-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtfMWN8qQoCl1qE6xESu+CDTlhjhvGxy8K/RW42wARW30RaJd9IIKRBY5OjUIlSX nGc8a50/HVXighV1Rl6AMA== 0000950115-99-000451.txt : 19990331 0000950115-99-000451.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950115-99-000451 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLONDER TONGUE LABORATORIES INC CENTRAL INDEX KEY: 0001000683 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 521611421 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14120 FILM NUMBER: 99578932 BUSINESS ADDRESS: STREET 1: ONE JAKE BROWN RD STREET 2: PO BOX 1000 CITY: OLD BRIDGE STATE: NJ ZIP: 08857 BUSINESS PHONE: 9086794000 MAIL ADDRESS: STREET 1: ONE JAKE BROWN ROAD CITY: OLD BRIDGE STATE: NJ ZIP: 08857 10-K405 1 ANNUAL REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, 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 incorporation or organization) Identification No.) 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Exchange on which registered - ----------------------------- ------------------------------------ Common Stock, Par Value $.001 American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant (computed by using the closing stock price on March 23, 1999, as reported by the American Stock Exchange): $17,165,385. Number of shares of common stock, par value $.001, outstanding as of March 23, 1999: 8,289,797 Documents incorporated by reference: Certain portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 6, 1999 (which is expected to be filed with the Commission not later than 120 days after the end of the registrant's last fiscal year) are incorporated by reference into Part III of this report. Forward-Looking Statements In addition to historical information, this Annual Report contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company's business include, but are not limited to, those matters discussed herein in the sections entitled Item 1 - Business, Item 3 - Legal Proceedings, and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The words "believe", "expect", "anticipate", "project" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Blonder Tongue 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. PART I ITEM 1. BUSINESS Introduction Blonder Tongue Laboratories, Inc. (the "Company") is a designer, manufacturer and supplier of a comprehensive line of electronics and systems equipment for the non-franchised cable television industry, commonly referred to as the private cable industry ("Private Cable"), and the franchised cable industry ("CATV"), which now potentially includes the regional and long distance telephone service providers. The Company's products are used in the acquisition, conversion, distribution and protection of television signals transmitted via satellite, coaxial cable, terrestrial broadcast, terrestrial multi-channel, multi-point distribution systems and low power television. These products are sold to customers which provide an array of communications services, including television, to single family dwellings, multiple dwelling units ("MDU") consisting mainly of apartment complexes and condominiums, the lodging industry ("Lodging") consisting mainly of hotels, motels and resorts, and other facilities such as schools, hospitals, prisons and marinas. The Company's products are also used in surveillance systems ranging in complexity from simple in-home monitoring systems to advanced business security systems with hundreds of cameras. Blonder Tongue's product line can be separated, according to function, into the following categories: (i) headend products used by a system operator for signal acquisition, processing and manipulation for further transmission ("Headend Products"), (ii) distribution products used to permit signals to travel to their ultimate destination in a home, apartment unit, hotel room, office or other terminal location ("Distribution Products"), (iii) subscriber products used to control access to programming at the subscriber's location and to split and amplify incoming signals for transmission to multiple sites and for multiple television sets within a site ("Subscriber Products"), and (iv) microwave products used to transmit the output of Headend Products to multiple locations using point-to-point communication links in the 13 GHz (for CATV) and 18 GHz (for Private Cable) range of frequencies ("Microwave Products"). The Company's principal customers are system integrators which design, package, install and in most instances operate the cable system. On March 26, 1998, the Company acquired all of the assets and technology rights of the interdiction business (the "Interdiction Business") of Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i) $19 million in cash, (ii) 67,889 shares of the Company's common stock, (iii) a warrant to purchase 150,000 additional shares of the Company's common stock at an exercise price of $14.25 per share and (iv) assumption by the Company of certain obligations under executory contracts with vendors and customers and certain warranty obligations and other current liabilities of the Interdiction Business. The Interdiction Business 2 generated approximately $16 million in revenues for the prior twelve month period. The Company believes that Scientific's interdiction products, which have been engineered primarily to serve the franchised cable market, will supplement the Company's VideoMask(TM) products, which are primarily focused on the Private Cable market. In addition, the Company expects that the technology acquired as part of the Interdiction Business will enhance its ability to design products that meet the specific needs of all cable providers, while improving its position in the franchised cable market. Industry Overview The television signal distribution industry is dominated by broadcast television and CATV. Private Cable, wireless cable and direct broadcast satellite, although smaller in market size, are becoming more significant players and are growing more rapidly. The regional telephone companies and long distance carriers are also emerging as television providers, through telephone lines, coaxial cable, fiber optics and/or wireless transmission. Recently enacted governmental deregulation of the communications industry has eliminated many remaining barriers to entry by alternative service providers, fostering an environment of greater competition and change. CATV service is typically provided through a coaxial cable network or a combination of optical fiber and coaxial cable that originates from a central headend and is carried to the subscriber's television set on telephone poles or underground along utility rights-of-way. Since the installation and maintenance of this network requires substantial initial and ongoing investment, a local governmental body typically awards a CATV operator rights to provide cable service to a defined geographic area. These rights or franchises were awarded on an exclusive basis prior to the adoption of the Telecommunications Act of 1996. Presently, additional franchises within geographical areas are encouraged, in order to increase competition. In contrast, Private Cable operates within the boundaries of private property, does not require any governmental license or franchise (other than the FCC license for transmission of television signals in the 18 GHz frequency band), and does not need access to public or private rights-of-way to deliver service. In Private Cable, television signals are acquired and transmitted from property to property via wireless transmission or using common carrier services (i.e. fiber networks operated by telephone service providers) rather than coaxial cable. The traditional CATV customer is a homeowner who is likely to remain in the same home as a long-term subscriber. For a wide variety of reasons, including the transient nature of apartment dwellers and the high cost of replacing lost or damaged set-top converters in apartment units when the tenants change, CATV has failed to adequately service the MDU market. This failure, together with the ability of Private Cable operators to link multiple properties to a central headend system, has greatly expanded the potential market for Private Cable. Present franchise cable operators recognizing the competition of private cable, anticipating direct competition by telephone service providers, and faced with employing even more costly in-house converters (i.e. as digital service is added) realize the vulnerability of the set top concept and the need to expand services to retain subscribers. CATV ---- Many CATV operators and telephone service providers are building fiber optic networks with alternative combinations of fiber optic and coaxial cable to deliver television signal programming data and phone services on one drop cable. CATV's deployment of fiber optic trunk has been completed in only 10% to 20% of existing systems. Deployment of the latest technology is in the test system stage. The system architecture being employed to accomplish the combined provision of television and telephone service is either hybrid fiber coax ("HFC") or fiber to the curb ("FTTC"). In HFC systems, fiber optic trunk lines connect to nodes which feed 200 to 400 subscribers, using coaxial cable. In FTTC systems fiber optic cable is used deeper into the network, with as few as four to eight subscribers fed by coaxial cable from each node. In either case, extensive rebuilding of a CATV system is required to provide the services anticipated. Consequently, not only are the regional and long distance telephone service providers faced with enormous capital expenditures to enter the video signal delivery business, but CATV is faced with similar expenditures to compete with them (or to discourage them from entering the race) to be the provider of the information superhighway. The Company believes that most major metropolitan areas will eventually have complex networks of one or two independent operators interconnecting the homes and private cable operators will have large networks 3 interconnecting many multi-dwelling complexes. All these networks are potential users of Blonder Tongue Headend and interdiction products. MDU --- Until February, 1991, the ability of Private Cable operators to penetrate the MDU market was substantially limited by FCC rules which specifically prohibited the Private Cable operator from using coaxial cable connections between properties. CATV operators had a significant competitive advantage because they could connect properties within their franchised areas with coaxial cable. In an effort to level the playing field, the FCC designated special frequency bands enabling Private Cable operators to link multiple properties to one central headend system via microwave signal transmission, thereby spreading the cost of headend electronics over multiple MDUs and a wider potential subscriber base. 18 GHz service is wide enough to support the transmission of 72 channels of television programming, has been the catalyst fueling the growth and product investment of MDU system operators, and has caused a substantial increase in the demand for quality Headend Products. In addition, provisions of the Telecommunications Act of 1996 permit Private Cable system operators to use coaxial cable connections between adjacent properties where no access to public rights-of-way are required. Further, fiber optic networks built by regional and long distance telephone service providers, which are common carriers, could be used by Private Cable system integrators as interconnects. Through the use of Microwave Products and common carrier fiber optic networks, Private Cable operators can target geographic areas with multiple properties, many of which would not otherwise have been considered economically feasible, for inclusion as part of an extensive Private Cable network. In the past, properties with 100 to 200 subscribers, could not financially justify more than 15 to 20 channels, but can now be linked to a central headend and justify a high channel carrier service of 60 channels or more. This allows Private Cable operators to supply a wide variety of programming at a price which is competitive with CATV. The economic feasibility of a Private Cable system depends on controlling the headend cost and spreading that cost over as many subscribers as possible using microwave links to multiple MDUs. Electronic equipment providing the best possible performance-to-cost ratio is key to successfully providing for the needs of Private Cable operators. The Company believes that its products are cost-effective and competitive with the products of other companies supplying the CATV industry, in terms of quality, number of channels and price. Lodging ------- Until the early 1990's, one system integrator dominated the Lodging market and manufactured much of its own equipment. During the last several years, other Private Cable integrators have successfully entered and expanded the Lodging market by offering systems with more channels, video-on-demand and interactivity. These systems have been well received in the market, as property owners have sought additional revenues and guests have demanded increased in-room conveniences. The integrators leading this market evolution rely upon outside suppliers for their system electronics and are Blonder Tongue customers. These companies and others offer Lodging establishments VCR-based systems which provide true video-on-demand movies with a large selection of titles. To meet these demands, the typical Lodging system headend will include as many as 20 to 40 receivers and as many as 60 to 80 modulators, and will be capable of providing the guest with more channels free-to-guest, video-on-demand for a broad selection of movie titles and even interactive services such as remote check-out and concierge services. This is in contrast to the systems which preceded them which had typically 10 to 12 receivers and modulators and provided six to ten channels free-to-guest and two to five channels of VCR-based movies running at published scheduled times. There is a trend to substitute video file servers for VCRs, which the Company believes will eventually replace VCR's in video-on-demand systems. The timing and speed of this transition is dependent on availability of lower cost servers. Most of the systems with video-on-demand service are in larger hotels, where the economics of high channel capacity systems are more easily justified. The conversion of hotel pay-per-view systems into video-on-demand is increasing. Smaller hotels and motels have had limited video-on-demand penetration to date, 4 principally because of the headend cost associated with each system and the limited revenues generated by the smaller number of rooms. International ------------- For much of the world, television service is in its infancy, but is expected to rapidly expand as technological advancement reduces the cost to consumers. In addition, economic development in Latin America and Asia has allowed first time construction of integrated delivery systems which utilize a variety of electronics and broadband hardware. The pace of growth is difficult to predict, but as more alternatives become available and television service becomes increasingly affordable, it is likely that more equipment will be placed in the field. In October, 1997, the Company executed a two-year distribution agreement with American Technology Exporters, Inc. ("Amtech"), a privately held company based in Miami, Florida. Under the terms of the contract, Amtech is required to purchase at least $3,000,000 per year of the Company's products and has been granted distribution rights in the Caribbean, Mexico and Central and South America. Amtech will also provide repair services for the Company's products in certain of these areas. During the first year of the contract, due primarily to competitive factors as well as economic conditions in certain South American countries, Amtech did not meet the minimum sales requirement. The Company is evaluating other initiatives to assist in building its penetration in these markets, including adding new distributors and obtaining "CE" certification for certain of the Company's products which are anticipated to be offered in several European markets. Additional Considerations ------------------------- The technological revolution taking place in the communications industry, which includes direct broadcast satellite, is providing digital television to an increasing number of homes. Wireless cable systems also utilize digital compression to provide channel capacity which is competitive with CATV and other television delivery systems. In addition, franchised cable companies and telephone