SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
|
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 | |
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005, 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
(Exact name of registrant as specified in its charter)
Registrant’sDelaware52-1611421
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Jake Brown Road, Old Bridge, New Jersey08857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 679-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No___
X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _X_
X Number of shares of common stock, par value $.001, outstanding as of November 15, 2004: 8,002,406.
May 13,
2005: 8,015,406
The Exhibit Index appears on page 18.
PART I –- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(In
(In thousands)
| (unaudited) | ||||||
| Sept. 30, | Dec. 31, | |||||
| 2004 | 2003* | |||||
| Assets (Note 4) | ||||||
| Current assets: | ||||||
| Cash | $ | 146 | $ | 195 | ||
| Accounts receivable, net of allowance for doubtful | ||||||
| accounts of $519 and $1,192 respectively | 5,494 | 5,682 | ||||
| Inventories (Note 3) | 9,239 | 9,482 | ||||
| Notes receivable (Note 6) | 9 | 627 | ||||
| Income tax receivable | 319 | 679 | ||||
| Prepaid pension benefit costs | 631 | 631 | ||||
| Prepaid and other current assets | 559 | 695 | ||||
| Deferred income taxes | 960 | 960 | ||||
| Total current assets | 17,357 | 18,951 | ||||
| Inventories non-current (net) (Note 3) | 9,365 | 11,106 | ||||
| Notes receivable (Note 6) | -- | 216 | ||||
| Property, plant and equipment, net of accumulated | ||||||
| depreciation and amortization | 6,226 | 6,652 | ||||
| Patents, net | 2,337 | 2,649 | ||||
| Rights-of-Entry, net (Note 5) | 1,035 | 1,300 | ||||
| Other assets, net | 1,132 | 851 | ||||
| Investment in Blonder Tongue Telephone LLC (Note 5) | 1,916 | 2,043 | ||||
| Deferred income taxes | 4,222 | 4,222 | ||||
| $ | 43,590 | $ | 47,990 | |||
| Liabilities and Stockholders’ Equity | ||||||
| Current liabilities: | ||||||
| Current portion of long-term debt (Note 4) | $ | 6,048 | $ | 3,201 | ||
| Accounts payable | 1,259 | 2,731 | ||||
| Accrued compensation | 1,022 | 560 | ||||
| Other accrued expenses (Note 7) | 415 | 868 | ||||
| Total current liabilities | 8,744 | 7,360 | ||||
| Long-term debt (Note 4) | 3,696 | 9,745 | ||||
| Stockholders’ equity: | ||||||
| Preferred stock, $.001 par value; authorized 5,000 shares; | ||||||
| no shares outstanding | -- | -- | ||||
| Common stock, $.001 par value; authorized 25,000 shares, 8,452 and 8,445 | ||||||
| shares issued | 8 | 8 | ||||
| Paid-in capital | 24,165 | 24,145 | ||||
| Retained earnings | 12,432 | 12,187 | ||||
| Treasury stock, at cost, 449 shares | (5,455 | ) | (5,455 | ) | ||
| Total stockholders’ equity | 31,150 | 30,885 | ||||
| $ | 43,590 | $ | 47,990 | |||
| *See Note 3 regarding reclassifications in amounts previously reported | ||||||
(unaudited) March 31, December 31, 20052004 Assets (Note 5) Current assets: Cash....................................... $246 $70 Accounts receivable, net of allowance for doubtful accounts of $548 and $607 respectively........................... 5,341 3,693 Inventories (Note 4)....................... 9,289 10,309 Income tax receivable...................... 322 320 Prepaid and other current assets........... 741 654 Deferred income taxes ..................... 960 960 -------------- ---------------- Total current assets................... 16,899 16,006 Inventories, non-current (net) (Note 4)......... 8,552 8,968 Property, plant and equipment, net of accumulated depreciation and amortization................................ 6,086 6,214 Patents, net ................................... 2,145 2,240 Rights-of-Entry, net (Note 6)................... 915 977 Other assets, net............................... 925 925 Investment in Blonder Tongue Telephone LLC (Note 6)...................... 1,336 1,430 Deferred income taxes........................... 1,396 1,396 -------------- ---------------- $38,254 $38,156 ============== ================ Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt (Note 5).................. $2,293 $2,683 Accounts payable........................... 1,510 1,497 Accrued compensation....................... 1,095 639 Accrued benefit liability.................. 314 314 Other accrued expenses (Note 8)............ 301 270 -------------- ---------------- Total current liabilities.............. 5,513 5,403 -------------- ---------------- Long-term debt (Note 5)......................... 6,708 5,830 Stockholders' equity: Preferred stock, $.001 par value; authorized 5,000 shares; no shares outstanding..................... - - Common stock, $.001 par value; authorized 25,000 shares, 8,445 shares Issued......................... 8 8 Paid-in capital............................ 24,202 24,202 Retained earnings.......................... 8,175 9,065 Accumulated other comprehensive loss....... (897) (897) Treasury stock, at cost, 449 shares........ (5,455) (5,455) -------------- ---------------- Total stockholders' equity............. 26,033 26,923 -------------- ---------------- $38,254 $38,156 ============== ================ See accompanying notes to consolidated financial statements.
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(In
(In thousands, except per share amounts)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Net sales | $ | 11,215 | $ | 9,195 | $ | 30,661 | $ | 26,331 | ||||
| Cost of goods sold | 7,635 | 6,230 | 21,060 | 18,532 | ||||||||
| Gross profit (Note 6) | 3,580 | 2,965 | 9,601 | 7,799 | ||||||||
| Operating expenses: | ||||||||||||
| Selling | 1,047 | 947 | 3,185 | 2,898 | ||||||||
| General and administrative | 1,488 | 1,397 | 4,444 | 4,568 | ||||||||
| Research and development | 385 | 433 | 1,187 | 1,449 | ||||||||
| 2,920 | 2,777 | 8,816 | 8,915 | |||||||||
| Earnings (loss) from operations | 660 | 188 | 785 | (1,116 | ) | |||||||
| Other Expense: | ||||||||||||
| Interest expense | (215 | ) | (272 | ) | (713 | ) | (827 | ) | ||||
| Equity in loss of Blonder Tongue | ||||||||||||
| Telephone, LLC | (126 | ) | -- | (126 | ) | -- | ||||||
| Interest and other income (Note 6) | 87 | -- | 299 | -- | ||||||||
| (254 | ) | (272 | ) | (540 | ) | (827 | ) | |||||
| Earnings (loss) before income taxes | 406 | (84 | ) | 245 | (1,943 | ) | ||||||
| Provision (benefit) for income taxes | -- | (19 | ) | -- | (730 | ) | ||||||
| Net (loss) earnings | $ | 406 | $ | (65 | ) | $ | 245 | $ | (1,213 | ) | ||
| Basic earnings (loss) per share | $ | 0.05 | $ | (0.01 | ) | $ | 0.03 | $ | (0.16 | ) | ||
| Basic weighted average shares outstanding | 8,002 | 7,577 | 7,995 | 7,539 | ||||||||
| Diluted earnings (loss) per share | $ | 0.05 | $ | (0.01 | ) | $ | 0.03 | $ | (0.16 | ) | ||
| Diluted weighted average shares outstanding | 8,026 | 7,577 | 8,033 | 7,539 | ||||||||
See accompanying notes to consolidated financial statement
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(unaudited)
| Nine Months Ended September 30, | |||||||
| 2004 | 2003 | ||||||
| Cash Flows From Operating Activities: | |||||||
| Net income (loss) | $ | 245 | $ | (1,213 | ) | ||
| Adjustments to reconcile net income (loss) to cash | |||||||
| provided by operating activities: | |||||||
| Equity in loss from Blonder Tongue Telephone, LLC | 127 | -- | |||||
| Depreciation | 789 | 872 | |||||
| Amortization | 517 | 564 | |||||
| Gain on sale of rights of entry | (54 | ) | -- | ||||
| Allowance for doubtful accounts | 2 | 277 | |||||
| Provision for inventory reserves | 300 | 39 | |||||
| Deferred income taxes | -- | 41 | |||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | 186 | 841 | |||||
| Inventories | 1,684 | 2,532 | |||||
| Prepaid and other current assets | (65 | ) | (170 | ) | |||
| Other assets | (80 | ) | 37 | ||||
| Income taxes | 360 | (626 | ) | ||||
