FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Jake Brown Road, Old Bridge, New Jersey 08857
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(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (732) 679-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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Common Stock, Par Value $.001 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2006: $6,568,935.
Number of shares of common stock, par value $.001, outstanding as of March 20,
2007: 6,222,252.
Documents incorporated by reference:
Certain portions of the registrant’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 23, 2007 (which is expected to be
filed with the Commission not later than 120 days after the end of the
registrant’s last fiscal year) are incorporated by reference into Part III of
this report.
Forward-Looking Statements
In addition to historical information, this Annual Report of Blonder Tongue
Laboratories, Inc. ("Blonder Tongue" or the "Company") 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
sections entitled 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. 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
herein and in other documents the Company files from time to time with the
Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
Introduction
Overview
Since it’s founding in 1950, Blonder Tongue has been an innovative designer
and manufacturer of products for the cable television industry, primarily
focused on the development of technology for niche cable television
applications. This focus has given the Company a dominant position in the
private cable market. During the past several years the differentiation between
the franchised and private cable markets has blurred due to the consumer’s
increased expectations for cutting edge services such as high-speed data,
telephony, and digital video offerings. In response, the Company has expanded
its strategic thrust to accommodate both the franchised and private cable
markets and is a provider of integrated network solutions to all of the cable
markets that the Company serves, including the multi-dwelling unit ("MDU")
market, the lodging/hospitality market and the institutional market which
includes hospitals, prisons and schools.
The cable market has reacted quickly to consumer demands for additional
services by integrating multiple technologies into their existing networks to
provide consumers high-speed data and telephony in addition to video offerings.
Telephone companies have also entered this competitive arena by upgrading their
existing distribution networks, enabling them to be able to provide video and
high-speed data in addition to telephony offerings. As a result of these market
forces, the lodging and institutional markets are now playing catch up in order
to meet consumers’ expectations that these services be available, and are
installing new infrastructure and upgrading existing networks. This is a
significant area of opportunity for the Company to market and sell it’s core
product line.
Most of the changes in the market segments that the Company serves have
recently been focused on the transition to digital technologies. One of the most
promising areas is Internet Protocol Television ("IPTV"), an emerging technology
which allows viewers to access broadcast network channels, subscriber services
and movies-on-demand. This technology is already experiencing full scale
commercialization in international markets such as Hong Kong, Italy and France.
The worldwide market projections are impressive with an estimated 62 million
subscribers subscribing to IPTV services by 2010. The Company has negotiated
license agreements that will provide entry into this promising market, and is
currently developing products to meet the needs of customers in the markets that
it serves.
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Recent Developments
During 2006 the Company has continued to advance the implementation of its
current strategic plan in an effort to maximize shareholder value. The Company’s
strategic plan consists of the following:
o divesting its interests in non-core business activities,
o focusing on the efficient operation of its core business,
o realigning its leadership structure, and
o implementation of an initiative to have high volume products manufactured
in the People’s Republic of China("PRC") in order to substantially reduce
the Company’s manufacturing costs, obtain competitive advantage in the
markets served and allow a more aggressive marketing program.
The Company’s manufacturing initiative in the PRC will entail a combination
of contract manufacturing agreements and purchasing agreements with key Chinese
manufacturers that can most fully meet the Company’s needs. The Company has
entered into a manufacturing agreement with a major contract manufacturer in the
PRC that would govern the terms of its manufacture of certain of the Company’s
high volume and complex products upon a purchase order being submitted by the
Company. The Company is also negotiating with other PRC-based contract
manufacturers with respect to other products. 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, with the first
products transitioning within the next 6 to 9 months.
On December 15, 2006, the Company completed the divesture 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. It is also anticipated that Blonder Tongue will
provide DirecPath with certain systems engineering and technical services.
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. As
a result of BDR acquiring additional rights-of-entry, 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 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. During 2004, two Systems located outside of Texas were
sold. 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 has been
owned by Priority Systems, LLC, for nominal consideration.
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
("Patents") 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,
non-sublicenseable, worldwide right and license to use the 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.
On June 30, 2006, the Company completed the divesture of its 50% ownership
interest in Blonder Tongue Telephone, LLC ("BTT"). Under the terms of a Share
Exchange and Settlement Agreement ("Share Exchange Agreement") with BTT and
certain related parties of BTT, the Company transferred to BTT its 49 membership
shares of BTT in exchange for BTT transferring 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 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. BTT agreed to change its corporate name within 90
days after closing and cease using any intellectual property of the Company,
including, the names "Blonder," "Blonder Tongue" or "BT." As part of the
transaction, certain other non-material agreements among BTT and the Company
were also terminated.
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The Company acquired its 50% ownership interest in BTT as part of a series
of agreements entered into in March 2003 and September 2003. 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. In addition to the Company’s interest in BTT, the Company
also acquired a 50% economic interest in NetLinc Communications, LLC (“NetLinc”)
as part of the same series of agreements. The Company continues to hold its
interest in NetLinc, which 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 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"), an affiliate of Master Gain, to Octalica, Ltd. ("Octalica") in
connection with Shenzhen’s purchase of T.M.T.-Third Millennium Technology
Limited ("TMT") from Octalica. 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. 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. Upon consummation of the
acquisition, MegaPort, 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.
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.
The Company was incorporated under the laws of the State of Delaware in
November 1988 and completed its initial public offering in December 1995.
Strategy
It is a constant challenge for the Company to stay at the forefront of the
technological requirements of the cable markets that the Company serves,
including the MDU, lodging, and institutional markets. Changes and developments
in the manner in which information (whether video, voice or data) is transmitted
as well as the use of alternative compression technologies all require the
Company to continue to develop innovative new products. The Company has added
and intends to continue to add new and innovative products to respond to the
migration from analog to digital signal transmission. In order to provide
products and services that allow integrators and operators to deploy triple play
services of voice, high-speed data and video (both analog and digital), the
Company has added new products to the Digital Video Headend, High-speed Data and
Fiber Optic product lines. These key product lines are more thoroughly discussed
under "Business - Products" beginning on page 7 below. This evolution of the
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Company’s product lines will focus on the increased needs created in the digital
space by IPTV, Digital Video, and HDTV signals and integrating these signals in
to the optical networks of the future.
In response to the market pressure to compete with Far East manufactured
products and to expand its market coverage outside North America, the Company is
seeking strategic contract manufacturing relationships in the PRC, and has
already entered into a manufacturing agreement with a major contract
manufacturer in the PRC for certain of its high volume and complex products. The
Company believes that this initiative will reduce the manufacturing costs of its
products, with resultant improvement in gross profit margins. The Company
expects to commence production of products in the PRC during 2007.
The Company’s principal customers are:
o Cable System Operators (both franchise and private, as well as cable
contractors) that design, package, install and in most instances operate,
upgrade and maintain the systems they build,
o Lodging / Hospitality video and high speed data system operators that
specialize in the Lodging/Hospitality Markets, and
o Institutional System Operators that operate, upgrade and maintain the
systems that are in their facilities, or Contractors that install, upgrade
and maintain these systems
A key component of the Company’s strategy is to leverage its reputation
across a broad product line, offering one-stop shop convenience to the cable
market customers it serves and delivering products having a high
performance-to-cost ratio. The Company has historically enjoyed, and continues
to enjoy, a dominant market position in the private cable industry, while
progressively making inroads into the franchise cable market. The Company
provides integrated network solutions for the MDU market, the
lodging/hospitality market and the institutional market. As the Company has
expanded its market coverage, however, the distinctions between private cable
and franchise cable have become blurred. For example, the most efficient,
highest revenue-producing private cable systems and small franchise cable
systems are built with the same electronic building blocks. Most of the
electronics required for these systems are available from Blonder Tongue.
The Company’s product lines (headend and distribution) must continue to
evolve to maintain the 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.
Markets Overview
The broadband signal distribution industry (involving the high-speed
transmission of television, telephony and internet signals) has been dominated
by franchise cable television and multiple system cable operators ("MSOs"). The
penetration of wireless, direct-broadcast satellite ("DBS"), such as
DIRECTV(TM)and DISH Network(TM), in the TV market continues to grow with a
combined subscriber count in excess of 29 million. The Regional Bell Operating
Companies (i.e. Verizon and AT&T; "RBOC’s") also compete with the MSO’s for
high-speed data services and are building fiber optic networks, on a national
level, capable of delivering triple play services direct to the home or to the
curb utilizing packet-based, Internet Protocol technology ("IP"). The MSO’s are
deploying IP for their Video on Demand ("VOD") services and continue to expand
the reach of fiber optic networks in order to maintain their dominant position.
The long term result of these activities will be increased competition for
the provision of all three services and a trend toward delivery of these
services through fiber using IP technology. This major market transition has
resulted in increased consumer expectations, so that the lodging and
institutional markets are under pressure to install new infrastructure and
upgrade existing networks. It is not known how long this transition will take
but to remain competitive, the Company must continue to increase its product
offerings for fiber transmission, digital television, IP encoding and decoding
and digital applications.
5
Cable Television
Most cable television operators, both large and small, have built fiber
optic networks with various combinations of fiber optic and coaxial cable to
deliver television signal programming, data, and phone services on one drop
cable. Cable television deployment of fiber optic trunk has been completed in
most existing systems. The system architecture being employed to accomplish the
provision of analog video, digital video, HDTV, high-speed data, VOD, and
telephone service is a hybrid fiber coaxial ("HFC") network. In an HFC network,
fiber optic trunk lines connect to nodes which typically feed 50 to 250
subscribers, using coaxial cable.
The Company believes that most major metropolitan areas will eventually
have complex networks of two or more independent operators interconnecting
homes, and multi-dwelling complexes. All of these networks are potential users
of Blonder Tongue’s Analog Video Headend, Digital Video Headend, Fiber Optic,
and Addressable products.
Lodging
Competition among cable operators serving the lodging market to provide
more channels, VOD, and enhanced interactivity, has resulted in increased demand
for analog, digital and high definition television system electronics. These
systems have been and continue to be well received in the market, as property
owners have sought additional revenue streams and guests have demanded increased
in-room technology services. The leading system integrators in this market rely
upon outside suppliers for their system electronics and most are Blonder Tongue
customers. These companies and others offer lodging establishments systems that
provide VOD movies with a large selection of titles. The typical lodging system
headend will include as many as 20 to 40 receivers and as many as 60 to 80
modulators, and will be capable of providing guests with more free channels, VOD
for a broad selection of movie titles, and interactive services.
Most of the systems with VOD service were initially in large hotels, where
the economics of high channel capacity systems are more easily justified. The
conversion of hotel pay-per-view systems into video-on-demand is increasing.
Smaller hotels and motels are being provided with video-on-demand as enhanced
technology results in reduced headend costs, keeping the market growth
reasonably steady. A current trend in lodging is to provide "plug-and-play"
high-speed data service to customers and Blonder Tongue’s MegaPort(TM)high-speed
data product is an ideal solution for hotel/motel high-speed data deployment.
Institutional
The Company identifies the Institutional market as: education campus
environments, correctional facilities and short or long term health service
environments. What all of these seemingly unrelated facilities have in common is
that they all contain private networks that are dependant on either locally
generated or externally sourced video and/or data content. As the advanced
technologies of VOD, HDTV, and IPTV permeate the market, these facilities are
embracing these technologies to achieve site specific goals. The Company has
traditionally benefited from a very strong share of this market with its Analog
Video Headend and Distribution Products. We anticipate that this trend will
continue and evolve into firm adoption of our Digital Video Headend Products,
which include HDTV and Digital Video solutions and our upcoming IPTV platforms.
International
Cable television service for much of the world is expanding as
technological advancement reduces the cost to consumers. In addition, economic
development in Latin America, Asia and Eastern Europe has allowed construction
of integrated delivery systems that utilize a variety of electronics and
broadband hardware. The pace of growth is difficult to predict, but as more
alternatives become available and television service becomes increasingly
affordable, it is anticipated that more equipment will be placed in the field.
The Company utilizes several distributors in Florida and within Latin America to
serve the Latin American market, although during the last several years
international sales have not materially contributed to the Company’s revenue
base. The Company’s initiative to manufacture products in the PRC will expand
the Company’s capability to manufacture core products at a more competitive cost
and also could lead to the development of new markets for product sales in the
Far East. In connection with any expansion, however, there are inherent risks of
international operations in general, and operating in the PRC in particular.
These risks are described in more detail under "Risk Factors" below.
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Additional Considerations
The technological revolution with respect to video, data and voice services
continues at a rapid pace. Cable TV’s QAM video is competing with DIRECTV(TM)and
EchoStar’s DBS service and cable modems compete with DSL offered by the RBOC’s.
RBOC’s are building national fiber networks and are now delivering video, data
and voice services directly to the home over fiber optic cable, and voice over
IP ("VOIP") is being offered by cable companies and others in competition with
traditional phone companies. The Company is also beginning to see the
convergence of data and video communications, wherein computer and television
systems merge. While it is not possible to predict with certainty which
technology will be dominant at any particular point in time, the Company
believes that delivery of services using IP technology will eventually dominate
the delivery systems of the future and the tremendous bandwidth available
through the use of fiber optic cable will eventually be the dominant carrier of
video, voice and data communications signals.
Since the installed base of United States television sets are for the most
part analog (not digital), direct satellite television, digitally compressed
programming and IP delivery requires headend products or set-top decoding
receivers or converters to convert the transmitted signals back to analog. The
replacement of all television sets with digital sets will be costly and take
many years to complete. The Company believes that for many years to come,
program providers will deliver an analog television signal on standard channels
to subscribers’ television sets using headend products at some distribution
point in their networks or employ decoding receivers at each television set.
Products
Blonder Tongue’s products can be separated, according to function, into the
several categories described below:
o Analog Video Headend Products used by a system operator for signal
acquisition, processing and manipulation for further transmission.
Among the products offered by the Company in this category are
satellite receivers, integrated receiver/decoders, demodulators,
modulators, antennas and antenna mounts, amplifiers, equalizers, and
processors. The headend is the "brain" of a television signal
distribution system. It is the central location where the
multi-channel signal is initially received, converted and allocated to
specific channels for analog distribution. In some cases, where the
signal is transmitted in encrypted form or digitized and compressed, a
receiver will also be required to decode the signal. Blonder Tongue is
a licensee of Motorola, Inc.’s ("Motorola") VideoCipher(R)and
DigiCipher(R)encryption technologies and integrates their decoders
into integrated receiver/decoder products, where required. The Company
estimates that Analog Video Headend Products accounted for
approximately 49% of the Company’s revenues in 2006, 49% in 2005 and
52% in 2004.
o Digital Video Headend Products used by a system operator for
acquisition, processing and manipulation of digital video signals.
Blonder Tongue is constantly expanding its Digital Products offering,
which currently includes the QTM line of Transcoders, Digital QAM
Up-converters for data-over-cable applications, Digital High
Definition Television Processors for delivery of HDTV programming and
QAM Modulators. The QTM line is used for economically deploying or
adding a satellite based digital programming tier of standard digital
or HDTV digital programming. The unit transcodes a satellite signal’s
modulation from Quadrature Phase Shift Key ("QPSK") to Quadrature
Amplitude Modulation ("QAM") or from 8PSK (HDTV Format) to QAM for
signals received from a satellite transponder. Since QPSK and 8PSK are
optimum for satellite transmission and QAM is optimum for
fiber/coaxial distribution, precious system bandwidth is saved while
the signal maintains its digital form. Building upon the innovative
design work that brought about the QTM Transcoders, QAM Up-converters,
and HDTV Processors, the Company launched the AQD Series of Agile QAM
Demodulators. The AQD Series allows for the reception and demodulation
of QAM digital, Off-air Standard Digital or Off-air HDTV signals. This
enables system operators in all of the Company’s primary markets to
benefit from digital transmission, while preserving their analog
distribution networks and viewing sites long after the FCC mandatory
transition in 2009. Digital Video Headend Products continue to expand
in all of the Company’s primary markets, bringing more advanced
technology to consumers and operators, and it is expected that this
area will evolve in to a major element of the Company’s business in
the future. The Company estimates that Digital Video Headend Products
accounted for approximately 16% of the Company’s revenues in 2006, 13%
in 2005 and 9% in 2004.
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o Fiber Products used to transmit the output of a cable system headend
to multiple locations using fiber optic cable. Among the products
offered are optical transmitters, receivers, couplers and splitters.
These products convert RF frequencies to light (or infrared)
frequencies and launch them on optical fiber. At each receiver site,
an optical receiver is used to convert the signals back to normal VHF
frequencies for distribution to subscribers. While sales of products
in this category have not historically contributed significantly to
the Company’s revenues, they are expected to increase due to recent
new product innovations that the Company will be bringing to market.
o Distribution Products used to permit signals to travel from the
headend to their ultimate destination in a home, apartment unit, hotel
room, office or other terminal location along a distribution network
of fiber optic or coaxial cable. Among the products offered by the
Company in this category are line extenders, broadband amplifiers,
directional taps, splitters and wall taps. In cable television
systems, the distribution products are either mounted on exterior
telephone poles or encased in pedestals, vaults or other security
devices. In private cable systems the distribution system is typically
enclosed within the walls of the building (if a single structure) or
added to an existing structure using various techniques to hide the
coaxial cable and devices. The non-passive devices within this
category are designed to ensure that the signal distributed from the
headend is of sufficient strength when it arrives at its final
destination to provide high quality audio/video images. The Company
estimates that distribution products accounted for approximately 19%
of the Company’s revenues in 2006, 20% in 2005 and 19% in 2004.
o Addressable Products used to control access to programming at the
subscriber’s location. The products offered in this category are
Interdiction and Addressable Multi-Tap (AMT) products. Interdiction
products limit the availability of programs to subscribers through
jamming of particular channels. Recently, the Company introduced a
consumer version of this product, the TV Channel Blocker Parental
Control, which provides local (at the consumer level) control of the
full analog block of channels. AMT products remotely control all
access to programming for a particular subscriber. Sales of these
products have not contributed significantly to the Company’s revenues.
o High-speed Data Products used to provide Internet access and transfer
data over a hybrid fiber/coaxial cable system. Products in this
category include standard DOCSIS cable modems, DOCSIS/Euro DOCSIS
cable modem termination system ("CMTS"), and the MegaPort(TM)solution
for providing broadband Internet access to hospitality environments &
MDUs. The MegaPort(TM)solution consists of two main components, the
Gateway and the Intelligent Outlets. The Gateway is a broadband
Ethernet router or bridge that establishes a network within a building
or community over the existing coaxial cable system. The Intelligent
Outlet serves as the modem, but is permanently installed in the
location to eliminate loss of equipment associated with churn. Each
Gateway can accommodate 64 enabled Outlets and with a software
upgrade, up to 250 outlets. On February 13, 2007, the Company entered
in to a non-exclusive distribution agreement with Motorola, Inc. for
the sales and distribution of Motorola’s Connected Home Solutions
voice and data products to the private cable, lodging and
institutional markets in the United States. Products feature the
industry leading Motorola SurfBoard(R)5101 cable modem and the BSR2000
(Broadband Services Router) compact CMTS featuring DOCSIS(R)2.0
qualification. The BSR2000 is a compact, high-performance CMTS with 1
downstream and 4 upstream channels that is ideal for small or medium
sized distribution systems. The unit offers advanced functionality,
allowing smaller cable operators to efficiently migrate to DOCSIS or
EuroDOCSIS 2.0 while simultaneously increasing the performance of
their existing base of DOCSIS 1.0 and 1.1 cable modems. This is a
relatively new category of products for the Company and has not as yet
contributed significantly to the Company’s revenues.
o Telephony Products used to provide expanded telephone service to MDU
subscribers. These products are designed to offer carrier class
telephone service to residences using existing twisted pair wires.