companies, as stated earlier, are building fiber optic networks to offer video data and telephony. There is also the possibility of convergence of data and video communications, wherein computer and television systems merge and the computer monitor replaces the television screen. While it is not possible to predict with certainty which technology will be dominant in the future, it is clear that digitized video and advances in the ability to compress the digitized video signal make both digital television and the convergence of computer, telephone and television systems technically possible. Since United States television sets are analog (not digital), direct satellite television and other digitally compressed programming requires Headend Products or expensive set-top decoding receivers to convert the digitally transmitted satellite signals back to analog. The replacement of all television sets with digital sets will be costly and take many years to evolve. The Company believes that for many years to come, program providers will be required to deliver an analog television signal on standard channels to subscribers' television sets using Headend Products at some distribution point in their networks or employ decoding receivers at each television set. Headend Products are the heart of Blonder Tongue's business and except for systems deploying digital decoders at each television set (which is very expensive), the Company believes interdiction is an ideal product for a system operator to use to control access to the multitude of programming that will be available. In the completely digital environment which may develop over the long term, all analog Headend Products will need to be replaced with pure digital products. The Company and all other suppliers to Private Cable, CATV and the television industry generally will need to design and manufacture new products for that environment. Products Blonder Tongue's products can be separated, according to function, into the four broad categories described below: o Headend Products used by a system operator for signal acquisition, processing and manipulation for further transmission. Among the products offered by the Company in this category are satellite receivers (digital and analog), integrated receiver/decoders, demodulators, modulators, antennas and antenna mounts, amplifiers, equalizers, and processors. The headend of a television signal distribution 5 system is the "brain" of the system, the central location where the multi-channel signal is initially received, converted and allocated to specific channels for distribution. In some cases, where the signal is transmitted in encrypted form or digitized and compressed, the receiver will also be required to decode the signal. Blonder Tongue is a licensee of General Instrument Corporation's VideoCipher(R) and DigiCipher(R) encryption technologies, EchoStar Communication Corp.'s digital technologies and Hughes Network Systems digital technologies and integrates their decoders into integrated receiver/decoder products, where required. The Company is negotiating with additional companies which are delivering digital television signal transmission to acquire licenses to incorporate their proprietary digital decoders into the Company's receivers. The Company estimates that Headend Products accounted for approximately 70% of the Company's revenues in 1998, 80% in 1997, and 84% in 1996. o Distribution Products used to permit signals to travel from the headend to their ultimate destination in a home, apartment unit, hotel room, office or other terminal location along a distribution network of fiber optic or coaxial cable. Among the products offered by the Company in this category are line extenders, broadband amplifiers, directional taps, splitters and wall taps. In CATV systems, the distribution products are either mounted on exterior telephone poles or encased in pedestals, vaults or other security devices. In Private Cable systems the distribution system is typically enclosed within the walls of the building (if a single structure) or added to an existing structure using various techniques to hide the coaxial cable and devices. The non-passive devices within this category are designed to ensure that the signal distributed from the headend is of sufficient strength when it arrives at its final destination to provide high quality audio/video images. o Subscriber Products used to control access to programming at the subscriber's location and to split and amplify incoming signals for transmission to multiple sites and multiple television sets within a site. Among the products offered by the Company in this category are addressable interdiction devices, splitters, couplers and multiplexers. The Company believes that the most significant products within this category are (i) its VideoMask(TM) addressable signal jammer, licensed from Philips Electronics North America Corporation and its affiliate Philips Broadband Networks, Inc. in August 1995 under certain non-exclusive technology and patent license agreements (the "Philips License Agreements"), and (ii) the interdiction product line acquired from Scientific as part of its Interdiction Business. Interdiction products such as these limit, through jamming of particular channels, the availability of programs to subscribers. Such products enable an integrator to control subscriber access to premium channels and other enhanced services through a computer located off-premises. They also eliminate the necessity of an operator having to make a service call to install or remove passive traps and eliminate the costs associated with damage or loss of set-top converters in the subscribers' locations. Interdiction products are also being successfully used by CATV operators as an anti-piracy system in conjunction with set-top converters. The Company believes that the anti-piracy benefits of interdiction will be a significant factor in further product penetration into the CATV market. While it is not possible to predict the breadth of market acceptance for these products, the Company believes the potential is substantial in both the MDU market as well as in the CATV market as alternatives to, or in conjunction with, set-top converters and as a viable option for telephone companies, electric utilities and other new entrants to television signal distribution, who are planning to over-build existing cable infrastructures and are seeking a cost effective way to compete with CATV. o Microwave Products used to transmit the output of a cable system headend to multiple locations using point-to-point communication links in the 13 GHz (for CATV) and 18 GHz (for Private Cable) range of frequencies. Among the products offered by the Company in this category are power amplifiers, repeaters, receivers, transmitters and compatible accessories. These products convert the headend output up to the microwave band and transmit this signal using parabolic antennas. At each receiver site, a parabolic antenna-receiver combination converts the signal back to normal VHF frequencies for distribution to subscribers at the receiver site. The Company believes that this class of products will be a major catalyst for growth in the Private Cable MDU market and will be a strategic element in developing the Company's CATV market penetration. The Company will modify its products to meet specific customer requirements. Typically, these modifications are minor and do not materially alter the functionality of the products. Thus the inability of the 6 customer to accept such products does not generally result in the Company being otherwise unable to sell such products to other customers. Research and Product Development The markets served by Blonder Tongue are characterized by technological change, new product introductions, and evolving industry standards. To compete effectively in this environment, the Company must engage in continuous research and development in order to (i) create new products, (ii) expand the frequency range of existing products in order to accommodate customer demand for greater channel capacity, (iii) license new technology (such as digital satellite receiver decoders), and (iv) acquire products incorporating technology which could not otherwise be developed quickly enough using internal resources, to suit the dynamics of the evolving marketplace. Research and development projects are often initially undertaken at the request of and in an effort to address the particular needs of its customers and customer prospects with the expectation or promise of substantial future orders from such customers or customer prospects. Additional research and development efforts are also continuously underway for the purpose of enhancing product quality and engineering to lower production costs. For the acquisition of new technologies, the Company may rely upon technology licenses from third parties when the Company believes that it can obtain such technology more quickly and/or cost-effectively from such third parties than the Company could otherwise develop on its own, or when the desired technology is proprietary to a third party. There were 22 employees in the research and development department of the Company at December 31, 1998. Recent research and development product initiatives include a new line of microwave products transmitting in the 13 GHz frequency band and an internet connectivity device for use in cable systems to allow MDU subscribers to access the internet using DIRECTV(TM)'s DirecPC(TM) Technology to download data through their cable connection at speeds of up to 400 kbps, which is almost 10 times the speed of the traditional 56 kbps telephone modem. Marketing and Sales Blonder Tongue markets and sells its products worldwide to Private Cable integrators, which accounted for approximately 65% of the Company's revenues for fiscal years 1998, and 80% in 1997 and 1996, to regional and long distance telephone service providers, and to CATV integrators. Sales are made directly to customers by the Company's internal sales force, as well as through numerous domestic and international stocking distributors. The Company historically maintained contractual relationships with numerous independent sales representatives. In February, 1998, the Company terminated its contractual relationships with its independent sales representatives because management believes its internal sales force has the capacity to maintain or increase sales formerly made through independent sales representatives without the necessity of paying sales commissions. Should it be deemed necessary, the Company may retain independent sales representatives in particular geographic areas or targeted to specific customer prospects. The Company's internal sales force consists of approximately 26 employees, which currently includes six salespersons (two salespersons in Old Bridge, New Jersey, one salesperson in each of Cincinnati, Ohio, Cudahy, Wisconsin, and Covina and Folsom, California) and 20 sales-support personnel at the Company headquarters in Old Bridge, New Jersey. The Company's standard customer payment terms are 2%-10, net 30 days. From time to time where the Company determines that circumstances warrant, such as when a customer agrees to commit to a large blanket purchase order, the Company extends payment terms beyond its standard payment terms. The Company has several marketing programs to support the sale and distribution of its products. Blonder Tongue participates in industry trade shows and conferences. The Company also publishes technical articles in trade and technical journals, distributes sales and product literature and has an active public relations plan to ensure complete coverage of Blonder Tongue's products and technology by editors of trade journals. The 7 Company provides system design engineering for its customers, maintains extensive ongoing communications with many original equipment manufacturer customers and provides one-on-one demonstrations and technical seminars to potential new customers. Blonder Tongue supplies sales and applications support, product literature and training to its sales representatives and distributors. The management of the Company travels extensively, identifying customer needs and meeting potential customers. The Company had approximately $5,361,000 and $5,375,000 in purchase orders as of December 31, 1998 and December 31, 1997, respectively. All of the purchase orders outstanding as of December 31, 1998 are expected to be shipped prior to December 31, 1999. The purchase orders are for the future delivery of products and are subject to cancellation by the customer. Customers Blonder Tongue has a broad customer base, which in 1998 consisted of more than 1,000 active accounts. Approximately 33%, 40% and 39% of the Company's revenues in fiscal years 1998, 1997 and 1996, respectively, were derived from sales of products to the Company's five largest customers. In 1998, sales to Toner Cable Equipment, Inc. accounted for approximately 10% of the Company's revenues. Sales to the five largest customers consisted principally of Headend Products. There can be no assurance that any sales to these entities, individually or as a group, will reach or exceed historical levels in any future period. However, the Company anticipates that these customers will continue to account for a significant portion of the Company's revenues in future periods, although none of them is obligated to purchase any specified amount of products (beyond outstanding purchase orders) or to provide the Company with binding forecasts of product purchases for any future period. The complement of leading customers may shift as the most efficient and better financed integrators grow more rapidly than others. The Company believes that many integrators will grow rapidly, and as such the Company's success will depend in part on the viability of those customers and on the Company's ability to maintain its position in the overall marketplace by shifting its emphasis to those customers with the greatest growth and growth prospects. Any substantial decrease or delay in sales to one or more of the Company's leading customers, the financial failure of any of these entities, or the Company's inability to develop and maintain solid relationships with the integrators which may replace the present leading customers, would have a material adverse effect on the Company's results of operations and financial condition. During 1998, one of the Company's customers experienced financial difficulties and demonstrated the inability to pay. This customer could not continue as a going concern and, as of March 16, 1999, this customer had an outstanding account with the Company of approximately $991,000, which has been outstanding for more than ninety (90) days. Accordingly, the Company has significantly increased the allowance for doubtful accounts for this exposure. In addition, the Company has a personal guarantee from the parties involved in the amount of $300,000, and has filed a claim in the State of California for recovery of these funds. The Company does not anticipate a resolution to this matter in the near future. The Company's revenues are derived primarily from customers in the continental United States, however, the Company also derives revenues from customers outside the continental United States, primarily in underdeveloped countries. Television service is in its infancy in many international markets, particularly Latin America and Asia, creating opportunity for those participants who offer quality products at a competitive price. Sales to customers outside of the United States represented approximately 2%, 3% and 5% of the Company's revenues in fiscal years 1998, 1997 and 1996, respectively. All of the Company's transactions with customers located outside of the continental United States are denominated in U.S. dollars, therefore, the Company has no material foreign currency transactions. Manufacturing and Suppliers Blonder Tongue's manufacturing operations are located at the Company's headquarters in Old Bridge, New Jersey. The Company's manufacturing operations are vertically integrated and consist principally of the assembly and testing of electronic assemblies built from fabricated parts, printed circuit boards and electronic devices and the fabrication from raw sheet metal of chassis and cabinets for such assemblies. Management 8 continues to implement a significant number of changes to the manufacturing process to increase production volume and reduce product cost, including logistics modifications on the factory floor, an increased use of surface mount, axial lead and radial lead robotics to place electronic components on printed circuit