| Accounts payable, accrued compensation and other accrued expenses | (1,463 | ) | 1,047 | ||||
| Net cash provided by operating activities | 2,548 | 4,241 | |||||
| Cash Flows From Investing Activities: | |||||||
| Capital expenditures | (388 | ) | (878 | ) | |||
| Acquisition of rights-of-entry | (12 | ) | (165 | ) | |||
| Proceeds from sale of rights of entry | 151 | -- | |||||
| Collection of note receivable | 834 | 477 | |||||
| Investment in Blonder Tongue Telephone, LLC | -- | (975 | ) | ||||
| Net cash provided by (used in) investing activities | 585 | (1,541 | ) | ||||
| Cash Flows From Financing Activities: | |||||||
| Borrowings of debt | 10,400 | 8,186 | |||||
| Repayments of debt | (13,602 | ) | (10,982 | ) | |||
| Proceeds from exercise of stock options | 20 | -- | |||||
| Acquisition of treasury stock | -- | (116 | ) | ||||
| Net cash used in financing activities | (3,182 | ) | (2,912 | ) | |||
| Net decrease in cash | (49 | ) | (212 | ) | |||
| Cash, beginning of period | 195 | 258 | |||||
| Cash, end of period | $ | 146 | $ | 46 | |||
| Supplemental Cash Flow Information: | |||||||
| Cash paid for interest | $ | 689 | $ | 753 | |||
| Cash paid for income taxes | $ | -- | $ | -- | |||
| Non Cash Inventory and Financing Activities: | |||||||
| Investment in Blonder Tongue Telephone LLC using treasury stock | $ | -- | $ | 1,030 | |||
Three Months Ended March 31, -------------------------------------- 2005 2004 ---------------- ---------------- Net sales............................. $9,269 $8,529 Cost of goods sold.................... 6,742 5,588 ---------------- ---------------- Gross profit...................... 2,527 2,941 ---------------- ---------------- Operating expenses: Selling........................... 1,066 1,045 General and administrative........ 1,653 1,607 Research and development.......... 411 411 ---------------- ---------------- 3,130 3,063 ---------------- ---------------- Loss from operations.................. (603) (122) ---------------- ---------------- Other expense Interest expense (net)............ (193) (275) Equity in loss of Blonder Tongue Telephone, LLC......... (94) - ---------------- ---------------- (287) (275) Loss before income taxes.............. (890) (397) Benefit for income taxes.............. - - ---------------- ---------------- Net loss.............................. $(890) $(397) ================ ================ Basic and diluted loss per share...... $(0.11) $(0.05) ================ ================ Basic and diluted weighted average shares outstanding............ 8,015 7,997 ================ ================ See accompanying notes to consolidated financial statements.
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
2005 2004
---------- ----------
Cash Flows From Operating Activities:
Net loss........................................ $(890) $(397)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation.................................. 253 264
Amortization.................................. 160 186
Allowance for doubtful accounts............... - 90
Provision for inventory reserves.............. 603 -
Equity in loss from Blonder Tongue
Telephone, LLC.............................. 94 -
Changes in operating assets and liabilities:
Accounts receivable......................... (1,648) -
Inventories................................. 833 (877)
Other current assets........................ (87) (305)
Other assets................................ - 43
Income taxes................................ (2) 372
Accounts payable, accrued compensation and
accrued expenses.......................... 500 1,462
----------- ------------
Net cash provided by (used in) operating
activities................................ (184) 838
----------- ------------
Cash Flows From Investing Activities:
Capital expenditures............................ (125) (97)
Collection of note receivable................... - 389
Acquisition of rights-of-entry.................. (3) -
----------- ------------
Net cash provided by (used in) investing
activities................................... (128) 292
----------- ------------
Cash Flows From Financing Activities:
Borrowings of long-term debt.................... 3,640 2,945
Repayments of long-term debt.................... (3,152) (4,177)
Proceeds from exercise of stock options......... - 20
----------- ------------
Net cash provided by (used in) financing
activities.............................. 488 (1,212)
----------- ------------
Net increase (decrease) in cash...................... 176 (82)
Cash, beginning of period............................ 70 195
----------- ------------
Cash, end of period.................................. $246 $113
=========== ============
Supplemental Cash Flow Information:
Cash paid for interest.......................... $140 $278
Cash paid for income taxes...................... $ 2 -
=========== ============
See accompanying notes to consolidated financial statements.
4
(In
(In thousands)
(unaudited)
Note 1 - Company and Basis of Presentation
Blonder Tongue Laboratories, Inc. (the “Company”"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. Significant intercompany accounts and transactions have been
eliminated in consolidation.
The results for the thirdfirst quarter and nine months of 20042005 are not necessarily indicative of
the results to be expected for the full fiscal year and have not been audited.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting primarily of normal recurring
accruals, necessary for a fair statement of the results of operations for the
period presented and the consolidated balance sheet at September 30, 2004.March 31, 2005. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the SEC rules and regulations. These financial
statements should be read in conjunction with the financial statements and notes
thereto that were included in the Company’sCompany's latest annual report on Form 10-K/A10-K
for the year ended December 31, 2003.
2004.
Note 2 - New Accounting Pronouncements
In December, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment." This statement is a revision to SFAS No.
123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." This statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, primarily focusing on the accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. Companies will be required to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). The cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award, which requisite service period will usually
be the vesting period. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models. If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. SFAS No. 123R will be effective for fiscal years beginning after
June 15, 2005 and allows for several alternative transition methods.
Accordingly, the Company will adopt SFAS No. 123R in its first quarter of fiscal
2006. The Company reclassifiedis currently evaluating the provisions of SFAS No. 123R and
has not yet determined the impact that this Statement will have on its results
of operations or financial position.
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 Company
does not believe adoption of SFAS No. 151 will have a material effect on its
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. Although FSP FAS No. 109-1 was
effective upon issuance, the Company is still evaluating the impact FSP FAS No.
109-1 will have on its consolidated financial statements.
In December, 2003, the FASB issued a revision to SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This statement
does not change the measurement or recognition aspects for pensions and other
post-retirement benefit plans; however, it does revise employers' disclosures to
5
balance sheetand for all other matters, is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
a material effect on the Company's financial position or results of operations.