Service will be fully transparent to subscribers with advanced calling
features such as 911, Caller ID, Call Waiting Plus, and Three-way
Calling available and bundled at a flat rate to subscribers. The
existing twisted-pair telephone wiring infrastructure is utilized to
provide dial tone at a resident’s premises using any standard
telephone. The Company does not have a significant history of sales of
telephony products, having only acquired the distribution rights in
2003 in connection with its past venture efforts in BTT. Sales volume
has been lower than originally anticipated and the recent divesture by
the Company of its interest in BTT is likely to further diminish the
Company’s sales prospects for these products. It is not presently
anticipated that sales of telephony products will become a significant
source of revenue for the Company.
8
o Microwave Products used to transmit voice, analog video, digital
video, and data signals to multiple locations using point-to-point
communication links in the 18 GHz range of frequencies. The company
offers the full line of products required to construct and maintain
these point-to-point, 18 GHz communication links. While microwave
products will continue to be sold to maintain existing systems, the
Company does not anticipate that these products will contribute
significantly to the Company’s revenues.
o Test Products used for measuring signals in the Headend and
Distribution. Among the products offered by the Company in this
category are Analog and Digital QPSK Analyzers, Palm Tops Analog and
Digital Analyzers and Signal Level Meters . While the Company expects
to continue selling test products to meet the needs of customers, the
Company does not anticipate that these products will contribute
significantly to the Company’s revenues.
The Company will modify its products to meet specific customer requirements.
Typically, these modifications are minor and do not materially alter the
functionality of the products. Thus, the inability of the customer to accept
such products does not generally result in the Company being otherwise unable to
sell such products to other customers.
Research and Product Development
The markets served by Blonder Tongue are characterized by technological
change, new product introductions, and evolving industry standards. To compete
effectively in this environment, the Company must engage in ongoing research and
development in order to (i) create new products, (ii) expand the frequency range
of existing products in order to accommodate customer demand for greater channel
capacity, (iii) license new technology, and (iv) acquire products incorporating
technology that could not otherwise be developed quickly enough using internal
resources. Research and development projects are often initially undertaken at
the request of and in an effort to address the particular needs of the Company’s
customers and customer prospects with the expectation or promise of substantial
future orders from such customers or customer prospects. In the new product
development process, the vast experience of the Company’s Technical Services
Group is leveraged to ensure the highest level of suitability and widest
acceptance to the marketplace. Products tend to be developed in a functional
building block approach that allows for different combinations of blocks to
generate new relevant products if the market demands. Additional research and
development efforts are also continuously underway for the purpose of enhancing
product quality and engineering lower production costs. For the acquisition of
new technologies, the Company may rely upon technology licenses from third
parties. The Company will also license technology if it can obtain technology
quicker, or more cost-effectively from third parties than it could otherwise
develop on its own, or if the desired technology is proprietary to a third
party. There were 13 employees in the research and development department of the
Company at December 31, 2006. The Company spent $1,634,000, $1,552,000 and
$1,549,000 on research and development expenses for the years ended December 31,
2006, 2005 and 2004, respectively.
Marketing and Sales
Blonder Tongue markets and sells its products worldwide primarily to the
following markets: the MDU market, the lodging market and the institutional
market. Sales are made directly to customers by the Company’s internal sales
force, as well as through a few domestic stocking distributors (which accounted
for approximately 46% of the Company’s revenues for fiscal 2006). These
distributors serve multiple markets. Direct sales to cable operators and system
integrators accounted for approximately 28% of the Company’s revenues for fiscal
2006.
The Company’s sales and marketing function is predominantly performed by
its internal sales force. Should it be deemed necessary, the Company may retain
independent sales representatives in particular geographic areas or targeted to
specific customer prospects or target market opportunities. The Company’s
internal sales force consists of 39 employees, which currently includes 9
salespersons in Old Bridge, New Jersey, one salesperson in each of North Myrtle
Beach, South Carolina, Cudahy, Wisconsin, Austin, TX and Santa Margarita, CA and
26 sales-support personnel at the Company headquarters in Old Bridge, New
Jersey.
The Company’s standard customer payment terms are 2%-10, net 30 days. From
time to time, when circumstances warrant, such as a commitment to a large
blanket purchase order, the Company will extend payment terms beyond its
standard payment terms.
9
The Company has several marketing programs to support the sale and
distribution of its products. Blonder Tongue participates in industry trade
shows and conferences. The Company also publishes technical articles in trade
and technical journals, distributes sales and product literature and has an
active public relations plan to ensure complete coverage of Blonder Tongue’s
products and technology by editors of trade journals. The Company provides
system design engineering for its customers, maintains extensive ongoing
communications with many original equipment manufacturer customers and provides
one-on-one demonstrations and technical seminars to potential new customers.
Blonder Tongue supplies sales and applications support, product literature and
training to its sales representatives and distributors. The management of the
Company travels extensively, identifying customer needs and meeting potential
customers.
The Company had approximately $3,400,000 in purchase orders as of December
31, 2006 and approximately $2,800,000 in purchase orders as of December 31,
2005. All outstanding purchase orders as of December 31, 2006 are expected to be
shipped prior to December 31, 2007. These purchase orders are for the future
delivery of products and are subject to cancellation by the customers.
Customers
Blonder Tongue has a broad customer base, which in 2006 consisted of
approximately 557 active accounts. Approximately 50%, 48%, and 39% of the
Company’s revenues in fiscal years 2006, 2005, and 2004, respectively, were
derived from sales of products to the Company’s five largest customers. In 2006,
2005 and 2004, sales to Toner Cable Equipment, Inc. accounted for approximately
20%, 17% and 18% respectively of the Company’s revenues. There can be no
assurance that any sales to these entities, individually or as a group, will
reach or exceed historical levels in any future period. However, the Company
anticipates that these customers will continue to account for a significant
portion of the Company’s revenues in future periods, although none of them is
obligated to purchase any specified amount of products or to provide the Company
with binding forecasts of product purchases for any future period.
The complement of leading customers tends to vary over time as the most
efficient and better financed integrators grow more rapidly than others. The
Company believes that many integrators will grow rapidly, and as such the
Company’s success will depend in part on the viability of those customers and on
the Company’s ability to maintain its position in the overall marketplace by
shifting its emphasis to those customers with the greatest growth and growth
prospects. Any substantial decrease or delay in sales to one or more of the
Company’s leading customers, the financial failure of any of these entities, or
the Company’s inability to develop and maintain solid relationships with the
integrators which may replace the present leading customers, would have a
material adverse effect on the Company’s results of operations and financial
condition.
The Company’s revenues are derived primarily from customers in the
continental United States, however, the Company also derives revenues from
customers outside the continental United States, primarily in Canada and to a
more limited extent, in underdeveloped countries. Television service is less
developed in many international markets, particularly Latin America, Eastern
Europe, and Asia, creating opportunity for those participants who offer quality
products at a competitive price. Sales to customers outside of the United States
represented approximately 6%, 6% and 4% of the Company’s revenues in fiscal
years 2006, 2005 and 2004 respectively. All of the Company’s transactions with
customers located outside of the continental United States are denominated in
U.S. dollars, therefore, the Company has no material foreign currency
transactions. In connection with the Company’s anticipated initiatives in the
PRC, the Company may have foreign currency transactions and may be subject to
various currency exchange control programs related to its PRC operations. See
Risk Factors below for more detail on the risk of foreign operations.
Manufacturing and Suppliers
Blonder Tongue’s manufacturing operations are presently located at the
Company’s headquarters in Old Bridge, New Jersey. The Company’s manufacturing
operations are vertically integrated and consist principally of the assembly and
testing of electronic assemblies built from fabricated parts, printed circuit
boards and electronic devices and the fabrication from raw sheet metal of
chassis and cabinets for such assemblies. Management continues to implement a
significant number of changes to the manufacturing process to increase
production volume and reduce product cost, including logistics modifications on
10
the factory floor, an increased use of surface mount, axial lead and radial lead
robotics to place electronic components on printed circuit boards, a continuing
program of circuit board redesign to make more products compatible with robotic
insertion equipment and an increased integration in machining and fabrication.
All of these efforts are consistent with and part of the Company’s strategy to
provide its customers with high performance-to-cost ratio products. The Company
has also entered into a manufacturing agreement with a major contract
manufacturer in the PRC that would govern the terms of its manufacture of
certain of the Company’s high volume and complex products upon a purchase order
being submitted by the Company. The Company is also negotiating with other
PRC-based contract manufacturers with respect to other products. The Company
expects to commence production of certain products in the PRC during 2007. If
successful, the Company may shift a material portion of its manufacturing
operations to the PRC in order to maximize manufacturing and operational
efficiencies.
Outside contractors supply standard components, etch-printed circuit boards
and electronic subassemblies to the Company’s specifications. While the Company
generally purchases electronic parts which do not have a unique source, certain
electronic component parts used within the Company’s products are available from
a limited number of suppliers and can be subject to temporary shortages because
of general economic conditions and the demand and supply for such component
parts. If the Company were to experience a temporary shortage of any given
electronic part, the Company believes that alternative parts could be obtained
or system design changes implemented. However, in such situations the Company
may experience temporary reductions in its ability to ship products affected by
the component shortage. On an as-needed basis, the Company purchases several
products from sole suppliers for which alternative sources are not available,
such as the DigiCipher(R)encryption systems manufactured by Motorola, which are
standard encryption methodologies employed on U.S. C-Band and Ku-Band
transponders, EchoStar digital receivers for delivery of DISH Network(TM)
programming, and Hughes digital satellite receivers for delivery of
DIRECTV(TM)programming. An inability to timely obtain sufficient quantities of
certain of these components would have a material adverse effect on the
Company’s operating results. The Company does not have an agreement with any
sole source supplier requiring the supplier to sell a specified volume of
components to the Company.
Blonder Tongue maintains a quality assurance program which tests samples of
component parts purchased, as well as its finished products, on an ongoing
basis. The Company also tests component and sub-assembly boards throughout the
manufacturing process using commercially available and in-house built testing
systems that incorporate proprietary procedures. The highest level of quality
assurance is maintained through out all aspects of the design and manufacturing
process because of the in-house calibration program. This program ensures that
all test and measurement equipment that is used in the manufacturing process is
calibrated to the same in-house reference standard on a consistent basis. When
all test and measurement devices are calibrated in this manner, discrepancies
are eliminated between the engineering, manufacturing, and quality control
departments, thus increasing operational efficiency and ensuring a high level of
product quality. Blonder Tongue performs final product tests prior to shipment
to customers.
Competition
All aspects of the Company’s business are highly competitive. The Company
competes with national, regional and local manufacturers and distributors,
including companies larger than Blonder Tongue which have substantially greater
resources. Various manufacturers who are suppliers to the Company sell directly
as well as through distributors into the franchise and private cable
marketplaces. Because of the convergence of the cable, telecommunications and
computer industries and rapid technological development, new competitors may
seek to enter the principal markets served by the Company. Many of these
potential competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than Blonder Tongue. The
Company expects that direct and indirect competition will increase in the
future. Additional competition could result in price reductions, loss of market
share and delays in the timing of customer orders. The principal methods of
competition are product differentiation, performance, quality, price, terms,
service, technical support and administrative support. The Company believes it
differentiates itself from competitors by continuously offering innovative
products, providing excellent technical service support and delivering a high
performance-to-cost ratio.
Intellectual Property
The Company currently holds 11 United States patents and 4 foreign patents
none of which are considered material to the Company’s present operations
because they do not relate to high volume applications. In December 2006, the
Company’s wholly-owned subsidiary, Blonder Tongue Investment Company, completed
the sale to Moonbeam L.L.C. of a portfolio of selected patents, patent
applications, provisional patent applications and related foreign patents and
applications ("Patents") originally acquired in the Company’s acquisition of
Scientific-Atlanta, Inc.’s interdiction business in 1998. Blonder Tongue
11
retained a non-exclusive, royalty free, non-sublicenseable, worldwide right and
license to use the Patents to continue to develop, manufacture, use, sell,
distribute and otherwise exploit all of the Company’s products currently
protected under the Patents. Because of the rapidly evolving nature of the cable
television industry, the Company believes that its market position as a supplier
to cable integrators derives primarily from its ability to develop a continuous
stream of new products which are designed to meet its customers’ needs and which
have a high performance-to-cost ratio.
The Company has a registered trademark on "Blonder Tongue(R)" and also on a
"BT(R)" logo. In connection with the transactions pursuant to which the Company
acquired an ownership interest in NetLinc and BTT, the Company granted BTT a
non-exclusive, revocable and royalty-free license to use these trademarks and
certain variations of such names. This license was terminated as part of the
2006 transaction in which the Company divested its interest in BTT.
The Company is a licensee of Philips Electronics North America Corporation
and its affiliate, Philips Broadband Networks, Inc., Motorola, Hughes and
several smaller software development companies.
Under the Philips License Agreements, the Company is granted a
non-exclusive license for a term which expires in 2010, concurrently with the
last to expire of the relevant patents. The Philips License Agreements provide
for the payment by the Company of a one-time license fee and for the payment by
the Company of royalties based upon unit sales of licensed products.
The Company is a licensee of Motorola relating to Motorola’s
VideoCipher(R)encryption technology and is also a party to a private label
agreement with Motorola relating to its DigiCipher(R)technology. Under the
VideoCipher(R)license agreement, the Company is granted a non-exclusive license
under certain proprietary know-how, to design and manufacture certain licensed
products to be compatible with the VideoCipher(R)commercial descrambler module.
The VideoCipher(R)license agreement provides for the payment by the Company of a
one-time license fee for the Company’s first model of licensed product and
additional one-time license fees for each additional model of licensed product.
The VideoCipher(R)license agreement also provides for the payment by the Company
of royalties based upon unit sales of licensed products. Under the
DigiCipher(R)private label agreement, the Company is granted the non-exclusive
right to sell DigiCipher(R)II integrated receiver decoders bearing the Blonder
Tongue name for use in the commercial market. The DigiCipher(R)private label
agreement provides for the payment by the Company of a one-time license fee for
the Company’s first model of licensed product and additional one-time license
fees for each additional model of licensed product.
During 1996, the Company entered into several software development and
license agreements for specifically designed controller and interface software
necessary for the operation of the Company’s Video Central(TM)remote
interdiction control system, which is used for remote operation of
VideoMask(TM)signal jammers installed at subscriber locations. These licenses
are perpetual and require the payment of a one-time license fee and in one case
additional payments, the aggregate of which are not material.
The Company relies on a combination of contractual rights and trade secret
laws to protect its proprietary technologies and know-how. There can be no
assurance that the Company will be able to protect its technologies and know-how
or that third parties will not be able to develop similar technologies and
know-how independently. Therefore, existing and potential competitors may be
able to develop products that are competitive with the Company’s products and
such competition could adversely affect the prices for the Company’s products or
the Company’s market share. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining its competitive position.
Regulation
Private cable, while in some cases subject to certain FCC licensing
requirements, is not presently burdened with extensive government regulations.
Franchise cable operators had been subject to extensive government regulation
pursuant to the Cable Television Consumer Protection and Competition Act of
1992, which among other things provided for rate rollbacks for basic tier cable
service, further rate reductions under certain circumstances and limitations on
future rate increases. The Telecommunications Act of 1996 deregulated many
aspects of franchise cable system operation and opened the door to competition
among cable operators and telephone companies in each of their respective
industries.
12
In June, 2000, the FCC adopted and issued a Final Rule and Order relating
to the re-designation of portions of the 18GHz-frequency band among the various
currently allocated services. The Final Rules regarding this issue provided for
the grandfathering, for a period of ten years, of certain pre-existing
(installed) terrestrial fixed service operators ("TFSOs") and TFSOs that had
made application for a license prior to a certain date. In November 2002, the
FCC issued a Second Order on Reconsideration (the "Second Order"), which
redefined the use of the 18 GHz microwave band. As a result of the Second Order,
the Company’s existing microwave inventory would have to be modified to function
within the new frequency band. In addition, on April 19, 2004, the FCC
International Bureau released a Notice of Proposed Rulemaking ("NPRM"), Docket
04-143, which among other things, proposes channelization changes for the 18GHz
band to further reduce the usable band. The uncertainty associated with these
regulatory issues, coupled with the expanding use of fiber optic cable due to
its inherently superior bandwidth, have resulted in a significant shift away
from microwave products. These products are not anticipated to be a material
portion of the Company’s future sales.
Environmental Regulations
The Company is subject to a variety of Federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
processes. The Company did not incur in 2006 and does not anticipate incurring
in 2007 material capital expenditures for compliance with Federal, state and
local environmental laws and regulations. There can be no assurance, however,
that changes in environmental regulations will not result in the need for
additional capital expenditures or otherwise impose additional financial burdens
on the Company. Further, such regulations could restrict the Company’s ability
to expand its operations. Any failure by the Company to obtain required permits
for, control the use of, or adequately restrict the discharge of, hazardous
substances under present or future regulations could subject the Company to
substantial liability or could cause its manufacturing operations to be
suspended.
The Company presently holds a permit from the New Jersey Department of
Environmental Protection ("NJDEP"), Division of Environmental Quality, Air
Pollution Control Program relating to its operation of certain process
equipment, which permit expires in May, 2007. The Company has held such a permit
for this equipment on a substantially continuous basis since approximately
April, 1989. The Company also has authorization under the New Jersey Pollution
Discharge Elimination System/Discharge to Surface Waters General Industrial
Stormwater Permit, Permit No. NJ0088315. This permit will expire May 31, 2007.
Employees
As of March 16, 2007, the Company employed approximately 250 people,
including 174 in manufacturing, 15 in research and development, 11 in quality
assurance, 30 in sales and marketing, and 20 in a general and administrative
capacity. 105 of the Company’s employees are members of the International
Brotherhood of Electrical Workers Union, Local 2066, which has a three year
labor agreement with the Company expiring in February, 2009. The Company
considers its relations with its employees to be good.
ITEM 1A RISK FACTORS
The Company’s business operates in a rapidly changing environment that
involves numerous risks, some of which are beyond the Company’s control. The
following "Risk Factors" highlights some of these risks. Additional risks not
currently known to the Company or that the Company now deems immaterial may also
affect the Company and the value of its common stock. The risks described below,
together with all of the other information included in this report, should be
carefully considered in evaluating our business and prospects. The occurrence of
any of the following risks could harm the Company’s business, financial
condition or results of operations. Solely for purposes of the risk factors in
this Item 1A, the terms "we", "our" and "us" refer to Blonder Tongue
Laboratories, Inc. and its subsidiaries.