boards, a continuing program of circuit board redesign to make more products compatible with robotic insertion equipment and an increased integration in machining and fabrication. All of these efforts are consistent with and part of the Company's strategy to provide its customers with high performance-to-cost ratio products. Outside contractors supply standard components and etch printed circuit boards to the Company's specifications. While the Company generally purchases electronic parts which do not have a unique source, certain electronic component parts used within the Company's products are available from a limited number of suppliers and can be subject to temporary shortages because of general economic conditions and the demand and supply for such component parts. If the Company were to experience a temporary shortage of any given electronic part, the Company believes that alternative parts could be obtained or system design changes implemented. However, in such situations the Company may experience temporary reductions in its ability to ship products affected by the component shortage. The Company purchases several products from sole suppliers for which alternative sources are not available, such as the VideoCipher(R) and DigiCipher(R) encryption systems manufactured by General Instrument Corporation, which are standard encryption methodology employed on U.S. C-Band and Ku-Band transponders, EchoStar digital satellite receiver decoders, which are specifically designed to work with the DISH Network(TM), and Hughes Network Systems digital satellite receivers for delivery of DIRECTV(TM) programming. An inability to timely obtain sufficient quantities of these components could have a material adverse effect on the Company's operating results. The Company does not have a supply agreement with General Instrument Corporation or any other supplier. The Company submits purchase orders to its suppliers on an as-needed basis. Blonder Tongue maintains a quality assurance program which tests samples of component parts purchased, as well as its finished products, on an ongoing basis and also conducts tests throughout the manufacturing process using commercially available and in-house built testing systems that incorporate proprietary procedures. Blonder Tongue performs final product tests on 100% of its products prior to shipment to customers. Competition All aspects of the Company's business are highly competitive. The Company competes with national, regional and local manufacturers and distributors, including companies larger than Blonder Tongue which have substantially greater resources. Various manufacturers who are suppliers to the Company sell directly as well as through distributors into the CATV and Private Cable marketplaces. Because of the convergence of the cable, telecommunications and computer industries and rapid technological development, new competitors may seek to enter the principal markets served by the Company. Many of these potential competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than Blonder Tongue. The Company expects that direct and indirect competition will increase in the future. Additional competition could result in price reductions, loss of market share and delays in the timing of customer orders. The principal methods of competition are product differentiation, performance and quality, price and terms, service, and technical and administrative support. Intellectual Property The Company currently holds 30 United States patents and 14 foreign patents covering a wide range of electronic systems and circuits, of which 19 United States patents and 10 foreign patents were obtained in the acquisition of Scientific's Interdiction Business. Other than certain of the patents acquired from Scientific, none of the Company's patents are considered material to the Company's present operations because they do not relate to high volume applications. Because of the rapidly evolving nature of the Private Cable and CATV industries, the Company believes that its market position as a leading supplier to Private Cable derives primarily from its ability to develop a continuous stream of new products which are designed to meet its customers' needs and which have a high performance-to-cost ratio. The Company is a licensee of Philips Electronics North America Corporation and its affiliate Philips Broadband Networks, Inc., General Instrument Corporation ("GI"), Houston Tracker Systems, Inc., a 9 subsidiary of EchoStar Communications Corp. ("EchoStar"), Hughes Network Systems, a Hughes Electronics Corporation ("Hughes") and several smaller software development companies. Under the Philips License Agreements, the Company is granted a non-exclusive license for a term which expires in 2010, concurrently with the last to expire of the relevant patents. The Philips License Agreements provide for the payment by the Company of a one-time license fee and for the payment by the Company of royalties based upon unit sales of licensed products. The Company is a licensee of GI relating to GI's VideoCipher(R) encryption technology and is also a party to a private label agreement with GI relating to its DigiCipher(R) technology. Under the VideoCipher(R) license agreement, the Company is granted a non-exclusive license under certain proprietary know-how, to design and manufacture certain licensed products to be compatible with the VideoCipher(R) commercial descrambler module for a term of ten years, expiring in August, 2000. The VideoCipher(R) license agreement provides for the payment by the Company of a one-time license fee for the Company's first model of licensed product and additional one-time license fees for each additional model of licensed product. The VideoCipher(R) license agreement also provides for the payment by the Company of royalties based upon unit sales of licensed products. Under the DigiCipher(R) private label agreement, the Company is granted the non-exclusive right to sell DigiCipher(R) II integrated receiver decoders bearing the Blonder Tongue name for use in the commercial market for a term expiring in December, 1999. The DigiCipher(R) private label agreement provides for the payment by the Company of a one-time license fee for the Company's first model of licensed product and additional one-time license fees for each additional model of licensed product. In November, 1996, the Company entered into a license agreement with EchoStar, pursuant to which the Company is licensed to manufacture and sell digital satellite receiver systems which are compatible with digital programming transmitted by EchoStar's DISH Network(TM), for use in the commercial market. The agreement is for a term of five years, expiring in November, 2001. The EchoStar license agreement provides for the payment by the Company of a one-time license fee and for the payment of royalties based upon unit sales of licensed products. During 1996, the Company also entered into several software development and license agreements for specifically designed controller and interface software necessary for the operation of the Company's Video Central(TM) remote interdiction control system, which is used for remote operation of VideoMask(TM) signal jammers installed at subscriber locations. These licenses are perpetual and require the payment of a one-time license fee and in one case additional payments, the aggregate of which are not material. In February, 1998, the Company entered into an exclusive license agreement with Hughes, pursuant to which the Company is licensed to design, manufacture, and market commercial digital satellite receivers which are compatible with DIRECTV(TM) programming, for use in headend applications in both the franchised and private cable markets. The agreement is for a term of five (5) years, expiring in February 2003. The Company relies on a combination of contractual rights and trade secret laws to protect its proprietary technology and know-how. There can be no assurance that the Company will be able to protect its technology and know-how or that third parties will not be able to develop similar technology and know-how independently. Therefore, existing and potential competitors may be able to develop products that are competitive with the Company's products and such competition could adversely affect the prices for the Company's products or the Company's market share. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining its leadership position. Regulation Private Cable (estimated by the Company to represent approximately 80% of its business), while in some cases subject to certain FCC licensing requirements, is not presently burdened with extensive government regulations. CATV operators (estimated by the Company to represent approximately 20% of its business) had been subject to extensive government regulation pursuant to the Cable Television Consumer Protection and Competition Act of 1992, which among other things provided for rate rollbacks for basic tier cable service, further rate reductions 10 under certain circumstances and limitations on future rate increases. The Telecommunications Act of 1996 has deregulated many aspects of CATV system operation and has opened the door to competition among cable operators and telephone companies in each of their respective industries. The Company believes that this legislation will increase the base of potential customers for the Company's products. In September, 1998, the FCC issued a Notice of Proposed Rulemaking proposing to grant primary status for use of the 18 GHz frequency band to Fixed Satellite Service Operators. If adopted, this rule would adversely affect sales of 18 GHz microwave products to Private Cable operators. In anticipation of a change in the frequency which would be allocated for use by Private Cable operators, the Company has developed a new line of microwave products operating in the 13 GHz frequency band. Pending release of the FCC's Report and Order with respect to this matter, any applications filed by Private Cable operators for use of the 18 GHz frequency band will be grandfathered. Environmental Regulations The Company is subject to a variety of federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing processes. The Company did not incur in 1998 and does not anticipate incurring in 1999 material capital expenditures for compliance with federal, state and local environmental laws and regulations. There can be no assurance, however, that changes in environmental regulations will not result in the need for additional capital expenditures or otherwise impose additional financial burdens on the Company. Further, such regulations could restrict the Company's ability to expand its operations. Any failure by the Company to obtain required permits for, control the use of, or adequately restrict the discharge of, hazardous substances under present or future regulations could subject the Company to substantial liability or could cause its manufacturing operations to be suspended. The Company presently holds a permit from the New Jersey Department of Environmental Protection ("NJDEP"), Division of Environmental Quality, Air Pollution Control Program relating to its operation of certain process equipment, which permit expires in June, 2001. The Company has held such a permit for this equipment on a substantially continuous basis since approximately April, 1989. The Company also has authorization under the New Jersey Pollution Discharge Elimination System/Discharge to Surface Waters General Industrial Stormwater Permit, Permit No. NJ0088315. This permit will expire January 2002. Employees The Company employs approximately 526 persons, including 397 in manufacturing, 20 in research and development, 15 in quality assurance, 45 in production services, 26 in sales and marketing, and 23 in a general and administrative capacity. 326 of the Company's employees are members of the International Brotherhood of Electrical Workers Union, Local 2066, which has a three year labor agreement with the Company expiring in February, 2002. ITEM 2. PROPERTIES The Company's principal manufacturing, engineering, sales and administrative facilities consist of one building totalling approximately 130,000 square feet located on approximately 20 acres of land in Old Bridge, New Jersey (the "Old Bridge Facility") which is owned by the Company. The Company also leases office space in Cincinnati, Ohio for which it pays rent of approximately $260 per month. Management believes that the Old Bridge Facility is adequate to support the Company's anticipated needs in 1999. Subject to compliance with applicable zoning and building codes, the Old Bridge real property is large enough to double the size of the plant to accommodate expansion of the Company's operations should the need arise. 11 ITEM 3. LEGAL PROCEEDINGS The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company's business, financial condition, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1998 through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been traded on the American Stock Exchange since the Company's initial public offering on December 14, 1995. The following table sets forth for the fiscal quarters indicated, the high and low sale prices for the Company's Common Stock on the American Stock Exchange. Market Information Fiscal Year Ended December 31, 1998: High Low ---- --- First Quarter ............................. 16 1/8 12 3/8 Second Quarter ............................. 14 1/4 9 3/8 Third Quarter ............................. 11 3/4 5 3/8 Fourth Quarter............................ .. 9 1/4 5 1/4 Fiscal Year Ended December 31, 1997: High Low ---- --- First Quarter ............................. 9 1/2 6 3/8 Second Quarter ............................. 9 6 1/8 Third Quarter ............................. 17 1/2 7 11/16 Fourth Quarter............................ .. 18 7/16 12 5/8 The Company's Common Stock is traded on the American Stock Exchange under the symbol "BDR". Holders As of March 16, 1999, the Company had approximately 66 holders of record of the Common Stock. Since a portion of the Company's common stock is held in "street" or nominee name, the Company is unable to determine the exact number of beneficial holders. Dividends The Company currently anticipates that it will retain all of its earnings to finance the operation and expansion of its business, and therefore does not intend to pay dividends on its Common Stock in the foreseeable future. Other than in connection with certain S Corporation distributions, the Company has never declared or paid any cash dividends on its Common Stock. Any determination to pay dividends in the future is at the discretion of the Company's Board of Directors and will depend upon the Company's financial condition, results of operations, capital requirements, limitations contained in loan agreements and such other factors as the Board of Directors 12 deems relevant. The Company's loan agreement with First Union National Bank prohibits the payment of dividends by the Company on its Common Stock, unless at the time of and after giving effect to any proposed dividend payment, the Company is not in default under the loan agreement and is in compliance with certain financial covenants relating to, among other things, working capital, tangible net worth and debt service coverage. Sale of Unregistered Securities In connection with the acquisition of Scientific's Interdiction Business, in March, 1998, the Company issued 67,889 shares of common stock and a warrant to purchase an additional 150,000 shares of common stock to Scientific pursuant to the exemption from registration provided by Section 4(2) and Regulation D under the Securities Act of 1933, as amended. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of earnings data presented below for each of the years ended December 31, 1998, 1997 and 1996, and the selected consolidated balance sheet data as of December 31, 1998 and 1997 are derived from, and are qualified by reference to, the audited consolidated financial statements of the Company and notes thereto included elsewhere in this Form 10-K. The selected consolidated statement of earnings data for the years ended December 31, 1995 and 1994 and the selected consolidated balance sheet data as of December 31, 1996, 1995 and 1994 are derived from audited consolidated financial statements not included herein. The data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, notes thereto and other financial and statistical information appearing elsewhere herein. Year Ended December 31, -------------------------------------------------- 1998(1) 1997 1996 1995 1994 ------- ------- ------- ------- ------- (in thousands, except per share data) Consolidated Statement of Earnings Data: Net sales.................. $70,792 $62,057 $48,862 $51,982 $35,804 Cost of goods sold......... 45,344 39,656 30,613 32,528 21,791 ------- ------- ------- ------- ------- Gross profit............. 