In January, 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" and in December 2003, a revised
interpretation was issued (FIN No. 46, as revised). In general, a variable
interest entity ("VIE") is a corporation partnership, trust, or any other legal
structure used for business purposes that either does not have equity investors
with voting rights or has equity investors that do not provide sufficient
financial resources for the entity to reflect certain inventories, related reservessupport its activities. FIN No. 46, as
revised requires a VIE to be consolidated by a company if that company is
designated as the primary beneficiary. The interpretation applies to VIEs
created after January 31, 2003, and deferred taxfor all financial statements issued after
December 15, 2003 for VIEs in which an enterprise held a variable interest that
it acquired before February 1, 2003. The adoption of FIN No. 46, as revised, did
not have a material effect on the Company's financial position or results of
operations.
In March, 2005, the Financial Accounting Standards Board ("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 non-current (seepart 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 plans to adopt FIN 47 at the end of
its 2005 fiscal year and does not believe that the adoption will have a material
impact on its results of operations or financial position.
Note 3).
Note 2 –3 - Stock Options
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Statement of Financial Accounting Standards No. 123 (("FAS 123)123"), Accounting for
Stock-Based Compensation, requires the Company to provide pro forma information
regarding net income (loss) and net income (loss) income per common share as if
compensation cost for stock options granted under the plans, if applicable, had
been determined in accordance with the fair value based method prescribed in FAS
123. The Company does not plan to adopt the fair value based method prescribed
by FAS 123.
The Company estimates the fair value of each stock option grant by using
the Black-Scholes option-pricing model. During 2004 and 2003,model with the following weighted average
assumptions were used for grants:grants made during the three months ended March 31, 2005:
6
volatibility of 76% andvolatility at 73%, risk free
interest rate of 3.2%.
for 2005. No options were granted during the three months
ended March 31, 2004.
Under accounting provisions of FAS 123, the Company’sCompany's net loss to common
shareholders and net loss per common share would have been adjusted to the pro
forma amounts indicated below (in thousands, except per share data):
| Three Months Ended Sept. 30, | Nine Months Ended Sept. 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Net earnings (loss) as reported | $ | 406 | $ | (65 | ) | $ | 245 | $ | (1,213 | ) | ||
| Adjustment for fair value of stock options, | ||||||||||||
| net of tax | 51 | 81 | 152 | 243 | ||||||||
| Pro forma | $ | 355 | $ | (146 | ) | $ | 93 | $ | (1,456 | ) | ||
| Net earnings (loss) per share basic and | ||||||||||||
| diluted: | ||||||||||||
| As reported | $ | 0.05 | $ | (0.01 | ) | $ | 0.03 | $ | (0.16 | ) | ||
| Pro forma | $ | 0.04 | $ | (0.02 | ) | $ | 0.01 | $ | (0.19 | ) | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands)(unaudited)
Three Months Ended March 31
---------------------------
2005 2004
-------------- ---------------
Net loss as reported .................. $(890) $(397)
Adjustment for fair value of stock
options, net of tax................. 160 41
-------------- ---------------
Pro forma......................... $(1,050) $(438)
============== ===============
Net loss per share basic and diluted:
As reported....................... $(0.10) $(0.05)
============== ===============
Pro forma......................... $(0.13) $(0.06)
============== ===============
Note 3 –4 - Inventories
Inventories net of reserves are summarized as follows:
| Sept. 30, | Dec. 31, | |||||
| 2004 | 2003 | |||||
| Raw Materials | $ | 11,843 | $ | 11,379 | ||
| Work in process | 1,442 | 1,746 | ||||
| Finished Goods | 9,091 | 10,935 | ||||
| 22,376 | 24,060 | |||||
| Less current inventory | (9,239 | ) | (9,482 | ) | ||
| 13,137 | 14,578 | |||||
| Less reserve for excess inventory | (3,772 | ) | (3,472 | ) | ||
| $ | 9,365 | $ | 11,106 | |||
March 31, Dec. 31,
2005 2004
-------------- -------------
Raw Materials.................................... $10,788 $11,308
Work in process.................................. 1,297 1,698
Finished Goods................................... 10,703 10,615
-------------- -------------
22,788 23,621
Less current inventory........................... (9,289) (10,309)
-------------- -------------
13,499 13,312
Less Reserve for excess inventory................ (4,947) (4,344)
-------------- -------------
$8,552 $8,968
============== =============
The Company periodically analyzes anticipated product sales based on
historical results, current backlog and marketing plans. Based on these
analyses, and a change in market factors in 2003, the Company determinedanticipates that as of December 31, 2003 certain products wouldwill 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.
Accordingly, $11,106 has been reclassified from current assets to non-current and current deferred income tax assets of $1,390 (related to the reserve for excess inventory) have also been reclassified to non-current as of December 31, 2003.
Over 60% of the non-current inventories are comprisedcomposed of raw materials. The
Company has established a program to use interchangeable parts in its various
product offerings and to modify certain of its finished goods to better match
customer demands. In addition the Company has instituted additional marketing
programs to dispose of the slower moving inventories.
The Company continually analyzes its slow-moving, excess and obsolete inventories. Based on historical and projected sales volumes and anticipated selling prices, the Company establishes reserves. 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. The Company believes reserves are adequate and inventories are reflected at net realizable value.
7
4 –5 - Debt
On March 20, 2002 the Company entered into a credit agreement with Commerce
Bank, N.A. for a $19,500 credit facility, originally comprised of (i) a $7,000 revolving
line of credit under which funds may be borrowed at LIBOR, plus a margin ranging
from 1.75% to 2.50%, in each case depending on the calculation of certain
financial covenants, with a floor of 5% through March 19, 2003, (ii) a $9,000
term loan which bore interest at a rate of 6.75% through September 30, 2002, and
thereafter at a fixed rate ranging from 6.50% to 7.25% to reset quarterly
depending on the calculation of certain financial covenants and (iii) a $3,500
mortgage loan bearing interest at 7.5%. Borrowings under the revolving line of
credit are limited to certain percentages of eligible accounts receivable and
inventory, as defined in the credit agreement. The credit facility is
collateralized by a security interest in all of the Company’sCompany's assets. The
agreement also contains restrictions that require the Company to maintain
certain financial ratios as well as restrictions on the payment of cash
dividends. The initial maturity date of the line of credit with Commerce Bank
was March 20, 2004. The term loan required equal monthly principal payments of
$187 and matures on April 1, 2006. The mortgage loan requires equal monthly
principal payments of $19 and matures on April 1, 2017. The mortgage loan is
callable after five years at the lender’slender's option.
In November, 2003, the Company's credit agreement with Commerce Bank was
amended to modify the interest rate and amortization schedule for certain of the
loans thereunder, as well as to modify one of the financial covenants. Beginning
November 1, 2003, the revolving line of credit began to accruebore interest at the prime rate
plus 1.5%, with a floor of 5.5% (6.0% at September 30, 2004), and the term loan began to accrue interest at a
fixed rate of 7.5%. Beginning December 1, 2003, the term loan requires equal
monthly principal payments of $193 plus interest with a final payment on April
1, 2006 of all remaining unpaid principal and interest.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands)(unaudited)
At March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003,
the Company was unable to meet one of its financial covenants required under its
credit agreement with Commerce Bank, which non-compliance was waived by the Bank
effective as of each such date.
