entities. On June 30, 2006,
the Company sold its ownership interest in BTT. See Note 5.
The results for the second quarter of 2007 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 June 30, 2007.
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, 2006.
Note 2 - New Accounting Pronouncement
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation Number 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109," ("FIN No. 48"),
which prescribes a single, comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on its tax returns.
Upon adoption of FIN No. 48, the Company recognized a decrease of approximately
$400 in the liability for unrecognized tax benefits, which was accounted for as
an increase to retained earnings of $400 as of January 1, 2007.
As of January 1, 2007, after the implementation of FIN No. 48, the
Company's amount of unrecognized tax benefits is $55. The amount of unrecognized
tax benefits, if recognized, would not have a material impact on the Company's
effective tax rate. The Company files income tax returns in the United States
(federal) and in various state jurisdictions. The Company is no longer subject
to federal and state income tax examinations by tax authorities for years prior
to 2003.
Note 3 - Inventories
Inventories net of reserves are summarized as follows:
(unaudited)
June 30, Dec. 31,
2007 2006
------------- --------------
Raw Materials................................... $8,300 $8,564
Work in process................................. 1,812 1,864
Finished Goods.................................. 11,502 11,162
------------- --------------
21,614 21,590
Less current inventory.......................... (9,174) (9,708)
------------- --------------
12,440 11,882
Less Reserve primarily for excess inventory..... (7,388) (6,830)
------------- --------------
$5,052 $5,052
============= =============
Inventories are stated at the lower of cost, determined by the first-in,
first-out ("FIFO") method, or market.
5
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
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 initially provided 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.
In March 2006, the Credit Agreement was amended to (i) modify certain
financial covenants as defined under the Credit Agreement, (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 and (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. The increase in
interest rates and availability block were released as of November 14, 2006.
On December 15, 2006, the Company and BDR, as Borrowers, and Blonder Tongue
Investment Company, a wholly-owned subsidiary of the Company, as Guarantor,
entered into a Second Amendment to Credit and Security Agreement (the
"Amendment") with NCBC and the Bank. The Amendment removed BDR as a "Borrower"
under the Credit Agreement as amended and included other modifications and
amendments to the Credit Agreement and related ancillary agreements necessitated
by the removal of BDR as a Borrower. These other modifications and amendments
included a reduction of approximately $1,400 to the maximum amount of advances
that NCBC will make to the Company under the Revolving Loan, due to the release
from collateral of the rights of entry owned by BDR.
At March 31, 2007, and June 30, 2007, the Company was in violation of a
certain financial covenant, compliance with which was waived by the Bank
effective as of each such date.
On August 8, 2007, the Credit Agreement was amended to (i) reduce the
maximum revolving advance amount by $2,500 to $7,500; (ii) increase by one
percent (1.0%), the applicable interest rate margin for the Revolving Loan and
Term Loan thereunder priced against the lender's "prime" or "base" rate; (iii)
eliminate the Company's option to pay interest on its loans based upon the LIBOR
rate plus an applicable margin; (iv) add a covenant requiring the Company to
meet certain levels of EBITDA for the calendar months of July through September
2007; and (v) add a covenant requiring the Company to maintain certain minimum
levels of undrawn availability under the Revolving Loan.
6
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
Under the Credit Agreement, as amended, the Revolving Loan bears interest
at a rate per annum equal to the "Alternate Base Rate," being the higher of (i)
the prime lending rate announced from time to time by the Bank plus 1.00% 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 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.
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.
Note 5 - Discontinued Operations and Sale of BTT (Subscribers and passings in
whole numbers)
In June 2002 the Company acquired its initial 90% ownership interest in BDR
Broadband, LLC and in October 2006 acquired the 10% minority interest that had
been owned by Priority Systems, LLC for nominal consideration. In June 2002, BDR
acquired certain rights-of-entry for multiple dwelling unit cable television and
high-speed data systems (the "Systems"). As a result of BDR acquiring additional
rights-of-entry, at the time of divesture in December 2006, BDR owned Systems
for approximately 25 MDU properties in the State of Texas, representing
approximately 3,300 MDU cable television subscribers and 8,400 passings. The
Systems were upgraded with approximately $81 and $799 of interdiction and other
products of the Company during 2006 and 2005, respectively. During 2004, two
Systems located outside of Texas were sold.
On December 15, 2006, the Company and BDR, entered into a Membership
Interest Purchase Agreement ("Purchase Agreement") with DirecPath Holdings, LLC,
a Delaware limited liability company ("DirecPath"), pursuant to which the
Company sold all of the issued and outstanding membership interests of BDR to
DirecPath.