25,448 22,401 18,249 19,454 14,013 ------- ------- ------- ------- ------- Operating expenses: Selling, general and administrative......... 10,755 9,938 9,135 9,791 7,060 Research and development. 2,156 1,954 1,972 2,011 1,477 ------- ------- ------- ------- ------- Total operating expenses. 12,911 11,892 11,107 11,802 8,537 ------- ------- ------- ------- ------- Earnings from operations... 12,537 10,509 7,142 7,652 5,476 Interest expense........... 1,596 414 658 1,296 439 Other (income) expense, net (40) (595) -- (60) (89) ------- ------- ------- ------- ------- Earnings before income taxes 10,981 10,690 6,484 6,416 5,126 Provisions for income taxes 3,868 4,276 2,601 ------- ------- ------- Net earnings............... $ 7,113 $ 6,414 $ 3,883 ======= ======= ======= Basic earnings per share... $ 0.86 $ 0.78 $ 0.48 Basic weighted average shares outstanding(2)...... 8,292 8,227 8,144 Diluted earnings per share. $ 0.84 $ 0.77 $ 0.47 Diluted weighted average shares outstanding(2)...... 8,471 8,375 8,300 Pro Forma Data: Pro forma provision for income taxes(3)............ 2,566 2,050 ------- ------- Pro forma net earnings..... $ 3,850 $ 3,076 ======= ======= Pro forma basic net earnings per share.................. $ 0.66 $ 0.48 Basic weighted average shares outstanding(2)...... 5,823 6,406 Pro forma diluted earnings per share.................. $ 0.64 $ 0.48 Diluted weighted average shares outstanding(2)...... 6,054 6,475 Other Data: S Corporation distributions declared................... $ -- $ -- $ -- $ 7,896 $ 4,425 Year Ended December 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- -------- (in thousands) Consolidated Balance Sheet Data: Working capital........... $17,049 $26,055 $23,015 $14,407 $ 5,786 Total assets.............. 69,651 42,272 36,165 31,804 15,832 Long-term debt (including current maturities) ...... 22,359 5,054 6,347 2,145 5,196 Stockholders' equity...... 40,496 31,795 25,576 19,740 3,509 - ------------------ (1) On March 26, 1998, the Company acquired all of the assets and technology rights of Scientific-Atlanta, Inc.'s interdiction business. See Note 11 to the Company's consolidated financial statements. (2) Weighted average shares are calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." See Note 1(j) of notes to the Company's consolidated financial statements. (3) On December 11, 1995, the Company's status as an S Corporation terminated and as a result the Company is now subject to corporate income taxes. Accordingly, pro forma net earnings reflect a pro forma adjustment for income taxes which would have been recorded had the Company been a C Corporation. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's historical results of operations and liquidity and capital resources should be read in conjunction with "Selected Consolidated Financial Data" and the consolidated financial statements of the Company and notes thereto appearing elsewhere herein. Overview The Company was incorporated in November, 1988, under the laws of Delaware as GPS Acquisition Corp. for the purpose of acquiring the business of Blonder-Tongue Laboratories, Inc., a New Jersey corporation which was founded in 1950 by Ben H. Tongue and Isaac S. Blonder (the "former Blonder-Tongue") 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'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 CATV system integrators and to deliver products having a high performance-to-cost ratio. The Company has experienced significant growth since the acquisition of the former Blonder-Tongue, both internally and through strategic acquisitions. In December 1995, the Company successfully concluded an initial public offering of 2,200,000 shares of its Common Stock. Thereafter, in January 1996, the Company's underwriters exercised their over-allotment option, as a result of which an additional 181,735 shares of the Company's Common Stock were sold. The proceeds received by the Company from the sale of its Common Stock in the offering (including shares sold pursuant to the over-allotment option), net of expenses of the offering and certain S Corporation distributions to the Company's principal stockholders, was approximately $14,045,000. These funds were used to acquire the Company's Old Bridge Facility and to reduce the Company's outstanding bank debt. The Company has further enhanced its liquidity through a long-term loan secured by a mortgage against the Old Bridge Facility. On March 26, 1998, the Company acquired all of the assets and technology rights of the interdiction business (the "Interdiction Business") of Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i) $19 million in cash, (ii) 67,889 shares of the Company's common stock, (iii) a warrant to purchase 150,000 additional shares of the Company's common stock at an exercise price of $14.25 per share and (iv) assumption by the Company of certain obligations under executory contracts with vendors and customers and certain warranty obligations and other current liabilities of the Interdiction Business. The Interdiction Business generated approximately $16 million in revenues for the prior twelve month period. The Company believes that Scientific's interdiction products, which have been engineered primarily to serve the franchised cable market, will supplement the Company's VideoMask(TM) products, which are primarily focused on the Private Cable market. In addition, the Company expects that the technology acquired as part of the Interdiction Business will enhance its ability to design products that meet the specific needs of all cable providers, while improving its position in the franchised cable market. 15 Results of Operations The following table sets forth, for the fiscal periods indicated, certain consolidated statement of earnings data as a percentage of net sales: Year Ended December 31, ---------------------------------- 1998 1997 1996 ------ ------ ------ Net sales.............................. 100.0% 100.0% 100.0% Costs of goods sold.................... 64.1 63.9 62.7 Gross profit........................... 35.9 36.1 37.3 Selling expenses....................... 6.8 8.0 9.8 General and administrative expenses.... 8.4 8.0 8.9 Research and development expenses...... 3.0 3.2 4.0 Earnings from operations............... 17.7 16.9 14.6 Other (income) expense, net............ 2.2 (.3) 1.3 Earnings before income taxes........... 15.5 17.2 13.3 1998 Compared with 1997 Net Sales. Net sales increased $8,735,000, or 14.1%, to $70,792,000 in 1998 from $62,057,000 in 1997. International sales accounted for $1,137,000 (1.6% of total sales) for 1998 compared to $1,620,000 (2.6% of total sales) for 1997. The increase in sales is primarily attributed to the increase in sales of interdiction equipment including sales to the franchised cable market. Net sales included approximately $15,938,000 of interdiction equipment for 1998 compared to approximately $7,567,000 for 1997. Cost of Goods Sold. Cost of goods sold increased to $45,344,000 for 1998 from $39,656,000 for 1997, primarily due to increased volume, and increased as a percentage of sales to 64.1% from 63.9%. The increase as a percentage of sales was caused primarily by a greater proportion of sales during the period being comprised of lower margin products. Selling Expenses. Selling expenses decreased to $4,823,000 in 1998 from $4,964,000 in 1997, and decreased as a percentage of sales to 6.8% in 1998 from 8.0% in 1997. The decrease was primarily due to a decrease in commissions and promotional goods offset by an increase in shipping materials. General and Administrative Expenses. General and administrative expenses increased to $5,932,000 in 1998 from $4,974,000 for 1997 and increased as a percentage of sales to 8.4% in 1998 from 8.0% for 1997. The $958,000 increase can be attributed to an increase in the allowance for doubtful accounts along with an increase in the amortization of intangibles related to the acquisition of Scientific's Interdiction Business offset by a decrease in the accrual for executive bonuses. The increase in the allowance for doubtful accounts is primarily attributable to one account demonstrating the inability to pay within the third quarter. Research and Development Expenses. Research and development expenses increased 10.3% to $2,156,000 in 1998 from $1,954,000 in 1997. The $202,000 increase is primarily due to an increase in purchased materials for research and development and the reimbursement of costs incurred as a result of the termination of the Pacific Bell contract in 1997. Research and development expenses decreased as a percentage of sales to 3.0% from 3.2%. Operating Income. Operating income increased 19.3% to $12,537,000 for 1998 from $10,509,000 for 1997. Operating income as a percentage of sales increased to 17.7% in 1998 from 16.9% in 1997. Interest and Other Expenses. Other expenses in 1998 consisted of $1,596,000 of interest expense offset by $40,000 of interest income. Other income in 1997 consisted of $535,000 related to the final payment received from Pacific Bell as a result of the contract termination in July 1997, along with $60,000 of interest income 16 offset by $414,000 of interest expense. The increase in interest expense is primarily attributed to increased borrowings under the Company's acquisition loan commitment. Income Taxes. The provision for income taxes for 1998 decreased to $3,868,000 from $4,276,000 for 1997 as a result of state tax credits available to the Company related to 1997 activity which also reduced the Company's effective tax rate to 39% from 40%. 1997 Compared with 1996 Net Sales. Net sales increased $13,195,000, or 27%, to $62,057,000 in 1997 from $48,862,000 in 1996. International sales accounted for $1,620,000 (2.6% of total sales) for 1997 compared to $2,655,000 (5.4% of total sales) for 1996. Net sales did not include any milestone billings under the Company's agreement with Pacific Bell for 1997 compared to $2,192,000 for 1996. The increase in sales is primarily attributed to an increase in demand for products in the MDU market and the continued growth in the Lodging market. In addition, the sales of VideoMask(TM) interdiction equipment remained strong. Net sales included approximately $7,567,000 of VideoMask(TM) interdiction equipment for 1997 compared to $2,939,000 for 1996. Effective July 18, 1997, the Company's agreement to supply interdiction equipment to Pacific Bell was terminated. The termination did not have a significant impact on 1997 sales. The Pacific Bell contract contained provisions for penalties upon early termination by either party. In July, 1997, the Company received a payment in the amount of $1.5 million from Pacific Bell for reimbursement of costs incurred by the Company through the date of termination. The payment was offset by a portion of the costs incurred by the Company for customized inventory ($708,000) and operating expenses ($257,000) incurred in connection with the contract. In addition, the Company recognized $535,000 in other income. Cost of Goods Sold. Cost of goods sold increased to $39,656,000 for 1997 from $30,613,000 for 1996, primarily due to increased volume, and increased as a percentage of sales to 63.9% from 62.7%. The increase as a percentage of sales was caused primarily by a greater proportion of sales during the period being comprised of lower margin products. Selling Expenses. Selling expenses increased to $4,964,000 in 1997 from $4,780,000 in 1996, but decreased as a percentage of sales to 8.0% in 1997 from 9.8% in 1996. The dollar increase was primarily due to an increase in commissions ($128,000) as a result of the increase in sales, an increase in shipping materials ($86,000) and an increase in royalty payments related to licensing agreements ($76,000). These increases were offset by a reduction of costs incurred for trade shows ($142,000). General and Administrative Expenses. General and administrative expenses increased to $4,974,000 in 1997 from $4,355,000 for 1996 but decreased as a percentage of sales to 8.0% in 1997 from 8.9% for 1996. The $619,000 increase can be primarily attributable to an increase in the accrual for executive bonuses in connection with the implementation of the Company's Executive Officer Bonus Plan and an increase in the allowance for doubtful accounts related to the increase in sales volume. Research and Development Expenses. Research and development expenses decreased 1% to $1,954,000 in 1997 from $1,972,000 in 1996, primarily due to the reimbursement of costs incurred as a result of the termination of the Pacific Bell contract and a decrease in expenditures for consulting services that were incurred with respect to the VideoMask(TM) product line in 1996. These decreases were offset by an increase in amortization of technology license agreements, an increase in depreciation expense related to the acquisition of new equipment and an increase in wages due to the hiring of personnel with higher qualifications. Research and development expenses also decreased as a percentage of sales to 3.2% from 4.0%. Operating Income. Operating income increased 47.1% to $10,509,000 for 1997 from $7,142,000 for 1996. Operating income as a percentage of sales increased to 16.9% in 1997 from 14.6% in 1996. 17 Interest and Other Expenses. Other income in 1997 consisted of $535,000 related to the final payment received from Pacific Bell as a result of the contract termination in July, 1997, along with $60,000 of interest income offset by $414,000 of interest expense. Other expenses in 1996 consisted of interest expense of $658,000. The reduction in interest expense is primarily attributed to reduced borrowings under the Company's credit line. Income Taxes. The provision for income taxes for 1997 increased to $4,276,000 from $2,601,000 for 1996 as a result of increased taxable income. The effective tax rate for both years remained at 40%. Inflation and Seasonality Inflation and seasonality have not had a material impact on the results of operations of the Company. Fourth quarter sales in 1998 were slightly impacted by fewer production days. The Company expects sales each year in the fourth quarter to be impacted by fewer production days. Year 2000 The Company has assigned certain individuals to identify and correct Year 2000 compliance issues. Information technology ("IT") systems with non-compliant code are expected to be modified or replaced with systems that are Year 2000 compliant. Similar actions are being taken with respect to non-IT systems, primarily systems embedded in manufacturing and the Company's products. The individuals are also responsible for investigating the readiness of suppliers, customers and other third parties along with the development of contingency plans where necessary. All IT systems have been inventoried and assessed for compliance, and detailed plans are in place for required system modifications or replacements. Remediation and testing activities are underway with approximately 60% of the systems already compliant. IT systems are expected to be fully compliant by the end of the second quarter of 1999. Inventories and assessments of non-IT systems have been completed. Progress of the Year 2000 compliance program is continuously being monitored by senior management. The Company has identified critical suppliers, customers and other third parties and has surveyed their Year 2000 remediation programs. Risk assessments and contingency plans, where necessary, will be finalized in the first quarter of 1999. Incremental costs directly related to Year 2000 issues are estimated to be $300,000 to be incurred between 1998 and 2000, of which $240,000 (or 80%) has been spent to date. Approximately 90% of the total estimated spending represents costs to modify existing systems. Costs incurred prior to 1998 were immaterial. This estimate assumes that the Company will not incur significant Year 2000 related costs on behalf of suppliers, customers or other third parties. The Company's most likely potential risk is the inability of some customers to order and pay on a timely basis. In addition, the Company has several foreign suppliers, which, if not in compliance, would cause the Company to utilize more expensive suppliers resulting in reduced margins. Contingency plans for Year 2000-related interruptions are being developed and will include, but not be limited to, the development of emergency backup and recovery procedures, remediation of existing systems parallel with installation of new systems and identification of alternate suppliers. All