In March, 2004, the Company's credit agreement with Commerce Bank was
amended to (i) extend the maturity date of the line of credit until April 1,
2005, (ii) reduce the maximum amount that may be borrowed under the line of
credit to $6,000, (iii) suspend the applicability of the cash flow coverage
ratio covenant until March 31, 2005, (iv) impose a new financial covenant
requiring the Company to achieve certain levels of consolidated pre-tax income
on a quarterly basis commencing with the fiscal quarter ended March 31, 2004,
and (v) require that the Company make a prepayment against its outstanding term
loan to the Bank equal to 100% of the amount of any prepayment received by the
Company on its outstanding note receivable from a customer, up to a maximum
amount of $500.
The full $500At December 31, 2004, the Company was paid during the six months ended June 30, 2004.
The Company is in compliance with all suchunable to meet one of its financial
covenants required under its credit agreement with Commerce Bank, which
non-compliance was waived by the Bank effective as amended. The Company anticipates that it will either conclude negotiationsof such date.
In March, 2005, the Company's credit agreement with its bank and obtain a renewalCommerce Bank was amended to
(i) extend the maturity date of its currentthe line of credit facilities, or enter into new credit facilities with another bank prior tountil April 1, 2005.
At September 30, 2004, there was $3,331, $3,013 and $2,936 outstanding under2006, (ii)
provide for a interest rate on the revolving line of credit term loanof the prime rate
plus 2.0%, with a floor of 5.5% (7.75% at March 31, 2005), (iii) waive the
applicability of consolidated pre-tax income for the quarter ended December 31,
2004, (iv) suspend the applicability of the cash flow coverage ratio covenant
until March 31, 2006, and mortgage loan, respectively.
(v) impose a financial covenant requiring the Company
to achieve certain levels of consolidated pre-tax income on a quarterly basis
commencing with the fiscal quarter ended March 31, 2005.
At March 31, 2005, the Company was unable to meet one of its financial
covenants required under its credit agreement with Commerce Bank, which
non-compliance was waived by the Bank effective as of such date.
Note 5 – Acquisition6 - Cable Systems and Telephone Products (Subscribers and passings in whole
numbers)
During June, 2002, the Company formed a venture with Priority Systems, LLC
and Paradigm Capital Investments, LLC for the purpose of acquiring the
rights-of-entry for certain multiple dwelling unit (“MDU”("MDU") cable television
systems (the “Systems”"Systems") owned by affiliates of Verizon Communications, Inc. The
8
(“("BDR Broadband”Broadband"), 90% of the outstanding
capital stock of which is owned by the Company, acquired the Systems, which are
comprised of approximately 3,070 existing MDU cable television subscribers and
approximately 7,520 passings. BDR Broadband paid approximately $1,880 for the
Systems, subject to adjustment, which constitutes a purchase price of approximately $.575 per
subscriber. The final closing date for the transaction was on October 1, 2002.
The Systems were cash flow positive beginning in the first year. To date, the
Systems have been upgraded with approximately $904$1,348 of interdiction and other
products of the Company.Company and, during 2004, two of the Systems located outside the
region where the remaining Systems are located, were sold. It is planned that
the Systems will be upgraded with approximately $500$400 of additional interdiction
and other products of the Company over the course of operation. During July,
2003, the Company purchased the 10% interest in BDR Broadband that had been
originally owned by Paradigm Capital Investments, LLC, for an aggregate purchase
price of $35, resulting in an increase in the Company’sCompany's stake in BDR Broadband
from 80% to 90%.
The purchase price was allocated $1,524 to rights-of-entry and $391 to
fixed assets. The rights-of-entry are being amortized over a five yearfive-year period.
In consideration for its majority interest in BDR Broadband, the Company advanced to BDR Broadband $250, which was paid to the sellers as a down payment against the final purchase price for the Systems. The Company also agreed to guaranty payment of the aggregate purchase price for the Systems by BDR Broadband. The approximately $1,630 balance of the purchase price was paid by the Company on behalf of BDR Broadband on November 30, 2002 pursuant to the terms and in satisfaction of certain promissory notes executed by BDR Broadband in favor of the sellers.
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”("NetLinc") and a 35% minority interest in Blonder Tongue Telephone, LLC
(“BTT”("BTT") (to which the Company has 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’sCompany's common stock. NetLinc owns patents, proprietary
technology and know-how for certain telephony products that allow Competitive
Local Exchange Carriers (“CLECs”("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’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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands)(unaudited)
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’sCompany'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 has an obligation to redeem the $1,167
cash component of the purchase price to the Company via preferential
distributions of cash flow under BTT’sBTT'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 payswould pay certain future royalties to NetLinc and BTT from the sale of
these products by the Company. While the distributorship agreements among
NetLinc, BTT and the Company have not been terminated, the Company does not
anticipate purchasing products from NetLinc in the near term. NetLinc, however,
continues to own intellectual property, which may be further developed and used
in the future to manufacture and sell telephony products under the
distributorship agreements. The Company accounts for its investments in NetLinc
and BTT using the equity method.
9
6 –7 - Notes Receivable
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 arewere payable by the customer in 48 monthly
principal and interest (at 11.5%) installments of approximately $51 commencing
January 1, 2003. The customer’scustomer's payment obligations under the notes arewere
collateralized by purchase money liens on the inventory sold and blanket second
liens on all other assets of the customer. The Company recorded the notes
receivable at the inventory cost and willdid not recognize any revenue or gross
profit on the transaction until a substantial amount of the cost hashad been
recovered, and collectibility iswas assured. The Companybalances of the notes were
collected $1,355 during the first nine monthslast three quarters of 2004 and recorded $832 as a reduction in the note receivable balance, $301approximately $482 of gross
margin and $222 of interest income. The balance of the notes are expected to be collected during 2004 and an additional $181 of gross margin and $134$356 of interest income is expected to bewas recognized.
Note 7 –8 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement with a director, who is also the largest stockholder.
Under the agreement, the director provides consulting services on various
operational and financial issues and as of March 31, 2005, was paid at an annual
rate of $152 but in no event is such annual rate permitted to exceed $200. The
director also agreed to keep all Company information confidential and will not
compete directly or indirectly with the Company for the term of the agreement
and for a period of two years thereafter. The initial term of this agreement
expired on December 31, 2004 and automatically renews thereafter for successive
one-year terms (subject to termination at the end of the initial term or any
renewal term on at least 90 days' notice). This agreement automatically renewed
for a one-year extension until December 31, 2005.
As of March 31, 2005, the Chief Executive Officer was indebted to the
Company in the amount of $193, for which no interest has been charged. This
indebtedness arose from a series of cash advances, the latest of which was
advanced in February 2002 and is included in other assets at March 31, 2005 and
December 31, 2004.
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 the 2004 was $675. The Company repaid this loan in
full in July, 2004. 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 is entitled to receive from the Companyplus 25% of
the gross profit derived from the Company’sCompany's resale of such inventory, which amounts will not beinventory. During
2004, interest on the loan paid to Mr. Palle was $12. In addition, Mr. Palle was
paid $33, representing an advance payment against his share of gross profit
derived from the President untilresale of such equipment, the outstanding balancefinal amount of the indebtedness has been paid in full and a final accountingwhich will be
determined as of the transaction has been concluded.December 31, 2005. 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 becomebecomes
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. At September 30, 2004,March 31, 2005, the aggregate remaining
outstanding balance due to the President from the foregoing transactionssale of the consigned goods
was approximately $117$4 and was included in other accrued expenses.