Any substantial decrease in sales to our largest customer may adversely affect
our results of operations or financial condition.
In 2006, 2005 and 2004, sales to Toner Cable Equipment, Inc. accounted for
approximately 20%, 17% and 18%, respectively, of our revenues. There can be no
13
assurance that any sales to this customer will reach or exceed historical levels
in any future period. However, we anticipate that this customer will continue to
account for a significant portion of our revenues in future periods, although it
is not obligated to purchase any specified amount of products (beyond
outstanding purchase orders) or to provide us with binding forecasts of product
purchases for any future period.
The complement of leading customers tends to vary over time as the most
efficient and better-financed integrators grow more rapidly than others. We
believe that many integrators will grow rapidly, and, as such, our success will
depend in part on:
o the viability of those customers;
o our ability to identify those customers with the greatest growth and
growth prospects; and
o our ability to maintain our position in the overall marketplace by
shifting our emphasis to such customers.
Any substantial decrease or delay in sales to one or more of our leading
customers, the financial failure of any of these entities, or our inability to
develop solid relationships with the integrators which may replace the present
leading customers, could have a material adverse effect on our results of
operations and financial condition.
An inability to reduce expenses or increase of revenues may cause continued net
losses.
We have had net losses from continuing operations each year since 2002.
While management believes its plans to reduce expenses and increase revenues
will return us to profitability, there can be no assurance that these actions
will be successful. Failure to reduce expenses or increase revenues could have a
material adverse effect on our results of operations and financial condition.
A significant increase to inventory reserves due to inadequate reserves in a
prior period or to an increase in excess or obsolete inventories may adversely
affect our results of operations and financial condition.
We continually analyze our slow-moving, excess and obsolete inventories.
Based on historical and projected sales volumes and anticipated selling prices,
we establish reserves. If we do not meet our sales expectations, these reserves
are increased. Products that are determined to be obsolete are written down to
net realizable value. We recorded an increase to our reserve of $114,000,
$4,372,000 and $872,000 during 2006, 2005 and 2004, respectively. Although we
believe reserves are adequate and inventories are reflected at net realizable
value, there can be no assurance that we will not have to record additional
inventory reserves in the future. Significant increases to inventory reserves
could have a material adverse effect on our results of operations and financial
condition.
An inability to develop, or acquire the rights to, technology, products or
applications in response to changes in industry standards or customer needs may
reduce our sales and profitability.
Both the private cable and franchised cable industries are characterized by
the continuing advancement of technology, evolving industry standards and
changing customer needs. To be successful, we must anticipate the evolution of
industry standards and changes in customer needs, through the timely development
and introduction of new products, enhancement of existing products and licensing
of new technology from third parties. Although we depend primarily on our own
research and development efforts to develop new products and enhancements to our
existing products, we have and may continue to seek licenses for new technology
from third parties when we believe that we can obtain such technology more
quickly and/or cost-effectively from such third parties than we could otherwise
develop on our own, or when the desired technology has already been patented by
a third party. There can, however, be no assurance that new technology or such
licenses will be available on terms acceptable to us. There can be no assurance
that:
o we will be able to anticipate the evolution of industry standards in
the cable television or the communications industry generally;
o we will be able to anticipate changes in the market and customer
needs;
14
o technologies and applications under development by us will be
successfully developed; or
o successfully developed technologies and applications will achieve
market acceptance.
If we are unable for technological or other reasons to develop and
introduce products and applications or to obtain licenses for new technologies
from third parties in a timely manner in response to changing market conditions
or customer requirements, our results of operations and financial condition
would be materially adversely affected.
Anticipated increases in direct and indirect competition with us may have an
adverse effect on our results of operations and financial condition.
All aspects of our business are highly competitive. We compete with
national, regional and local manufacturers and distributors, including companies
larger than us, which have substantially greater resources. Various
manufacturers who are suppliers to us sell directly as well as through
distributors into the cable television marketplace. Because of the convergence
of the cable, telecommunications and computer industries and rapid technological
development, new competitors may seek to enter the principal markets served by
us. Many of these potential competitors have significantly greater financial,
technical, manufacturing, marketing, sales and other resources than we have. We
expect that direct and indirect competition will increase in the future.
Additional competition could have a material adverse effect on our results of
operations and financial condition through:
o price reductions;
o loss of market share;
o delays in the timing of customer orders; and
o an inability to increase our penetration into the cable television
market.
Our sales and profitability may suffer due to any substantial decrease or delay
in capital spending by the cable infrastructure operators that we serve in the
MDU, lodging and institutional cable markets.
The vast majority of our revenues in fiscal years 2006, 2005 and 2004 came
from sales of our products for use by cable infrastructure operators. Demand for
our products depends to a large extent upon capital spending on private cable
systems and specifically by private cable operators for constructing,
rebuilding, maintaining or upgrading their systems. Capital spending by private
cable operators and, therefore, our sales and profitability, are dependent on a
variety of factors, including
o access by private cable operators to financing for capital
expenditures;
o demand for their cable services;
o availability of alternative video delivery technologies; and
o general economic conditions.
In addition, our sales and profitability may in the future be more
dependent on capital spending by traditional franchise cable system operators as
well as by new entrants to this market planning to over-build existing cable
system infrastructures, or constructing, rebuilding, maintaining and upgrading
their systems. There can be no assurance that system operators in private cable
or franchise cable will continue capital spending for constructing, rebuilding,
maintaining, or upgrading their systems. Any substantial decrease or delay in
capital spending by private cable or franchise cable operators would have a
material adverse effect on our results of operations and financial condition.
15
Any significant casualty to our facility in Old Bridge, New Jersey may cause a
lengthy interruption to our business operations.
We operate out of one manufacturing facility in Old Bridge, New Jersey (the
"Old Bridge Facility"). While we maintain a limited amount of business
interruption insurance, a casualty that results in a lengthy interruption of the
ability to manufacture at, or otherwise use, that facility would have a material
adverse effect on our results of operations and financial condition.
Our dependence on certain third party suppliers could create an inability for us
to obtain component products not otherwise available or to do so only at
increased prices.
We purchase several products from sole suppliers for which alternative
sources are not available, such as certain components of EchoStar’s digital
satellite receiver decoders, which are specifically designed to work with the
DISH Network(TM), and certain components of Hughes Network Systems digital
15
satellite receivers which are specifically designed to work with DIRECTV(R)
programming. Our results of operations and financial condition could be
materially adversely affected by:
o an inability to obtain sufficient quantities of these components;
o our receipt of a significant number of defective components;
o an increase in component prices; or
o our inability to obtain lower component prices in response to
competitive pressures on the pricing of our products.
Our existing and proposed international sales and operations subject us to the
risks of changes in foreign currency exchange rates, changes in foreign
telecommunications standards, and unfavorable political, regulatory, labor and
tax conditions in other countries.
Sales to customers outside of the United States represented approximately
6%, 6% and 4% of our revenues in fiscal years 2006, 2005 and 2004, respectively.
Such sales are subject to certain risks such as:
o changes in foreign government regulations and telecommunications
standards;
o export license requirements;
o tariffs and taxes;
o other trade barriers;
o capital and exchange control programs;
o fluctuations in foreign currency exchange rates;
o difficulties in staffing and managing foreign operations; and
o political and economic instability.
Fluctuations in currency exchange rates could cause our products to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. There can be no assurance
that sales to customers outside the United States will reach or exceed
historical levels in the future, or that international markets will continue to
develop or that we will receive additional contracts to supply our products for
use in systems and equipment in international markets. Our results of operations
and financial condition could be materially adversely affected if international
markets do not continue to develop, we do not continue to receive additional
contracts to supply our products for use in systems and equipment in
international markets or our international sales are affected by the other risks
of international operations.
16
Our anticipated contract manufacturing in the PRC may subject us to the risks of
unfavorable political, regulatory, legal and labor conditions in the PRC.
During the second half of 2007, we expect to begin manufacturing and
assembling some of our products in the People’s Republic of China, or PRC, under
contract manufacturing arrangements with certain key Chinese manufacturers. In
addition, we may increase the amount of revenues we derive from sales to
customers outside the United States, including sales in the PRC. Our future
operations and earnings may be adversely affected by the risks related to, or
any other problems arising from, having our products manufactured in the PRC,
including those risks described in the preceding risk factor. Although the PRC
has a large and growing economy, its potential economic, political, legal and
labor developments entail uncertainties and risks. In the event of any changes
that adversely affect our ability to manufacture in the PRC after products have
been successfully transitioned out of the United States, our business will
suffer.
Shifting our operations between regions may entail considerable expense.
Over time we may shift a material portion of our manufacturing operations
to the PRC in order to maximize manufacturing and operational efficiency. This
could result in reducing our domestic operations in the future, which in turn
could entail significant one-time earnings charges to account for severance,
equipment write-offs or write downs and moving expenses.
Competitors may develop products that are similar to, and compete with, our
products due to our limited proprietary protection.
We possess limited patent or registered intellectual property rights with
respect to our technology. We rely on a combination of contractual rights and
trade secret laws to protect our proprietary technology and know-how. There can
be no assurance that we will be able to protect our technology and know-how or
that third parties will not be able to develop similar technology independently.
Therefore, existing and potential competitors may be able to develop similar
products which compete with our products. Such competition could adversely
affect the prices for our products or our market share and could have a material
adverse effect upon our results of operations and financial condition.
Patent infringement claims against us or our customers, whether or not
successful, may cause us to incur significant costs.
While we do not believe that our products (including products and
technologies licensed from others) infringe the proprietary rights of any third
parties, there can be no assurance that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted against us or our customers. Damages for violation of third party
proprietary rights could be substantial, in some instances damages are trebled,
and could have a material adverse effect on the Company’s financial condition
and results of operation. Regardless of the validity or the successful assertion
of any such claims, we would incur significant costs and diversion of resources
with respect to the defense thereof which could have a material adverse effect
on our financial condition and results of operations. If we are unsuccessful in
defending any claims or actions that are asserted against us or our customers,
we may seek to obtain a license under a third party’s intellectual property
rights. There can be no assurance, however, that under such circumstances, a
license would be available under reasonable terms or at all. The failure to
obtain a license to a third party’s intellectual property rights on commercially
reasonable terms could have a material adverse effect on our results of
operations and financial condition.
Any increase in governmental regulation of the cable markets that we serve,
including the MDU, lodging and institutional markets, may have an adverse effect
on our results of operations and financial condition.
The MDU, lodging and institutional markets within the cable industry, which
represents the vast majority of our business, while in some cases subject to
certain FCC licensing requirements, is not presently burdened with extensive
government regulations. It is possible, however, that regulations could be
adopted in the future which impose burdensome restrictions on these cable
markets resulting in, among other things, barriers to the entry of new
competitors or limitations on capital expenditures. Any such regulations, if
adopted, could have a material adverse effect on our results of operations and
financial condition.
Operators in the franchise cable market, which represents a relatively
small percentage of our business, had been subject to extensive government
regulation pursuant to the Cable Television Consumer Protection and Competition
Act of 1992, which among other things provided for rate rollbacks for basic tier
cable service, further rate reductions under certain circumstances and
limitations on future rate increases. The Telecommunications Act of 1996 has
deregulated many aspects of franchise cable system operation and has opened the
door to competition among cable operators and telephone companies in each of
their respective industries. It is possible, however, that regulations could be
adopted which would re-impose burdensome restrictions on franchise cable
operators resulting in, among other things, the grant of exclusive rights or
franchises within certain geographical areas. In addition, certain rules adopted
by the FCC in June, 2000 (as further revised in 2002 and 2004) provide for the
re-designation of portions of the 18GHz-frequency band among the various
currently allocated services, which rules have shifted demand away from our
microwave products. Any increased regulation of franchise cable could have a
material adverse effect on our results of operations and financial condition.
Any increase in governmental environmental regulations or our inability or
failure to comply with existing environmental regulations may cause an adverse
effect on our results of operations or financial condition.
We are subject to a variety of federal, state and local governmental
regulations related to the storage, use, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes.
We do not anticipate material capital expenditures during the fiscal year ending
2007 for compliance with federal, state and local environmental laws and
regulations. There can be no assurance, however, that changes in environmental
regulations will not result in the need for additional capital expenditures or
otherwise impose additional financial burdens on us. Further, such regulations
could restrict our ability to expand our operations. Any failure by us to obtain
required permits for, control the use of, or adequately restrict the discharge
of, hazardous substances under present or future regulations could subject us to
substantial liability or could cause our manufacturing operations to be
suspended. Such liability or suspension of manufacturing operations could have a
material adverse effect on our results of operations and financial condition.
Losing the services of our executive officers or our other highly qualified and
experienced employees, or our inability to continue to attract and retain highly
qualified and experienced employees, could adversely affect our business.
Our future success depends in large part on the continued service of our
key executives and technical and management personnel, including James A.
Luksch, Chief Executive Officer, and Robert J. Palle, President and Chief
Operating Officer. We maintain and are the beneficiary of $1,000,000 of key man
life insurance on each of Mr. Luksch and Mr. Palle. Our future success also
depends on our ability to continue to attract and retain highly skilled
engineering, manufacturing, marketing and managerial personnel. The competition
for such personnel is intense, and the loss of key employees, in particular the
principal members of our management and technical staff, could have a material
adverse effect on our results of operations and financial condition.
Our organizational documents and Delaware state law contain provisions that
could discourage or prevent a potential takeover or change in control of our
company or prevent our stockholders from receiving a premium for their shares of
our Common Stock.
Our board of directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock, to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any unissued series of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by our stockholders. The Preferred Stock could be issued
with voting, liquidation, dividend and other rights superior to the rights of
the Common Stock. Furthermore, such Preferred Stock may have other rights,
including economic rights, senior to the Common Stock, and as a result, the
issuance of such stock could have a material adverse effect on the market value
of the Common Stock. In addition, our Restated Certificate of Incorporation:
o eliminates the right of our stockholders to act without a meeting;
o does not provide cumulative voting for the election of directors;
o does not provide our stockholders with the right to call special
meetings;
18
o provides for a classified board of directors; and
o imposes various procedural requirements which could make it difficult
for our stockholders to affect certain corporate actions.
These provisions and the Board’s ability to issue Preferred Stock may have
the effect of deterring hostile takeovers or offers from third parties to
acquire our company, preventing our stockholders from receiving a premium for
their shares of our Common Stock, or delaying or preventing changes in control
or management of our company. We are also afforded the protection of Section 203
of the Delaware General Corporation Law, which could:
o delay or prevent a change in control of our company;
o impede a merger, consolidation or other business combination involving
us; or
o discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
Any of these provisions which may have the effect of delaying or preventing
a change in control of our company or could have a material adverse effect on
the market value of our Common Stock.
It is unlikely that we will pay dividends on our Common Stock.
We intend to retain all earnings to finance the growth of our business and
therefore do not intend to pay dividends on our Common Stock in the foreseeable
future. Moreover, our loan agreement with National City Business Credit
prohibits the payment of cash dividends by us on our Common Stock.
Potential fluctuations in the stock price for our Common Stock may adversely
affect the market price for our Common Stock.
Factors such as:
o announcements of technological innovations or new products by us, our
competitors or third parties;
o quarterly variations in our actual or anticipated results of
operations;
o failure of revenues or earnings in any quarter to meet the investment
community’s expectations; and
o market conditions for cable industry stocks in general;
may cause the market price of our Common Stock to fluctuate significantly. The
stock price may also be affected by broader market trends unrelated to our
performance. These fluctuations may adversely affect the market price of our
Common Stock.
Delays or difficulties in negotiating a labor agreement may cause an adverse
effect on our manufacturing and business operations.
All of our direct labor employees are members of the International
Brotherhood of Electrical Workers Union, Local 2066, under a collective
bargaining agreement, which expires in February 2009. Delays or difficulties in
negotiating and executing a new agreement, which may result in work stoppages,
could have a material adverse effect on our results of operations and financial
condition.
ITEM 2. PROPERTIES
The Company’s principal manufacturing, engineering, sales and
administrative facilities consist of one building totaling approximately 130,000
square feet located on approximately 20 acres of land in Old Bridge, New Jersey
19
(the "Old Bridge Facility") which is owned by the Company. The Old Bridge
Facility is encumbered by a mortgage held by National City Business Credit, Inc.
in the principal amount of $1,767,000 as of December 31, 2006. Management
believes that the Old Bridge Facility is adequate to support the Company’s
anticipated needs in 2007.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2006, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s common stock has been traded on the American Stock Exchange
since the Company’s initial public offering on December 14, 1995. The following
table sets forth for the fiscal quarters indicated, the high and low sale prices
for the Company’s Common Stock on the American Stock Exchange.
Market Information
Fiscal Year Ended December 31, 2006: High Low
First Quarter ..................................$2.29 $1.80
Second Quarter.................................. 2.90 1.40
Third Quarter .................................. 1.85 .95
Fourth Quarter ................................. 1.90 1.16
Fiscal Year Ended December 31, 2005: High Low
First Quarter ..................................$4.39 $3.45
Second Quarter.................................. 3.84 2.40
Third Quarter .................................. 2.85 2.01
Fourth Quarter ................................. 2.20 1.59
The Company’s Common Stock is traded on the American Stock Exchange under
the symbol "BDR".
Holders
As of March 28, 2007, the Company had approximately 58 holders of record of
the Common Stock. Since a portion of the Company’s common stock is held in
"street" or nominee name, the Company is unable to determine the exact number of
beneficial holders.
Dividends
The Company currently anticipates that it will retain all of its earnings
to finance the operation and expansion of its business, and therefore does not
intend to pay dividends on its Common Stock in the foreseeable future. Since its
initial public offering, the Company has never declared or paid any cash
dividends on its Common Stock. Any determination to pay dividends in the future
is at the discretion of the Company’s Board of Directors and will depend upon
20
the Company’s financial condition, results of operations, capital requirements,
limitations contained in loan agreements and such other factors as the Board of
Directors deems relevant. The Company’s credit agreement with National City
Business Credit, Inc. prohibits the payment of cash dividends by the Company on
its Common Stock.
Issuer Purchases of Equity Securities
The following table sets forth for the calendar months indicated,
information regarding the Company’s repurchase of its common stock.