plans are expected to be completed by the end of the second quarter of 1999. The Company's Year 2000 efforts are ongoing and its overall plan, as well as the consideration of contingency plans, will continue to evolve as new information becomes available. While the Company anticipates no major interruption of its business activities, that will be dependent in part, upon the ability of third parties to properly remediate their IT and non-IT systems in a timely manner. Although the Company has implemented the actions described above to address third party issues, it has no ability to influence the compliance actions of such parties. Accordingly, while the Company believes its actions in this regard should have the effect of reducing Year 18 2000 risks, it is unable to eliminate them or estimate the ultimate effect Year 2000 risks will have on the Company's operating results. Liquidity and Capital Resources As of December 31, 1998 and 1997, the Company's working capital was $17,049,000 and $26,055,000, respectively. The decrease in working capital is attributable primarily to the Company's acquisition of Scientific's Interdiction Business resulting in $19,000,000 outstanding under the acquisition loan commitment. Historically, the Company has satisfied its cash requirements primarily from net cash provided by operating activities and from borrowings under its line of credit. The Company's net cash provided by operating activities for the period ended December 31, 1998 was $921,000 as a result of the Company's net earnings offset by $4,147,000 to fund the increase in inventory and $3,456,000 related to the increase in accounts receivable, compared to cash provided by operating activities for the period ended December 31, 1997 of $2,290,000. Cash used in investing activities was $19,879,000. $19,000,000 was utilized for the acquisition of Scientific's Interdiction Business, and $879,000 is attributable to capital expenditures for new equipment. The Company purchased automated assembly and test equipment, along with computer hardware and software. The Company does not have any present plans or commitments for material capital expenditures for fiscal year 1999. Cash provided by financing activities was $18,945,000 for the period ended December 31, 1998, comprised primarily of $19,000,000 in proceeds from the Company's acquisition loan commitment. In October, 1997, the Company executed a new $15 million revolving line of credit with its bank, on which funds may be borrowed at the bank's overnight base rate ("OBR") plus a margin ranging from .95% to 2.45%, depending upon the calculation of certain financial covenants (7.95% at December 31, 1998). As of December 31, 1998, the Company had $1.8 million outstanding under the line of credit. The line of credit is collateralized by a security interest in all of the Company's assets. The agreement contains restrictions that require the Company to maintain certain financial ratios as well as restrictions on the payment of dividends. In addition, the Company has an acquisition loan commitment which may be drawn upon by the Company to finance acquisitions in accordance with certain terms. The acquisition loan commitment had been $15 million until March, 1998 when it was increased to $20 million to accommodate the acquisition of Scientific's Interdiction Business. Funds may be borrowed under the acquisition loan commitment at OBR plus a margin ranging from 1.25% to 2.75%, depending upon the calculation of certain financial covenants. At December 31, 1998, there was $19 million outstanding under the acquisition loan commitment. The line of credit and the acquisition loan commitment expire on June 30, 1999. The Company is currently in the final stages of negotiations to renew the line of credit and acquisition loan commitment with interest rates based upon LIBOR plus a variable margin. When executed, the renewed line of credit and acquisition loan commitment (and LIBOR-based interest rate) will be effective as of February 1, 1999. On February 3, 1999, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000. The swap agreement has a maturity date of June 3, 2002 and requires the Company to make fixed rate interest payments on the notional amount of 8.01% per annum in exchange for floating rate payments equal to LIBOR plus 2.55%. The Company is exposed to credit risk in the unlikely event of the nonperformance by the counterparties. Interest to be paid or received is accrued over the life of the agreement at the net effective interest rate for the swap and corresponding debt instrument. The Company currently anticipates that the cash generated from operations, existing cash balances and amounts available under its existing or a replacement line of credit, will be sufficient to satisfy its foreseeable working capital needs. New Accounting Pronouncements In June, 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133 standardizes accounting and reporting for derivative instruments and for hedging activities. This 19 statement is effective in the year 2000. The Company will be reviewing this pronouncement to determine its applicability to the Company, if any. Additional Factors That May Affect Future Results and Market Price of Stock Blonder Tongue's business operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks which are not otherwise addressed elsewhere in this Annual Report. There can be no assurance that the Company will anticipate the evolution of industry standards in Private Cable or the communications industry generally, changes in the market and customer needs, or that technologies and applications under development by the Company will be successfully developed, or if they are successfully developed, that they will achieve market acceptance. The competition to attract and retain highly-skilled engineering, manufacturing, marketing and managerial personnel is intense. Capital spending by cable operators for constructing, rebuilding, maintaining or upgrading their systems (upon which the Company's sales and profitability are dependent) is dependent on a variety of factors, including access to financing, demand for their cable services, availability of alternative video delivery technologies, and general economic conditions. Factors such as announcements of technological innovations or new products by the Company, its competitors or third parties, quarterly variations in the Company's actual or anticipated results of operations, market conditions for emerging growth stocks or cable industry stocks in general, or the failure of revenues or earnings in any quarter to meet the investment community's expectations, may cause the market price of the Company's Common Stock to fluctuate significantly. The stock price may also be affected by broader market trends unrelated to the Company's performance. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates. At December 31, 1998 and 1997 the principal amount of the Company's aggregate outstanding variable rate indebtedness was $20,827,000 and $1,278,000, respectively. A hypothetical 10% adverse change in interest rates would have had an annualized unfavorable impact of approximately $156,000 and $10,000, respectively, on the Company's earnings and cash flows based upon these year-end debt levels. To ameliorate these risks, in February, 1999, the Company entered into an interest rate Swap Agreement with a notional amount of $10,000,000. The specific terms of the Swap Agreement are more fully discussed above in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from the consolidated financial statements and notes thereto of the Company which are attached hereto beginning on page 25. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 20 PART III ITEMS 10. through 13. INCORPORATED BY REFERENCE The information called for by Item 10 "Directors and Executive Officers of the Registrant," Item 11 "Executive Compensation," Item 12 "Security Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain Relationships and Related Transactions" is incorporated herein by reference to the Company's definitive proxy statement for its Annual Meeting of Stockholders scheduled to be held May 6, 1999, which definitive proxy statement is expected to be filed with the Commission not later than 120 days after the end of the fiscal year to which this report relates. Note that the sections in the definitive proxy statement entitled "Report of Compensation Committee on Executive Compensation Policies" and "Comparative Stock Performance" pursuant to Regulation S-K, Item 402(a)(9), are not deemed "soliciting material" or "filed" as part of this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements and Supplementary Data. Report of Independent Certified Public Accountants, BDO Seidman, LLP....... 26 Consolidated Balance Sheets as of December 31, 1998 and 1997............... 27 Consolidated Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996.............................................................. 28 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996........................................... 29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996........................................................ 30 Notes to Consolidated Financial Statements................................. 31
(a)(2) Financial Statement Schedules. Included in Part IV of this report: Schedule II Valuation and Qualifying Accounts and Reserves All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the applicable instructions or are inapplicable and therefore have been omitted. 21 (a)(3) Exhibits The exhibits are listed in the Index to Exhibits appearing below and are filed herewith or are incorporated by reference to exhibits previously filed with the Commission. (b) No reports on Form 8-K were filed in the quarter ended December 31, 1998. (c) Exhibits: Exhibit # Description Location - --------- ----------- -------- 3.1 Restated Certificate of Incorporated by reference Incorporation of Blonder Tongue from Exhibit 3.1 to Laboratories, Inc. Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 3.2 Restated Bylaws of Blonder Tongue Incorporated by reference Laboratories, Inc. from Exhibit 3.2 to Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 4.1 Specimen of stock certificate Incorporated by reference from Exhibit 4.1 to Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.1 Consulting Agreement, dated Incorporated by reference January 1, 1995, between Blonder from Exhibit 10.3 to Tongue Laboratories, Inc. and Registrant's S-1 James H. Williams. Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.2 1994 Incentive Stock Option Plan. Incorporated by reference from Exhibit 10.5 to Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.3 1995 Long Term Incentive Plan. Incorporated by reference from Exhibit 10.6 to Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.4 Amended and Restated 1996 Director Incorporated by reference Option Plan. from Appendix B to Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders originally filed March 27, 1998. 10.5 Employment Agreement, dated August Incorporated by reference 1, 1995, between Blonder Tongue from Exhibit 10.9 to Laboratories, Inc. and Daniel J. Registrant's S-1 Altiere. Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.6 Form of Indemnification Agreement Incorporated by reference entered into by Blonder Tongue from Exhibit 10.10 to Laboratories, Inc. in favor of Registrant's S-1 each of its Directors and Officers. Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.7 VideoCipher(R) IICM Commercial Incorporated by reference Descrambler Module Master Purchase from Exhibit 10.11 to and License Agreement, dated Registrant's S-1 August 23, 1990, between Blonder Registration Statement No. Tongue Laboratories, Inc. and 33-98070 originally filed Cable/Home Communication Corp. October 12, 1995, as amended. 22 Exhibit # Description Location - --------- ----------- -------- +10.8 Patent License Agreement, dated Incorporated by reference August 21, 1995, between Blonder from Exhibit 10.12 to Tongue Laboratories, Inc. and Registrant's S-1 Philips Electronics North America Registration Statement No. Corporation. 33-98070 originally filed October 12, 1995, as amended. +10.9 Interdiction Technology License Incorporated by reference Agreement, dated August 21, 1995, from Exhibit 10.13 to between Blonder Tongue Registrant's S-1 Laboratories, Inc. and Philips Registration Statement No. Broadband Networks, Inc. 33-98070 originally filed October 12, 1995, as amended. 10.10 401(k) Savings & Investment Incorporated by reference Retirement Plan. from Exhibit 10.21 to S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.11 Bargaining Unit Pension Plan. Incorporated by reference from Exhibit 10.22 to S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.12 Mortgage, Assignment of Leases, Incorporated by reference and Security Agreement dated May from Exhibit 10.2 to 23, 1996 by Blonder Tongue Registrant's Quarterly Laboratories, Inc. in favor of Report on Form 10-Q for the CoreStates Bank, N.A., successor period ended June 30, 1996, to Meridian Bank. filed August 14, 1996. 10.13 Real Estate Loan Note dated May Incorporated by reference 23, 1996 from Blonder Tongue from Exhibit 10.3 to Laboratories, Inc. in favor of Registrant's Quarterly CoreStates Bank, N.A., successor Report on Form 10-Q for the to Meridian Bank. period ended June 30, 1996, filed August 14, 1996. 10.14 Allonge to Real Estate Loan Note, Incorporated by reference dated September 26, 1996 from from Exhibit 10.3 to Blonder Tongue Laboratories, Inc., Registrant's Quarterly in favor of CoreStates Bank, N.A., Report on Form 10-Q for the successor to Meridian Bank. period ended September 30, 1996, filed November 14, 1996. +10.15 License Agreement dated November Incorporated by reference 12, 1996 between Blonder Tongue from Exhibit 10.31 to Laboratories, Inc. and Houston Registrant's Annual Report Tracker Systems, Inc. on Form 10-K for fiscal year ended December 31, 1996, filed March 27, 1997. 10.16 Executive Officer Bonus Plan Incorporated by reference from Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997. 10.17 Second Amendment to 1995 Long Term Incorporated by reference Incentive Plan from Appendix A to Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders originally filed March 27, 1998. 10.18 Third Amended and Restated Loan Incorporated by reference Agreement dated October 29, 1997 from Exhibit 10.18 to between Blonder Tongue Registrant's Annual Report Laboratories, Inc. and CoreStates on Form 10-K for fiscal year Bank, N.A. ended December 31, 1997, filed March 27, 1998. 10.19 Third Amended and Restated Line of Incorporated by reference Credit Note dated October 29, 1997 from Exhibit 10.19 to by Blonder Tongue Laboratories, Registrant's Annual Report Inc. in favor of CoreStates Bank, on Form 10-K for fiscal year N.A. ended December 31, 1997, filed March 27, 1998. 21 Subsidiaries of Blonder Tongue Filed herewith. Laboratories, Inc. 23 Consent of BDO Seidman, LLP Filed herewith. 27 Financial Data Schedule Electronic filing only. 23 - ------------------ +Certain portions of exhibit have been afforded confidential treatment by the Securities and Exchange Commission. (d) Financial Statement Schedules: Report of BDO Seidman, LLP on financial statement schedule. The following financial statement schedule is included on page 47 of this Annual Report on Form 10-K: Schedule II. Valuation and Qualifying Accounts and Reserves All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the applicable instructions or are inapplicable and therefore have been omitted. 24 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants, BDO Seidman, LLP.... 26 Consolidated Balance Sheets as of December 31, 1998 and 1997............ 27 Consolidated Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996..................................................... 28 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996........................................ 29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996..................................................... 30 Notes to Consolidated Financial Statements.............................. 31 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Blonder Tongue Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Blonder Tongue Laboratories, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blonder Tongue Laboratories, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. BDO Seidman, LLP Woodbridge, New Jersey February 12, 1999 26 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) December 31, -------------------- 1998 1997 -------- -------- Assets (Note 4) Current assets: Cash ............................................... $ 542 $ 555 Accounts receivable, net of allowance for doubtful accounts of $1,201 and $607, respectively .......... 15,988 13,130 Inventories (Note 2) ............................... 24,540 17,875 Other current assets ............................... 597 318 Deferred income taxes (Note 13) .................... 1,445 1,054 -------- -------- Total current assets ............................ 43,112 32,932 Property, plant and equipment, net of accumulated depreciation and amortization (Notes 3 and 5) ...... 7,968 7,721 Patents, net (Note 11) ................................ 4,115 176 Goodwill, net (Note 11) ............................... 13,157 274 Other assets .......................................... 1,299 1,169 -------- -------- $ 69,651 $ 42,272 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Revolving line of credit (Note 4) .................. $ 1,827 $ -- Current portion of long-term debt, including related party debt of $1,278 in 1997 (Note 4) .............. 19,494 1,866 Accounts payable ................................... 2,134 2,305 Accrued compensation ............................... 1,287 1,606 Other accrued expenses ............................. 933 929 Income taxes (Note 13) ............................. 388 171 -------- -------- Total current liabilities ....................... 26,063 6,877 -------- -------- Deferred income taxes (Note 13) ....................... 227 412 Long-term debt (Note 4) ............................... 2,865 3,188 Commitments and contingencies (Notes 5, 6 and 7) ...... -- -- Stockholders' equity (Notes 9, 10, 11 and 12): Preferred stock, $.001 par value; authorized 5,000 shares; no shares outstanding ...................... -- -- Common stock, $.001 par value; authorized 25,000 shares, 8,370 shares issued at December 31, 1998 and 8 8 8,273 shares issued at December 31, 1997 Paid-in capital .................................... 23,743 21,802 Retained earnings .................................. 17,596 10,483 Treasury stock at cost, 81 shares at December 31, 1998 and 40 at December 31, 1997 (Note 9) .......... (851) (498) -------- -------- Total stockholders' equity ...................... 40,496 31,795 -------- -------- $ 69,651 $ 42,272 ======== ======== See accompanying notes to consolidated financial statements 27 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts)
Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Net sales ..................................... $ 70,792 $ 62,057 $ 48,862 Cost of goods sold ............................ 45,344 39,656 30,613 -------- -------- -------- Gross profit ............................... 25,448 22,401 18,249 -------- -------- -------- Operating expenses: Selling expenses ........................... 4,823 4,964 4,780 General and administrative ................. 5,932 4,974 4,355 Research and development ................... 2,156 1,954 1,972 -------- -------- -------- 12,911 11,892 11,107 -------- -------- -------- Earnings from operations ...................... 12,537 10,509 7,142 -------- -------- -------- Other income (expense): Interest expense ........................... (1,596) (414) (658) Other income .............................. 40 595 -- -------- -------- -------- (1,556) 181 (658) -------- -------- -------- Earnings before income taxes .................. 10,981 10,690 6,484 Provision for income taxes (Note 13) .......... 3,868 4,276 2,601 -------- -------- -------- Net earnings ............................... $ 7,113 $ 6,414 $ 3,883 ======== ======== ======== Basic earnings per share (Note 10) ............ $ 0.86 $ 0.78 $ 0.48 ======== ======== ======== Basic weighted average shares outstanding (Note 10) ................................... 8,292 8,227 8,144 ======== ======== ======== Diluted earnings per share (Note 10) .......... $ 0.84 $ 0.77 $ 0.47 ======== ======== ======== Diluted weighted average shares outstanding (Note 10) ................................... 8,471 8,375 8,300 ======== ======== ========
See accompanying notes to consolidated financial statements 28 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except per share amounts)
Common Stock --------------------- Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total -------- -------- ------- -------- -------- -------- Balance at January 1, 1996 ..... 7,919 $ 8 $ 19,546 $ 186 $ -- $ 19,740 Proceeds from sale of stock .. 182 -- 1,606 -- -- 1,606 Proceeds from exercise of stock options ................ 84 -- 261 -- -- 261 Issuance of common stock in exchange for investment ...... 8 -- 86 -- -- 86 Net earnings ................. -- -- -- 3,883 -- 3,883 -------- -------- -------- -------- -------- -------- Balance at December 31, 1996 ... 8,193 8 21,499 4,069 -- 25,576 Proceeds from exercise of stock options ................ 80 -- 303 -- -- 303 Acquisition of treasury stock -- -- -- -- (498) (498) Net earnings ................. -- -- -- 6,414 -- 6,414 -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 ... 8,273 8 21,802 10,483 (498) 31,795 Proceeds from exercise of stock options ................ 29 -- 166 -- -- 166 Acquisition of treasury stock -- -- -- -- (353) (353) Issuance of common stock for acquired business ............ 68 -- 1,000 -- -- 1,000 Issuance of warrant for acquired business ............ -- -- 775 -- -- 775 Net earnings ................. -- -- -- 7,113 -- 7,113 -------- -------- -------- -------- -------- -------- Balance at December 31, 1998 ... 8,370 $ 8 $ 23,743 $ 17,596 $ (851) $ 40,496 ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements 29 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Cash Flows From Operating Activities: Net earnings ...................................................... $ 7,113 $ 6,414 $ 3,883 Adjustments to reconcile net earnings to cash provided by (used in) operating activities: Depreciation and amortization .................................. 2,365 1,130 1,099 Provision for doubtful accounts ................................ 598 327 135 Deferred income taxes .......................................... (576) (518) (469) Changes in operating assets and liabilities, net of acquisition: Accounts receivable .......................................... (3,456) (4,470) 33 Inventories .................................................. (4,147) (1,847) (2,638) Other current assets ......................................... (279) 85 503 Other assets ................................................. (428) (10) (184) Income taxes ................................................. 217 (452) 97 Accounts payable and accrued expenses ........................ (486) 1,631 (2,993) -------- -------- -------- Net cash provided by (used in) operating activities ................................................ 921 2,290 (534) -------- -------- -------- Cash Flows From Investing Activities: Capital expenditures .............................................. (879) (1,424) (1,471) Acquisition of licenses ........................................... -- (163) (492) Acquisition of business ........................................... (19,000) -- -- -------- -------- -------- Net cash used in investing activities ....................... (19,879) (1,587) (1,963) -------- -------- -------- Cash Flows From Financing Activities: Net borrowings (repayments) under revolving line of credit .......................................................... 1,827 (1,176) (1,533) Repayments of borrowings from stockholders ........................ -- (313) -- Proceeds from long-term debt ...................................... 19,199 683 3,422 Repayments of long-term debt ...................................... (1,894) (487) (396) Proceeds from sale of common stock ................................ -- -- 1,606 Proceeds from exercise of stock options ........................... 166 303 261 Acquisition of treasury stock ..................................... (353) (498) -- -------- -------- -------- Net cash provided by (used in) financing activities ......... 18,945 (1,488) 3,360 -------- -------- -------- Net (Decrease) Increase In Cash ...................................... (13) (785) 863 Cash, beginning of year .............................................. 555 1,340 477 -------- -------- -------- Cash, end of year .................................................... $ 542 $ 555 $ 1,340 ======== ======== ======== Supplemental Cash Flow Information: Cash paid for interest ............................................ $ 1,261 $ 397 $ 650 Cash paid for income taxes ........................................ 4,276 5,251 2,681 ======== ======== ======== Non-cash transactions: Common stock issued for acquired business ......................... $ 1,000 $ -- $ -- Warrant issued for acquired business .............................. 775 -- -- Issuance of common stock in exchange for investment ............... -- -- 86 ======== ======== ========
See accompanying notes to consolidated financial statements 30 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 1 - Summary of Significant Accounting Policies (a) Company and Basis of Presentation Blonder Tongue Laboratories, Inc. (the "Company") is a manufacturer of television and satellite signal distribution equipment supplied to the private cable television and broadcast industries. The consolidated financial statements include the accounts of Blonder Tongue Laboratories, Inc. and subsidiaries as discussed below. Significant intercompany accounts and transactions have been eliminated in consolidation. (b) Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out ("FIFO") method, or market. (c) Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company provides for depreciation generally on the straight-line method based upon estimated useful lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and fixtures, 6 to 10 years for machinery and equipment, 10 to 15 years for building improvements and 40 years for the manufacturing and administrative office facility. (d) Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for temporary differences in the recognition of certain income and expenses for financial and tax reporting purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. (e) Intangible Assets Intangible assets totaling $18,571 and $1,617 as of December 31, 1998 and 1997, respectively, consist of goodwill, prepaid licensing fees, and acquired patent rights, and are carried at cost less accumulated amortization. Amortization is computed utilizing the straight-line method over the estimated useful life of the respective asset, 3 to 15 years. Accumulated amortization was $1,985 and $724 for 1998 and 1997, respectively. (f) Long-Lived Assets The Company follows Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 standardized the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets based on non-discounted cash flows. No impairment losses have been recorded through December 31, 1998. (g) Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with a maturity of less than three months at purchase to be cash equivalents. The Company did not have any cash equivalents at December 31, 1998, 1997 and 1996. (h) Research and Development Research and development expenditures for the Company's projects are expensed as incurred. 31 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (i) Revenue Recognition The Company records revenues when products are shipped. Customers do not have a right to return products shipped. (j) Earnings Per Share During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which provides for the calculation of "basic" and "diluted" earnings per share. This Statement, effective for financial statements issued for periods ended after December 15, 1997, required restatement of all prior-period earnings per share data presented. Basic earnings per share includes no dilution and is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. All periods presented have been restated to comply with the provisions of SFAS 128. (k) Treasury Stock Treasury Stock is recorded at cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. (l) Derivative Financial Instruments The Company utilizes interest rate swaps to manage interest rate exposures. The Company specifically designates interest rate swaps as hedges of debt instruments and recognizes interest differentials as adjustments to interest expense in the period they occur. The Company does not hold or issue financial instruments for trading purposes. (m) Significant Risks and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Approximately 62% of the Company's employees are covered by a three year collective bargaining agreement, which expires in February, 2002. The Company estimates that Headend products accounted for approximately 70% of the Company's revenues in 1998, 80% in 1997 and 84% in 1996. Any substantial decrease in sales of Headend products could have a material adverse effect on the Company's results of operations and financial condition. The Company purchases several products from sole suppliers for which alternative sources are not available, such as the VideoCipher(R) and DigiCipher(R) encryption systems manufactured by General Instrument Corporation, which are standard encryption methodology employed on U.S. C-Band and Ku-Band transponders and EchoStar digital satellite receiver decoders, which are specifically designed to work with the DISH Network(TM) and Hughes Network Systems digital satellite receivers for delivery of DIRECTV(TM) programming. An inability to timely obtain sufficient quantities of these components could have a material adverse effect on the Company's operating results. The Company does not have a supply agreement with General Instrument Corporation or any other supplier. The Company submits purchase orders to its suppliers on an as-needed basis. 32 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (n) New Accounting Pronouncements In June, 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133 standardizes accounting and reporting for derivative instruments and for hedging activities. This statement is effective in the year 2000. The Company will be reviewing this pronouncement to determine its applicability to the Company, if any. Note 2 - Inventories Inventories are summarized as follows: December 31, -------------------- 1998 1997 ------- ------- Raw materials.................................. $ 9,550 $ 8,740 Work in process................................ 2,463 2,907 Finished goods................................. 12,527 6,228 ------- ------- $24,540 $17,875 ======= ======= Note 3 - Property, Plant and Equipment Property, plant and equipment are summarized as follows: December 31, ------------------- 1998 1997 ------- ------- Land............................................... $ 1,000 $ 1,000 Building........................................... 3,361 3,361 Machinery and equipment............................ 5,158 4,623 Furniture and fixtures............................. 395 391 Office equipment................................... 764 729 Building improvements.............................. 466 415 ------- ------- 11,144 10,519 Less: Accumulated depreciation and amortization... (3,176) (2,798) ------- ------- $ 7,968 $ 7,721 ======= ======= Note 4 - Debt In October, 1997, the Company executed a new $15,000 revolving line of credit with its bank, on which funds may be borrowed at the bank's overnight base rate ("OBR") plus a margin ranging from .95% to 2.45%, depending upon the calculation of certain financial covenants (7.95% at December 31, 1998). As of December 31, 1998, the Company had $1,800 outstanding under the line of credit. The line of credit is collateralized by a security interest in all of the Company's assets. The agreement contains restrictions that require the Company to maintain certain financial ratios as well as restrictions on the payment of dividends. In addition, the Company has an acquisition loan commitment which may be drawn upon by the Company to finance acquisitions in accordance with certain terms. The acquisition loan commitment had been $15,000 until March, 1998 when it was increased to $20,000 to accommodate the acquisition of Scientific's Interdiction Business (See Note 11). Funds may be borrowed under the acquisition loan commitment at OBR plus a margin ranging from 1.25% to 2.75%, depending upon the calculation of certain financial covenants. At December 31, 1998, there was $19,000 outstanding under the acquisition loan commitment. The line of credit and the acquisition loan commitment expire on June 30, 1999. The Company is currently in negotiations to renew the line of credit and acquisition loan commitment with interest rates based upon LIBOR plus a variable margin. 