Pursuant to the Purchase Agreement, DirecPath paid the Company an aggregate
purchase price of $3,130 in cash, subject to certain post-closing adjustments,
including an adjustment for cash, an adjustment for working capital and
adjustments related to the number of subscribers for certain types of services,
all as of the closing date and as set forth in the Purchase Agreement. A portion
of the purchase price, $490 (which is included as part of the prepaid and other
current assets), was deposited into an escrow account pursuant to an Escrow
Agreement dated December 15, 2006, among the Company, DirecPath and U.S. Bank
National Association, to secure the Company's indemnification obligations under
the Purchase Agreement.
On March 15, 2007, the Company received from DirecPath a Final Purchase
Price Certificate (the "Certificate") as defined under the Purchase Agreement.
The Certificate asserted various purchase price adjustments aggregating
approximately $970 as being due to DirecPath. The Company evaluated the claims
outlined in the Certificate and filed a Disputed Items Notice (the "Notice")
dated May 11, 2007, within the sixty day period allowed under the Purchase
Agreement. The Notice asserted that adjustments to the purchase price
aggregating $3 are due to the Company. In connection therewith, the Company and
DirecPath agreed to settle the claims whereby the Company paid $58, of which $25
was disbursed from the escrow account.
In addition, in connection with the purchase transaction, on December 15,
2006, the Company entered into a Purchase and Supply Agreement with DirecPath,
LLC, a wholly-owned subsidiary of DirecPath ("DPLLC"), pursuant to which DPLLC
will purchase $1,630 of products from the Company, subject to certain
adjustments, over a period of three (3) years beginning no later than June 13,
2007. The period in which DPLLC is required to satisfy the purchase commitment
7
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
may be extended upon the occurrence of certain events, including if the Company
is unable to deliver the products required by DPLLC. The Purchase Agreement
includes customary representations and warranties and post-closing covenants,
including indemnification obligations, subject to certain limitations, on behalf
of the parties with respect to their representations, warranties and agreements
made pursuant to the Purchase Agreement. In addition, except for certain
activities by Hybrid Networks, LLC, a wholly-owned subsidiary of the Company,
the Company agreed, for a period of two (2) years, not to engage in any business
that competes with BDR.
In connection with the Purchase Agreement, the Company also entered into a
Transition Services Agreement with DirecPath, pursuant to which the Company will
provide certain administrative and other services to DirecPath during a
ninety-day transition period, which was extended and completed in April, 2007.
As a result of the above, the Company reflected the sale of BDR and the
results of its operations for the three and six months ended June 30, 2006, as a
discontinued operation. Components of the loss from discontinued operations are
as follows:
Three Six
months months
ended ended
June 30, June 30,
2006 2006
------------ ------------
Net Sales..................................... $490 $920
Cost of goods sold............................ 155 313
------------ ------------
Gross profit......................... 335 607
------------ ------------
General and administrative.................... 407 804
------------ ------------
Net loss...................................... $(72) $(197)
============ ============
During 2003, the Company entered into a series of agreements pursuant to
which the Company ultimately acquired a 50% economic ownership interest in
NetLinc Communications, LLC ("NetLinc") and Blonder Tongue Telephone, LLC
("BTT") (to which the Company had licensed its name). The aggregate purchase
price consisted of (i) the cash portion of $1,167, plus (ii) 500 shares of the
Company's common stock. BTT had an obligation to redeem the $1,167 cash
component of the purchase price to the Company via preferential distributions of
cash flow under BTT's limited liability company operating agreement. In
addition, of the 500 shares of common stock issued to BTT as the non-cash
component of the purchase price (fair valued at $1,030), one-half (250 shares)
were pledged to the Company as collateral.
NetLinc owns patents, proprietary technology and know-how for certain
telephony products that allow Competitive Local Exchange Carriers ("CLECs") to
competitively provide voice service to multiple dwelling units ("MDUs"). BTT
partnered 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
offered 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 acquired the right to distribute NetLinc's
telephony products in certain markets. The Company also purchased similar
telephony products from third party suppliers other than NetLinc and, in
connection with the sales of such third-party products, incurred royalty
obligations to NetLinc and BTT. While the distributorship agreements among
NetLinc, BTT and the Company have not been terminated, the Company does not
presently anticipate purchasing products from NetLinc. NetLinc, however,
continues to own intellectual property, which could be further developed and
used in the future to manufacture and sell telephony products under the
8
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
distributorship agreements, although the Company has no present intention to do
so. The Company accounts for its investments in NetLinc and BTT using the equity
method.