-------------------- -------------- ----------- ------------------- -----------------
(d)
(c) Maximum Number (or
Total Number of Approximate Dollar
Shares Purchased Value) of Shares
(a) (b) as Part of that May Yet Be
Total Number Average Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased Per Share or Programs or Programs(2)
-------------------- -------------- ----------- ------------------- -----------------
-------------------- -------------- ----------- ------------------- -----------------
October 1, 2006 to
October 31, 2006 - - 0 $100,000.00
-------------------- -------------- ----------- ------------------- -----------------
-------------------- -------------- ----------- ------------------- -----------------
November 1, 2006 to
November 30, 2006 1,293,154(1) $0.75 0 $100,000.00
-------------------- -------------- ----------- ------------------- -----------------
-------------------- -------------- ----------- ------------------- -----------------
December 1, 2006 to
December 31, 2006 - - 0 $100,000.00
-------------------- -------------- ----------- ------------------- -----------------
-------------------- -------------- ----------- ------------------- -----------------
Total 1,293,154 $0.75 0 $100,000.00
-------------------- -------------- ----------- ------------------- -----------------
(1) On November 14, 2006, the Company purchased 1,293,154 shares of its Common
Stock in a private off-market block transaction from a former director, who
was at the time the Company’s largest shareholder.
(2) In July 2002, the Company commenced an on-going stock repurchase program to
acquire up to $300,000 worth of its outstanding common stock (the "2002
Plan"). The Company did not repurchase any of its Common Stock during
fiscal year 2006 under the 2002 Plan and as of December 31, 2006 the
Company can purchase an additional $100,000 of its common stock under the
2002 Plan. On February 13, 2007, the Company announced a new stock
repurchase program to acquire up to an additional 100,000 shares of its
outstanding common stock (the "2007 Plan"). The Company intends to resume
making purchases under the 2002 Plan up to its limits, and thereafter to
make purchases under the 2007 Plan.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total return during the period from
December 31, 2001 to December 31, 2006, for the Company’s Common Stock, the AMEX
Stock Exchange Composite Index (formerly the AMEX Market Value Index) and the
Dow Jones Electrical Components & Equipment Industry Group Index. This graph
assumes the investment of $100 in the Company’s Common Stock, the stock in the
companies presented in the AMEX Stock Exchange Composite Index and the stock in
the companies comprising the Dow Jones Electrical Components & Equipment
Industry Group Index on January 1, 2002 and the reinvestment of all dividends.
21
[GRAPHIC OMITTED][GRAPHIC OMITTED]
12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
BDR 100.00 43.36 86.99 116.80 52.85 46.07
AMEX 100.00 97.26 209.24 169.00 207.53 242.61
DJEI 100.00 59.27 96.82 89.21 90.72 101.20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
each of the years ended December 31, 2006, 2005 and 2004, and the selected
consolidated balance sheet data as of December 31, 2006 and 2005, are derived
from, and are qualified by reference to, the audited consolidated financial
statements of the Company and notes thereto included elsewhere in this Form
10-K. The selected consolidated statement of operations data for the years ended
December 31, 2003 and 2002 and the selected consolidated balance sheet data as
of December 31, 2004, 2003 and 2002 are derived from audited consolidated
financial statements not included herein. The data set forth below is qualified
in its entirety by, and should be read in conjunction with, "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, notes thereto and other financial and
statistical information appearing elsewhere herein.
On December 15, 2006, the Company sold BDR Broadband, LLC. The amounts
previously reported below in the consolidated statement of operations data for
the years ended December 31, 2005, 2004, 2003 and 2002 have been changed to
reflect BDR Broadband, LLC as a discontinued operation.
22
Certain amounts previously reported for the years ended December 31, 2003
and 2002 have been restated.
(as restated)
2006 2005 2004 2003 2002
(In thousands, except per share data)
Consolidated Statement
of Operations Data:
Net sales........................... $35,775 $34,730 $37,783 $34,343 $46,702
Cost of goods sold (2).............. 23,409 27,399 26,104 25,629 34,647
--------- -------- -------- -------- --------
Gross profit...................... 12,366 7,331 11,679 8,714 12,055
--------- -------- -------- -------- --------
Operating expenses:
Selling, general and
administrative.................... 10,396 9,503 8,888 8,631 8,796
Research and development.......... 1,634 1,552 1,549 1,833 1,972
--------- --------- -------- -------- -------
Total operating expenses.......... 12,030 11,055 10,437 10,464 10,768
--------- -------- -------- -------- -------
Earnings (loss) from
operations (2)...................... 336 (3,724) 1,242 (1,750) 1,287
Interest and other income........... 386 1 357 - -
Interest expense.................... (711) (796) (903) (1,105) (1,036)
Equity in loss of Blonder
Tongue Telephone, LLC (107) (437) (613) (154) -
--------- -------- -------- -------- -------
Earnings (loss) from continuing
operations (96) (4,956) 83 (3,009) 251
before income taxes (2)...........
Provision (benefit)
for income taxes (2) - - 2.826 (318) 43
--------- ------- ------- ------ -------
Earnings (loss) before
discontinued operations
and cumulative effect of
change in accounting
principle (2)...................... (96) (4,956) (2,743) (2,691) 208
Loss from discontinued operations
(net of tax).......... (500) (544) (379) (431) (124)
Gain on disposal of subsidiary..... 938 - - - -
Cumulative effect of change in
accounting principle, net of tax (1) - - - - (6,886)
--------- ------- ------- ------ -------
Net (loss) earnings (2)............ $342 $(5,500) (3,122) $(3,122) $(6,802)
========= ======== ======= ======== ========
Basic earnings (loss) per
share before cumulative effect of
change in accounting principle (2). $0.05 $(0.69) $(0.39) $(0.41) $0.01
Cumulative effect of
change in accounting
principle, net of tax............. - - - - (0.90)
--------- ------- ------- -------- -------
Basic earnings (loss) per share (2) $0.05 $(0.69) $(0.39) $(0.41) $ (0.89)
========= ======= ======= ======== ========
Basic weighted average
shares outstanding 7,592 8,015 8,001 7,654 7,604
Diluted earnings (loss)
per share before cumulative
effect of change in accounting
principle (2)...................... $0.05 $(0.69) $(0.39) $(0.41) $ 0.01
Cumulative effect of change
in accounting principle,
net of tax................... - - - - (0.90)
--------- ------- ------- -------- -------
Diluted earnings (loss)
per share (2)... $0.05 $(0.69) $(0.39) $(0.41) $ (0.89)
========= ======= ======= ======== ========
Diluted weighted average
shares outstanding 7,592 8,015 8,001 7,654 7,604
(as restated)
2006 2005 2004 2003 2002
Consolidated Balance Sheet Data:
Working capital (2).................. $9,511 $7,108 $10,603 $11,591 $29,635
Total assets (2)..................... 27,222 32,864 38,156 47,990 52,375
Long-term debt (including
current maturities) ................. 4,028 7,578 8,513 12,946 16,910
Stockholders’ equity (2)............. 20,232 21,499 26,923 30,885 32,585
__________________
(1) Effective January 1, 2002, the Company implemented FAS 142, which resulted
in the write off of $10,760 of the net book value of goodwill, offset by
the future tax benefit thereof in the amount of $3,874.
(2) Amounts previously reported for the years ended December 31, 2003 and 2002
have been restated.
23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company’s historical results
of operations and liquidity and capital resources should be read in conjunction
with "Selected Consolidated Financial Data" and the consolidated financial
statements of the Company and notes thereto appearing elsewhere herein. The
following discussion and analysis also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors. See "Forward Looking Statements" that precedes Item 1 above.
Overview
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 business 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 this Annual Report on Form 10-K. These acquisitions and related
dispositions are described in more detail below, along with other recent
transactions affecting the Company in recent years.
On December 15, 2006, the Company completed the divesture 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 DirectPath 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.
24
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.
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. 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
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 approximately
$107,000 and $437,000 for the fiscal years ended December 31, 2006 and 2005,
respectively. The Company estimates that the divestiture of these two businesses
(BTT and BDR Broadband) should result in an annualized improvement to the
Company’s net income in 2007. 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.
25
One of the Company’s recent initiatives is to manufacture products in 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 has delayed the Company’s
efforts to move production of its products to the Far East, the Company
continues to believe that shifting production to the Far East is in the best
interests of the Company. The Company has 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, with the first products estimated to be
transitioning within the next 6 to 9 months.
In addition, on February 27, 2006 (the “Effective Date”), the Company
entered into a series of agreements related to its MegaPort™ 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™ 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™ products have been met, and then only as and to the extent
that revenues are derived from sales of such products. 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. Upon consummation of the
acquisition, MegaPort, 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
The following table sets forth, for the fiscal periods indicated, certain
consolidated statement of earnings data from continuing operations as a
percentage of net sales. On December 15, 2006, the Company sold BDR Broadband,
LLC. The amounts previously reported below in the results of operations for the
years ended December 31, 2005 and 2004 have been changed to reflect BDR
Broadband, LLC as a discontinued operation.
26
Year Ended December 31,
------------------------------------------
2006 2005 2004
-------------- ------------ ------------
-------------- ------------ ------------
-------------- ------------ ------------
-------------- ------------ ------------
100.0% 100.0% 100.0%
Net sales..........................
Costs of goods sold................ 65.4 78.9 69.1
Gross profit....................... 34.6 21.1 30.9
Selling expenses................... 13.2 12.9 11.0
General and administrative expenses 15.8 14.4 12.5
Research and development expenses.. 4.6 4.5 4.1
Earnings (loss) from operations.... 1.0 (10.7) 3.3
Other expense, net................. 1.2 3.6 3.1
Earnings (loss) from continuing
operations before income taxes
and before cumulative effect of
change in accounting principle............ (0.2) (14.3) 0.2
Provision (benefit) for income taxes - - 7.5
2006 Compared with 2005
Net sales. Net sales increased $1,045,000 or 3.0% to $35,775,000 in 2006
from $34,730,000 in 2005. The increase is primarily attributed to an increase in
sales of digital headend products and fiber products offset by decreases in
sales of interdiction and analog headend products. Digital headend sales were
$5,715,000 and $4,725,000, fiber sales were $1,731,000 and $1,027,000,
interdiction sales were $1,835,000 and $2,054,000 and analog headend sales were
$17,506,000 and $17,901,000 in 2006 and 2005, respectively.
Cost of Goods Sold. Costs of goods sold decreased to $23,409,000 for 2006
from $27,399,000 in 2005 and decreased as a percentage of sales to 65.4% from
78.9%. The decrease is primarily attributed to an increase in the inventory
reserve of $114,000 in 2006 as compared to an increase in the inventory reserve
of $4,373,000 in 2005. The change in the inventory reserve is primarily
attributed to fully reserving items for which there was no usage in 2005.
Selling Expenses. Selling expenses increased to $4,738,000 for 2006 from
$4,481,000 in 2005 and increased as a percentage of sales to 13.2% for 2006 from
12.9% for 2005. This $257,000 increase is primarily attributable to an increase
in travel and entertainment of $101,000 and an increase in freight expense of
$102,000 due to increased shipping and handling costs.
General and Administrative Expenses. General and administrative expenses
increased to $5,658,000 in 2006 from $5,022,000 for 2005 and increased as a
percentage of sales to 15.8% for 2006 from 14.4% in 2005. This $636,000 increase
is primarily attributable to an increase in salaries and fringes of $422,000 due
to increased head count and an increase in executive bonuses, as well as an
increase in professional fees of $215,000.
Research and Development Expense. Research and development expenses
increased to $1,634,000 in 2006 from $1,552,000 in 2005 and increased as a
percentage of sales to 4.6% in 2006 from 4.5% in 2005. This $82,000 increase is
primarily attributable to an increase in consulting fees of $76,000.
Operating Income (Loss). Operating income of $336,000 for 2006 represents
an increase of $4,060,000 from an operating loss of $3,724,000 in 2005.
Operating income (loss) as a percentage of sales increased to 1.0% in 2006 from
(10.7%) in 2005.
Interest expense. Interest expense decreased to $711,000 in 2006 from
$796,000 in 2005. The decrease is the result of lower average borrowings.
Income Taxes. The provision for income taxes remained at zero for 2006 and
2005. The provision is zero as a result of an increase in the deferred tax
assets due to net operating loss carry forwards being offset by an increase in
the valuation allowance of $502,000 and $1,959,000 in 2006 and 2005,
respectively, since the realization of the deferred tax benefit is not
considered more likely than not. The Company believes its current projected
taxable income over the next five years as well as certain tax strategies are
adequate to the realization of the remaining deferred tax benefit.
27
2005 Compared with 2004
Net sales. Net sales decreased $3,053,000 or 8.1% to $34,730,000 in 2005
from $37,783,000 in 2004. The decrease is primarily attributed to a decrease in
sales of high-speed data products of $1,095,000 in 2005 and the collection of a
$1,929,000 note receivable in 2004 which was being recorded in revenue on a cash
basis.
Cost of Goods Sold. Cost of goods sold increased to $27,399,000 for 2005
from $26,104,000 in 2004 and increased as a percentage of sales to 78.9% from
69.1%. The increase is primarily attributed to an increase in the inventory
reserve of $4,373,000 in 2005 as compared to an increase in the inventory
reserve of $872,000 in 2004. The increase in the inventory reserve is primarily
attributed to fully reserving items for which there was no usage in 2005.
Selling Expenses. Selling expenses increased to $4,481,000 for 2005 from
$4,169,000 in 2004 and increased as a percentage of sales to 12.9% for 2005 from
11.0% for 2004. This $312,000 increase is primarily attributable to an increase
in salaries and fringe benefits of $330,000 due to an increase in head count.
General and Administrative Expenses. General and administrative expenses
increased to $5,022,000 in 2005 from $4,719,000 for 2004 and increased as a
percentage of sales to 14.4% for 2005 from 12.5% in 2004. This $303,000 increase
is primarily attributable to an increase in bad debt expense of $253,000 as well
as an increase in professional fees of $180,000.
Research and Development Expense. Research and development expenses
increased to $1,552,000 in 2005 from $1,549,000 in 2004 and increased as a
percentage of sales to 4.5% in 2005 from 4.1% in 2004. This $3,000 increase is
primarily attributable to an increase in salaries and fringe benefits of $53,000
offset by a decrease in product licensing fees and depreciation of $33,000 and
$17,000, respectively.
Operating Income (Loss). Operating loss of $3,724,000 for 2005 represents a
decrease of $4,966,000 from operating income of $1,242,000 in 2004. Operating
income (loss) as a percentage of sales decreased to (10.7%) in 2005 from 3.3% in
2004.
Interest expense. Interest expense decreased to $796,000 in 2005 from
$903,000 in 2004. The decrease is the result of lower average borrowings.
Income Taxes. The provision for income taxes decreased to zero for 2005
from $2,826,000 in 2004. The provision is zero as a result of an increase in the
deferred tax assets due to net operating loss carry forwards being offset by an
increase in the valuation allowance of $1,959,000 since the realization of the
deferred tax benefit is not considered more likely than not. The Company
believes its current projected taxable income over the next five years as well
as certain tax strategies are adequate to the realization of the remaining
deferred tax benefit.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on the results of
operations of the Company. Fourth quarter sales in 2006 as compared to other
quarters were slightly impacted by fewer production days. The Company expects
sales each year in the fourth quarter to be impacted by fewer production days.
Liquidity and Capital Resources
As of December 31, 2006 and 2005, the Company’s working capital was
$9,511,000 and $7,108,000, respectively. The increase in working capital is
attributable primarily to a decrease in the current portion of debt of
$1,780,000, and a decrease in accounts payable of $834,000.
The Company’s net cash provided by operating activities for the year ended
December 31, 2006 was $72,000 primarily due to an increase in accounts
receivable of $316,000 and an increase in accounts payable, accrued expenses and
accrued compensation of $719,000, compared to net cash provided by operating
activities for the year ended December 31, 2005 of $2,646,000.
28
Cash provided by investing activities was $3,745,000, which was
attributable primarily to proceeds from the sale of BDR of $2,234,000 and
proceeds from the sale of patents of $2,000,000 offset by capital expenditures
of $398,000.
Cash used in financing activities was $4,520,000 for the period ended
December 31, 2006, comprised of repayment of debt of $40,635,000, and
acquisition of treasury stock of $970,000, offset by $37,085,000 in additional
borrowings of debt.
On December 29, 2005 the Company entered into a Credit and Security
Agreement ("Credit Agreement") with National City Business Credit, Inc. ("NCBC")
and National City Bank (the "Bank"). The Credit Agreement provides for (i) a
$10,000,000 asset-based revolving credit facility ("Revolving Loan") and (ii) a
$3,500,000 term loan facility ("Term Loan"), both of which have a three year
term. The amounts which may be borrowed under the Revolving Loan are based on
certain percentages of Eligible Receivables and Eligible Inventory, as such
terms are defined in the Credit Agreement. The obligations of the Company under
the Credit Agreement are secured by substantially all of the assets of the
Company.
Under the Credit Agreement, the Revolving Loan bears interest at a rate per
annum equal to the Libor Rate Plus 2.25%, or the "Alternate Base Rate," being
the higher of (i) the prime lending rate announced from time to time by the Bank
or (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement),
plus 0.50%. The Term Loan bears interest at a rate per annum equal to the Libor
Rate plus 2.75% or the Alternate Base Rate plus 0.50%. In connection with the
Term Loan, the Company previously entered into an interest rate swap agreement
("Swap Agreement") with the Bank which exchanges the variable interest rate of
the Term Loan for a fixed interest rate of 5.13% per annum effective January 10,
2006 through the maturity of the Term Loan.
In March 2006, the Credit Agreement was amended to (i) modify the
definition of "EBITDA" to exclude certain non-cash items from the calculation
thereof, (ii) increase the applicable interest rates for the Revolving Loan and
Term Loan thereunder by 25 basis points until such time as the Company has met
certain financial covenants for two consecutive fiscal quarters, (iii) impose an
availability block of $500,000 under the Company’s borrowing base until such
time as the Company has met certain financial covenants for two consecutive
fiscal quarters, and (iv) retroactively modify the agreement to defer
applicability of the fixed charge coverage ratio until June 30, 2006 and
increase the required ratio from 1.00:1.00 to 1.10:1.00 thereunder.
On December 15, 2006, the Company and BDR, as Borrowers, and Blonder Tongue
Investment Company, a wholly-owned subsidiary of the Company, as Guarantor,
executed a Second Amendment to Credit and Security Agreement (the "Amendment").
The Amendment removes BDR as a "Borrower" under the Credit and Security
Agreement dated as of December 29, 2005, as amended (the "Credit Agreement"),
and includes 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 include a reduction of approximately
$1,400,000 to the maximum amount of Revolving Advances that NCBC will make to
the Company due to the release from collateral of the rights of entry owned by
BDR.
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
29
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 December 31, 2006, there was $2,199,000 outstanding under the NCBC
Revolving Loan. The Company has the ability to borrow $7,801,000 under its line
of credit, however only $1,405,000 was available at December 31, 2006, based on
the Company’s current collateral.
The average amount outstanding on the Company’s line of credit during 2006
was $3,522,000 at a weighted average interest rate of 8.9%. The maximum amount
outstanding on the lines of credit during 2006 was $4,558,000.
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.