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 BTT.Blonder Tongue Telephone, LLC
("BTT"). During September, 2003, the parties restructured the terms of their
business arrangement, which included increasing Blonder Tongue’sTongue's economic
ownership in NetLinc from 20% to 50% and in BTT from 35% to 50%, all at no
additional cost to Blonder Tongue. The cash portion of the purchase price in the
venture was decreased from $3,500 to $1,167, and was paid in full by
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In
(In thousands)
(unaudited)
the Company
to BTT in October, 2003. As the non-cash component of the purchase price, the
Company issued 500 shares of Common Stock to BTT, resulting in BTT becoming the
owner of greater than 5% of the outstanding Common Stock of the Company. The
Company will receive preferential distributions equal to the $1,167 cash
component of the purchase price from the cash flows of BTT. One-half of such
Common Stock (250 shares) has been pledged to the Company as collateral to
secure BTT’sBTT's obligation. Under the restructured arrangement, the Company pays
certain future royalties to NetLinc and BTT upon the sale of telephony products. During 2004, the total royalties to NetLinc and BTT were $5 and $36, respectively.
Through this telephony venture, BTT offers primary voice service to MDUs and the
Company offers for sale a line of telephony equipment to complement the voice
service.
ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company’sCompany's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company’sCompany's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company’sCompany's business include, but are not limited to, those matters
discussed herein in the section entitled Item 2 - Management’sManagement's Discussion and
Analysis of Financial Condition and Results of Operations. The words “believe”"believe",
“expect”"expect", “anticipate”"anticipate", “project”"project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management’smanagement's analysis only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including without limitation, the Company’sCompany's Annual Report
on Form 10-K/A10-K for the year ended December 31, 20032004 (See Item 1 –Business;- Business; Item 3
–- - Legal Proceedings; and Item 7 – Management’s- Management's Discussion and Analysis of Financial
Condition and Results of Operations)Operations; and Risk Factors).
General
The Company was incorporated in November, 1988, under the laws of Delaware
as GPS Acquisition Corp. for the purpose of acquiring the business of
Blonder-Tongue Laboratories, Inc., a New Jersey corporation which was founded in
1950 by Ben H. Tongue and Isaac S. Blonder to design, manufacture and supply a
line of electronics and systems equipment principally for the Private Cable
industry. Following the acquisition, the Company changed its name to Blonder
Tongue Laboratories, Inc. The Company completed the initial public offering of
its shares of Common Stock in December, 1995.
The Company is principally a designer, manufacturer and supplier of a
comprehensive line of electronics and systems equipment, primarily for the cable
television industry (both franchise and private cable). Over the past few years,
the Company has also introduced equipment and innovative solutions for the
high-speed transmission of data and the provision of telephony services in
multiple dwelling unit applications. The Company's products are used to acquire,
distribute and protect the broad range of communications signals carried on
fiber optic, twisted pair, coaxial cable and wireless distribution systems.
These products are sold to customers providing an array of communications
services, including television, high-speed data (Internet) and telephony, to
single family dwellings, multiple dwelling units, the lodging industry and
institutions such as hospitals, prisons, schools and marinas. The Company's
principal customers are cable system integrators (both franchise and private
cable operators, as well as contractors) that design, package, install and in
most instances operate, upgrade and maintain the systems they build.
The Company's success is due in part to management's efforts to leverage
the Company's reputation by broadening its product line to offer one-stop shop
convenience to private cable and franchise cable system integrators and to
deliver products having a high performance-to-cost ratio. The Company continues
to expand its core product lines (headend and distribution), to maintain its
ability to provide all of the electronic equipment needed to build small cable
systems and much of the equipment needed in larger systems for the most
efficient operation and highest profitability in high density applications.
In March, 1998, the Company acquired all of the assets and technology
rights, including the SMI Interdiction product line, of the interdiction
business of Scientific-Atlanta, Inc. The Company is utilizing the SMI
Interdiction product line acquired from Scientific-Atlanta, which has been
engineered primarily to serve the franchise cable market, as a supplement to the
Company's VideoMask(TM)Interdiction products, which are primarily focused on the
private cable market.
12
“Systems”"Systems") owned by affiliates of Verizon Communications, Inc. The venture
entity, BDR Broadband, 90% of the outstanding capital stock of which is owned by
the Company, acquired the Systems, which are comprised of approximately 3,070
existing MDU cable television subscribers and approximately 7,520 passings. BDR
Broadband paid approximately $1,880,000 for the Systems, subject to adjustment,
which constitutes a purchase price of $575 per subscriber. The final closing
date for the transaction was on October 1, 2002. The Systems were cash flow
positive beginning in the first year. To date, the Systems have been upgraded
with approximately $890,000$1,348 of interdiction and other products of the Company.Company and,
during 2004, two of the Systems located outside the region where the remaining
Systems are located, were sold. It is planned that the Systems will be upgraded
with approximately $500,000$400,000 of additional interdiction and other products of the
Company over the course of operation. During July, 2003, the Company purchased
the 10% interest in BDR Broadband that had been originally owned by Paradigm
Capital Investments, LLC, for an aggregate purchase price of $35,000, resulting
in an increase in the Company’sCompany's stake in BDR Broadband from 80% to 90%.
In consideration for its majority interest in BDR Broadband, the Company
advanced to BDR Broadband $250,000, which was paid to the sellers as a down
payment against the final purchase price for the Systems. The Company also
agreed to guaranty payment of the aggregate purchase price for the Systems by
BDR Broadband. The approximately $1,630,000 balance of the purchase price was
paid by the Company on behalf of BDR Broadband on November 30, 2002, pursuant to
the terms and in satisfaction of certain promissory notes (the “Seller Notes”"Seller Notes")
executed by BDR Broadband in favor of the sellers.
The Company believes that similarthe model it devised for acquiring and operating
the Systems has been successful and can be replicated for other transactions.
The Company also believes that opportunities currently exist to acquire
additional rights-of-entry for multiple dwelling unit cable television,
systems at historically low prices.high-speed data and/or telephony systems. The Company also believesis seeking and is
presently negotiating several such opportunities, although there is no assurance
that the model it devised for acquiring and operating the SystemsCompany will be successful and can be replicated for other transactions with the same or new venture partners. Accordingly, the Company is currently seeking and assessing various opportunities to acquire additional rights-of-entry via venture arrangements with third parties that would market and operate the systems. As of the date hereof, however, the Company does not have any binding commitments or agreements for any such acquisitions. Moreover, even if attractive opportunities arise,in consummating these transactions. In
addition, the Company may need financing to acquire the additional
rights-of-entry, for such cable systems. Given thatand financing may not be available on acceptable terms or at
all, the Company may be unable to pursue these opportunities.
all.
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”("NetLinc") and a 35% minority interest in Blonder Tongue Telephone, LLC
(“BTT”("BTT") (to which the Company has licensed its name). The aggregate purchase
price consisted of (i) up to $3,500,000 payable over a minimum of two years,
plus (ii) 500,000 shares of the Company’sCompany's common stock. NetLinc owns patents,
proprietary technology and know-how for certain telephony products that allow
Competitive Local Exchange Carriers (“CLECs”("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’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’sCompany'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 $3,500,000 to $1,166,667
and the then outstanding balance of $342,000 was paid in installments of $50,000
13
BTT’sBTT's obligation to repay the $1,167,667
cash component of the purchase price to the Company via preferential
distributions of cash flow under BTT’sBTT's limited liability company operating
agreement. 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 payswould pay certain future royalties to
NetLinc and BTT from the sale of these products by the Company. While the
distributorship agreements among NetLinc, BTT and the Company have not been
terminated, the Company does not anticipate purchasing products from NetLinc in
the near term. NetLinc, however, continues to own intellectual property, which
may be further developed and used in the future to manufacture and sell
telephony products under the distributorship agreements.