On June 30, 2006, the Company entered into a Share Exchange and Settlement
Agreement ("Share Exchange Agreement") with BTT and certain related parties of
BTT. Pursuant to the Share Exchange Agreement, in exchange for all of the
membership shares of BTT owned by the Company (the "BTT Shares"), BTT
transferred back to the Company the 500 shares of the Company's common stock
that were previously contributed by the Company to the capital of BTT (the
"Company Common Stock"). Under the terms of the Share Exchange Agreement, the
parties also agreed to the following:
o the Company granted BTT a non-transferable equipment purchase credit
in the aggregate amount of $400 (subject to certain off-sets as set
forth in the Share Exchange Agreement); two-thirds (2/3rds) of which
($270) had to be used solely for the purchase of telephony equipment
and the remaining one-third (1/3rd) of which ($130) could be used for
either video/data equipment or telephony equipment;
o the equipment credit would have expired automatically on December 31,
2006, but it was exercised in full by September 30, 2006;
o certain non-material agreements were terminated, including the Amended
and Restated Operating Agreement of BTT among the Company, BTT and
remaining member of BTT, the Joint Venture Agreement among the
Company, BTT, and certain related parties, the Royalty Agreement
between the Company and BTT, and the Stock Pledge Agreement between
the Company and BTT, each dated September 11, 2003 (collectively, the
"Prior Agreements");
o BTT agreed, within ninety (90) days, to change its corporate name and
cease using any intellectual property of the Company, including,
without limitation, the names "Blonder", "Blonder Tongue" or "BT"; and
o the mutual release among the parties of all claims related to (i) the
ownership, purchase, sale or transfer of the BTT Shares or the Company
Common Stock, (ii) the Joint Venture (as defined in the Joint Venture
Agreement) and (iii) the Prior Agreements.
Note 6 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement with James H. Williams who was a director of the
Company until May 24, 2006 and who was also the largest stockholder until
November 14, 2006. Under the agreement, Mr. Williams provides consulting
services on various operational and financial issues and is currently paid at an
annual rate of $169 but in no event is such annual rate permitted to exceed
$200. Mr. Williams also agreed to keep all Company information confidential and
not to compete directly or indirectly with the Company for the term of the
agreement and for a period of two years thereafter. The initial term of this
agreement expired on December 31, 2004 and automatically renews thereafter for
successive one-year terms (subject to termination at the end of the initial term
or any renewal term on at least 90 days' notice). This agreement automatically
renewed for a one-year extension until December 31, 2007. On November 14, 2006,
the Company repurchased 1,293 shares of its common stock from Mr. Williams in a
private off-market block transaction for $0.75 per share, for an aggregate
purchase price of $970.
As of June 30, 2007 the Chief Executive Officer was indebted to the Company
in the amount of $159, 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 June 30, 2007 and December 31,
2006.
As described in Note 5, the Company entered into a series of agreements in
2003 pursuant to which it acquired a 50% economic ownership interest in NetLinc
and BTT. As the non-cash component of the purchase price, the Company issued 500
shares of its common stock to BTT, resulting in BTT becoming the owner of
greater than 5% of the outstanding common stock of the Company. As further
described in Note 5, on June 30, 2006 the Company entered into the Share
Exchange Agreement with BTT and certain related parties pursuant to which, among
9
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
other things, the Company received back these 500 shares in exchange for the
Company's membership interest in BTT and the grant to BTT of an equipment
purchase credit of $400, which was exercised in 2006. The Company remains
obligated to pay royalties to NetLinc upon the sale of certain telephony
products, although material future sales of such telephony products are not
anticipated.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in 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, 2006 (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 operators (both franchise and private
cable), as well as contractors that design, package, install and in most
instances operate, upgrade and maintain the systems they build, including
institutional and lodging/hospitality operators.
A key component of the Company's strategy is to leverage its reputation
across a broad product line, offering one-stop shop convenience to private cable
and franchise cable system operators and delivering 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 necessary 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. The Company has also divested its
interests in certain non-core businesses as part of its strategy to focus on the
efficient operation of its core businesses.
Over the past several years, the Company expanded beyond its core business
by acquiring a private cable television system (BDR Broadband, LLC). During
2003, the Company also acquired an interest in a company offering a private
telephone program for multiple dwelling unit applications (Blonder Tongue
Telephone, LLC). However, as part of its strategy to focus on its core business,
the Company sold its interests in these businesses during 2006. The results of
operations from BDR Broadband, LLC, as well as the gain due to its sale, are
reflected as discontinued operations in the consolidated statement of operations
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2006 and this Quarterly Report on Form 10-Q. These acquisitions and related
dispositions are described in more detail below, along with other recent
transactions affecting the Company in recent years.
11
On December 15, 2006, the Company completed the divestiture of its
wholly-owned subsidiary, BDR Broadband, LLC ("BDR"), through the sale of all of
the issued and outstanding membership interests of BDR to DirecPath, a joint
venture between Hicks Holdings LLC and The DIRECTV Group, Inc. The aggregate
sale price was approximately $3.1 million resulting in a gain of approximately
$938,000 on the sale, subject to certain post-closing adjustments. This
divestiture is expected to result in annualized savings of approximately
$525,000 per year. The transaction included a long-term equipment purchase
commitment from DirecPath, pursuant to which a subsidiary of DirecPath will
purchase $1,630,000 of products from the Company, subject to certain
adjustments, over a period of three (3) years beginning no later than June 13,
2007. It is also anticipated that Blonder Tongue will provide DirecPath with
certain systems engineering and technical services.