Contractual Obligations and Commitments
At December 31, 2006, the Company’s contractual obligations and commitments
to make future payments are as follows:
Payment Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- --------- ---------
Long-Term Debt
Obligations $4,028,000 $2,469,000 $1,559,000 $ - $ -
Capital Lease
Obligations 75,000 44,000 31,000 - -
Operating Leases 223,000 101,000 92,000 28,000 2,000
Purchase
Commitments (1) 2,448,000 2,448,000 - -
Consulting Agreement 169,000 169,000 - - -
Estimated Pension
Obligations 1,347,000 79,000 247,000 271,000 750,000
Interest on Long-Term
Debt and Capital
Lease Obligations 604,000 343,000 261,000 - -
----------- ----------- ----------- ---------- -------
Total Contractual
Obligations $8,894,000 $5,653,000 $2,190,000 $299,000 $752,000
=========== =========== =========== ========== ========
________
(1) Purchase commitments consist primarily of obligations to purchase certain
raw materials and finished goods inventory to be utilized in the ordinary
course of business.
Critical Accounting Policies
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States. Preparing financial
statements in accordance with generally accepted accounting principles requires
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required. You should also
review Note 1 to the financial statements for further discussion of significant
accounting policies.
30
Revenue Recognition
The Company records revenue when products are shipped. Legal title and risk
of loss with respect to the products pass to customers at the point of shipment.
Customers do not have a right to return products shipped. Products carry a three
year warranty, which amount is not material to the Company’s operations.
Inventory and Obsolescence
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. This procedure has been
applied to the December 31, 2006 and 2005 inventories and, accordingly,
$5,052,000 and $4,866,000, respectively, have been classified to non-current
assets.
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 for finished goods,
historical and projected usage of raw materials, and anticipated selling prices,
the Company establishes reserves. If the Company does not meet its sales
expectations these reserves are increased. Products that are determined to be
obsolete are written down to net realizable value. During 2006 and 2005, the
Company recorded an increase to its reserve of $114,000 and $4,372,000,
respectively. The increase in the inventory reserve during 2006 was primarily
the result of an increase in certain obsolete raw materials. The increase in the
inventory reserve during 2005 was primarily the result of reserving 100% of all
items for which there was no usage over the previous twelve months and 100% of
the value of closeout products. The Company believes reserves are adequate and
inventories are reflected at net realizable value.
Accounts Receivable and Allowance for Doubtful Accounts
Management periodically performs a detailed review of amounts due from
customers to determine if accounts receivable balances are impaired based on
factors affecting the collectibility of those balances. Management’s estimates
of the allowance for doubtful accounts requires management to exercise
significant judgment about the timing, frequency and severity of collection
losses, which affects the allowances and net earnings. As these factors are
difficult to predict and are subject to future events that may alter management
assumptions, these allowances may need to be adjusted in the future.
Long-Lived Assets
On a periodic basis, management assesses whether there are any indicators
that the value of the Company’s long-lived assets may be impaired. An asset’s
value may be impaired only if management’s estimate of the aggregate future cash
flows, on an undiscounted basis, to be generated by the asset are less than the
carrying value of the asset.
If impairment has occurred, the loss shall be measured as the excess of the
carrying amount of the asset over the fair value of the long-lived asset. The
Company’s estimates of aggregate future cash flows expected to be generated by
each long-lived asset are based on a number of assumptions that are subject to
economic and market uncertainties. As these factors are difficult to predict and
are subject to future events that may alter management’s assumptions, the future
cash flows estimated by management in their impairment analyses may not be
achieved.
New Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
a fair value. The objective of SFAS 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently.
31
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings. The FASB has indicated it believes that SFAS 159 helps
to mitigate this type of accounting-induced volatility by enabling companies to
report related assets and liabilities at fair value, which would likely reduce
the need for companies to comply with detailed rules for hedge accounting. SFAS
159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. Management is in the
process of evaluating this pronouncement.
In September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”)
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108”). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years’ financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement is not expected to have an
impact on the Company’s financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans.” Among other items, SFAS
No. 158 requires recognition of the overfunded or underfunded status of an
entity’s defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer’s fiscal year, and
requires recognition of the funded status of defined benefit postretirement
plans in other comprehensive income. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company adopted SFAS 158 in the fourth
quarter of 2006 on a prospective basis and does not believe that the adoption
will have a material impact on its consolidated results of operation or
financial position.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Accounting for Fair Value Measurements.” SFAS No. 157 defines
fair value, and establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosure about fair value
measurements. SFAS No. 157 is effective for the Company for financial
statements issued subsequent to November 15, 2007. The Company does not believe
adoption of SFAS No. 157 will have a material impact on its consolidated
financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
Statement No. 3" which, among other things, changes the accounting and reporting
requirements for a change in accounting principle and provides guidance on error
corrections. SFAS No. 154 requires retrospective application to prior period
financial statements of a voluntary change in accounting principle unless
impracticable to determine the period-specific effects or cumulative effect of
the change, and restatement with respect to the reporting of error corrections.
SFAS No. 154 applies to all voluntary changes in accounting principles, and to
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS No. 154 also
requires that a change in method of depreciation or amortization for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Adoption of SFAS No. 154 has not had a significant
impact on the Company’s financial statements or results of operations.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations - An Interpretation of
FASB Statement No. 143" ("FIN 47"), which will result in (a) more consistent
recognition of liabilities relating to asset retirement obligations, (b) more
information about expected future cash outflows associated with those
obligations, and (c) more information about investment in long-lived assets
because additional asset retirement costs will be recognized as part of the
carrying amounts of the assets. FIN 47 clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement. Uncertainty
about the timing and/or method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when
sufficient information exists. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
32
ending after December 15, 2005. The Company adopted FIN 47 at the end of its
2005 fiscal year and the adoption has not had a significant impact on its
consolidated results of operations or financial position.
In December 2004, the FASB issued its final standard on accounting for
share-based payments ("SBP"), FASB Statement No. 123R (revised 2004),
Share-Based Payment. The statement requires companies to expense the value of
employee stock options and similar awards. Under FAS 123R, SBP 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 would not be reversed if the awards expire without being
exercised. The effective date for public companies was the annual period
beginning after December 15, 2005, and it applied to all outstanding and
unvested SBP awards at a company’s adoption. Implementation of FAS 123R resulted
in additional stock-based compensation expense.
In November, 2004, the FASB issued SFAS No. 151, "Inventory Costs", an
amendment of Accounting Research Bulletin No. 43 Chapter 4. SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The adoption
of SFAS No. 151 has not had a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
In December, 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP FAS
No. 109-1"), "Application of FASB Statement No. 109, ’Accounting for Income
Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004." The American Jobs Creation Act of 2004
introduces a special tax deduction of up to 9% when fully phased in, of the
lesser of "qualified production activities income" or taxable income. FSP FAS
109-1 clarifies that this tax deduction should be accounted for as a special tax
deduction in accordance with SFAS No. 109. FSP FAS No. 109-1 did not have a
material effect on the Company’s financial statements.
ITEM 7A. 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 December 31, 2006 and 2005 the principal amount of the Company’s
aggregate outstanding variable rate indebtedness was $3,966,000 and $7,322,000,
respectively. A hypothetical 100 basis point adverse change in interest rates
would have had an annualized unfavorable impact of approximately $40,000 and
$73,000, respectively, on the Company’s earnings and cash flows based upon these
year-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 3 year Term Loan, will reduce the
unfavorable impact of any increase in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the consolidated financial statements and
notes thereto of the Company, which are attached hereto beginning on page 40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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,
33
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 December 31, 2006.
During the quarter ended December 31, 2006, 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.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about the Company’s directors and executive officers, its
Audit Committee, the Audit Committee’s "audit committee financial expert," and
the procedures by which nominees are recommended to the Board, is incorporated
by reference from the discussion under the heading "Directors and Executive
Officers" in the Company’s proxy statement for its 2007 Annual Meeting of
Stockholders. Information about compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference from the discussion under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company’s proxy statement for its 2007 Annual Meeting of Stockholders.
Each of the Company’s directors, officers and employee are required to
comply with the Blonder Tongue Laboratories, Inc. Code of Ethics adopted by the
Company. The Code of Ethics sets forth policies covering a broad range of
subjects and requires strict adherence to laws and regulations applicable to the
Company’s business. The Code of Ethics is available on the Company’s website at
www.blondertongue.com, under the "Investor Relations-Code of Ethics" captions.
The Company will post to its website any amendments to the Code of Ethics, or
waiver from the provisions thereof for executive officers or directors, under
the "Investor Relations-Code of Ethics" caption.
ITEM 11. EXECUTIVE COMPENSATION
Information about director and executive officer compensation is
incorporated by reference from the discussion under the headings "Directors’
Compensation" and "Executive Compensation" in the Company’s proxy statement for
its 2007 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information about security ownership of certain beneficial owners and
management is incorporated by reference from the discussion under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company’s proxy statement for its 2007 Annual Meeting of Stockholders. Summary
information concerning the Company’s equity compensation plans is incorporated
by reference from the discussion related to Proposal 2 under the heading "Equity
Compensation Plans" in the Company’s proxy statement for its 2007 Annual Meeting
of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and transactions with related
parties is incorporated by reference from the discussion under the heading
"Certain Relationships and Related Transactions" in the Company’s proxy
statement for its 2007 Annual Meeting of Stockholders. Information about the
independence of each director or nominee for director of the Company during 2006
is incorporated by reference from the discussion under the heading "Directors
and Executive Officers" in the Company’s proxy statement for its 2007 Annual
Meeting of Stockholders.
34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information about procedures related to the engagement of the independent
registered public accountants and fees and services paid to the independent
registered public accountants is incorporated by reference from the discussion
under the headings "Audit and Other Fees Paid to Independent Registered Public
Accountants" and "Pre-Approval Policy for Services by Independent Registered
Public Accountants" in the Company’s proxy statement for its 2007 Annual Meeting
of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements and Supplementary Data.
Reports of Independent Registered
Public Accounting Firms......................................... 40
Consolidated Balance Sheets as of
December 31, 2006 and 2005...................................... 42
Consolidated Statements of Operations for the
Years Ended December 31, 2006, 2005 and 2004.................... 43
Consolidated Statements of Stockholders’
Equity for the Years Ended December 31, 2006, 2005 and 2004..... 44
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2006, 2005 and 2004.................... 45
Notes to Consolidated Financial Statements...................... 46
(a)(2) Financial Statement Schedules.
Included in Part IV of this report:
Schedule II. Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
(a)(3) Exhibits.
The exhibits are listed in the Index to Exhibits appearing below and are
filed herewith or are incorporated by reference to exhibits previously filed
with the Commission.
(b) Index to Exhibits:
Exhibit # Description Location
3.1 Restated Certificate of
Incorporation of Blonder Incorporated by reference from
Tongue Laboratories, Inc. Exhibit 3.1 to Registrant’s S-1
Registration Statement No.33-98070,
filed October 12, 1995, as amended.
3.2 Restated Bylaws of Blonder Tongue
Laboratories, Inc. Incorporated by reference from
Exhibit 3.2 to Registrant’s S-1
Registration Statement No. 33-98070,
filed October 12, 1995, as amended.
35
4.1 Specimen of stock certificate. Incorporated by reference from
Exhibit 4.1 to Registrant’s S-1
Registration Statement No.
33-98070, filed October 12, 1995,
as amended.
10.1 Consulting Agreement, dated Incorporated by reference from
January 1, 1995, between Blonder Exhibit 10.3 to Registrant’s S-1
Tongue Laboratories, Inc. and Registration Statement No. 33-98070,
James H. Williams. filed October 12, 1995, as
amended.
10.2 1994 Incentive Stock Option Plan. Incorporated by reference from
Exhibit 10.5 to Registrant’s S-1
Registration Statement No. 33-98070,
filed October 12, 1995, as amended.
10.3 1995 Long Term Incentive Plan. Incorporated by reference from
Exhibit 10.6 to Registrant’s S-1
Registration Statement No. 33-98070,
filed October 12, 1995, as amended.
10.4 First Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 10.5(a) to Registrant’s
Quarterly Report on Form 10-Q for the
period ended March 31, 1997.
10.5 Second Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 4.3 to S-8 Registration
Statement No. 333-52519 originally
filed on May 13, 1998.
10.6 Third Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 4.4 to S-8 Registration
Statement No. 333-37670, originally
filed May 23, 2000.
10.7 Fourth Amendment to the 1995 Plan. Incorporated by reference from
Exhibit 4.5 to S-8 Registration
Statement No. 33-96993,
originally filed July 24, 2002.
10.8 Amended and Restated 1996 Director Incorporated by reference from
Option Plan. Appendix B to Registrant’s Proxy
Statement for its 1998 Annual
Meeting of Stockholders, filed
March 27, 1998.
10.9 First Amendment to the Amended and Incorporated by reference from
Restated 1996 Director Option Plan. Exhibit 4.2 to S-8 Registration
Statement No. 333-111367, originally
filed on December 19, 2003.
10.10 Form of Indemnification Agreement Incorporated by reference from
entered into by Blonder Tongue Exhibit 10.10 to Registrant’s S-1
Laboratories, Inc. in favor of Registration Statement No. 33-98070,
each of its Directors and Officers. filed October 12, 1995, as
amended.
10.11 VideoCipher(R)IICM Commercial Incorporated by reference from
Descrambler Module Master Purchase Exhibit 10.11 to Registrant’s
and License Agreement, dated August S-1 Registration Statement
23, 1990, between Blonder No. 33-98070, filed October 12,
Tongue Laboratories, Inc. and 1995, as amended.
Cable/Home Communication Corp.
+10.12 Patent License Agreement, dated Incorporated by reference from
August 21, 1995, between Exhibit 10.12 to Registrant’s
Blonder Tongue Laboratories, S-1 Registration Statement
Inc. and Philips Electronics No. 33-98070, filed
North America Corporation. October 12, 1995, as amended.
+10.13 Interdiction Technology License Incorporated by reference from
Agreement, dated August Exhibit 10.13 to Registrant’s
21, 1995, between Blonder Tongue S-1 Registration Statement
Laboratories, Inc. and Philips No. 33-98070, filed
Broadband Networks, Inc. October 12, 1995, as amended.
36
10.14 Bargaining Unit Pension Plan. Incorporated by reference from
Exhibit 10.22 to S-1
Registration Statement No. 33-98070,
filed October 12, 1995, as amended.
10.15 Executive Officer Bonus Plan. Incorporated by reference from
Exhibit 10.3 to Registrant’s
Quarterly Report on Form 10-Q for
the period ended March 31, 1997,
filed May 13, 1997.
10.16 Second Amendment to Consulting and Incorporated by reference from
Non-Competition Agreement Exhibit 10.1 to Registrant’s
between Registrant and James H. Quarterly Report on Form 10-Q
Williams, dated as of June for the period ended June 30, 2000,
30, 2000. filed August 14, 2000.
10.17 Blonder Tongue Laboratories, Inc. Incorporated by reference from
2005 Employee Equity Appendix A to the Company’s
Incentive Plan Definitive Proxy Statement for
its 2005 Annual Meeting of
Stockholders held on May 24, 2005.
10.18 Blonder Tongue Laboratories, Incorporated by reference from
Inc. 2005 Director Appendix B to the Company’s
Equity Incentive Plan Definitive Proxy Statement for
its 2005 Annual Meeting of
Stockholders held on May 24, 2005.
10.19 Credit and Security Agreement Incorporated by reference from
dated December 29, 2005 between Exhibit 99.1 to Registrant’s
Blonder Tongue Laboratories, Inc., Current Report on Form 8-K
BDR Broadband, LLC, Blonder dated December 29, 2005,
Tongue Investment Company, National filed January 5, 2006.
City Business Credit, Inc., and
National City Bank.
10.20 Interest Rate Swap Agreement Incorporated by reference from
dated December 21, 2005 between Exhibit 99.2
Blonder Tongue Laboratories, Inc. to Registrant’s Current Report on
and National City Bank. Form 8-K dated December
29, 2005, filed January 5, 2006.
10.21 Form of Option Agreement under the Incorporated by reference from
1995 Long Term Incentive Plan. Exhibit 10.33 to Registrant’s
Annual Report on Form 10-K
for the period ending December 31,
2004, filed April 15, 2005.
10.22 Form of Option Agreement under Incorporated by reference from
the 1996 Director Option Plan. Exhibit 10.34 to Registrant’s
Annual Report on Form 10-K
for the period ending December
31, 2004, filed April 15, 2005.
10.23 Form of Option Agreement under Incorporated by reference from
the 2005 Employee Equity Incentive Exhibit 10.3 to Registrant’s
Plan. Quarterly Report on Form 10-Q for
the period ending June 30, 2005,
filed August 15, 2005.
10.24 First Amendmentto Credit and Incorporated by reference from
Security Agreement dated March Exhibit 10.1 of Registrant’s
29, 2006 among Blonder Tongue Quarterly Report in Form 10-Q
Laboratories, Inc., BDR for the period ending March 31,
Broadband, LLC, Blonder Tongue 2006, filed May 12, 2006.
Investment Company, National
City Business Credit, Inc. and
National City Bank.
10.25 Share Exchange and Settlement Incorporated by reference from
Agreement dated June 30, 2006 Exhibit 99.1 to Registrant’s
among Blonder Tongue Laboratories, Current Report in Form 8-K
Inc., Blonder Tongue Telephone, dated June 30, 2006, filed
LLC, Resource Investment June 7, 2006.
Group, LLC, Broadstar South,
LLC, H.Tyler Bell and Douglas
Bell.
10.26 Patent Purchase Agreement dated Incorporated by reference from
September 12, 2006 between Exhibit 99.1 and to Registrant’s
Blonder Tongue Investment Company Current Report in Form 8-K
Moonbean L.L.C. dated September 12, 2006,
filed September 18, 2006.
37
10.27 Stock Purchase Agreement dated Incorporated by reference from
November 14, 2006 between Exhibit 99.1 to Registrant’s
Blonder Tongue Laboratories, Current Report in Form 8-K
Inc. and Ferris, Baker, Watts dated November 14, 2006, filed
Incorporated. November 20, 2006.
10.28 Second Amendment to Credit and Incorporated by reference from
Security Agreement dated Exhibit 10.2 to Registrant’s
December 14, 2006 among Blonder Current Report on Form 8-K
Tongue Laboratories, Inc., dated December 15, 2006,
BDR Broadband, LLC, Blonder filed December 21, 2006.
Tongue Investment Company,
National City Business
Credit, Inc. and National City Bank.
10.29 Membership Interest Purchase Incorporated by reference from
Agreement dated December 15, Exhibit 10.1 to the Registrant’s
2006 among Blonder Tongue Current Report on Form 8-K dated
Laboratories, Inc., BDR December 15, 2006, filed December
Broadband, LLC and DirecPath 21, 2006.
Holdings, LLC.
21 Subsidiaries of Blonder Tongue Filed herewith.
Laboratories, Inc.
23.1 Consent of Marcum & Kliegman LLP. Filed herewith.
23.2 Consent of BDO Seidman, LLP. Filed herewith.
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 the Sarbanes-Oxley
Act of 2002.
99.1 Audited Financial Statements Filed herewith.
of Blonder Tongue Telephone,
LLC
+ Certain portions of exhibit have been afforded confidential
treatment by the Securities and Exchange Commission.
