10-Q 1 blonder10q063003.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ TO _____________. COMMISSION FILE NUMBER 1-14120 BLONDER TONGUE LABORATORIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 52-1611421 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE JAKE BROWN ROAD, OLD BRIDGE, NEW JERSEY 08857 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 679-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ------ Number of shares of common stock, par value $.001, outstanding as of August 14, 2003: 7,495,406 The Exhibit Index appears on page 16. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(unaudited) June 30, December 2003 31, 2002 -------- -------- ASSETS (NOTE 4) Current assets: Cash ................................................................ $ 281 $ 258 Accounts receivable, net of allowance for doubtful accounts of $872 and $715 respectively .............................. 5,753 6,713 Inventories, net (Note 3) ........................................... 22,140 24,760 Notes receivable (Note 6) ........................................... 459 459 Income tax receivable ............................................... 663 170 Prepaid and other current assets .................................... 970 556 Deferred income taxes ............................................... 1,933 1,858 -------- -------- Total current assets ............................................ 32,199 34,774 Notes receivable (Note 6) ................................................ 652 1,019 Property, plant and equipment, net of accumulated depreciation and amortization ........................................ 6,956 6,831 Patents, net ............................................................. 2,881 3,120 Rights-of-Entry, net (Note 5) ............................................ 1,407 1,396 Other assets, net ........................................................ 991 951 Investment in Blonder Tongue Telephone LLC (Note 7) ...................... 725 -- Deferred income taxes .................................................... 3,799 3,911 -------- -------- $ 49,610 $ 52,002 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 4) .......................... $ 15,781 $ 2,632 Accounts payable .................................................... 470 888 Accrued compensation ................................................ 697 514 Accrued benefit liability ........................................... 196 196 Other accrued expenses .............................................. 69 227 -------- -------- Total current liabilities ....................................... 17,213 4,457 -------- -------- Long-term debt (Note 4) .................................................. 394 14,278 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 ..................................................... 24,145 24,145 Retained earnings ................................................... 14,843 15,991 Accumulated other comprehensive loss ................................ (508) (508) Treasury stock, at cost, 949 shares and 879 shares, respectively .... (6,485) (6,369) -------- -------- Total stockholders' equity ...................................... 32,003 33,267 -------- -------- $ 49,610 $ 52,002 ======== ========
See accompanying notes to consolidated financial statements. 2 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Six Months Ended June 30, Ended June 30, -------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net sales .................................. $ 8,534 $ 11,257 $ 17,136 $ 22,147 Cost of goods sold ......................... 5,859 8,206 12,302 15,780 -------- -------- -------- -------- Gross profit ............................ 2,675 3,051 4,834 6,367 -------- -------- -------- -------- Operating expenses: Selling ................................. 953 1,081 1,951 2,199 General and administrative .............. 1,607 1,171 3,171 2,368 Research and development ................ 468 469 1,016 966 -------- -------- -------- -------- 3,028 2,721 6,138 5,533 -------- -------- -------- -------- Earnings (loss) from operations ............ (353) 330 (1,304) 834 -------- -------- -------- -------- Interest expense ........................... (282) (275) (555) (486) -------- -------- -------- -------- Earnings (loss) before income taxes ........ (635) 55 (1,859) 348 Provision (benefit) for income taxes ....... (245) 22 (711) 132 -------- -------- -------- -------- Earnings (loss) before cumulative effect ... (390) 33 (1,148) 216 Cumulative effect of change in accounting principle, net of tax ................... -- -- -- (6,886) -------- -------- -------- -------- Net (loss) earnings ........................ $ (390) $ 33 $ (1,148) $ (6,670) ======== ======== ======== ======== Basic earnings (loss) per share before cumulative effect ....................... $ (0.05) $ 0.01 $ (0.15) $ 0.03 Cumulative effect of change in accounting principle, net of tax ................... -- -- -- (0.90) -------- -------- -------- -------- Basic earnings (loss) per share ............ $ (0.05) $ 0.01 $ (0.15) $ (0.87) ======== ======== ======== ======== Basic weighted average shares outstanding .. 