Under the terms of the Purchase Agreement between DirecPath and the Company
pursuant to which DirecPath acquired all of the Company's membership interests
in BDR, DirecPath paid the Company an aggregate purchase price of $3,130,000 in
cash, subject to certain post-closing adjustments, including an adjustment for
cash, an adjustment for working capital and adjustments related to the number of
subscribers for certain type of services, all as of the closing date and as set
forth in the Purchase Agreement. A portion of the purchase price ($490,000,
which is included as part of the prepaid and other current assets) was deposited
into an escrow account, pursuant to an Escrow Agreement dated December 15, 2006,
among the Company, DirecPath and U.S. Bank National Association, to secure the
Company's indemnification obligations under the Purchase Agreement.
On March 15, 2007, the Company received from DirecPath a Final Purchase
Price Certificate (the "Certificate") as defined under the Purchase Agreement.
The Certificate asserted various purchase price adjustments aggregating
approximately $970,000 as being due to DirecPath. The Company evaluated the
claims outlined in the Certificate and filed a Disputed Items Notice (the
"Notice") dated May 11, 2007, within the sixty day period allowed under the
Purchase Agreement. The Notice asserted that adjustments to the purchase price
aggregating $3,000 are due to the Company. In connection therewith, the Company
and DirecPath agreed to settle the claims whereby the Company paid $58,000, of
which $25,000 was disbursed from the escrow account.
BDR commenced operations in June 2002, when it acquired certain
rights-of-entry for MDU cable television and high-speed data systems (the
"Systems") from Verizon Media Ventures, Inc. and GTE Southwest Incorporated. At
the time of the divesture, BDR owned Systems for approximately 25 MDU properties
in the State of Texas, representing approximately 3,300 MDU cable television
subscribers and 8,400 passings. The loss from operations of BDR was $500,000,
$544,000 and $379,000 during 2006, 2005 and 2004, respectively. The Systems were
upgraded with approximately $81,000, $799,000 and $331,000 of interdiction and
other products of the Company during 2006, 2005 and 2004, respectively. While
the Company continued to invest in and expand BDR's business, in August 2006 the
Company determined to seek a buyer for BDR and exit the business of operating
Systems in Texas to allow the Company to pursue alternative strategic
opportunities. In October 2006, several months prior to the divestiture of BDR,
the Company acquired the 10% minority interest that had been owned by Priority
Systems, LLC, for nominal consideration.
During 2003, the Company entered into a series of agreements pursuant to
which the Company ultimately acquired a 50% economic ownership interest in
NetLinc Communications, LLC ("NetLinc") and Blonder Tongue Telephone, LLC
("BTT") (to which the Company had licensed its name). The aggregate purchase
price consisted of (i) the cash portion of $1,166,667 plus (ii) 500,000 shares
of the Company's common stock. BTT had an obligation to redeem the $1,166,667
cash component of the purchase price to the Company via preferential
distributions of cash flow under BTT's limited liability company operating
agreement. In addition, of the 500,000 shares of common stock issued to BTT as
the non-cash component of the purchase price (fair valued at $1,030,000),
one-half (250,000 shares) were pledged to the Company as collateral.
Through its ownership interest in BTT, the Company was involved in
providing a proprietary telephone system suited to MDU development and was
entitled to receive incremental revenues associated with direct sales of
telephony products, however, revenues derived from sales of such telephony
products and services were not material. NetLinc owns patents, proprietary
technology and know-how for certain telephony products that allow Competitive
Local Exchange Carriers ("CLECs") to competitively provide voice service to
MDUs. While NetLinc's intellectual property could be further developed and used
in the future to manufacture and sell telephony products, the Company has no
present intention to do so.
On June 30, 2006, the Company entered into a Share Exchange and Settlement
Agreement ("Share Exchange Agreement") with BTT and certain related parties of
BTT, pursuant to which the Company transferred to BTT its 49 membership shares
of BTT, representing the Company's 50% ownership interest in BTT. In exchange,
BTT transferred back to the Company the 500,000 shares of the Company's common
stock that were previously contributed by the Company to the capital of BTT.
Pursuant to the Share Exchange Agreement, the Company granted BTT a
12
non-transferable equipment purchase credit in the aggregate amount of $400,000
(subject to certain off-sets), which was exercised in full by September 30,
2006. The Company's equity in loss of BTT was approximately $107,000 and
$437,000 for the fiscal years ended December 31, 2006 and 2005, respectively.