In addition to receiving incremental revenues associated with its direct
sales of the telephony products, the Company also anticipates receiving
a portion of BTT’s net income derivedadditional revenues from voice-service revenuestelephony services provided by or through itscontracts for
such services obtained by BDR Broadband, BTT (through the Company's 50% stake
in BTT.therein) as well as through joint ventures with third parties. While the events
related to the restructuring resulted in a delay in the Company’sCompany's anticipated
revenue stream from the sale of telephony products, the Company believes that
these revised terms are beneficial and will result in the Company enjoying
higher gross margins on telephony equipment unit sales as well as an
incrementally higher proportion of telephony service revenues. It has been the
Company's experience during the past year that the time frame from introduction
of a telephony service opportunity to consummation of the associated
right-of-entry agreement, is longer than the time frame relating to obtaining
rights-of-entry for the provision of video and high-speed data services. This
protracted time frame has had an adverse impact on the growth of telephony
system revenues. Material incremental revenues associated with the sale of
telephony products are not presently anticipated to be received until at least
the firstthird quarter of 2005.
During September 2002, the Company sold inventory at a cost
Results of approximately $1,447,000 to a private cable operator for approximately $1,929,000 in exchange for which the Company received notes receivable in the principal amount of approximately $1,929,000. The notes are payable by the customer in 48 monthly principal and interest (at 11.5%) installments of approximately $51,000 commencing January 1, 2003. The customer’s payment obligations under the notes are collateralized by purchase money liens on the inventory sold and blanket second liens on all other assets of the customer. The Company recorded the notes receivable at the inventory cost and will not recognize any revenue or gross profit on the transaction until a substantial amount of the cost has been recovered, and collectibility is assured. The Company collected $1,355,000 during the first nineOperations
First three months of 2004 and recorded $832,000 as a reduction in the note receivable balance, $301,000 of gross margin and $222,000 of interest income. The balance of the notes are expected to be collected during 2004 and a total of approximately $482,000 of gross margin and $356,000 of interest income is expected to be recognized.
Third2005 Compared with first three months of 2004
Compared with thirdNet Sales. Net sales increased $740,000 or 8.7% to $9,269,000 in the first
three months of 2003.
Net Sales. Net sales increased $2,020,000, or 22.0%, to $11,215,0002005 from $8,529,000 in the thirdfirst three months of 2004 from $9,195,000 in the third three months of 2003.2004. The
increase in sales is primarily attributed to an increase in capital spending by
cable system operators, primarily for the Company's distribution products and
improved overall economic conditions and the recognition of
$458,000 of sales attributable to the note receivable described above. As a result, the Company experienced higher headend product sales.products. Included in net sales are revenues from BDR Broadband of
$355,000$417,000 and $303,000$346,000 for the thirdfirst three months of 2005 and 2004, and 2003, respectively.
Cost of Goods Sold.Sold. Cost of goods sold increased to $7,635,000$6,472,000 for the
thirdfirst three months of 20042005 from $6,230,000$5,588,000 for the thirdfirst three months of 20032004,
and increased as a percentage of sales to 68.1%72.7% from 67.8%65.5%. The increase as a percentage of sales wasThese increases were
caused primarily by a higher portionan increase in the inventory reserve of $603,000 in the
first quarter of 2005, and secondarily by increased sales during the period being comprised of lower margin products.
volume.
Selling Expenses. Selling expenses increased to $1,047,000$1,066,000 for the thirdfirst
three months of 20042005 from $947,000$1,045,00 in the thirdfirst three months of 2003,2004 but
decreased as a percentage of sales to 9.3%11.5% for the thirdfirst three months of 20042005
from 10.3%12.3% for the thirdfirst three months of 2003. The $100,000 increase was primarily due to an increase in salaries and fringe benefits of $84,000 due to an increase in headcount.
General and Administrative Expenses. General and administrative expenses increased to $1,488,000 for the third three months of 2004 from $1,397,000 for the third three months of 2003, but decreased as a percentage of sales to 13.3% for the third three months of 2004 from 15.2% for the third three months of 2003. The $91,000 increase can be primarily attributed to an increase in operating expenses of BDR Broadband of $139,000 offset by a decrease in legal expenses of $35,000.
Research and Development Expenses. Research and development expenses decreased to $385,000 in the third three months of 2004 from $433,000 in the third three months of 2003, primarily due to a decrease in salaries and fringe benefits of $19,000 due to a headcount reduction and a decrease in consulting fees of $10,000. Research and development expenses, as a percentage of sales, decreased to 3.4% in the third three months of 2004 from 4.7% in the third three months of 2003.
Operating Income. Operating income of $660,000 for the third three months of 2004 represents an increase from $188,000 for the third three months of 2003. Operating income as a percentage of sales increased to 5.9% in the third three months of 2004 from 2.0% in the third three months of 2003.
Other Expense. Interest expense decreased to $215,000 in the third three months of 2004 from $272,000 in the third three months of 2003. The decrease is the result of lower average borrowing. Other income increased $87,000 in the third three months of 2004 compared to zero in the third three months of 2003 primarily due to the recognition of $85,000 of interest income on the note receivable described above.
Income Taxes. The provision for income taxes for the third three months of 2004 was zero compared to a benefit of $19,000 for the third three months of 2003. As a result of the Company’s losses in prior periods, a 100% valuation allowance was recorded against the taxable loss in 2003 and the first quarter of 2004. The provision in the third three months of 2004 has been offset by the reversal of an equal amount of the valuation allowance.
First nine months of 2004 Compared with first nine months of 2003
Net Sales. Net sales increased $4,330,000, or 16.4%, to $30,661,000 in the first nine months of 2004 from $26,331,00 in the first nine months of 2003. The increase in sales is primarily attributed to an increase in capital spending by cable system operators, improved overall economic conditions and the recognition of $1,203,000 of sales attributable to the note receivable described above. As a result, the Company experienced higher headend and data product sales. Included in net sales are revenues from BDR Broadband of $1,094,000 and $744,000 for the first nine months of 2004 and 2003, respectively.
Cost of Goods Sold. Cost of goods sold increased to $21,060,000 for the first nine months of 2004 from $18,532,000 for the first nine months of 2003, primarily due to increased volume, and decreased as a percentage of sales to 68.7% from 70.4%. The decrease as a percentage of sales was caused primarily by a higher portion of sales during the period being comprised of higher margin products.
Selling Expenses. Selling expenses increased to $3,185,000 for the first nine months of 2004 from $2,898,000 in the first nine months of 2003, but decreased as a percentage of sales to 10.4% for the first nine months
of 2004 from 11.0% for the first nine months of 2003. This $287,000 increase is primarily
attributable to an increase in wages and fringe benefits of $266,000,$105,000 due to an
increase in headcount.
headcount, offset by a reduction in royalty expense of $64,000 due
to reduced sales of royalty related products.
