-----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, Aqowtpdnv/EjqOhbgp9f3jkbztJ/t3fYKNaUJoKwROd5q+YJ2z8VQEcpymayNZuW lzHnxwvDJkUaBIE/fgWbjg== 0000950115-98-000571.txt : 19980331 0000950115-98-000571.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950115-98-000571 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 001-14120 FILM NUMBER: 98578856 BUSINESS ADDRESS: STREET 1: ONE JAKE BROWN RD 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-K 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, 1997, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ to ____________________ Commission file number: 1-14120 ------- BLONDER TONGUE LABORATORIES, INC. (Exact name of registrant as specified in its charter) Delaware 52-1611421 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Jake Brown Road, Old Bridge, New Jersey 08857 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 679-4000 -------------- 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 16, 1998, as reported by the American Stock Exchange): $40,193,367. Number of shares of common stock, par value $.001, outstanding as of March 16, 1998: 8,245,494 Documents incorporated by reference: Certain portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 1998 (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. The Exhibit Index appears on page 22. 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. -2- 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. Scientific will provide certain manufacturing, consulting and other transition services to the Company during a limited period following the acquisition pursuant to agreements executed by the parties in order to permit the Company to fulfill sales orders of the Interdiction Business for the transition period following the closing. In addition, under the terms of the purchase agreement with Scientific, the Company is obligated to file a registration statement with the Securities and Exchange Commission to register the shares of common stock issued to Scientific and underlying the warrant held by Scientific as part of the purchase price for the Interdiction Business within 90 days after the closing of the acquisition. 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, have greatly expanded the potential market for Private Cable. Present franchise cable operators recognizing the competition of private cable, anticipating direct -3- 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 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. This new 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 -4- 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, 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. It is anticipated that this agreement will increase the Company's international market penetration. 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 -5- 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 VideoMask(TM) 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 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 80% of the Company's revenues in 1997, 84% in 1996 and 90% in 1995. 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. -6- 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 new 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. 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 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 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 21 employees in the research and development department of the Company at December 31, 1997. -7- Marketing and Sales Blonder Tongue markets and sells its products worldwide to Private Cable integrators, which accounted for approximately 80% of the Company's revenues for fiscal years 1997, 1996 and 1995, 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 21 employees, which currently includes five salespersons (one salesperson in each of Old Bridge, New Jersey, Cincinnati, Ohio, Plano, Texas, Covina, California and Moreno Valley, California) and 16 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 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 $5,375,000 and $3,248,000 in purchase orders as of December 31, 1997 and December 31, 1996, respectively. All of the purchase orders outstanding as of December 31, 1997 are expected to be shipped prior to December 31, 1998. 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 1997 consisted of more than 1,000 active accounts. Approximately 40%, 39% and 46% of the Company's revenues in fiscal years 1997, 1996 and 1995, respectively, were derived from sales of products to the Company's five largest customers. In 1997, sales to OpTel, Inc. accounted for approximately 16% 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. -8- 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. 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 3%, 5% and 9% of the Company's revenues in fiscal years 1997, 1996 and 1995, 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 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(R) 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 -9- 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 Excluding the patents obtained from Scientific in connection with the acquisition of their Interdiction Business, the Company currently holds 11 United States patents and 4 foreign patents covering a wide range of electronic systems and circuits. None of these patents, however, 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 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, 1998. 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. -10- 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(R) 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. In connection with the acquisition of Scientific's Interdiction Business in March, 1998, the Company acquired all intellectual property and related technology associated with the Interdiction Business, including 29 patents filed in the United States and/or abroad. 