7,500 7,613 7,519 7,613 ======== ======== ======== ======== Diluted earnings (loss) per share before cumulative effect ....................... $ (0.05) $ 0.01 $ (0.15) $ 0.03 Cumulative effect of change in accounting principle, net of tax ................... -- -- -- (0.90) -------- -------- -------- -------- Diluted earnings (loss) per share .......... $ (0.05) $ 0.01 $ (0.15) $ (0.87) ======== ======== ======== ======== Diluted weighted average shares outstanding 7,500 7,630 7,519 7,613 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 3 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30, -------------------- 2003 2002 -------- -------- Cash Flows From Operating Activities: Net loss .............................................. $ (1,148) $ (6,670) Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities: Cumulative effect of change in accounting principle.. -- 6,886 Depreciation ........................................ 574 642 Amortization ........................................ 378 216 Provision for doubtful accounts ..................... 180 168 Provision for inventory reserves .................... 39 -- Deferred income taxes ............................... 37 (90) Changes in operating assets and liabilities: Accounts receivable ................................. 780 3,368 Inventories ......................................... 2,581 622 Other current assets ................................ (414) 359 Other assets ........................................ (40) (186) Income taxes ........................................ (493) 51 Accounts payable and accrued expenses ............... (393) (5,525) -------- -------- Net cash provided by (used in) operating activities 2,081 (159) -------- -------- Cash Flows From Investing Activities: Capital expenditures .................................. (699) (78) Acquisition of rights-of-entry ........................ (150) (250) Receipt from note receivable .......................... 367 -- Investment in Blonder Tongue Telephone, LLC ........... (725) -- -------- -------- Net cash used in investing activities ................. (1,207) (328) -------- -------- Cash Flows From Financing Activities: Borrowings of long-term debt .......................... 5,971 23,719 Repayments of long-term debt .......................... (6,706) (24,108) Proceeds from exercise of stock options ............... -- 2 Acquisition of treasury stock ......................... (116) -- -------- -------- Net cash used in financing activities ................. (851) (387) -------- -------- Net increase (decrease) in cash ....................... 23 (874) -------- -------- Cash, beginning of period ............................... 258 942 -------- -------- Cash, end of period ..................................... $ 281 $ 68 ======== ======== Supplemental Cash Flow Information: Cash paid for interest ................................ $ 475 $ 470 Cash paid for income taxes ............................ $ -- $ 51
See accompanying notes to consolidated financial statements. 4 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 1 - COMPANY AND BASIS OF PRESENTATION Blonder Tongue Laboratories, Inc. (the "COMPANY") is a designer, manufacturer and supplier of electronics and systems equipment for the cable television industry, primarily throughout the United States. The consolidated financial statements include the accounts of Blonder Tongue Laboratories, Inc. and subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the second quarter and six months of 2003 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 only of normal recurring accruals, necessary for a fair statement of the results of operations for the period presented and the consolidated balance sheet at June 30, 2003. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company's latest annual report on Form 10-K for the year ended December 31, 2002. NOTE 2 - 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"), Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and net 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 with the following weighted average assumptions used for grants: expected lives of 9.5 years, no dividend yield, volatility at 73%, and risk free interest rate of 3.2% for the six months ended June 30, 2002; expected lives of 9.2 years, no dividend yield, volatility at 73%, and risk free interest rate of 3.67% for the six months ended June 30, 2003. Under accounting provisions of FAS 123, the Company's net loss to common shareholders and net loss per common share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data): Six Months Ended June 30 ------------------ 2003 2002 ------- ------- Net loss as reported ................................. $(1,148) $(6,670) Adjustment for fair value of stock options, net of tax 162 295 ------- ------- Pro forma ....................................... $(1,310) $(6,965) ======= ======= Net loss per share basic and diluted: As reported ..................................... $ (0.15) $ (0.87) ======= ======= Pro forma ....................................... $ (0.17) $ (0.91) ======= ======= 5 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 3 - INVENTORIES Inventories net of reserves are summarized as follows: June 30, Dec. 31, 2003 2002 ------- ------- Raw Materials ................ $10,339 $11,054 Work in process .............. 1,384 1,660 Finished Goods ............... 