Exhibits 10.1 - 10.9, 10.15 - 10.18, and 10.21 - 10.23 represent
management contracts or compensation plans or arrangements.
(c) Financial Statement Schedules:
Report of Marcum & Kliegman LLP on financial statement schedule is included
on page 70 of this Annual Report on Form 10-K.
Report of BDO Seidman, LLP on financial statement schedule is included on
page 71 of this Annual Report on Form 10-K.
The following financial statement schedule is included on page 72 of this
Annual Report on Form 10-K:
Schedule II. Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
38
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public
Accounting Firms..................................................... 40
Consolidated Balance Sheets as of December 31, 2006 and 2005......... 42
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004..................................... 43
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2006, 2005 and 2004......................... 44
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006, 2005 and 2004............................... 45
Notes to Consolidated Financial Statements........................... 46
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of
Blonder Tongue Laboratories, Inc.
Old Bridge, New Jersey
We have audited the accompanying consolidated balance sheets of Blonder Tongue
Laboratories, Inc. and Subsidiaries as of December 31, 2006 and 2005 and the
related consolidated statements of operations, comprehensive loss, stockholders’
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blonder Tongue Laboratories,
Inc. and Subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended in conformity with
United States generally accepted accounting principles.
/s/ Marcum & Kliegman LLP
Marcum & Kliegman LLP
New York, New York
February 23, 2007, except for Note 16 as to
which the date is March 29, 2007
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
Old Bridge, New Jersey
We have audited the accompanying consolidated statements of operations,
stockholders’ equity and cash flows of Blonder Tongue Laboratories, Inc. and
subsidiaries for the year ended December 31, 2004. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Blonder Tongue Laboratories, Inc. and subsidiaries for the year ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
April 12, 2005, except for Note 13
for which date is March 27, 2007
412
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-----------------------
2006 2005
Assets (Note 4)
Current assets:
Cash................................................ $ 84 $ 787
Accounts receivable, net of allowance for doubtful
accounts of $652 and $863 respectively (Note 8)..... 3,874 3,567
Inventories (Note 2)................................ 9,708 9,649
Prepaid and other current assets.................... 708 490
Deferred income taxes (Note 12)..................... 568 651
------------ ----------
Total current assets............................ 14,942 15,144
Inventories, net non-current (Note 2).................... 5,052 4,866
Property, plant and equipment, net of accumulated
depreciation and amortization (Notes 3 and 5)........ 4,537 6,184
Patents, net ............................................ 107 1,864
Rights-of-Entry, net (Note 13)........................... - 720
Other assets, net (Note 7)............................... 796 1,388
Investment in Blonder Tongue Telephone LLC (Note 13)..... - 993
Deferred income taxes (Note 12).......................... 1,788 1,705
----------- -----------
$27,222 $32,864
=========== ===========
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt (Note 4).......... $2,469 $4,249
Accounts payable.................................... 1,397 2,231
Accrued compensation................................ 742 598
Accrued benefit liability (Note 6).................. 103 185
Income taxes payable................................ 461 491
Other accrued expenses (Note 7)..................... 259 282
------------ ----------
Total current liabilities....................... 5,431 8,036
----------- -----------
Long-term debt (Note 4).................................. 1,559 3,329
Commitments and contingencies (Notes 5, 6 and 7)......... - -
Stockholders’ equity (Notes 6, 9 and 11):
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..................................... 24,454 24,202
Retained earnings................................... 3,907 3,565
Accumulated other comprehensive loss................ (826) (821)
Treasury stock, at cost, 2,242 and 449 shares,
respectively........................................ (7,311) (5,455)
----------- -----------
Total stockholders’ equity...................... 20,232 21,499
----------- -----------
$27,222 $32,864
=========== ===========
See accompanying notes to consolidated financial statements
42
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
---------------------------------
2006 2005 2004
-------- ---------- ---------
Net sales (Note 8)....................... $35,775 $34,730 $37,783
Cost of goods sold....................... 23,409 27,399 26,104
--------- ---------- ---------
Gross profit......................... 12,366 7,331 11,679
--------- ---------- ---------
Operating expenses:
Selling expenses..................... 4,738 4,481 4,169
General and administrative
(Notes 5, 6, and 7).... 5,658 5,022 4,719
Research and development............. 1,634 1,552 1,549
--------- ----------- ---------
12,030 11,055 10,437
--------- ----------- ---------
Earnings (loss) from operations.......... 336 (3,724) 1,242
---------- ----------- ---------
Other expense:
Interest expense..................... (711) (796) (903)
Interest and other income
(Note 14)............... 386 1 357
Equity in loss of Blonder
Tongue Telephone,
LLC (Note 13)........................ (107) (437) (613)
--------- -------- ------------
(432) (1,232) (1,159)
--------- -------- ------------
Earnings (loss) from continuing
operations before income taxes........... (96) (4,956) 83
Provision (benefit) for income
taxes (Note 12)........ - - 2,826
--------- --------- -----------
Earnings (loss) from continuing operations
after income taxes....................... (96) (4,956) (2,743)
--------- -------- ------------
Discontinued operations: (Note 13)
Loss from discontinued
operations (net of tax). (500) (544) (379)
Gain on disposal of subsidiary.......... 938 - -
--------- --------- -----------
Net income (loss)...................... $342 $(5,500) $(3,122)
--------- ---------- ----------
Basic and diluted income (loss)
per share from continuing operations.. $(0.01) $(0.62) $(0.34)
Basic and diluted loss per share from
discontinued operations.................. $(0.06) $(0.07) $(0.05)
Basic and diluted gain per
share on disposal.......... $0.12 - -
--------- ----------- ---------
Basic and diluted net income
(loss) per share......... $0.05 $(0.69) $(0.39)
========= =========== =========
Basic and diluted weighted
average shares outstanding. 7,592 8,015 8,001
========= ========== ==========
See accompanying notes to consolidated financial statements
43
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Accumulated
Common Stock Other
------------- Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Loss Stock Total
------ ------ --------- ------- --------------- ---------- ---------
Balance at
January 1, 2004 8,445 $8 $24,145 $12,187 - $(5,455) $30,885
Net loss - - - ( 3,122) - - (3,122)
Unrecognized
pension expense,
net of tax - - - - -
(897) (897)
-------
Comprehensive
loss (4,019)
Proceeds from
exercise of stock 20 - 57 - - - 57
options
------- ------ --------- -------- --------------- ---------- --------
Balance at
December 31, 2004 8,465 8 24,202 9,065 (897) (5,455) 26,923
-------- ----- --------- -------- --------------- ---------- --------
Net loss - - - (5,500) - - (5,500)
Recognized
pension expense,
net of taxes - - - - 76 - 76
-------
Comprehensive loss (5,424)
----- --------- -------- -------------- ---------- --------
Balance at
December 31, 2005 8,465 8 24,202 3,565 (821) (5,455) 21,499
Net income 342 342
Recognized pension
expense, net of (5) (5)
taxes
--------
Comprehensive loss 337
Stock-based
Compensation 252 252
Acquisition
of treasury stock (1,856) (1,856)
-------- ------- -------- ------------- ------------ ---------
Balance at
December 31, 2006 8,465 $8 $24,454 $3,907 $(826) $(7,311) $20,232
======== ===== ========= ======== ============= ========== ==========
See accompanying notes to consolidated financial statements
44
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
--------------------------------------
2006 2005 2004
------------ ----------- -----------
Cash Flows From Operating Activities:
Net income (loss)..................................$342 $(5,500) $(3,122)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Equity in loss from Blonder Tongue Telephone, LLC. 107 437 613
Depreciation...................................... 986 1,021 1,052
Amortization...................................... 629 636 679
Gain on sale of rights of entry................... - - (54)
Stock-based compensation ...................252 - -
Gain on sale of BDR Broadband, LLC......... (938) - -
Gain on sale of patents.....................(386) - -
Provision for inventory reserves.................. 114 4,372 872
Provision for doubtful accounts.................. (181) 256 107
Deferred income taxes............................ - - 2,826
Changes in operating assets and liabilities:
Accounts receivable............................ (316) (130) 1,882
Inventories.................................... (359) 390 439
Prepaid and other current assets............... 272 164 41
Other assets................................... 299 (463) (26)
Income taxes................................... (30) 811 359
Accounts payable, accrued expenses and accrued
compensation................................... (719) 652 (1,753)
------- ----------- -----------
Net cash provided by operating activities.... 72 2,646 3,915
------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures.............................. (398) (991) (639)
Collection of note receivable..................... - - 843
Acquisition of rights of entry.................... (91) (3) (19)
Proceeds from sale of BDR Broadband, LLC........2,234 - -
Proceeds from sale of patents..................2,000 - -
Proceeds from sale of rights of entry - - 151
------ ----------- -----------
Net cash provided by (used in)
investing activities....................... 3,745 (994) 336
------ ----------- -----------
Cash Flows From Financing Activities:
Repayments of debt............................. (40,635) (23,197) (19,588)
Borrowings of debt.......................... 37,085 22,262 15,155
Proceeds from exercise of stock options........ - - 57
Acquisition of treasury stock............... (970) - -
-------- ----------- -----------
Net cash used in financing activities...... (4,520) (935) (4,376)
-------- ----------- -----------
Net increase (decrease) in cash.............. (703) 717 (125)
Cash, beginning of year...................... 787 70 195
-------- ----------- -----------
Cash, end of year............................ $84 $ 787 $ 70
========= =========== ===========
Supplemental Cash Flow Information:
Cash paid for interest...................... $674 $ 791 $ 869
Cash paid for income taxes.................. - - -
Non-cash investing and financing activities:
Acquisition of treasury stock
for transfer of equity interest in Blonder
Tongue Telephone, LLC.................... $886 - -
See accompanying notes to consolidated financial statements
45
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 1 - Summary of Significant Accounting Policies
(a) 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"). 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 13.
The Company does not have substantive participating rights in the
day-to-day operations of NetLinc. NetLinc is managed by a Board of Mangers
consisting of two Managers, one of whom is a controlling member of the sole
other member of NetLinc and the other is an officer of the Company. However, the
Managers have delegated general and active management of NetLinc to a President,
who is also in a control position with respect to such other member. Although
the Company owns a 50% equity and voting interest in NetLinc, all decisions of
the members, including the election of Managers, require a vote of at least 51%
of the voting interests. In addition, each action of the Board of Managers,
including the election and removal of the President, requires a majority vote of
the Managers. The Company, therefore, does not control the election of the
Managers or the President of NetLinc, and does not have the power to remove the
President. Accordingly, the other member of NetLinc possesses substantive
participating rights through its common affiliation with the President. The
Company does possess certain protective rights in connection with certain
actions by NetLinc which require the unanimous approval of all members,
including the creation of a new class of membership interest, approving a change
of control, and approving a change in the nature of its business.
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 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 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, in part, by the failure of Master
Gain to contribute the $5,850 of capital to the joint venture as required by the
JV Agreement and the joint venture’s failure to obtain certain governmental
approvals and licenses necessary for the operation of the joint venture.
(b) Accounts Receivable and Allowance for Doubtful accounts
Accounts receivable are customer obligations due under normal trade terms.
The Company sells its products primarily to distributors and private cable
operators. The Company performs continuing credit evaluations of its customers’
financial condition and although the Company generally does not require
collateral, letters of credit may be required from its customers in certain
circumstances.
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables will potentially be uncollectible. The Company
includes any accounts receivable balances that are determined to be
uncollectible, along with a general reserve, in its overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information
available, the Company believes its allowance for doubtful accounts as of
December 31, 2006 is adequate; however, actual write-offs might exceed the
recorded allowance.
(c) Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out ("FIFO") method, or market.
46
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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.
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. If the Company does not meet
its sales expectations, these reserves are increased. Products that are
determined to be obsolete are written down to net realizable value. During 2005,
the Company reserved 100% of all items for which there was no usage over the
previous twelve months and 100% of the value of closeout products. The Company
recorded an increase to its reserve of $114, $4,372 and $872 during 2006, 2005
and 2004, respectively. The Company believes reserves are adequate and
inventories are reflected at net realizable value.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation generally on the straight-line method based upon estimated useful
lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and
fixtures, 6 to 10 years for machinery and equipment, 10 to 15 years for building
improvements, 5 to 7 years for cable systems, and 40 years for the manufacturing
and administrative office facility.
(e) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred
income taxes are provided for temporary differences in the recognition of
certain income and expenses for financial and tax reporting purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
(f) Intangible Assets
Intangible assets, net totaling $107 and $2,584 as of December 31, 2006 and
2005, respectively, consist of acquired patent rights and rights-of-entry, and
are carried at cost less accumulated amortization. Amortization is computed
utilizing the straight-line method over the estimated useful life of the
respective asset, 12 years for patents and 5 years for rights-of-entry.
The components of intangible assets at December 31, 2006 and December 31,
2005 are as follows:
December 31, 2006 December 31, 2005
------------------------ -----------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
Patents and trademarks $1,390 $1,283 $6,414 $4,550
Rights of entry - - 1,588 868
---------- --------------- ----------- ------------
---------- --------------- ----------- ------------
Total intangible assets $1,390 $1,283 $8,002 $5,418
========= ============= ============== ============
The Company continues to amortize its patents and rights-of-entry over
their estimated useful lives with no significant residual value. Amortization
expense for intangible assets was $629, $636 and $679 for the years ending
December 31, 2006, 2005 and 2004, respectively. Intangibles amortization is
projected to be approximately $33 per year for the next three years.
47
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(g) Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144").
FAS 144 standardized the accounting practices for the recognition and
measurement of impairment losses on certain long-lived assets based on
non-discounted cash flows. No impairment losses have been recorded through
December 31, 2006.
(h) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity of less than three
months at purchase to be cash equivalents. The Company did not have any cash
equivalents at December 31, 2006, 2005 and 2004.
(i) Research and Development
Research and development expenditures for the Company’s projects are
expensed as incurred.
(j) Revenue Recognition
The Company records revenues when products are shipped. Customers do not
have a right of return. The Company provides a three year warranty on most
products.
(k) Earnings (loss) Per Share
Earnings (loss) per share are calculated in accordance with FAS 128, which
provides for the calculation of "basic" and "diluted" earnings (loss) per share.
Basic earnings (loss) per share includes no dilution and is computed by dividing
net earnings by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflect, in periods in which they have
a dilutive effect, the effect of common shares issuable upon exercise of stock
options.
(l) Treasury Stock
Treasury Stock is recorded at cost. Gains and losses on disposition are
recorded as increases or decreases to additional paid-in capital with losses in
excess of previously recorded gains charged directly to retained earnings.
(m) Derivative Financial Instruments
The Company utilizes interest rate swaps at times to manage interest rate
exposures. The Company specifically designates interest rate swaps as hedges of
debt instruments and recognizes interest differentials as adjustments to
interest expense in the period they occur. The Company does not hold or issue
financial instruments for trading purposes. Although the Company held an
interest rate swap at December 31, 2006, the effect on the balance sheet was not
deemed material. The Company did not hold any derivative financial instruments
at December 31, 2005.
(n) Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Approximately 44% of the Company’s employees are covered by a three year
collective bargaining agreement, which expires in February 2009.
48
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The Company estimates that headend products accounted for approximately 49%
of the Company’s revenues in 2006, 49% in 2005 and 52% in 2004. Any substantial
decrease in sales of headend products could have a material adverse effect on
the Company’s results of operations, financial condition, and cash flows.
(o) Stock Options
The Company implemented SFAS No. 123(R), "Accounting for Share-Based
Payment," 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 $252 for the year ended December 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: expected lives of 6.3, 9.5 and 9.5 years; no
dividend yield; volatility at 72%, 73% and 73%; and risk free interest rate of
4.65%, 3.2% and 3.2% for 2006, 2005 and 2004, respectively.
Under accounting provisions of FAS 123, the Company’s net income (loss) to
common shareholders and net income (loss) per common share would have been
adjusted to the pro forma amounts indicated below (in thousands, except per
share data):
Years Ended December 31,
2005 2004
---------------- ---------------
Net loss as reported .................. $(5,500) $(3,122)
Adjustment for fair value of
stock options.......................... 647 204
---------------- ---------------
---------------- ---------------
Pro forma......................... (6,147) $(3,326)
================ ===============
Net loss per share basic and diluted:
As reported....................... $(0.69) $(0.39)
================ ===============
Pro forma......................... $(0.77) $(0.42)
================ ===============
(p) New Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earning caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility be enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. Management is in the process of evaluating this
pronouncement.
In September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”)
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
issued in order to reduce the diversity in practice in how public companies
quantify misstatements of financial statements, including misstatement that were
not material to prior years’ financial statements. SAB 108 is effective for
fiscal year 2007. The adoption of this pronouncement is not expected to have an
impact on the Company’s financial position, results of operations or cash flows.
49
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans.” Among other items, SFAS
No. 158 requires recognition of the overfunded or underfunded status of an
entity’s defined benefit postretirement plan as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer’s fiscal year, and
requires recognition of the funded status of defined benefit postretirement
plans in other comprehensive income. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company adopted SFAS 158 in the fourth
quarter of 2006 on a prospective basis and does not believe that the adoption
will have a material impact on its consolidated results of operation or
financial position.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Accounting for Fair Value Measurements.” SFAS No. 157 defines
fair value, and establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosure about fair value
measurements. SFAS No. 157 is effective for the Company for financial
statements issued subsequent to November 15, 2007. The Company does not believe
adoption of SFAS No. 157 will have a material impact on its consolidated
financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
Statement No. 3" which, among other things, changes the accounting and reporting
requirements for a change in accounting principle and provides guidance on error
corrections. SFAS No. 154 requires retrospective application to prior period
financial statements of a voluntary change in accounting principle unless
impracticable to determine the period-specific effects or cumulative effect of
the change, and restatement with respect to the reporting of error corrections.
SFAS No. 154 applies to all voluntary changes in accounting principles, and to
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS No. 154 also
requires that a change in method of depreciation or amortization for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Adoption of SFAS No. 154 has not had a significant
impact on the Company’s financial statements or results of operations.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations - An Interpretation of
FASB Statement No. 143" ("FIN 47"), which will result in (a) more consistent
recognition of liabilities relating to asset retirement obligations, (b) more
information about expected future cash outflows associated with those
obligations, and (c) more information about investment in long-lived assets
because additional asset retirement costs will be recognized as part of the
carrying amounts of the assets. FIN 47 clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and/or method of settlement. Uncertainty
about the timing and/or method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when
sufficient information exists. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The Company adopted FIN 47 at the end of its
2005 fiscal year and the adoption has not had a significant impact on its
consolidated results of operations or financial position.
In December 2004, the FASB issued its final standard on accounting for
share-based payments ("SBP"), SFAS No. 123(R) (revised 2004), "Accounting for
Share-Based Payment." The statement requires companies to expense the value of
employee stock options and similar awards. Under FAS 123(R), SBP 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 would not be reversed if the awards expire without being
exercised. The effective date for public companies was the annual period
beginning after December 15, 2005, and it applied to all outstanding and
unvested SBP awards at a company’s adoption. The Company adopted on a
prospective basis FAS 123(R) effective January 1, 2006. The implementation of
FAS 123(R) resulted in additional stock-based compensation expense.