33 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The average amount outstanding on the line of credit during 1998 was $544 at a weighted average interest rate of 7.14%. The maximum outstanding under this facility was $4,110 in 1998. On May 24, 1996, the Company borrowed $2,800 for a ten year term secured by a mortgage against the Company's Old Bridge Facility. The loan bears interest at the fixed rate of 7.25% through May 1999 and may be negotiated to another fixed rate or remain variable for the remaining seven years of the loan. Long-term debt consists of the following: December 31, ----------------------- 1998 1997 ------- -------- Term loan with a bank bearing interest at prime rate less 2%, payable in quarterly installments through June, 1998 .................. $ -- $ 143 Term loan with a bank bearing interest at 7.25%, payable in monthly installments ........... 2,318 2,505 Loan with a bank bearing interest at OBR plus 2.75%(a) .................................... 19,000 -- Term loans with stockholders bearing interest at prime, due December 19, 1998(b) ...... -- 1,278 Capital leases (Note 5) .......................... 1,041 1,128 -------- -------- 22,359 5,054 Less: Current portion ........................... (19,494) (1,866) -------- -------- $ 2,865 $ 3,188 ======== ======== (a) The Company is in the final stages of negotiations of a term loan with a bank bearing interest at LIBOR plus a variable margin ranging from 1.05% to 2.55% based on certain financial ratios. When executed, the new term loan and interest rate will be effective as of February 1, 1999. (b) $1,591 of the S Corporation distributions made after September 30, 1995 was lent back to the Company by the principal stockholders on an unsecured basis for a term of three years at an interest rate equal to the rate on the Company's line of credit. These loan agreements with the stockholders provide for payments of accrued interest on a monthly basis with the principal balance due in December, 1998. In 1997, the Company made prepayments of $313 on these notes. In January, 1998, the Company prepaid the balance due plus accrued interest in full satisfaction of these notes. The fair value of the debt approximates the recorded value based on the borrowing rates currently available for loans with similar terms and maturities. 34 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Annual maturities of long-term debt at December 31, 1998 are: 1999.............. $19,494 2000.............. 515 2001.............. 464 2002.............. 315 2003.............. 187 Thereafter........ 1,384 ------- $22,359 ======= Note 5 - Commitments and Contingencies Leases The Company leases certain factory and automotive equipment under noncancellable operating leases expiring at various dates through December 2002. Future minimum rental payments, required for all noncancellable leases are as follows: Capital Operating ------- --------- 1999............................................ $ 378 $ 129 2000............................................ 378 60 2001............................................ 308 26 2002............................................ 124 14 2003............................................ -- 2 ----- --------- Total future minimum lease payments............. 1,188 $ 231 ========= Less: amounts representing interest............ (147) ----- Present value of minimum lease payments......... $1,041 ===== Property, plant and equipment included capitalized leases of $1,533, less accumulated amortization of $449, at December 31, 1998, and $1,331, less accumulated amortization of $183, at December 31, 1997. Rent expense, net of sublease income was $12, $31 and $77 for the years ended December 31, 1998, 1997 and 1996 respectively. Rent expense was $12, $43 and $79 for the years ended December 31, 1998, 1997 and 1996, respectively. Litigation The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company's business, financial condition, or results of operations. 35 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 6 - Benefit Plans Defined Contribution Plan The Company has a defined contribution plan covering all full time non-union employees qualified under Section 401(k) of the Internal Revenue Code, in which the Company matches a portion of an employee's salary deferral. The Company's contributions to this plan were $122, $59 and $54 for the years ended December 31, 1998, 1997 and 1996, respectively. Defined Benefit Pension Plan Substantially all union employees who meet certain requirements of age, length of service and hours worked per year are covered by a Company sponsored non-contributory defined benefit pension plan. Benefits paid to retirees are based upon age at retirement and years of credited service. Net periodic pension cost for this plan includes the following components: December 31, ---------------------------- Components of net periodic pension cost: 1998 1997 1996 ---- ---- ---- Service cost............................ $118 $ 81 $ 78 Interest cost........................... 64 56 49 Actual return on plan assets............ (57) (90) (63) Recognized net actuarial loss........... 6 42 29 ---- ---- ---- Net periodic pension cost............... $131 $ 89 $ 93 ==== ==== ==== The funded status of the plan and the amounts recorded in the Company's consolidated balance sheets are as follows: December 31, --------------- 1998 1997 ----- ----- Change in benefit obligation: Benefit obligation at beginning of year...... $ 862 $ 753 Service cost................................. 118 81 Interest cost................................ 64 56 Amendment to discount rate................... 86 -- Actuarial loss............................... -- 104 Benefits paid................................ (24) (132) ----- ----- Benefit obligation at end of year............ 1,106 862 ----- ----- Change in plan assets: Fair value of plan assets at beginning of year......................................... 762 681 Actual return on plan assets................. 57 90 Employer contribution........................ 120 123 Benefits paid................................ (24) (132) ----- ----- Fair value of plan assets at end of year..... 915 762 ----- ----- Funded status................................ (191) (100) Unrecognized net actuarial loss.............. 360 290 Unrecognized net transition liability........ (79) (89) ----- ----- Prepaid benefit cost......................... $ 90 $ 101 ===== ===== 36 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Key economic assumptions used in these determinations were: December 31, ------------- 1998 1997 ---- ---- Discount rate................................ 7.0% 7.5% Expected long-term rate of return............ 7.0% 7.0% Note 7 - Related Party Transactions On January 1, 1995, the Company entered into a consulting and non-competition agreement for a period of five years with a director, who is also the largest stockholder. During this period, the director will provide consulting services on various operational and financial issues and is currently paid at an annual rate of $130 but in no event is such amount permitted to exceed $150. 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. Note 8 - Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable. The Company maintains cash balances at several banks located in the northeastern United States. As part of its cash management process, the Company periodically reviews the relative credit standing of these banks. Credit risk with respect to trade accounts receivable is concentrated with ten of the Company's customers. These customers accounted for approximately 48% and 64% of the Company's outstanding trade accounts receivable at December 31, 1998 and 1997, respectively. These customers are distributors of telecommunications and private cable television components, and providers of private cable television service. The Company performs ongoing credit evaluations of its customers' financial condition, uses credit insurance and requires collateral, such as letters of credit, to mitigate its credit risk. The deterioration of the financial condition of one or more of its major customers could adversely impact the Company's operations. For the year ended December 31, 1998, the Company's largest customer accounted for approximately 10% of the Company's sales. At December 31, 1998, this customer accounted for approximately 2% of the Company's outstanding trade accounts receivable. Management believes these amounts to be collectible. A different customer accounted for approximately 16% of the Company's sales in 1997 while a third customer accounted for approximately 17% of the Company's sales in 1996. Note 9 - Stockholders' Equity In December, 1995, the Company sold 2,200 shares of Common Stock at a price of $9.50 per share in a public offering which generated net proceeds of approximately $18,334. The proceeds were used to repay outstanding bank debt, purchase the Company's manufacturing facility, make certain S Corporation distributions and for working capital. In January, 1996, an additional 182 shares of Common Stock were sold at a price of $9.50 per share pursuant to the exercise of the underwriters' over-allotment option which generated net proceeds of approximately $1,606. 37 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Stock Repurchase Program On April 1, 1997, the Company announced that its Board of Directors authorized management to purchase up to 100 shares of its common stock. Purchases will be made from time to time in the open market, and it is expected that the funding of this program will come from operating cash flow and existing bank facilities. As of December 31, 1998, the Company had repurchased 81 shares under this new program. Note 10 - Earnings Per Share Basic and diluted earnings per share for each of the three years ended December 31, 1998, 1997 and 1996 are calculated as follows:
Net Income Shares Per Share (Numerator) (Denominator) Amount ---------------------------------------------- For the year ended December 31, 1998: Basic earnings per share .................. $7,113 8,292 $0.86 Effect of assumed conversion of employee stock options ............................. -- 179 ---------------------------------------------- Diluted earnings per share ................ $7,113 8,471 $0.84 ============================================== For the year ended December 31, 1997: Basic earnings per share .................. $6,414 8,227 $0.78 Effect of assumed conversion of employee stock options ............................. -- 148 ---------------------------------------------- Diluted earnings per share ................ $6,414 8,375 $0.77 ============================================== For the year ended December 31, 1996: Basic earnings per share .................. $3,883 8,144 $0.48 Effect of assumed conversion of employee stock options ............................. -- 156 ---------------------------------------------- Diluted earnings per share ................ $3,883 8,300 $0.47 ==============================================
Note 11 - Acquisition On March 26, 1998, the Company acquired all of the assets and technology rights of the interdiction business (the "Interdiction Business") of Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i) $19,000 in cash, (ii) 68 shares of the Company's common stock, (iii) a warrant to purchase 150 additional shares of the Company's common stock at an exercise price of $14.25 per share and (iv) assumption by the Company of certain obligations under executory contracts with vendors and customers and certain warranty obligations and current liabilities of the Interdiction Business. The Interdiction Business generated approximately 38 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) $16,000 in revenues for the prior twelve month period. The Company believes that Scientific's interdiction products, which have been engineered primarily to serve the franchised cable market, will supplement the Company's VideoMask(TM) products, which are primarily focused on the Private Cable market. In addition, the Company expects that the technology acquired as part of the Interdiction Business will enhance its ability to design products that meet the specific needs of all cable providers, while improving its position in the franchised cable market. The acquisition has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board No. 16 with the net assets recorded at fair market value and operations included in the financial statements from the date of acquisition. The allocation of the purchase price was recorded to inventory $2,518, property, plant and equipment $472, patents $4,200, and goodwill $13,585. The following table presents the unaudited pro forma results of operations as though the acquisition of Scientific-Atlanta, Inc.'s Interdiction Business occurred on January 1, 1997: Year Ended December 31, ----------------------- 1998 1997 ------- ------ Net sales $76,782 $77,833 Earnings from operations 13,682 8,829 Net income 8,251 4,565 Basic earnings per share 1.00 0.55 Diluted earnings per share 0.97 0.55 Note 12 - Stock Option Plans In 1994, the Company established the 1994 Incentive Stock Option Plan (the "1994 Plan"). The 1994 Plan provides for the granting of Incentive Stock Options to purchase shares of the Company's common stock to officers and key employees at a price not less than the fair market value at the date of grant as determined by the compensation committee of the Board of Directors. The maximum number of shares available for issuance under the plan was 298. Options become exercisable as determined by the compensation committee of the Board of Directors at the date of grant. Options expire ten years from the date of grant. In October, 1995, the Company's Board of Directors and stockholders approved the 1995 Long Term Incentive Plan (the "1995 Plan"). The 1995 Plan provides for grants of "incentive stock options" or nonqualified stock options, and awards of restricted stock, to executives and key employees, including officers and employee Directors. The 1995 Plan is administered by the Compensation Committee of the Board of Directors, which determines the optionees and the terms of the options granted under the 1995 Plan, including the exercise price, number of shares subject to the option and the exercisability thereof, as well as the recipients and number of shares awarded for restricted stock awards; provided, however, that no employee may receive stock options or restricted stock awards which would result, separately or in combination, in the acquisition of more than 100 shares of Common Stock of the Company under the 1995 Plan. The exercise price of incentive stock options granted under the 1995 Plan must be equal to at least the fair market value of the Common Stock on the date of grant. With respect to any optionee who owns stock representing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option must be equal to at least 110% of the fair market value of the Common Stock on the date of grant, and the term of the option may not exceed five years. The term of all other incentive stock options granted under the 1995 Plan may not exceed ten years. The aggregate fair market value of Common Stock (determined as of the date of the option grant) for which an incentive stock option may for the first time become exercisable in any calendar year may not exceed $100. The exercise price for nonqualified stock options is established by the Compensation Committee, and may be more or less than the fair market value of the Common Stock on the date of grant. Generally, options granted under the 1995 Plan are exercisable over the term of the option, as provided by the Compensation Committee. Upon any merger or consolidation, if the Company is not the surviving corporation, all outstanding options granted shall terminate unless such options are assumed or other options are substituted therefor by the successor corporation, or the vesting of such shares is accelerated by the Compensation Committee. Under the 1995 Plan awards may be made to key executive employees of restricted stock which is forfeitable unless the employee remains in the employ of the Company for five years and does not violate other 39 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) terms of the award, such as non-transferability. Exceptions to forfeiture are provided for the cases of retirement at age 65 or death while in employment. No restricted shares have been awarded under the 1995 Plan. Stockholders have previously approved a total of 750 shares of common stock for issuance under the 1995 Plan, as amended to date. In December, 1995, the stockholders of the Company approved the adoption of the Company's 1996 Director Option Plan (the "1996 Plan"). Under the 1996 Plan, Directors who within the preceding 12 months have not been employed