10,417 12,046 ------- ------- $22,140 $24,760 ======= ======= NOTE 4 - DEBT On March 20, 2002 the Company executed a credit agreement with Commerce Bank, N.A. for a $19,500 credit facility, 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 (5% at June 30, 2003), (ii) a $9,000 term loan which bore interest at a rate of 6.75% through September 30, 2002, and thereafter bears interest at a fixed rate ranging from 6.50% to 7.25% to reset quarterly depending on the calculation of certain financial covenants (6.75% at June 30, 2003) 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'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 maturity date of the line of credit with Commerce Bank is April 1, 2004. The term loan requires 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's option. Upon execution of the credit agreement with Commerce Bank, $14,954 was advanced to the Company, of which $14,827 was used to pay all unpaid principal and accrued interest under the Company's prior line of credit and term loans with First Union National Bank. At June 30, 2003, there was $6,026, $6,188 and $3,208 outstanding under the revolving line of credit, term loan and mortgage loan, respectively. At March 31, 2003 and June 30, 2003, the Company was unable to meet one of its financial covenants under its credit agreement with Commerce Bank, compliance with which was waived by the Bank effective as of each such date. 6 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 5 - RIGHTS OF ENTRY ACQUISITION 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 cable television systems (the "SYSTEMS") owned by affiliates of Verizon Communications, Inc. The venture entity, BDR Broadband, LLC ("BDR BROADBAND"), 80% of the outstanding capital stock of which is owned by the Company, acquired the Systems, which are comprised of approximately 3,270 existing MDU cable television subscribers and approximately 7,340 passings. BDR Broadband paid approximately $1,880 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 and BDR Broadband has been reflected in the consolidated results of the Company since that date. Excluding capital expenditures associated with System upgrades, the Systems were cash flow positive beginning in the first year. To date, the Systems have been upgraded with approximately $342 of interdiction and other products of the Company. It is planned that the Systems will be further upgraded with approximately $923 of additional interdiction and other products of the Company over the course of operation. The purchase price (excluding transaction costs) was allocated $1,489 to rights-of-entry and $391 to fixed assets. The rights-of-entry are being amortized over a five 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 had 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. NOTE 6 - 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 are 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 are 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 will not recognize any revenue or gross profit on the transaction until a substantial amount of the cost has been recovered. NOTE 7 - ACQUISITION 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 has licensed its name). The aggregate purchase price consists of (i) up to $3,500 payable over a minimum of two years, plus (ii) 500 shares of the Company's common stock. Of the $3,500 payable under the agreements, the Company's obligation to pay $2,500 is contingent upon BTT achieving specified targeted monthly earnings objectives. As of June 30, 2003, $725 has been paid. The parties have been involved in negotiations to amend the terms of the agreements entered into in March, 2003. The negotiations have focused on restructuring the business arrangement by amending certain of the agreements previously entered into and entering into certain new agreements that would result in, among other things, (i) the Company increasing its economic ownership in NetLinc and BTT to approximately 50%, (ii) the payment of certain future royalties to NetLinc and BTT from the sale of telephony products by the Company, and 7 (iii) a reduction in the cash component of the purchase price to approximately $1,100 with the remaining payments still owing to be paid in installments over time. While these negotiations are continuing, the Company has not reached a definitive agreement on the terms of any such amendments or new agreements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company's business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The words "believe", "expect", "anticipate", "project" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (See Item 1 - Business; Item 3 - Legal Proceedings; and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations). GENERAL 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 cable television systems (the "SYSTEMS") owned by affiliates of Verizon Communications, Inc. The venture entity, BDR Broadband, 80% of the outstanding capital stock of which is owned by the Company, acquired the Systems, which are comprised of approximately 3,270 existing MDU cable television subscribers and approximately 7,340 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. Excluding capital expenditures associated with System upgrades, the Systems were cash flow positive beginning in the first year. To date, the Systems have been upgraded with approximately $342,000 of interdiction and other products of the Company. It is planned that the Systems will be upgraded with approximately $923,000 of additional interdiction and other products of the Company over the course of operation. 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") executed by BDR Broadband in favor of the sellers. The Company believes that similar opportunities currently exist to acquire additional rights-of-entry for multiple dwelling unit cable television systems at historically low prices. The Company also believes that the model it devised for acquiring and operating the Systems 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, the Company may need 8 financing to acquire the rights-of-entry for such cable systems. Given that financing may not be available on acceptable terms or at all, the Company may be unable to pursue these opportunities. 