50
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
In November, 2004, the FASB issued SFAS No. 151, "Inventory Costs", an
amendment of Accounting Research Bulletin No. 43 Chapter 4. SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The adoption
of SFAS No. 151 has not had a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
In December, 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP FAS
No. 109-1"), "Application of FASB Statement No. 109, ’Accounting for Income
Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004." The American Jobs Creation Act of 2004
introduces a special tax deduction of up to 9% when fully phased in, of the
lesser of "qualified production activities income" or taxable income. FSP FAS
109-1 clarifies that this tax deduction should be accounted for as a special tax
deduction in accordance with SFAS No. 109. FSP FAS No. 109-1 did not have a
material effect on the Company’s financial statements.
(r) Royalty and License Expense
The Company records royalty expense, as applicable, when the related
products are sold. Royalty expense is recorded as a component of selling
expenses. The Company amortizes license fees over the life of the relevant
contract.
Note 2 - Inventories
Inventories, net of reserves, are summarized as follows:
December 31,
-------------------------
2006 2005
----------- ------------
Raw materials........................................ $8,564 $10,071
Work in process...................................... 1,864 2,102
Finished goods....................................... 11,162 11,058
----------- ------------
21,590 23,231
Less current inventory............................... (9,708) (9,649)
----------- ------------
11,882 13,582
Less reserve for slow moving and obsolete inventory (6,830) (8,716)
----------- ------------
$5,052 $4,866
=========== ============
The Company recorded a $114 and $4,372 provision for slow moving and
obsolete inventory during the years ended December 31, 2006 and 2005,
respectively. In 2006, the Company wrote off fully reserved inventories of
approximately $2,000. The Company periodically analyzes anticipated product
sales based on historical results, current backlog and marketing plans.
51
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 3 - Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31,
----------------------------
2006 2005
----------- -----------
Land............................................... $1,000 $1,000
Building........................................... 3,361 3,361
Machinery and equipment............................ 8,078 7,971
546 2,589
Cable systems ( See Note 13).......................
Furniture and fixtures............................. 403 407
Office equipment................................... 2,017 1,934
Building improvements.............................. 717 717
----------- -----------
16,122 17,979
Less: Accumulated depreciation and amortization... (11,585) (11,795)
----------- -----------
$4,537 $6,184
=========== ===========
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 previously 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 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.
On December 15, 2006, the Company and BDR, as Borrowers, and Blonder Tongue
Investment Company, a wholly-owned subsidiary of the Company, as Guarantor,
executed a Second Amendment to Credit and Security Agreement (the "Amendment")
with NCBC and the Bank. The Amendment removes BDR as a "Borrower" under the
Credit and Security Agreement dated as of December 29, 2005, as amended (the
"Credit Agreement"), and includes 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 include a reduction
of approximately $1,400 to the maximum amount of Revolving Advances that NCBC
will make to the Company due to the release from collateral of the rights of
entry owned by BDR.
52
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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.
The fair value of the debt approximates the recorded value based on the
borrowing rates currently available to the Company for loans with similar terms
and maturities.
Long-term debt consists of the following:
December 31,
---------------------------------
2006 2005
-------------- --------------
Revolving Line of Credit.............. $2,199 $3,822
Mortgage loan......................... 1,767 3,500
Capital leases (Note 5)................ 62 256
-------------- --------------
4,028 7,578
Less: Current portion................. (2,469) (4,249)
-------------- --------------
$1,559 $3,329
============== ==============
Annual maturities of long-term debt at December 31, 2006 are:
2007................................... $2,469
2008................................... 1,545
2009................................... 14
2010................................... -
2011................................... -
Thereafter............................. -
------------------
$4,028
==================
53
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The average amount outstanding on the Company’s lines of credit during 2006
and 2005 was $3,522 and $3,971, respectively. The maximum amount outstanding on
the lines of credit during 2006 and 2005 was $4,558 and $4,811, respectively.
The weighted average interest rate at December 31, 2006, 2005 and 2004 was 8.9%,
8.4% and 5.9%, respectively.
Note 5 - Commitments and Contingencies
Leases
The Company leases certain factory, office and automotive equipment under
noncancellable operating leases and equipment under capital leases expiring at
various dates through December, 2012.
Future minimum rental payments, required for all noncancellable leases are as
follows:
Capital Operating
---------- -------------
2007..................................... $44 $101
2008..................................... 16 60
2009..................................... 15 32
2010..................................... - 24
2011..................................... - 4
Thereafter............................... - 2
---------- -----------
Total future minimum lease payments...... 75 $ 223
===========
Less: amounts representing interest..... 13
----------
Present value of minimum lease payments.. $ 62
==========
Property, plant and equipment included capitalized leases of $2,724 and
2,720 at December 31, 2006 and 2005, respectively, less accumulated amortization
of $2,644 and $2,446 at December 31, 2006 and 2005, respectively.
Rent expense was $137, $164 and $158 for the years ended December 31, 2006,
2005 and 2004, respectively.
Litigation
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.
Note 6 - Benefit Plans
Defined Contribution Plan
The Company has a defined contribution plan covering all full time
employees qualified under Section 401(k) of the Internal Revenue Code, in which
the Company matches a portion of an employee’s salary deferral. The Company’s
contributions to this plan were $189, 180 and $183, for the years ended December
31, 2006, 2005 and 2004, respectively.
Defined Benefit Pension Plan
Substantially all union employees who meet certain requirements of age,
length of service and hours worked per year were covered by a Company sponsored
non-contributory defined benefit pension plan. Benefits paid to retirees are
based upon age at retirement and years of credited service. On August 1, 2006,
the plan was frozen.
54
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The following table sets forth the change in projected benefit obligation,
change in plan assets and funded status of defined benefit pension plan:
2006 2005 2004
------ ------- -------
Change in Benefit Obligation
Benefit obligation at beginning of year $2,633 $2,616 $2,020
Service cost 64 103 104
Interest cost 163 150 144
Plan participants’ contributions 0 0 0
Amendments 0 0 0
Actuarial loss (gain) 121 (92) 461
Business combinations 0 0 0
Divestitures 0 0 0
Curtailments (34) 0 0
Settlements 0 0 0
Special termination benefits 0 0 0
Benefits paid (189) (144) (114)
Currency translation adjustment 0 0 0
------- ------- -------
Benefit obligation at end of year $2,757 $2,633 $2,616
Change in Plan Assets
Fair value of plan assets at beginning of year $2,408 $2,240 $2,016
Actual return on plan assets 235 114 205
Employer contribution 200 200 132
Business combinations 0 0 0
Divestitures 0 0 0
Settlements 0 0 0
Plan participants’ contributions 0 0 0
Benefits paid (189) (144) (114)
Administrative Expenses Paid 0 0 0
Currency Translation Adjustment 0 0 0
------- ------- -------
Fair value of plan assets at end of year $2,654 $2,409 $2,240
Funded status $ 103 $ (224) $ (376)
Unrecognized actuarial loss (gain) 871 979
Unrecognized prior service cost 33 37
Unrecognized net initial obligation (10) (20)
------- -------
Net amount recognized $ 670 $ 620
Amounts Recognized in the Statement
of Financial Position consists of:
Before Adoption of FAS 158
Prepaid benefit cost $ 0 $ 0 $ 0
Accrued benefit liability (103) (185) (314)
Intangible asset 0 33 37
Accumulated other comprehensive income 826 821 897
------- ------- -------
Net amount recognized $ 723 $ 670 $ 620
After adoption of FAS 158
Noncurrent assets $ 0 $ 0 $ 0
Current liabilities $ 0 $ 0 $ 0
Noncurrent liabilities (103) $ 0 $ 0
------- ------- -------
Net amount recognized $ (103) $ 0 $ 0
55
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
2006 2005 2004
------ ------- -------
Change in Accumulated Other Comprehensive
Income Due to Adoption of $ 0
FAS 158 (before tax effects)
Amounts Recognized in Accumulated
Other Comprehensive Income
consist of:
Net actuarial loss (gain) $ 826
Prior service cost (credit) 0
Unrecognized net initial obligation (asset) 0
-------
Total (before tax effects) $ 826
Accumulated benefit Obligation End of Year $2,757 $2,593 $2,554
Information for Pension Plans with an
Accumulated Benefit
Obligation in excess of Plan Assets:
Projected benefit of obligation $2,757 $2,633 $2,616
Accumulated benefit obligation $2,757 $2,593 $2,554
Fair value of plan assets $2,654 $2,409 $2,240
Weighted-Average Assumptions Used to
Determine Benefit Obligation
in Excess of Plan Assets:
Discount Rate 6.00% 6.00% 6.00%
Salary Scale N/A N/A N/A
Components of Net Periodic Benefit
Cost and Other Amounts
Recognized in Other Comprehensive Income
Net periodic cost
Service cost $ 64 $ 103 $ 104
Interest cost 163 150 144
Expected return on plan assets (170) (160) (142)
Recognized prior service cost (credit 2 4 4
Recognized actuarial (gain) loss 66 63 44
Recognized net initial obligation (asset) (10) (10) (10)
Recognized actuarial (gain) loss
due to curtailments 31 0 0
Recognized actuarial (gain) loss
due to settlements 0 0 0
Recognized actuarial (gain) loss due to
special termination benefits 0 0 0
------- ------- -------
Net periodic benefit cost $ 147 $ 150 $ 144
Other Changes in Plan Assets and
Benefit Obligations Recognized in
Other comprehensive Income
Net actuarial loss (gain) $ 21
Recognized actuarial loss (gain) (66)
Prior service cost (credit) 0
Recognized prior service cost (credit) (33)
Total net obligation 10
------
Total recognized in other comprehensive
income (before tax effects) $ (68)
------
Total recognized in net periodic
benefit cost and other
comprehensive income (before tax effects) $ 79
56
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
During 2006 the plan’s total unrecognized net loss increased by $121. The
variance between the actual and expected return on plan assets during 2006
decreased the total unrecognized net loss by $65. Because the total unrecognized
net gain or loss exceeds the greater of 10% of the projected benefit obligation
or 10% of the plan asset, the excess will be amortized over the average expected
future working lifetime of active plan participants. As of January 1, 2006 the
average expected future working lifetime of active plan participants was 10.14
years. Actual results for 2007 will depend on the 2007 actuarial valuation of
the plan.
2006 2005 2004
Amounts Expected to be Recognized in
Net Periodic Cost in the Coming Year
(Gain)/loss recognition $ 54
Prior service cost recognition $ 0
Net initial obligations/(asset)
recognition $ 0
Weighted-Average Assumptions
Used to Determine Net Periodic
Cost for Fiscal Periods Ending
as of December 31
Discount rate 6.00% 6.00% 7.00%
Expected asset return 7.00% 7.00% 7.00%
Salary Scale N/A N/A N/A
The change in unrecognized net gain/loss is one measure of the degree to
which important assumptions have coincided with actual experience. During 2006
the unrecognized net loss decreased by 1.7% of the December 31, 2005 projected
benefit obligation. The company changes important assumptions whenever changing
conditions warrant. The discount rate is typically changed at least annually and
the expected long-term return on plan assets will typically be revised every
three to five years. Other material assumptions include the compensation
increase rates, rates of employee termination, and rates of participant
mortality.
The discount rate was determined by projecting the plan’s expected future
benefit payments as defined for the projected benefit obligation, discounting
those expected payments using a theoretical zero-coupon spot yield curve derived
from a universe of high-quality bonds as of the measurement date, and solving
for the single equivalent discount rate that resulted in the same projected
benefit obligation. A 1% increase/(decrease) in the discount rate would have
(decreased)/increased the net periodic benefit cost for 2006 by $(35)/37 and
(decreased)/increased the year-end projected benefit obligation by $(33)/425.
The expected return on plan assets was determined based on historical and
expected future returns of the various asset classes, using the target
allocations described below. Each 1% increase/(decrease) in the expected rate of
return assumption would have (decreased)/increased the net periodic benefit cost
for 2006 by $24,000.
Plan Assets
Expected Long-
Asset Category Term Return Target Allocation 2006 2005 2004
----------------- -------------- ------------------ ------ ------ ------
Equity securities 8.50% 55% 54% 55% 98%
Debt securities 5.50% 45% 46% 45% 2%
------ ----- ------ ------ ------
Total 7.00% 100% 100% 100% 100%
Estimated Future Benefit Payments
Expected company contributions in the following fiscal year $ 200
Expected Benefit Payments:
In the first year following the disclosure date $ 79
In the second year following the disclosure date $ 143
In the third year following the disclosure date $ 104
In the fourth year following the disclosure date $ 121
In the fifth year following the disclosure date $ 150
In the sixth year following the disclosure date $ 750
57
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 7 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement with James H. Williams who was a director of the
Company until May 24, 2006 and who 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 December 31, 2006 the Chief Executive Officer was indebted to the
Company in the amount of $166, 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 December 31, 2006
and 2005.
The President of the Company lent the Company 100% of the purchase price of
certain used-equipment inventory purchased by the Company in October through
November of 2003. The inventory was purchased at a substantial discount to
market price. While the aggregate cost to purchase all of the inventory was
approximately $950, the maximum amount of indebtedness outstanding to the
President at any one time during 2005 was $94. The President made the loan to
the Company on a non-recourse basis, secured solely by a security interest in
the inventory purchased by the Company and the proceeds resulting from the sale
of the inventory. In consideration for the extension of credit on a non-recourse
basis, the President received from the Company interest on the outstanding
balance at the margin interest rate he incurred for borrowing the funds from his
lenders and received from the Company 25 % of the gross profit derived from the
Company’s resale of such inventory. In April 2004, the President of the Company
acquired $75 of used equipment inventory, which was subsequently sold by him to
the Company on a consignment basis. Payment by the Company for the goods become
due upon the sale thereof by the Company and collection of the accounts
receivable generated by such sales. In connection with the transaction, the
Company agreed to pay the President cost plus 25% of the gross profit derived
from the sale of such inventory. As of December 31, 2005, all amounts owed to
the President were paid.
As described in Note 13, the Company entered into a series of agreements in
2003 pursuant to which it acquired a 50% economic ownership interest in NetLinc
Communications, LLC ("NetLinc") and Blonder Tongue Telephone, LLC ("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 13,
on June 30, 2006 the Company entered into the Share Exchange Agreement with BTT
and certain related parties pursuant to which, among other things, the Company
received back these 500 shares in exchange for the Company’s membership interest
in BTT and the grant to BTT of an equipment purchase credit of $400, which was
exercised in 2006. The Company will continue to pay future royalties to NetLinc
upon the sale of certain telephony products.
Note 8 - Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and trade
accounts receivable.
The Company maintains cash balances at several banks located in the
northeastern United States. As part of its cash management process, the Company
periodically reviews the relative credit standing of these banks.
Credit risk with respect to trade accounts receivable is concentrated with
two of the Company’s customers. These customers accounted for approximately 40%
and 21% of the Company’s outstanding trade accounts receivable at December 31,
58
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
2006 and 2005, respectively. These customers are distributors of
telecommunications and private cable television components, and providers of
franchise and private cable television service. The Company performs ongoing
credit evaluations of its customers’ financial condition, uses credit insurance
and requires collateral, such as letters of credit, to mitigate its credit risk.
The deterioration of the financial condition of one or more of its major
customers could adversely impact the Company’s operations. From time to time
where the Company determines that circumstances warrant, such as when a customer
agrees to commit to a large blanket purchase order, the Company extends payment
terms beyond its standard payment terms.
The Company’s largest customer accounted for approximately 20%, 17% and 18%
of the Company’s sales in each of the years ended December 31, 2006, 2005 and
2004, respectively. This customer accounted for approximately 24% and 10% of the
Company’s outstanding trade accounts receivable at December 31, 2006 and 2005,
respectively. A second customer accounted for approximately 14% of the Company’s
trade accounts receivable at December 31, 2006. A third customer accounted for
approximately 11% of the Company’s trade accounts receivable at December 31,
2005.
Note 9 - Stockholders’ Equity
On July 24, 2002, the Company commenced a stock repurchase program to
acquire up to $300 of its outstanding common stock. The stock repurchase was
funded by a combination of the Company’s cash on hand and borrowings against its
revolving line of credit. The Company repurchased 70 shares during 2003. On June
30, 2006, the Company reacquired 500 shares of stock at a basis of $886 in
connection with its sale of its ownership interest in BTT (see Note 13). On
November 14, 2006, the Company repurchased 1,293 shares of its common stock for
$970 from a former director in a private off market block transaction.
Note 10 - Earnings (loss) Per Share
Basic and diluted earnings (loss) per share for each of the three years
ended December 31, 2006, 2005 and 2004 are calculated as follows:
Net
Income (loss) Shares Per Share
(Numerator) (Denominator) Amount
============== ================ ==============
For the year ended
December 31, 2006:
Basic and Diluted
income per share..... $ 342 7,592 $ 0.05
============== ================ ==============
For the year ended
December 31, 2005:
Basic and diluted
loss per share....... $ (5,500) 8,015 $ (0.69)
============== ================ ==============
For the year ended
December 31, 2004:
Basic and Diluted
loss per share....... $(3,122) 8,001 $(0.39)
============== ================ ==============
The diluted share base excludes incremental shares of 1,527, 1,282 and 672
related to stock options for December 31, 2006, 2005 and 2004, respectively.
These shares were excluded due to their antidilutive effect.
59
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 11 - Stock Option Plans
In 1994, the Company established the 1994 Incentive Stock Option Plan (the
"1994 Plan"). The 1994 Plan provided for the granting of Incentive Stock Options
to purchase shares of the Company’s common stock to officers and key employees
at a price not less than the fair market value at the date of grant as
determined by the compensation committee of the Board of Directors. The maximum
number of shares available for issuance under the plan was 298. Options became
exercisable as determined by the compensation committee of the Board of
Directors at the date of grant. Options expire ten years from the date of grant.
In October, 1995, the Company’s Board of Directors and stockholders
approved the 1995 Long Term Incentive Plan (the "1995 Plan"). The 1995 Plan
provided for grants of "incentive stock options" or nonqualified stock options,
and awards of restricted stock, to executives and key employees, including
officers and employee Directors. The 1995 Plan is administered by the
Compensation Committee of the Board of Directors, which determines the optionees
and the terms of the options granted under the 1995 Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof, as
well as the recipients and number of shares awarded for restricted stock awards;
provided, however, that no employee may receive stock options or restricted
stock awards which would result, separately or in combination, in the
acquisition of more than 100 shares of Common Stock of the Company under the
1995 Plan. The exercise price of incentive stock options granted under the 1995
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant. With respect to any optionee who owns stock representing more
than 10% of the voting power of all classes of the Company’s outstanding capital
stock, the exercise price of any incentive stock option must be equal to at
least 110% of the fair market value of the Common Stock on the date of grant,
and the term of the option may not exceed five years. The term of all other
incentive stock options granted under the 1995 Plan may not exceed ten years.