The Company continues to hold its interest in NetLinc.
As a result of the transactions contemplated by the Share Exchange
Agreement, while the Company presently intends to continue to independently
pursue its existing and hereafter-developed leads for the provision of telephony
services and the sale of telephony equipment, the Company anticipates that over
the next year, sales derived from this business will not be a significant source
of revenues for the Company.
On December 14, 2006, the Company's wholly-owned subsidiary, Blonder Tongue
Investment Company, completed the sale of selected patents, patent applications,
provisional patent applications and related foreign patents and applications to
Moonbeam L.L.C. for net proceeds of $2,000,000. In connection with the sale, the
Company has retained a non-exclusive, royalty free, worldwide right and license
to use these patents to continue to develop, manufacture, use, sell, distribute
and otherwise exploit all of the Company's products currently protected under
the patents. These products include some of the interdiction lines in the
Addressable Subscriber category of equipment, some of which were part of the
interdiction business acquired from Scientific-Atlanta, Inc. ("Scientific") in
1998.
One of the Company's recent initiatives is its ongoing transition of
manufacturing for certain of its products to the People's Republic of China
("PRC") in order to reduce the Company's manufacturing costs and allow a more
aggressive marketing program in the private cable market. Towards this end, on
November 11, 2005, the Company and its wholly-owned subsidiary, Blonder Tongue
Far East, LLC, a Delaware limited liability company, entered into a joint
venture agreement ("JV Agreement") with Master Gain International Industrial
Limited, a Hong Kong corporation ("Master Gain"), intending to manufacture
products in the PRC. This joint venture was formed to compete with Far East
manufactured products and to expand market coverage outside North America. On
June 9, 2006, the Company terminated the JV Agreement due to the joint venture's
failure to meet certain quarterly financial milestones as set forth in the JV
Agreement. The inability to meet such financial milestones was caused by the
failure of Master Gain to contribute the $5,850,000 of capital to the joint
venture as required by the JV Agreement and the joint venture's failure to
obtain certain governmental approvals and licenses necessary for the operation
of the joint venture.
Although the termination of the JV Agreement delayed the Company's efforts
to move production of its products to the Far East, the Company shifted its
manufacturing initiative in the PRC to now entail a combination of contract
manufacturing agreements and purchasing agreements with key PRC manufacturers
that can most fully meet the Company's needs. The Company has entered into a
manufacturing agreement with a core contract manufacturer in the PRC that would
govern its production of the Company's high volume and complex products upon the
receipt of purchase orders from the Company. It is anticipated this transition
will relate to products representing a significant portion of the Company's net
sales and will be done in phases over the next several years. The Company will
begin to receive production units of its first transition product during the
third quarter 2007, with additional products to follow in subsequent phases.
On February 27, 2006 (the "Effective Date"), the Company entered into a
series of agreements related to its MegaPort(TM)line of high-speed data
communications products. As a result of these agreements, the Company has
expanded its distribution territory, favorably amended certain pricing and
volume provisions and extended by 10 years the term of the distribution
agreement for its MegaPort(TM)product line. These agreements also require the
Company to guaranty payment due by Shenzhen Junao Technology Company Ltd.
("Shenzhen") to Octalica, Ltd. ("Octalica"), in connection with Shenzhen's
purchase of T.M.T.-Third Millennium Technology Limited ("TMT") from Octalica.
Shenzhen is an affiliate of Master Gain. In exchange for this guaranty, MegaPort
Technology, LLC ("MegaPort"), a wholly-owned subsidiary of the Company, obtained
an assignable option (the "Option") to acquire substantially all of the assets
and assume certain liabilities of TMT on substantially the same terms as the
acquisition of TMT by Shenzhen from Octalica. The purchase price for TMT and,
therefore, the amount and payment terms guaranteed by the Company is the sum of
$383,150 plus an earn-out. The earn-out will not exceed 4.5% of the net revenues
derived from the sale of certain products during a period of 36 months
commencing after the sale of certain specified quantities of TMT inventory
following the Effective Date. The cash portion of the purchase price is payable
(i) $22,100 on the 120th day following the Effective Date, (ii) $22,100 on the
last day of the twenty-fourth month following the Effective Date, and (iii)
$338,950 commencing upon the later of (A) the second anniversary of the
Effective Date and (B) the date after which certain volume sales targets for
each of the MegaPort(TM)products have been met, and then only as and to the
extent that revenues are derived from sales of such products. As of the date of
the filing of this report, none of the volume sales targets for these MegaPort
products have been met and, accordingly, no further purchase price payments have
been made. In February 2007, MegaPort sent notice to TMT and Shenzhen of its
election to exercise the Option to acquire substantially all of the assets of
TMT. Shenzhen has not responded to MegaPort's notice of exercise of the Option.