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 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's common stock. Of the $3,500,000 payable under the agreements, Blonder Tongue's obligation to pay $2,500,000 was contingent upon BTT achieving specified targeted monthly earnings objectives. 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. 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. It is contemplated that BTT will partner with CLECs to offer the telephony solution, receiving a portion of the line charges due from the CLECs' telephone customers. 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, the parties have been involved in negotiating amendments to the terms of the agreements entered into in March, 2003 and the Company has not delivered the 500,000 shares of its common stock and has only paid $725,000 of the purchase price as of June 30, 2003. The negotiations have focused on restructuring the business arrangement by amending certain of the agreements previously entered into and entering into certain new agreements that would allow, among other things, the Company to (i) 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, (ii) increase the Company's economic ownership in NetLinc and BTT to approximately 50%, and (iii) reduce the cash component of the purchase price to approximately $1,100,000 with the remaining payments still owing to be paid in installments over time. While these negotiations are continuing and the Company believes they will be concluded in the third quarter, the Company has not reached a definitive agreement on the terms of any such amendments or new agreements. 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. Considering that the business arrangement documented by the March, 2003 agreements is in the process of being restructured, the Company's anticipated revenue stream from the sale of telephony products has been delayed. Material incremental revenues associated with the sale of telephony products are not presently anticipated to be received by the Company until at least the fourth quarter of 2003. Second three months of 2003 Compared with second three months of 2002. Net Sales. Net sales decreased $2,723,000, or 24%, to $8,534,000 in the second three months of 2003 from $11,257,000 in the second three months of 2002. The decrease in sales is primarily attributed to a decrease in capital spending by cable system operators and weak overall economic conditions. As a result, the Company experienced lower digital product sales. Net sales included approximately $1,122,000 and $218,000 of interdiction and digital equipment for the second three months of 2003 compared to approximately $866,000 and $1,172,000 for the second three months of 2002. Cost of Goods Sold. Cost of goods sold decreased to $5,859,000 for the second three months of 2003 from $8,206,000 for the second three months of 2002 and decreased as a percentage of sales to 68.7% from 72.9%. The decrease as a percentage of sales was caused primarily by a higher proportion of sales during the period being comprised of higher margin products. Selling Expenses. Selling expenses decreased to $953,000 for the second three months of 2003 from $1,081,000 in the second three months of 2002 but increased as a percentage of sales to 11.0% for the second three months of 2003 from 9.6% for the second three months of 2002. The $128,000 decrease was primarily due to a decrease in advertising of $60,000, consulting fees of $28,000, and departmental supplies of $22,000 achieved 9 through implementation of expense control programs and a decrease in commissions of $23,000 due to reduced sales levels. General and Administrative Expenses. General and administrative expenses increased to $1,607,000 for the second three months of 2003 from $1,171,000 for the second three months of 2002 and increased as a percentage of sales to 18.8% for the second three months of 2003 from 10.4% for the second three months of 2002. The $436,000 increase can be primarily attributed to an increase of professional fees of $69,000 and $346,000 of operating expenses relating to BDR Broadband. Research and Development Expenses. Research and development expenses decreased to $468,000 in the second three months of 2003 from $469,000 in the second three months of 2002, primarily due to a decrease in salaries and fringe benefits of $20,000 due to headcount reduction, offset by an increase in consulting fees of $24,000. Research and development expenses, as a percentage of sales, increased to 5.5% in the second three months of 2003 from 4.2% in the second three months of 2002. Operating Income (Loss). Operating loss of $353,000 for the second three months of 2003 represents a decrease from income of $330,000 for the second three months of 2002. Operating income as a percentage of sales decreased to (4.1)% in the second three months of 2003 from 2.9% in the second three months of 2002. Interest Expense. Interest expense increased to $282,000 in the second three months of 2003 from $275,000 in the second three months of 2002. The increase is the result of higher average borrowing. Income Taxes. The provision for income taxes for the second three months of 2003 decreased to a benefit of $245,000 from a provision of $22,000 for the second three months of 2002 as a result of a decrease