by the Company and have not served as a consultant to the Company where annual compensation exceeds $100, are eligible to receive options to purchase 0.5 shares of the Company's Common Stock for each year of service on the Board. The exercise price for such shares is the fair market value thereof on the date of grant (which is December 31 of each year) and the options are subject to a one-year vesting requirement. The options become exercisable, in whole or in part, during the second through sixth years from the date of grant. Under the 1996 Plan the grant of options is automatic to each eligible Director serving on December 31 of any year provided the Director had served in such capacity since June 30 of such year. A maximum of 25 shares may be awarded under the 1996 Plan which expires January 2, 2006. The plan is administered by a committee presently comprised of James A. Luksch and Robert J. Palle, Jr. During October, 1997, subject to stockholder approval, the Board of Directors amended the 1996 Plan to provide that it would be administered by the Board of Directors rather than the 1996 Plan Committee, and that rather than providing for annual automatic grants of options for a specified number of shares to all non-employee Directors, the Board would have the power to grant options to non-employee Directors at its discretion from time to time to purchase the number of shares of Common Stock determined by the Board; provided, however, that no Director would be permitted to receive options to purchase more than 2 shares of Common Stock in any one calendar year. During December, 1997, the Board of Directors adopted the Amended and Restated 1996 Director Option Plan (the "Amended 1996 Plan") subject to stockholder approval. The Amended 1996 Plan incorporates the amendments to the 1996 Plan the Board had approved in October, 1997, as well as certain additional amendments, and restates the 1996 Plan as amended. Under the Amended 1996 Plan, Directors who are not currently employed by the Company or any subsidiary of the Company and have not been so employed within the preceding six months are eligible to receive options from time to time to purchase the number of shares of Common Stock determined by the Board; provided, however, that no Director is permitted to receive options to purchase more than 5 shares of Common Stock in any one calendar year. The exercise price for such shares is the fair market value thereof on the date of grant, and the options vest as determined in each case by the Board of Directors. Options granted under the Amended 1996 Plan must be exercised within 10 years from the date of grant. A maximum of 100 shares of Common Stock are subject to issuance under the Amended 1996 Plan. The plan will be administered by the Board of Directors. Also subject to stockholder approval and in keeping with the terms of the Amended 1996 Plan, in 1997 no Director received the grant of an option to purchase 0.5 shares of Common Stock at year end provided for in the original 1996 Plan. In 1996, the Board of Directors granted a non-plan, non-qualified option for 10 shares to an individual, who was not an employee or director of the Company at the time of the grant. The option was originally exercisable at $10.25 per share and expires in 2006. This option was repriced to $6.88 per share on September 17, 1998. Stock Option Repricing During the third quarter of 1998, the Compensation Committee of the Board of Directors observed that, despite the strong financial performance of the Company over the past several months attributable to the contributions of the Company's employees, officers and Directors, the market price of the Company's Common Stock had recently declined significantly due to market forces and other outside factors. The decline in the Company's stock price caused many of its outstanding stock options granted to employees, officers and Directors to have exercise prices above (in many cases significantly above) the current market price for the Common Stock. The 40 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Compensation Committee was of the view that stock options with exercise prices well above the market value of the Company's Common Stock do not serve any incentive function and do not serve to retain employees of the Company. Accordingly, in an effort to ensure that the Company continues to provide meaningful, long-term incentive compensation to and retains its employees, officers and Directors through stock option grants, on September 4, 1998, the Compensation Committee recommended and the Board approve a repricing (the "Repricing") of all outstanding, unexercised stock options held by the Company's employees, officers and Directors having exercise prices exceeding the fair market value of the Common Stock as of September 17, 1998 (the "Affected Options"), provided, that no options would be repriced if the fair market value for the Common Stock exceeded $7.50 per share on September 17, 1998 (the "Effective Date"). The fair market value for the Common Stock as of the Effective Date was determined by the Board to be $6.88 per share (the "New Exercise Price"), which was the average of the high and low sales prices for the Common Stock on the American Stock Exchange on the Effective Date. All of the Company's optionholders were required to elect whether or not they wished to have their Affected Options repriced as of the Effective Date. Those who elected not to reprice their options retained their existing options without change. Those who elected to have their Affected Options repriced had such options cancelled as of the Effective Date, with new options (the "New Options") being granted as of such date on the same terms and in the same amounts except (i) all New Options have an exercise price equal to the New Exercise Price and (ii) the New Options retained the same vesting schedule as the options they replaced, except that (x) options which were already vested as of the Effective Date were treated as first becoming vested on the Effective Date and (y) in certain cases the vesting of a portion of the New Options was delayed in order to preserve the "incentive stock option" status of such options under the Internal Revenue Code. Neither James A. Luksch nor Robert J. Palle, Jr. elected to reprice any of their stock options in the Company. The Company has not conducted any other repricings of stock options during the last ten fiscal years. 41 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
Weighted- Weighted Average Average 1994 Exercise 1995 Exercise 1996 Weighted-Average Plan (#) Price ($) Plan (#) Price ($) Plan (#) Exercise Price ($) ------------------------------------------------------------------------------------- Shares under option: Outstanding at January 1, 1996 269 3.21 -- -- -- -- Granted 34 10.38 227 9.72 2 8.50 Exercised (84) 3.10 -- -- -- -- Canceled (6) 4.33 (2) 9.63 -- -- Outstanding at December 31, 1996 213 4.36 225 9.72 2 8.50 Granted -- -- 254(a) 9.27 --(b) -- Exercised (67) 2.77 (12) 9.63 -- -- Canceled (5) 4.33 (33) 9.35 -- -- Outstanding at December 31, 1997 141 5.13 434 9.49 2 8.50 Granted 6 6.88 903 7.86 49 9.41 Exercised (19) 3.23 (11) 9.63 -- -- Canceled (6) 9.38 (665) 9.74 (25) 11.90 Outstanding at December 31, 1998 122 5.30 661 7.00 26 6.91 Options exercisable at December 31, 1998 93 4.92 186 7.15 6 7.03 Weighted-average fair value of options granted during: 1996 $6.36 $6.27 $5.53 1997 -- $5.81 -- 1998 $4.67 $5.42 $4.88
- ------------ (a) Does not include options to purchase an aggregate of 30 shares of common stock which were conditionally granted by the Compensation Committee of the Board of Directors, subject to stockholder approval of an increase in the number of shares of common stock subject to issuance under the 1995 Plan. (b) Does not include options to purchase an aggregate of 4 shares of common stock which were conditionally granted by the Board of Directors, subject to stockholder approval of the Amended 1996 Plan. 42 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------------- Number of Weighted- Options Average Weighted- Number Weighted- Range of Exercise Outstanding at Remaining Average Exercisable at Average Prices ($) 12/31/98 Contractual Life Exercise Price ($) 12/31/98 Exercise Price ($) - -------------------------------------------------------------------------------------------------------------- 1994 Plan: 2.57 41 5.6 years 2.57 41 2.57 4.33 47 6.0 4.33 29 4.33 6.88 6 7.9 6.88 4 6.88 10.59 28 2.6 10.59 19 10.59 --- --- 2.57 to 10.59 122 5.2 5.30 93 4.92 === === 1995 Plan: 6.88 640 8.1 6.88 172 6.88 10.59 21 2.6 10.59 14 10.59 --- --- 6.88 to 10.59 661 7.9 7.00 186 7.15 === === 1996 Plan: 6.88 25 8.5 6.88 5 6.88 8.50 1 4.0 8.50 1 8.50 --- --- 26 8.5 6.91 6 7.03 === ===
The Corporation has adopted the disclosures only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost been recognized for the stock option plans been determined based on the fair value at the date of grant consistent with the provisions of SFAS No. 123, the Corporation's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended December 31, --------------------------- 1998 1997 1996 ------ ------ ------ Net earnings - as reported $7,113 $6,414 $3,883 Net earnings - pro forma 6,851 5,957 3,686 Basic earnings per share - as reported 0.86 0.78 0.48 Basic earnings per share - pro forma 0.83 0.72 0.45 Diluted earnings per share - as reported 0.84 0.77 0.47 Diluted earnings per share - pro forma 0.81 0.71 0.44 43 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The fair market value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: Year Ended December 31, ----------------------- 1998 1997 1996 Expected volatility 61% 60% 65% Risk-free interest rate 5.6% 6.0% 6.45% Expected lives 8 6 6 Dividend yield none none none Note 13 - Income Taxes The following summarizes the provision for income taxes: Year Ended December 31, ----------------------- 1998 1997 1996 ------ ------ ------ Current: Federal.................................. $3,844 $3,707 $2,372 State and local.......................... 600 1,087 698 ------ ------ ------ 4,444 4,794 3,070 Deferred: Federal.................................. (495) (399) (361) State and local.......................... (81) (119) (108) ------ ------ ------ (576) (518) (469) ------ ------ ------ Provision for income taxes................. $3,868 $4,276 $2,601 ====== ====== ====== The provision for income taxes on adjusted historical income differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
Year Ended December 31, ---------------------------- 1998 1997 1996 ------ ------ ------ Provision for Federal income taxes at the statutory rate.................................. $3,734 $3,630 $2,205 State and local income taxes, net of Federal benefit......................................... 549 641 391 Research and development credits................ -- (28) (28) Adjustment of prior year's accruals............. (415) -- -- Other, net...................................... -- 33 33 ------ ------ ------ Provision for income taxes...................... $3,868 $4,276 $2,601 ====== ====== ======
44 Significant components of the Company's deferred tax assets and liabilities are as follows: December 31, ------------------ 1998 1997 ------ ------ Deferred tax assets: Allowance for doubtful accounts $ 468 $ 243 Inventory 785 658 Accrued vacation 233 179 Other 117 123 ------ ------ Total deferred tax assets 1,603 1,203 ------ ------ Deferred tax liabilities: Tax accounting method (80) (165) Depreciation (305) (396) ------ ------ Total deferred tax liabilities (385) (561) ------ ------ $1,218 $ 642 ====== ====== Note 14 - Export Sales The Company exports its products to countries in North and South America, Europe, and Asia. The Company's export sales were approximately 2% in 1998, 3% in 1997, and 5% in 1996. The Company's export sales were concentrated to customers in North and South America for all periods presented. Note 15 - Quarterly Financial Information - Unaudited
1998 Quarters 1997 Quarters ------------- ------------- First Second Third Fourth First Second Third Fourth ------------------------------------------------------------------------------ Net sales $15,119 $20,525 $18,929 $16,219 $14,041 $15,575 $16,965 $15,476 Gross profit 5,095 6,739 7,362 6,252 4,745 5,284 6,181 6,191 Net earnings 1,005 1,776 2,274 2,058 1,130 1,510 2,098 1,676 Basic earnings per share .12 .21 .27 .25 0.14 0.18 0.26 0.20 Diluted earnings per share .12 .21 .27 .25 0.14 0.18 0.25 0.20
Note 16 - Subsequent Event On February 3, 1999, the Company entered into an interest rate swap agreement with a notional amount of $10,000. The swap agreement has a maturity date of June 3, 2002 and requires the Company to make fixed rate interest payments on the notional amount of 8.01% per annum in exchange for floating rate payments equal to LIBOR plus 2.55%. The Company is exposed to credit risk in the unlikely event of the nonperformance by the counterparties. Interest to be paid or received is accrued over the life of the agreement at the net effective interest rate for the swap and corresponding debt instrument. 45 Report of Independent Certified Public Accountants The Board of Directors and Stockholders Blonder Tongue Laboratories, Inc.: The audits referred to in our report dated February 12, 1999 relating to the consolidated financial statements of Blonder Tongue Laboratories, Inc. and subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Woodbridge, New Jersey February 12, 1999 46 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES for the years ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
Column A Column B Column C Column D Column E -------- -------- --------- -------- -------- Additions Balance at Charged Charged Allowance for Doubtful Beginning to to Other Deductions Balance at Accounts of Period Expenses Accounts Write-Offs End of Period ---------------------- --------- -------- -------- ---------- ------------- Year ended December 31, 1998: $607 $598 -- ($4) $1,201 Year ended December 31, 1997: $280 $366 -- ($39) $607 Year ended December 31, 1996: $205 $135 -- ($60) $280
47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLONDER TONGUE LABORATORIES, INC. Date: March 30, 1999 By: /S/ JAMES A. LUKSCH --------------------------------------------------- James A. Luksch President and Chief Executive Officer By: /S/ PETER PUGIELLI --------------------------------------------------- Peter Pugielli, Senior Vice President - Finance Treasurer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date - ---- ----- ---- /S/ JAMES A. LUKSCH Director, President and Chief March 30, 1999 - ----------------------------- Executive Officer (Principal James A. Luksch Executive Officer) /S/ PETER PUGIELLI Senior Vice President, Chief March 30, 1999 - ----------------------------- Financial Officer, Treasurer and Peter Pugielli Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) /S/ ROBERT J. PALLE, JR. Director, Executive Vice March 30, 1999 - ----------------------------- President, Chief Operating Robert J. Palle, Jr. Officer and Secretary /S/ JOHN E. DWIGHT Director and Senior Vice March 30, 1999 - ----------------------------- President John E. Dwight /S/ JAMES H. WILLIAMS Director March 30, 1999 - ----------------------------- James H. Williams /S/ JAMES F. WILLIAMS Director March 30, 1999 - ----------------------------- James F. Williams /S/ ROBERT B. MAYER Director March 30, 1999 - ----------------------------- Robert B. Mayer /S/ GARY P. SCHARMETT Director March 30, 1999 - ----------------------------- Gary P. Scharmett /S/ ROBERT E. HEATON Director March 30, 1999 - ----------------------------- Robert E. Heaton
48 EX-21 2 LIST OF SUBSIDIARIES EXHIBIT 21 - ---------- List of Subsidiaries of Blonder Tongue Laboratories, Inc. 1. Blonder Tongue International, Inc. 2. Vu-Tech Communications, Inc. (79% - owned subsidiary) EX-23 3 CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Blonder Tongue Laboratories, Inc. We hereby consent to the incorporation by reference in Registration No. 333-15039 of Blonder Tongue Laboratories, Inc. on Form S-8 of our report dated February 12, 1999, relating to the consolidated financial statements and schedule of Blonder Tongue Laboratories, Inc. included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. BDO Seidman, LLP Woodbridge, New Jersey March 30, 1999 EX-27 4 FDS --
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998 AND BALANCE SHEET AS AT DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 542 0 17,189 1,201 24,540 43,112 11,144 3,176 69,651 26,063 0 0 0 8 40,488 69,651 70,792 70,792 45,344 45,344 12,313 598 1,596 10,981 3,868 12,537 0 0 0 7,113 .86 .84
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