MegaPort has engaged legal representation in Israel to explore its options in
connection with enforcement of its contractual rights, but no decisions with
respect thereto have been made. Upon consummation of the acquisition, MegaPort,
13
or its assignee, will pay Shenzhen, in the same manner and at the same times,
cash payments equal to the purchase price payments due from Shenzhen to Octalica
and will assume certain liabilities of TMT.
Results of Operations
Second three months of 2007 compared with second three months of 2006
Net Sales. Net sales decreased $1,431,000, or 15.0%, to $8,091,000 in the
second three months of 2007 from $9,522,000 in the second three months of 2006.
The decrease in sales is primarily attributed to a decrease in headend and
interdiction product sales. Headend products were $3,907,000 and $4,806,000 and
interdiction products were $308,000 and $650,000 in the second three months of
2007 and 2006, respectively.
Cost of Goods Sold. Cost of goods sold decreased to $5,712,000 for the
second three months of 2007 from $6,510,000 for the second three months of 2006
but increased as a percentage of sales to 70.6% from 68.4%. The decrease was
attributed primarily to a decrease in sales in the second three months of 2007
as compared to 2006, offset by an increase in the provision for inventory
reserves of $558,000. Of the 2.2% increase in cost of goods sold as a percentage
of sales, 6.9%, as a percentage of sales, is attributable to the increase in the
provision for inventory reserves offset by a decrease in cost of goods sold as
percentage of sales of 4.7% due to a more favorable product mix.
Selling Expenses. Selling expenses increased to $1,303,000 for the second
three months of 2007 from $1,241,000 in the second three months of 2006 and
increased as a percentage of sales to 16.1% for the second three months of 2007
from 13.0% for the second three months of 2006. The $62,000 increase was
primarily the result of an increase in consulting fees of $96,000 offset by a
decrease in salaries and fringe benefits of $53,000 due to a decrease in
headcount.
General and Administrative Expenses. General and administrative expenses
decreased to $1,340,000 for the second three months of 2007 from $1,460,000 for
the second three months of 2006 but increased as a percentage of sales to 16.6%
for the second three months of 2007 from 15.3% for the second three months of
2006. This $120,000 decrease is primarily the result of a decrease in
amortization of $89,000 due to the sale of patents, a decrease in stock exchange
listing fees of $62,000 and a decrease in operating expenses of Hybrid Networks
(a wholly-owned subsidiary of the Company) of $67,000 offset by an increase in
salaries and fringe benefits of $159,000 due to an increase in executive
compensation.
Research and Development Expenses. Research and development expenses
increased to $440,000 in the second three months of 2007 from $409,000 in the
second three months of 2006 and increased as a percentage of sales to 5.4% for
the second three months of 2007 from 4.3% for the second three months of 2006.
This $31,000 increase is primarily the result of an increase in salaries and
fringe benefits of $40,000 due to an increase in head count.
Operating Loss. Operating loss of $704,000 for the second three months of
2007 represents an increase from the operating loss of $98,000 for the second
three months of 2006. Operating loss as a percentage of sales increased to (8.7)
% in the second three months of 2007 from (1.0) % in the second three months of
2006.
Other Expense. Interest expense decreased to $118,000 in the second three
months of 2007 from $192,000 in the second three months of 2006. The decrease is
the result of lower average borrowing.
Income Taxes. The current provision for income taxes for the second three
months of 2007 and 2006 was zero. A valuation allowance has been recorded on the
2007 and 2006 deferred tax assets. As a result of the Company's historical
losses, there is no change in the remaining deferred tax asset in 2007 or 2006.
First six months of 2007 compared with first six months of 2006
Net Sales. Net sales decreased $3,889,000, or 20.0%, to $15,590,000 in the
first six months of 2007 from $19,479,000 in the first six months of 2006. The
decrease in sales is primarily attributed to a decrease in headend, interdiction
and distribution product sales. Headend products were $7,794,000 and $9,856,000,
interdiction products were $506,000 and $1,272,000 and distribution products
were $3,344,000 and $3,810,000 in the first six months of 2007 and 2006,
respectively.
Cost of Goods Sold. Cost of goods sold decreased to $10,716,000 for the
first six months of 2007 from $13,169,000 for the first six months of 2006 but
increased as a percentage of sales to 68.7% from 67.6%. The decrease was
attributed primarily to a decrease in sales in the first six months of 2007 as
compared to 2006, offset by an increase in the provision for inventory reserves
of $558,000. Of the 1.1% increase in cost of goods sold as a percentage of
sales, 3.6%, as a percentage of sales, is attributable to the increase in the
provision for inventory reserves offset by a decrease in cost of goods sold as
percentage of sales of 4.7% due to a more favorable product mix.