General and Administrative Expenses. General and administrative expenses
decreasedincreased to $4,444,000$1,653,000 for the first ninethree months of 2005 from $1,607,000 for
the first three months of 2004 from $4,568,000 for the first nine months of 2003 andbut decreased as a percentage of sales to 14.5%17.8%
for the first ninethree months of 20042005 from 17.4%18.8% for the first ninethree months of
2003.2004. The $126,000 decreaseincrease in these expenses can be primarily attributed to a decrease in the allowance for bad debts of $268,000 as a result of improved collection efforts, a decrease in salary and fringe benefits of $129,000 due to the temporary reduction of salaries for certain executive officers, offset by an increase
in operating expensesconsulting fees of BDR Broadband$69,000 related to designing and documenting the Company's
internal control over financial reporting as required by Section 404 of $208,000.
the
Sarbanes-Oxley Act of 2002.
Research and Development Expenses. Research and development expenses
decreased to $1,187,000remained at $411,000 in the first ninethree months of 2004 from $1,449,000 in the2005 as compared to first
ninethree months of 2003. This $262,000 decrease was primarily due to a decrease in wages and fringe benefits of $170,000 due to a reduction in headcount.2004. Research and development expenses, as a percentage of
sales, decreased to 3.9%4.4% in the first ninethree months of 2005 from 4.8% in the
first three months of 2004.
14
from 5.5%primarily
attributable to the $603,000 increase in the first nine months of 2003.
Operating Income (Loss). Operating income was $785,000 for the first nine months of 2004 compared to a loss of $1,116,000 for the first nine months of 2003.
Otherinventory reserves.
Interest Expense. Interest expense decreased to $713,000$193,000 in the first ninethree
months of 20042005 from $827,000$275,000 in the first ninethree months of 2003.2004. The decrease is
the result of lower average borrowing.
Other income increased to $299,000 in the first nine months of 2004 compared to zero for the first nine months of 2003 primarily due to the recognition of $222,000 of interest income on the note receivable described above.
Income Taxes. The benefit for income taxes for the first nine months of 2004 was zero compared to a benefit of $730,000 for the first nine months of 2003 due to a valuation allowance of $93,000 since the realization of the deferred tax benefit is not considered more likely than not.
Liquidity and Capital Resources
As of September 30, 2004March 31, 2005 and December 31, 2003,2004, the Company’sCompany's working capital
was $8,814,000$11,386,000 and $11,591,000,$10,603,000, respectively. The decreaseincrease in working capital
is attributable primarily to an increase in the current portion oflong term debt of $3,331,000 due to the reclassification of the revolving line of credit to current.
$878,000.
The Company’sCompany's net cash provided byused in operating activities for the nine-monththree-month
period ended September 30, 2004March 31, 2005 was $2,548,000,$184,000, compared to net cash provided by
operating activities for the nine-monththree-month period ended September 30, 2003,March 31, 2004, which was
$4,241,000.
$838,000. The decrease is attributable primarily to an increase in accounts
receivable of $1,648,000.
Cash provided byused in investing activities was $585,000,$128,000, which was primarily
attributable to an $834,000 collection of a note receivable offset by capital expenditures for new equipment and upgrades to the BDR
Broadband Systems of $388,000.
$125,000.
Cash used inprovided by financing activities was $3,182,000$488,000 for the first ninethree
months of 20042005 primarily comprised of $13,602,000$3,640,000 of borrowings offset by
$3,152,000 of repayments of debt offset by $10,400,000 of borrowings.
debt.
On March 20, 2002 the Company entered into a credit agreement with Commerce
Bank, N.A. for a $19,500,000 credit facility, comprised of (i) a $7,000,000
revolving line of credit under which funds may be borrowed at LIBOR, plus a
margin ranging from 1.75% to 2.50%, in each case depending on the calculation of
certain financial covenants, with a floor of 5% through March 19, 2003, (ii) a
$9,000,000 term loan which bore interest at a rate of 6.75% through September
30, 2002, and thereafter at a fixed rate ranging from 6.50% to 7.25% to reset
quarterly depending on the calculation of certain financial covenants, and (iii)
a $3,500,000 mortgage loan bearing interest at 7.5%. Borrowings under the
revolving line of credit are limited to certain percentages of eligible accounts
receivable and inventory, as defined in the credit agreement. The credit
facility is collateralized by a security interest in all of the Company’sCompany's
assets. The agreement also contains restrictions that require the Company to
maintain certain financial ratios as well as restrictions on the payment of cash
dividends. The initial maturity date of the line of credit with Commerce Bank
was March 20, 2004. The term loan required equal monthly principal
payments of
$187,000 and matures on April 1, 2006. The mortgage loan requires equal monthly
principal payments of $19,000 and matures on April 1, 2017. The mortgage loan is
callable after five years at the lender’slender's option.
In November, 2003, the Company's credit agreement with Commerce Bank was
amended to modify the interest rate and amortization schedule for certain of the
loans thereunder, as well as to modify one of the financial covenants. Beginning
November 1, 2003, the revolving line of credit began to accruebore interest at the prime rate
plus 1.5%, with a floor of 5.5% (6.0% at September 30, 2004), and the term loan began to accrue interest at a
fixed rate of 7.5%. Beginning December 1, 2003, the term loan requires equal
monthly principal payments of $193,000 plus interest with a final payment on
April 1, 2006 of all remaining unpaid principal and interest.
At March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003,
the Company was unable to meet one of its financial covenants required under its
credit agreement with Commerce Bank, which non-compliance was waived by the Bank
effective as of each such date.
In March, 2004, the Company's credit agreement with Commerce Bank was
amended to (i) extend the maturity date of the line of credit until April 1,
2005, (ii) reduce the maximum amount that may be borrowed under the line of
credit to $6,000,000, (iii) suspend the applicability of the cash flow coverage
ratio covenant until March 31, 2005, (iv) impose a new financial covenant
requiring the Company to achieve certain levels of consolidated pre-tax income
on a quarterly basis commencing with the fiscal quarter ended March 31, 2004,
and (v) require that the Company make a prepayment against its outstanding term
loan to the Bank equal to 100% of the amount of any prepayment received by the
Company on its outstanding note receivable from a customer, up to a maximum
amount of $500,000.
The full $500,00015
paid during the six months ended June 30, 2004.
The Company is in compliance with all suchunable to meet one of its financial
covenants required under its credit agreement with Commerce Bank, which
non-compliance was waived by the Bank effective as amended. Theof such date.
In March, 2005, the Company's credit agreement with Commerce Bank was
amended to (i) extend the maturity date of the line of credit until April 1,
2006, (ii) provide for a interest rate on the revolving line of credit of the
prime rate plus 2.0%, with a floor of 5.5% (7.75% at March 31, 2005, (iii) waive
the applicability of consolidated pre-tax income for the quarter ended December
31, 2004, (iv) suspend the applicability of the cash flow coverage ratio
covenant until March 31, 2006, and (v) impose a financial covenant requiring the
Company anticipates that it will either conclude negotiationsto achieve certain levels of consolidated pre-tax income on a quarterly
basis commencing with its bank and obtain a renewalthe fiscal quarter ended March 31, 2005.
At March 31, 2005, the Company was unable to meet one of its currentfinancial
covenants required under its credit facilities, or enter into new credit facilitiesagreement with another bank prior to April 1, 2005.
Commerce Bank, which
non-compliance was waived by the Bank effective as of such date.
At September 30, 2004,March 31, 2005, there was $3,331,000, $3,013,000$3,911,000, $1,858,000 and $2,936,000$2,858,000
outstanding under the revolving line of credit, term loan and mortgage loan,
respectively.