in taxable income. First six months of 2003 Compared with first six months of 2002 Net Sales. Net sales decreased $5,011,000, or 22.6%, to $17,136,000 in the first six months of 2003 from $22,147,000 in the first six months of 2002. The decrease is attributed to a decrease in capital spending by cable system operators and weak overall economic conditions. As a result, the Company experienced lower digital product sales. Net sales included approximately $1,897,000 and $1,554,000 of interdiction and digital equipment for the first six months of 2003 compared to approximately $1,880,000 and $3,311,000 for the first six months of 2002. Cost of Goods Sold. Cost of goods sold decreased to $12,302,000 for the first six months of 2003 from $15,780,000 for the first six months of 2002 but increased as a percentage of sales to 71.8% from 71.3%. The increase as a percentage of sales was caused primarily by a higher portion of sales during the period being comprised of lower margin products. Selling Expenses. Selling expenses decreased to $1,951,000 for the first six months of 2003 from $2,199,000 in the first six months of 2002 but increased as a percentage of sales to 11.4% for the first six months of 2003 from 9.9% for the first six months of 2002. This $248,000 decrease is primarily attributable to a decrease in wages and fringe benefits of $40,000 due to a reduction in headcount, a reduction in advertising of $111,000 achieved through implementation of expense control programs and a reduction of freight of $62,000 and commissions of $47,000 due to reduced sales levels. General and Administrative Expenses. General and administrative expenses increased to $3,171,000 for the first six months of 2003 from $2,368,000 for the first six months of 2002 and increased as a percentage of sales to 18.5% for the first six months of 2003 from 10.7% for the first six months of 2002. The $803,000 increase can be primarily attributed to an increase in professional fees of $109,000 and $639,000 of operating expenses related to BDR Broadband. Research and Development Expenses. Research and development expenses increased to $1,016,000 in the first six months of 2003 from $966,000 in the first six months of 2002, primarily due to an 10 increase in licensing fees of $20,000 and consulting fees of $20,000. Research and development expenses as a percentage of sales, increased to 5.9% in the first six months of 2003 from 4.4% in the first six months of 2002. Operating Income (Loss). Operating loss of $1,304,000 for the first six months of 2003 represents a decrease from income of $834,000 for the first six months of 2002. Interest Expense. Interest expense increased to $555,000 in the first six months of 2003 from $486,000 in the first six months of 2002. The increase is the result of higher average borrowing . Income Taxes. The provision for income taxes for the first six months of 2003 decreased to a benefit of $711,000 from an expense of $132,000 for the first six months of 2002 as a result of a decrease in taxable income. Cumulative Effect of Change in Accounting Principle. During the first three months of 2002, the Company implemented FAS 142, which resulted in the write off of $10,760,000 of the net book value of goodwill, offset by the future tax benefit thereof in the amount of $3,874,000. The net cumulative effect of this change in accounting principles was a one-time non-recurring $6,886,000 charge against earnings in the first three months of 2002. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2003 and December 31, 2002, the Company's working capital was $14,986,000 and $30,317,000, respectively. The decrease in working capital is attributable primarily to an increase in borrowings under the revolving line of credit and the corresponding reclassification of debt to current liabilities due to its maturity date and failure to meet certain financial covenants, along with a reduction of inventory of $2,581,000. The Company's net cash provided by operating activities for the six-month period ended June 30, 2003 was $2,081,000, compared to net cash used by operating activities for the six-month period ended June 30, 2002, which was $159,000. The increase in net cash is primarily due to a decrease in inventory. Cash used in investing activities was $1,207,000 for the first six months of 2003, which was attributable to capital expenditures for new equipment and upgrades to the BDR Broadband Systems of $699,000 and a $725,000 investment in BTT. Cash used in financing activities was $851,000 for the first six months of 2003 primarily comprised of $5,971,000 of borrowings offset by $6,706,000 of repayments of long term debt. On March 20, 2002 the Company executed 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 (5% at June 30, 2003), (ii) a $9,000,000 term loan which bore interest at a rate of 6.75% through September 30, 2002, and thereafter bears interest at a fixed rate ranging from 6.50% to 7.25% to reset quarterly depending on the calculation of certain financial covenants (6.75% at June 30, 2003) 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'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 maturity date of the line of credit with Commerce Bank is April 1, 2004. The term loan requires 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's option. Upon execution of the credit agreement with Commerce Bank, $14,954,000 was advanced to the Company, of which $14,827,000 was used to pay all unpaid principal and accrued interest under the Company's prior line of credit and term loans with First Union National Bank. 11 At June 30, 2003, there was $6,026,000, $6,188,000 and $3,208,000 outstanding under the revolving line of credit, term loan and mortgage loan, respectively. At March 31, 2003 and June 30, 2003, the Company was unable to meet one of its financial covenants under its credit agreement with Commerce Bank, compliance with which was waived by the Bank effective as of each such date. 