14
Selling Expenses. Selling expenses increased to $2,610,000 for the first
six months of 2007 from $2,353,000 in the first six months of 2006 and increased
as a percentage of sales to 16.7% for the first six months of 2007 from 12.1%
for the first six months of 2006. The $257,000 increase was primarily the result
of an increase in salaries and fringe benefits of $86,000 due to an increase in
headcount and an increase of consulting fees of $121,000.
General and Administrative Expenses. General and administrative expenses
increased to $2,792,000 for the first six months of 2007 from $2,692,000 for the
first six months of 2006 and increased as a percentage of sales to 17.9% for the
first six months of 2007 from 13.8% for the first six months of 2006. The
$100,000 increase was primarily the result of an increase in salaries and fringe
benefits of $328,000, due primarily to an increase in executive compensation
offset by a decrease in amortization of $179,000 due to the sale of patents.
Research and Development Expenses. Research and development expenses
increased to $900,000 in the first six months of 2007 from $801,000 in the first
six months of 2006 and increased as a percentage of sales to 5.8% for the first
six months of 2007 from 4.1% for the first six months of 2006. This $99,000
increase is primarily the result of an increase in salaries and fringe benefits
of $73,000 due to an increase in headcount and an increase in consulting fees of
$23,000.
Operating Income (Loss). Operating loss of $1,428,000 for the first six
months of 2007 represents a decrease from operating income of $464,000 for the
first six months of 2006. Operating income as a percentage of sales decreased to
(9.2) % in the first six months of 2007 from 2.4% in the first six months of
2006.
Other Expense. Interest expense decreased to $236,000 in the first six
months of 2007 from $372,000 in the first six months of 2006. The decrease is
the result of lower average borrowing.
Income Taxes. The current provision for income taxes for the first six
months of 2007 and 2006 was zero. A valuation allowance has been recorded on the
2007 and 2006 deferred tax assets. As a result of the Company's historical
losses, there is no change in the remaining deferred tax asset in 2007 or 2006.
Liquidity and Capital Resources
As of June 30, 2007 and December 31, 2006, the Company's working capital
was $8,682,000 and $9,511,000, respectively. The decrease in working capital is
attributable primarily to a decrease in current inventory of $534,000 and a
decrease in accounts receivable of $325,000.
The Company's net cash used in operating activities for the six-month
period ended June 30, 2007 was $211,000, compared to net cash provided by
operating activities of $297,000 for the six-month period ended June 30, 2006.
Cash used in investing activities for the six-month period ended June 30,
2007 was $80,000, which was primarily attributable to capital expenditures for
new equipment.
Cash provided by financing activities was $265,000 for the first six months
of 2007, which was comprised of $16,395,000 of net borrowings offset by
$16,130,000 of repayment 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 initially provided 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.
In March 2006, the Credit Agreement was amended to (i) modify certain
financial covenants as defined under the Credit Agreement, (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 and (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. The
increase in interest rates and availability block were released as of November
14, 2006.
On December 15, 2006, the Company and BDR, as Borrowers, and Blonder Tongue
Investment Company, a wholly-owned subsidiary of the Company, as Guarantor,
entered into a Second Amendment to Credit and Security Agreement (the
"Amendment") with NCBC and the Bank. The Amendment removed BDR as a "Borrower"
15
under the Credit Agreement as amended and included other modifications and
amendments to the Credit Agreement and related ancillary agreements necessitated
by the removal of BDR as a Borrower. These other modifications and amendments
included a reduction of approximately $1,400,000 to the maximum amount of
advances that NCBC will make to the Company under the Revolving Loan, due to the
release from collateral of the rights of entry owned by BDR.
At March 31, 2007, and June 30, 2007, the Company was in violation of a
certain financial covenant, compliance with which was waived by the Bank
effective as of each such date.
On August 8, 2007, the Credit Agreement was amended to (i) reduce the
maximum revolving advance amount by $2,500,000 to $7,500,000; (ii) increase by
100 basis points, the applicable interest rate margin for the Revolving Loan and
Term Loan thereunder priced against the lender's "prime" or "base" rate; (iii)
eliminate the Company's option to pay interest on its loans based upon the LIBOR
rate plus an applicable margin; (iv) add a covenant requiring the Company to
meet certain levels of EBITDA for the calendar months of July through September
2007; and (v) add a covenant requiring the Company to maintain certain minimum
levels of undrawn availability under the Revolving Loan.
Under the Credit Agreement, as amended, the Revolving Loan bears interest
at a rate per annum equal to the "Alternate Base Rate," being the higher of (i)
the prime lending rate announced from time to time by the Bank plus 1.00% 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 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.
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.
At June 30, 2007, there was $2,602,000 and $1,650,000 outstanding under the
NCBC Revolving Loan and Term Loan, respectively.