The aggregate fair market value of Common Stock (determined as of the date of
the option grant) for which an incentive stock option may for the first time
become exercisable in any calendar year may not exceed $100. The exercise price
for nonqualified stock options is established by the Compensation Committee, and
may be more or less than the fair market value of the Common Stock on the date
of grant.
Stockholders have previously approved a total of 1,150 shares of common
stock for issuance under the 1995 Plan, as amended to date. The 1995 Plan
expired by its terms on November 30, 2005.
In May, 1998, the stockholders of the Company approved the Amended and
Restated 1996 Director Option Plan (the "Amended 1996 Plan"). Under the plan,
Directors who are not currently employed by the Company or any subsidiary of the
Company and have not been so employed within the preceding six months are
eligible to receive options from time to time to purchase the number of shares
of Common Stock determined by the Board in its discretion; provided, however,
that no Director is permitted to receive options to purchase more than 5 shares
of Common Stock in any one calendar year. The exercise price for such shares is
the fair market value thereof on the date of grant, and the options vest as
determined in each case by the Board of Directors. Options granted under the
Amended 1996 Plan must be exercised within 10 years from the date of grant. A
maximum of 200 shares of Common Stock are subject to issuance under the Amended
1996 Plan, as amended. The plan is administered by the Board of Directors. The
Amended 1996 Plan expired by its terms on January 2, 2006.
In 1996, the Board of Directors granted a non-plan, non-qualified option
for 10 shares to an individual, who was not an employee or director of the
Company at the time of the grant. The option was originally exercisable at
$10.25 per share and expired in 2006. This option was repriced to $6.88 per
share on September 17, 1998.
In May 2005, the stockholders of the Company approved the 2005 Employee
Equity Incentive Plan (the "Employee Plan"). The Employee Plan authorizes the
Compensation Committee of the Board of Directors (the "Committee") to grant a
maximum of 500 shares of equity based and other performance based awards to
executive officers and other key employees of the Company. The Committee
determines the optionees and the terms of the awards granted under the Employee
Plan, including the type of awards, exercise price, number of shares subject to
the award and the exercisability thereof.
In May 2005, the stockholders of the Company approved the 2005 Director
Equity Incentive Plan (the "Director Plan"). The Director Plan authorizes the
Board of Directors (the "Board") to grant a maximum of 200 shares of equity
based and other performance based awards to non employee directors of the
60
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Company. The Board determines the optionees and the terms of the awards granted
under the Director Plan, including the type of awards, exercise price, number of
shares subject to the award and the exercisability thereof.
The following tables summarize information about stock options outstanding for
each of the three years ended December 31, 2004, 2005 and 2006:
61
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Weighted- Weighted- Weighted- Weighted- Weighted-
Average Average Average 2005 Average 2005 Average
1994 Exercise 1995 Exercise 1996 Exercise Employee Exercise Director Exercise
Plan (#) Price ($) Plan (#) Price ($) Plan (#) Price ($) Plan (#) Price ($) Plan (#) Price ($)
-------------------------------------------------------------------------------------------------------
Shares under
option:
Options
outstanding at
January 1, 2004 80 3.45 1,027 5.37 114 4.70 - - - -
Granted - - 24 3.32 20 3.10 - - - -
Exercised - - (20) 2.88 - - - - - -
Forfeited (26) 2.56 (42) 5.43 (6) 4.63 - - - -
Options
outstanding at
December 31, 2004 54 3.85 989 5.35 128 4.37 - - - -
Granted - - 76 3.84 25 3.85 80 3.76 - -
Exercised - - - - - - - - - -
Forfeited (31) 4.33 (39) 5.43 - - - - - -
Options
outstanding at
December 31, 2005 23 3.40 1,026 5.24 153 4.28 80 3.76 - -
Granted - - - - - - 327 1.99 50 1.91
Exercised - - - - - - - - - -
Forfeited (6) 6.88 (107) 6.88 (5) 4.30 (4) 3.76 (10) 1.91
Options
outstanding at
December 31, 2006 17 2.88 919 5.08 148 4.30 403 2.32 40 1.91
Options
exercisable at
December 31, 2006 17 2.88 911 5.10 148 4.30 76 3.76 40 1.91
Weighted-average
fair value of
options granted
during: 2004 - $2.63 $2.46 - -
2005 - $3.84 $3.85 $3.76 -
2006 - - - $1.99 $1.91
62
Total options available for grant were 257 and 667 at December 31, 2006 and
December 31, 2005, respectively.
Options Outstanding Options Exercisable
------------------------ ----------------------
------------------------ ----------------------
Number Weighted- Weighted- Weighted-
Range of of Options Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices ($) at 12/31/06 Contractual Price ($) at 12/31/06 Price($)
Life
--------------------------------------------------------------------------------
1994 Plan:
2.88 17 4.1 2.88 17 2.88
1995 Plan:
2.88 to 7.38 919 3.6 5.08 911 5.10
1996 Plan:
2.05 to 7.03 148 5.1 4.30 148 4.30
2005 Employee Plan
1.91 to 3.84 403 9.1 2.32 76 3.76
2005 Director Plan
1.91 40 9.2 1.91 40 1.91
The exercisable options under each of the Plans at December 31, 2006 had an
intrinsic value of $0.
Note 12 - Income Taxes
The following summarizes the provision (benefit) for income taxes:
Year Ended December 31,
----------------------------------
2006 2005 2004
----------------------------------
Current: $-- $-- $--
Federal............................
State and local.................... -- -- --
----------- ----------- ------------
-- -- --
----------- ----------- ------------
Deferred:
Federal............................ (427) (1,606) (19)
State and local.................... (75) (353) (4)
----------- ----------- ------------
(502) (1,959) (23)
----------- ----------- ------------
Valuation allowance................... 502 1,959 2,849
----------- ----------- ------------
Provision (benefit) for income taxes.. $ - $ - $2,826
=========== =========== ============
63
The provision (benefit) for income taxes differs from the amounts computed by
applying the applicable Federal statutory rates due to the following:
Year Ended December 31,
---------------------------------------------
2006 2005 2004
------------ ------------ ------------
Provision (benefit) for Federal
income taxes at the statutory
rate..... $130 $(1,824) $(101)
State and local income
taxes, net of Federal benefit.... 18 (248) (14)
Adjustment of prior year’s accruals. - - -
Other, net..........................(650) 113 92
Change in valuation allowance....... 502 $1,959 2,849
------------ ------------ ------------
Provision (benefit) for income
taxes........................... $ -- $ -- $2,826
============ ============ ============
Significant components of the Company’s deferred tax assets and liabilities are
as follows:
December 31,
-----------------------------
2006 2005
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts...... $248 $328
Inventories.......................... 2,916 3,635
Other................................ - 128
Goodwill............................. 2,258 2,624
Net operating loss carry forward..... 3,275 1,532
----------- -----------
Total deferred tax assets.......... 8,697 8,247
----------- -----------
Deferred tax liabilities:
Depreciation......................... (3) (55)
----------- -----------
Total deferred tax liabilities..... (3) (55)
----------- -----------
8,694 8,192
Valuation allowance..................... (6,338) (5,836)
----------- -----------
Net..................................... $2,356 $2,356
=========== ===========
The Company has recorded $568 and $1,788 of short term and long term
deferred tax assets, respectively, as of December 31, 2006, since it projects
recovering these benefits over the next three to five years. The Company also
considered various tax strategies in arriving at the carrying amount of deferred
tax assets. A valuation allowance has been recorded against the balance of the
long-term deferred tax benefits since management does not believe the
realization of these benefits is more likely than not. As of December 31, 2006,
the Company had a federal net operating loss carry forward of approximately
$8,619, which will begin to expire in the year 2023.
Note 13 - Discontinued Operations and Sale of BTT (Subscribers and passings in
whole numbers)
In June 2002 the Company acquired its initial 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.
64
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
On December 15, 2006, Blonder Tongue Laboratories, Inc. (the "Company") and
its wholly-owned subsidiary, BDR Broadband, LLC, a Delaware limited liability
company ("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. BDR owns
rights-of-entry to provide video and high-speed data services to approximately
25 multi-dwelling unit communities in the State of Texas. The sale was completed
on December 15, 2006.
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, was deposited into an escrow account, and is
included as part of the prepaid and other current assets, 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.
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 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.
As a result of the above, the Company reflected the sale of BDR as a
discontinued operation. Components of the loss from discontinued operations are
as follows:
Year Ended December 31,
---------------------------------------------
2006 2005 2004
------------ ------------ ------------
Net Sales.................... $ 1,846 $ 1,738 $ 1,450
Cost of goods sold........... 624 765 527
------------ ------------ ------------
Gross profit........ 1,222 973 923
------------ ------------ ------------
General and administrative... 1,722 1,520 1,381
Other income................. - 3 79
------------ ------------ ------------
Net loss..................... $ (500) $ (544) $ (379)
============ ============ ============
In March, 2003, the Company entered into a series of agreements, pursuant
to which the Company acquired a 20% minority interest in NetLinc Communications,
LLC ("NetLinc") and a 35% minority interest in Blonder Tongue Telephone, LLC
("BTT") (to which the Company had licensed its name). The aggregate purchase
price consisted of (i) up to $3,500 payable over a minimum of two years, plus
(ii) 500 shares of the Company’s common stock. NetLinc owns patents, proprietary
technology and know-how for certain telephony products that allow Competitive
65
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Local Exchange Carriers ("CLECs") to competitively provide voice service to
MDUs. Certain distributorship agreements were also concurrently 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.
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.
As a result of NetLinc’s inability to retain a contract manufacturer to
manufacture and supply the products in a timely and consistent manner in
accordance with the requisite specifications, in September, 2003 the parties
agreed to restructure the terms of their business arrangement entered into in
March, 2003. The restructured business arrangement was accomplished by amending
certain of the agreements previously entered into and entering into certain new
agreements. Some of the principal terms of the restructured arrangement include
increasing the Company’s economic ownership in NetLinc from 20% to 50% and in
BTT from 35% to 50%, all at no additional cost to the Company. The cash portion
of the purchase price in the venture was decreased from $3,500 to $1,167 and the
then outstanding balance of $342 was paid in installments of $50 per week until
it was paid in full in October, 2003. 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) have been pledged to the Company as collateral. Under the restructured
arrangement, the Company can 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. 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 distributorship agreements,
although 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 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"). The 500 shares of the acquired Company common stock was
recorded as treasury stock at the carrying value ($886) of the Company’s
investment in Blonder Tongue Telephone LLC on the date of the Share Exchange
Agreement. Under the terms of the Share Exchange Agreement, the parties also
agreed to the following:
o the Company granted BTT a non-transferable equipment purchase credit in the
aggregate amount of $400 (subject to certain off-sets as set forth in the
Share Exchange Agreement); two-thirds (2/3rds) of which ($270) must be used
solely for the purchase of telephony equipment and the remaining one-third
(1/3rd) of which ($130) may be used for either video/data equipment or
telephony equipment;
o the equipment credit would have expired automatically on December 31, 2006,
but it was exercised in full by September 30, 2006;
o certain non-material agreements were terminated, including the Amended and
Restated Operating Agreement of BTT among the Company, BTT and remaining
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
66
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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.
The audited financial statements of Blonder Tongue Telephone, LLC are
included as Exhibit 99.1 to this Form 10-K.
The following is a summary of the condensed financial statements of BTT:
June 30, December 31,
2006 2005
-------------- -----------------
Balance Sheet
Current assets....................... $ 13 $ 23
Non-current assets................... 401 31
Investment in Blonder Tongue Common
Stock................................ - 975
-------------- -----------------
Total................................... 414 $ 1,029
============== =================
Current liabilities.................. 10 19
Payable to affiliates................ 166 42
-------------- -----------------
Total liabilities....................... 176 61
============== =================
Net worth............................... 238 968
============== =================
Total liabilities and net worth......... $ 414 $ 1,029
============== =================
June 30, December 31,
2006 2005
-------------- -----------------
Statement of Operations
Revenue.............................. $ 53 $ 205
Expenses............................. 209 640
-------------- -----------------
Net loss......................... $ (156) $(435)
-------------- -----------------
June 30, December 31,
2006 2005
-------------- -----------------
Cash Flows
Net cash used in operating activities $ (145) $ (444)
Net cash provided by (used in)
investing activities................. 30 25
Net cash provided by financing
activities........................... 114 420
-------------- -----------------
Net decrease/increase in cash.... (1) $ 1
============== =================
Note 14 - Other Income
During September 2002, the Company sold inventory at a cost of
approximately $1,447 to a private cable operator for approximately $1,929 in
exchange for which the Company received notes receivable in the principal amount
of approximately $1,929. The notes were payable by the customer in 48 monthly
principal and interest (at 11.5%) installments of approximately $51 commencing
January 1, 2003. The customer’s payment obligations under the notes were
collateralized by purchase money liens on the inventory sold and blanket second
liens on all other assets of the customer. The Company has recorded the notes
receivable at the inventory cost and did not recognize any revenue or gross
profit on the transaction until a substantial amount of the cost had been
recovered, and collectibility was assured. The Company collected $612 during
2003 and recorded the receipts as a reduction in the note receivable balance.
The balance of the notes was collected during 2004 and approximately $482 of
gross margin and $356 of interest income was recognized.
67
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
During September 2006, the Company’s wholly owned subsidiary, Blonder
Tongue investment Company, signed an agreement to sell selected patents to
Moonbeam, LLC, for net proceeds of approximately $2,000. In connection with the
sale, the Company retained a non-exclusive, royalty free, worldwide license to
continue to develop, manufacture, use, sell, distribute and otherwise exploit
all of the Company’s products currently protected under there patents. The
Company recognized a $386 gain in connection with the sale which is included in
other income for the year ended December 31, 2006.
Note 15 - Quarterly Financial Information - Unaudited
2006 Quarters 2005 Quarters
First Second Third Fourth First Second Third Fourth
------------------------------------------------------------
Net sales............... $9,957 $9,522 9,088 $7,208 $8,852 $8,962 $9,238 $7,678
Gross profit (loss) .... 3,298 3,012 3,438 2,618 2,303 2,607 (283) 2,704
Earnings (loss) from
continuing operations
after income taxes....... 317 (332) 345 (426) (782) (524) (3,372) (278)
Discontinued
operations:
Loss from
discontinued
operations
(net of tax)............ (125) (72) (170) (133) (108) (117) (144) (175)
Gain on disposal of
subsidiary.............. - - - 938 - - - -
Net earnings (loss) ..... 192 (404) 175 379 (890) (641) (3,516) (453)
Basic and diluted
earnings (loss)
per share from
continuing operations.... 0.04 (0.04) 0.05 (0.06) (0.10) (0.07) (0.42) (0.03)
Basic and diluted
earnings (loss)
per share from
discontinued operations.. (0.02) - (0.03) (0.01) (0.01) (0.01) (0.02) (0.03)
Basic and diluted
gain per share
on disposal............. - - - 0.12 - - - -
Basic and diluted
earnings (loss)
per share.............. 0.02 (0.04) 0.02 0.05 (0.11) (0.08) (0.44) (0.06)
The above amounts differ from amounts previously reported due to the Company
reflecting the sale of BDR Broadband, LLC as a discontinued operation.
Note 16 Subsequent Event
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 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
68
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
forth in the Purchase Agreement. A portion of the purchase price ($490) was
deposited into a escrow account, pursuant to an Escrow Agreement dated December
15, 2006, among the Company, DirecPath and U.S. Bank National Association, to
securethe Company’s indemnification obligations under the Purchase Agreement
(see Note 13).
On March 15, 2007, the Company received a Final Purchase Price Certificate (the
"Certificate") as defined under the Purchase Agreement. The Certificate states
various purchase price adjustments aggregating approximately $970 are due to
DirecPath. The Company is in the early stages of evaluating the claims outlined
in the Certificate. At this time, the Company does not believe the claims have
any merit and intends to file a Disputed Items Notice within the sixty days
period allowed under the Purchase Agreement.
69
Report of Independent Registered Public Accounting Firm
To the Audit Committee of
the Board of Directors and Stockholders of
Blonder Tongue Laboratories, Inc.
Old Bridge, New Jersey
The audits referred to in our report dated February 23, 2007, except for Note 16
as to which the date is March 29, 2007, relating to the consolidated financial
statements of Blonder Tongue Laboratories, Inc. and Subsidiaries, which is
contained in Item 8 of this Form 10-K, included the audits of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company’s management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audits.
In our opinion, such financial statement schedule presents fairly, in
all material respects, the information set forth therein.
/s/ Marcum and Kliegman, LLP
Marcum and Kliegman, LLP
New York, New York
February 23, 2007, except for Note 16 as to
which date is March 29, 2007
70
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
The audit referred to in our report dated April 12, 2005 (except for Note 13 for
which date is March 27, 2007), relating to the consolidated financial statements
of Blonder Tongue Laboratories, Inc. and subsidiaries, which is contained in
Item 8 of this Form 10-K, included the audit of the financial statement schedule
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company’s management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
April 12, 2005, except for Note 13
for which date is March 27, 2007
71
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 2006, 2005 and 2004
(Dollars in thousands)
Column A Column B Column C Column D Column E
Additions
Balance at Charged
Allowance for Doubtful Beginning Charged to Other Deductions Balance at
Accounts of Year to Expenses Accounts Write-Offs End of Year
------------------------ ---------- ----------- -------- ---------- ------------
Year ended December 31, 2006: $863 $110 - ($321)(1) $652
Year ended December 31, 2005: $607 $256 - -(1) $863
Year ended December 31, 2004: $1,192 $107 - ($692)(1) $607
Deferred Tax Asset
Valuation Allowance
---------------------
Year ended December 31, 2006: $5,836 $415 - - $6,251
Year ended December 31, 2005: $3,877 $1,959 - - $5,836
Year ended December 31, 2004: $1,028 $2,849 - - $3,877
Inventory Reserve
-------------------
Year ended December 31, 2006: $8,716 $114 - ($2,000)(2) $6,830
Year ended December 31, 2005: $4,344 $4,372 - - $8,716
Year ended December 31, 2004: $3,472 $872 - - $4,344
(1) Write off of uncollectible accounts.
(2) Disposal of fully reserved inventory.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 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
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/S/ JAMES A. LUKSCH Director and Chief Executive Officer March 30, 2007
James A. Luksch (Principal Executive Officer)
/S/ ERIC SKOLNIK Senior Vice President and Chief March 30, 2007
Eric Skolnik Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/S/ ROBERT J. PALLE, JR. Director, President, Chief March 30, 2007
Robert J. Palle, Jr. Operating Officer and Secretary
/S/ JOHN E. DWIGHT Director March 30, 2007
John E. Dwight
/S/ JAMES F. WILLIAMS Director March 30, 2007
James F. Williams
/S/ ROBERT B. MAYER Director March 30, 2007
Robert B. Mayer
/S/ GARY P. SCHARMETT Director March 30, 2007
Gary P. Scharmett
/S/ ROBERT E. HEATON Director March 30, 2007
Robert E. Heaton
73