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, the Company paid $725,000 and will incur additional obligations in connection with its investments in NetLinc and BTT. While the Company's existing lender agreed to allow the Company to fund both the BDR Broadband obligations and the NetLinc/BTT obligations, such lender did not agree to increase the Company's line of credit. This has and may hereafter decrease the amount of funds otherwise available to the Company for working capital purposes. Accordingly, if alternative financing is not obtained for BDR Broadband and/or NetLinc/BTT, the Company may eventually need to seek to increase the amount of its line of credit or find an alternative financing source. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates. At June 30, 2003 and 2002 the principal amount of the Company's aggregate outstanding variable rate indebtedness was $6,026,000 and $2,990,000, respectively. A hypothetical 100 basis point increase in interest rates would have had an annualized unfavorable impact of approximately $60,000 and $30,000, respectively, on the Company's earnings and cash flows based upon these quarter-end debt levels. The Company did not have any derivative financial instruments in the periods presented. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness 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 principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective 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's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at a reasonable assurance level. In addition, the Company reviewed its internal control over financial reporting and there have been no changes during the fiscal quarter covered by this report 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 has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company's business, financial condition, or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders (the "MEETING") on May 8, 2003. The Company solicited proxies in connection with the Meeting. At the record date of the Meeting (March 21, 2003) there were 7,525,229 shares of Common Stock outstanding and entitled to vote. The following were the matters voted upon at the Meeting: 1. Election of Directors. The following directors were elected at the Meeting: Robert J. Palle, Jr., Gary P. Scharmett and James H. Williams. The number of votes cast for and withheld from each director are as follows: DIRECTORS FOR WITHHELD ------------------------ ---------------- -------------------- Robert J. Palle, Jr. 7,398,791 79,405 Gary P. Scharmett 7,398,791 79,405 James H. Williams 7,398,791 79,405 John E. Dwight, Robert E. Heaton, James A. Luksch, Robert B. Mayer and James F. Williams continued as directors after the Meeting. 2. Approval of amendment to Amended and Restated 1996 Director Option Plan ("PLAN"). The amendment to the Plan to increase the shares issuable pursuant to options granted thereunder from 100,000 to 200,000 shares was approved by the following vote of the Common Stock: FOR AGAINST ABSTAINED ------------------------ ----------------- --------------------- 7,261,378 211,398 5,420 3. Ratification of Auditors. The appointment of BDO Seidman, LLP as the Company's independent auditors for the year ending December 31, 2003 was ratified by the following vote of Common Stock: FOR AGAINST ABSTAINED ------------------------ ----------------- --------------------- 7,452,071 21,905 4,220 13 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits are listed in the Exhibit Index appearing at page 16 herein. (b) Reports on Form 8-K On May 15, 2003, the Company filed a Form 8-K relating to Items 5 and 9 of such Form. The information under Item 5 related to the appointment of officers of the Company and the information under Item 9 related to the Company's May 15, 2003 press release announcing its unaudited financial results for the first quarter ended March 31, 2003 (as required by Item 12 of Form 8-K). 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLONDER TONGUE LABORATORIES, INC. Date: August 14, 2003 By: /s/ James A. Luksch -------------------------------- James A. Luksch Chief Executive Officer By: /s/ Eric Skolnik -------------------------------- Eric Skolnik Senior Vice President and Chief Financial Officer (Principal Financial Officer) 15 EXHIBIT INDEX -------------
Exhibit # Description Location --------- ----------- -------- 3.1 Restated Certificate of Incorporated by reference from Exhibit Incorporation of Blonder 3.1 to S-1 Registration Statement No. Tongue Laboratories, Inc. 33-98070 originally filed October 12, 1995, as amended. 3.2 Restated Bylaws of Blonder Incorporated by reference from Exhibit Tongue Laboratories, Inc. 3.2 to S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 31.1 Certification of James A. Filed herewith. Luksch pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Eric Skolnik Filed herewith. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to Filed herewith. Section 906 of Sarbanes-Oxley Act of 2002.
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