The Company anticipates that the cash generated from operations, existing
cash balances and amounts available under its credit facility with NCBC, will be
sufficient to satisfy its foreseeable working capital needs.
New Accounting Pronouncement
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation Number 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109," ("FIN" No. 48"),
which prescribes a single, comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on its tax returns.
Upon adoption of FIN No. 48, the Company recognized a decrease of approximately
$400,000 in the liability for unrecognized tax benefits, which was accounted for
as an increase to retained earnings of $400,000 as of January 1, 2007.
As of January 1, 2007, after the implementation of FIN No. 48, the
Company's amount of unrecognized tax benefits is $55,000. The amount of
unrecognized tax benefits, if recognized, would not have a material impact on
the Company's effective tax rate. The Company files income tax returns in the
United States (federal) and in various state jurisdictions. The Company is no
longer subject to federal and state income tax examinations by tax authorities
for years prior to 2003.
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 June 30, 2007 and 2006 the principal amount of the Company's aggregate
outstanding variable rate indebtedness was $4,252,000 and $6,986,000,
respectively. A hypothetical 100 basis point increase in interest rates would
have had an annualized unfavorable impact of approximately $43,000 and $70,000,
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
16
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 June 30, 2007.
During the quarter ended June 30, 2007, 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, results of operations, or cash flows.
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,
2006.
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
The Company held its Annual Meeting of Stockholders (the "Meeting") on May
23, 2007. The Company solicited proxies in connection with the Meeting. At the
record date of the Meeting (March 30, 2007), there were 6,222,252 shares of the
Company's common stock outstanding and entitled to vote. The following were the
matters voted upon at the Meeting:
1. Election of Directors. The following directors were elected at the
Meeting: Robert B. Mayer and James F. Williams. The number of votes cast
for and withheld from each director are as follows:
DIRECTORS FOR WITHHELD
Robert B. Mayer 5,749,690 375,014
James F. Williams 5,750,390 374,314
Robert J. Palle, Jr., Gary P. Scharmett, John E. Dwight, Robert E. Heaton
and James A. Luksch, continued as directors after the meeting.
17
2. Amendment to the 2005 Employee Equity Incentive Plan. The amendment
to the 2005 Employee Equity Incentive Plan was ratified by the following
vote of common stock:
FOR AGAINST ABSTAIN
3,011,996 1,294,262 18,065
3. Ratification of Auditors. The appointment of Marcum & Kliegman LLP
as the Company's independent registered public accountants for the fiscal
year ending December 31, 2007 was ratified by the following vote of common
stock:
FOR AGAINST ABSTAIN
6,046,716 41,365 36,623
ITEM 5. OTHER INFORMATION
On August 8, 2007, the Company, NCBC and the Bank entered into a Third
Amendment to Credit and Security Agreement, pursuant to which the Credit
Agreement was amended to (i) reduce the maximum revolving advance amount by
$2,500,000 to $7,500,000; (ii) increase by 100 basis points, the applicable
interest rate margin for the Revolving Loan and Term Loan thereunder priced
against the lender's "prime" or "base" rate; (iii) eliminate the Company's
option to pay interest on its loans based upon the LIBOR rate plus an applicable
margin; (iv) add a covenant requiring the Company to meet certain levels of
EBITDA for the calendar months of July through September 2007; and (v) add a
covenant requiring the Company to maintain certain minimum levels of undrawn
availability under the Revolving Loan.
The description above is qualified in its entirety by reference to the full
text of the Third Amendment to Credit and Security Agreement included in Exhibit
10.1 to this Form 10-Q.
ITEM 6. EXHIBITS
Exhibits
The exhibits are listed in the Exhibit Index appearing at page 20 herein.
18
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: August 10, 2007 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)
19
EXHIBIT INDEX
Exhibit # Description Location
3.1 Restated Certificate of Incorporated by reference from
Incorporation of Blonder Exhibit 3.1 to S-1 Registration
Tongue Laboratories, Inc. Statement No. 33-98070
originally filed October 12,
1995, as amended.
3.2 Restated Bylaws of Blonder Incorporated by reference from
Tongue Laboratories, Inc. Exhibit 3.2 to S-1 Registration
Statement No. 33-98070
originally filed October 12,
1995, as amended.
10.1 Third Amendment to Credit Filed herewith.
and Security Agreement
dated August 8, 2007 among
Blonder Tongue Laboratories,
Inc., Blonder Tongue
Investment Company, National
City Business Credit, Inc.
and National City Bank.
31.1 Certification of James A. Filed herewith.
Luksch pursuant to Section
302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Eric Skolnik Filed herewith.
pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to Filed herewith.
Section 906 of Sarbanes-Oxley
Act of 2002.
20