The Company has from time to time experienced short-term cash requirement
issues. In 2002, the Company paid approximately $1,880,000 in connection with
acquiring its majority interest in BDR Broadband and paying off the Seller Notes
for BDR Broadband. In addition, during 2004, the Company will incur additional obligations
related to royalties, if any, in connection with its $1,167,000 cash investments
during 2003, in NetLinc and BTT. While the Company’sCompany's existing lender agreed to
allow the Company to fund both the BDR Broadband obligations and the NetLinc/BTT
obligations using its line of credit, such lender did not agree to increase the
maximum amount available under such line of credit. These expenditures, coupled
with the March 2004 amendment to the Company’sCompany's credit agreement with Commerce
Bank described above, and certain near-term funding requirements relating to the
purchase of a large quantity of high-speed data products, will reduce the
Company’sCompany's working capital. The Company is exploring various alternatives to
enhance its working capital, including inventory-related pricing and product
reengineering efforts, as well as restructuring its long-term debt with Commerce Bank or seeking alternative financing. During 2003,2004,
BDR Broadband had positive cash flow, which has continuedis expected to continue in the first nine months of 2004.2005. As
such, BDR Broadband is not presently anticipated to adversely impact the
Company’sCompany's working capital.
New Accounting Pronouncements
In December, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment." This statement is a revision to SFAS No.
123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." This statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, primarily focusing on the accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. Companies will be required to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). The cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award, which requisite service period will usually
be the vesting period. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models. If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. SFAS No. 123R will be effective for fiscal years beginning after
June 15, 2005 and allows for several alternative transition methods.
Accordingly, the Company will adopt SFAS No. 123R in its first quarter of fiscal
2006. The Company is currently evaluating the provisions of SFAS No. 123R and
has not yet determined the impact that this Statement will have on its results
of operations or financial position.
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 Company
does not believe adoption of SFAS No. 151 will have a material effect on its
consolidated financial position, results of operations or cash flows.
16
The market risk inherent in the Company’sCompany's financial instruments and
positions represents the potential loss arising from adverse changes in interest
rates. At September 30,March 31, 2005 and 2004 and 2003 the principal amount of the Company’sCompany's
aggregate outstanding variable rate indebtedness was $3,331,000$3,911,000 and $4,621,000,$3,531,000,
respectively. A hypothetical 100 basis point increase in interest rates would
have had an annualized unfavorable impact of approximately $33,000$39,000 and $46,000,$35,000,
respectively, on the Company’sCompany's earnings and cash flows based upon these
quarter-end debt levels. At September 30, 2004,March 31, 2005, the Company did not have any
derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Under
The Company carried out an evaluation, under the supervision and with the
participation of its principal executive officer and principal financial
officer, of the Company evaluatedeffectiveness of the design and operation of the Company’sCompany's
disclosure controls and procedures as of September 30, 2004.the end of the period covered by this
report. Based uponon this evaluation, the evaluation at the time it was performed, the Company’sCompany's principal executive officer and
principal financial officer concluded that the Company’sCompany's disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in the Company’s periodic SEC reports. In October, 2004, subsequent to such evaluation, the Company identified an error in
accounting for inventories received that were not correctly recorded. This error resulted in a vendor’s account payable balance being understated and the related understatement of cost of goods sold. As a result, the Company concluded that its previously reported financial statements for each of the three years ended December 31, 2001, 2002 and 2003 should be restated to reflect the increase in accounts payable and related increase to cost of goods sold and deferred income taxes. Additionally, the Company concluded that the unaudited financial statements for the first quarter ended March 31, 2004 and second quarter ended June 30, 2004 should be restated to reflect the increase in accounts payable and decrease in stockholders’ equity.
In connection with the completion of its audit of the issuance of the Company’s restated consolidated financial statements for the fiscal years ended December 31, 2001, 2002 and 2003, the Company’s independent auditors, BDO Seidman, LLP (“BDO”), communicated to the Company’s Audit Committee that the following matters involving the Company’s internal controls and operations were considered to be “reportable conditions,” as defined under standards established by the American Institute of Certified Public Accountants or AICPA:
•Lack of reconciliation of accounts payable balances to vendor accounts.
• Inadequate review of details of accounts payable.
• Inadequate review of slow moving inventories.
Reportable conditions are matters coming to the attention of the independent auditors that in their judgment, relate to significant deficiencies in the design or operation of internal controls and could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider these matters, which are listed above, to be a “material weaknesses” that may increase the possibility that a material misstatement in the Company’s financial statements might not be prevented or detected by its employees in the normal course of performing their assigned functions.
To remediate these weaknesses, in August, 2004 the Company instituted procedures to review inventory quantities against sales projections and in November, 2004 the Company instituted procedures to reconcile accounts payable to vendor accounts and also modified certain accounts payable and inventory related policies and procedures, provided education regarding such policies and procedures to relevant staff members and has implemented enhanced monitoring of such policies and procedures and related accounting policies. In connection with restating the Company’s financial statements for the years ended December 31, 2001, 2002 and 2003, and the unaudited financial statements for the quarters ended March 31, 2004 and June 30, 2004, the Company, under the supervision and with the participation of its principal executive officer and principal financial officer, has concluded that, as a result of the foregoing modifications to certain policies and procedures, the Company believes the deficiencies have been remediated. The Company’s principal executive officer and principal financial officer did not note any other deficiencies in the Company’s disclosure controls and procedures during their evaluation. Other than the matters discussed above, the Company’s principal executive officer and principal financial officer have determined that the Company’s disclosure controls and procedures were effective as of September 30, 2004 in timely alerting them to material information required to be included in the Company’s periodic SEC reports. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote; however, the Company’sCompany's principal
executive officer and principal financial officer have concluded that other than as noted above, the
Company’sCompany's disclosure controls and procedures wereare effective at a reasonable
assurance level. The Company continues to monitor the effectiveness of its disclosure controls and procedures on an ongoing basis.
In addition, the Company reviewed its internal control over financial
reporting duringreporting. In connection with conducting its audit of the Company's financial
statements for the fiscal year ended December 31, 2004, the Company's
independent auditor uncovered material weaknesses in certain accounting
procedures, including preparation and review of certain account analyses, which
led to issues relating to calculating inventory cost, its calculation of the
equity loss in BTT and estimating a valuation reserve for deferred income taxes.
The delay in preparing these estimates and reviewing such accounts resulted in
fourth quarter covered by this report. During this quarter,adjustments in inventory, its calculation of the equity loss in
BTT and deferred income taxes. In March, 2005 the Company institutedimplemented procedures
to prepare and review inventory quantities against sales projections as described above.an analysis of these accounts on a quarterly basis to
rectify this weakness in accounting procedures. During thisthe Company's first
fiscal quarter of 2005, there have been no other changes in the Company’sCompany'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 hashave materially affected, or isare reasonably likely
to materially affect, the Company’sCompany's internal control over financial reporting.
After the end of the third fiscal quarter of 2004, in November, 2004 the Company made a change in the accounts payable reconciliation procedures as described above.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain proceedings incidental to the ordinary
course of its business, none of which, in the current opinion of management, is
likely to have a material adverse effect on the Company’sCompany's business, financial
condition, or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
The exhibits are listed in the Exhibit Index appearing at page 1821 herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXHIBIT INDEX
18