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 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. 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 1997 and does not anticipate incurring in 1998 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 -11- 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 November 1, 1998. The Company anticipates that such permit will be renewed. Employees The Company employs approximately 587 persons, including 458 in manufacturing, 21 in research and development, 20 in quality assurance, 45 in production services, 21 in sales and marketing, and 22 in a general and administrative capacity. 396 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, 1999. 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. Until June 30, 1997, the Company leased approximately 8,100 square feet of space in San Diego, California for which it paid base rent of approximately $4,100 per month, which base rent was offset by sublease income associated with such space of approximately $2,000 per month. The Company also leases office space in Cincinnati, Ohio and Grapevine, Texas for which it pays rent of approximately $260 and $1,000 per month, respectively. Management believes that the Old Bridge Facility is adequate to support the Company's anticipated needs in 1998. 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. ITEM 3. LEGAL PROCEEDINGS On October 18, 1996, the Company was served with a complaint in a lawsuit filed by Scientific- Atlanta, Inc. ("Scientific") in the United States District Court for the Northern District of Georgia alleging patent infringement by the Company's VideoMask(TM) interdiction product. The complaint requested an unspecified amount of damages and injunctive relief. Following the Company's acquisition of the assets and technology rights of Scientific's Interdiction Business, Scientific's lawsuit against the Company was dismissed with prejudice. 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, 1997 through the solicitation of proxies or otherwise. -12- 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, 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 Fiscal year ended December 31, 1996: High Low First Quarter ........................ 13 3/4 9 Second Quarter........................ 19 1/2 9 7/8 Third Quarter ........................ 15 7 3/4 Fourth Quarter ....................... 10 7/8 8 1/8 The Company's Common Stock is traded on the American Stock Exchange under the symbol "BDR". Holders As of March 16, 1998, the Company had approximately 76 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 deems relevant. The Company's loan agreement with CoreStates 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. -13- ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of earnings data presented below for each of the years ended December 31, 1997, 1996 and 1995, and the selected consolidated balance sheet data as of December 31, 1997 and 1996 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, 1994 and 1993 and the selected consolidated balance sheet data as of December 31, 1995, 1994 and 1993 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, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands, except per share data) Consolidated Statement of Earnings Data: Net sales...................................... $ 62,057 $ 48,862 $ 51,982 $ 35,804 $ 24,136 Cost of goods sold ............................ 39,656 30,613 32,528 21,791 14,472 -------- -------- -------- -------- -------- Gross profit................................. 22,401 18,249 19,454 14,013 9,664 -------- -------- -------- -------- -------- Operating expenses: Selling, general and administrative.......... 9,938 9,135 9,791 7,060 5,565 Research and development..................... 1,954 1,972 2,011 1,477 963 -------- -------- -------- -------- -------- Total operating expenses..................... 11,892 11,107 11,802 8,537 6,528 -------- -------- -------- -------- -------- Earnings from operations....................... 10,509 7,142 7,652 5,476 3,136 Interest expense............................... 414 658 1,296 439 183 Other (income) expense, net.................... (595) -- (60) (89) (15) -------- -------- -------- -------- -------- Earnings before income taxes................... 10,690 6,484 6,416 5,126 2,968 Provisions for income taxes.................... 4,276 2,601 -------- -------- Net earnings................................... $ 6,414 $ 3,883 ======== ======== Basic earnings per share....................... $ 0.78 $ 0.48 Basic weighted average shares outstanding(2)... 8,227 8,144 Diluted earnings per share..................... $ 0.77 $ 0.47 Diluted weighted average shares outstanding(2). 8,375 8,300 Pro Forma Data: Pro forma provision for income taxes(1)........ 2,566 2,050 1,187 -------- -------- -------- Pro forma net earnings......................... $ 3,850 $ 3,076 $ 1,781 ======== ======== ======== Pro forma basic net earnings per share......... $ 0.66 $ 0.48 $ 0.23 Basic weighted average shares outstanding(2)... 5,823 6,406 7,772 Pro forma diluted earnings per share........... $ 0.64 $ 0.48 $ 0.23 Diluted weighted average shares outstanding(2). 6,054 6,475 7,772 Other Data: S Corporation distributions declared........... $ -- $ -- $ 7,896 $ 4,425 $ 964
Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Consolidated Balance Sheet Data: Working capital ............................... $ 26,055 $ 23,015 $ 14,407 $ 5,786 $ 3,920 Total assets .................................. 42,272 36,165 31,804 15,832 11,197 Long-term debt (including current maturities) ........................... 5,054 6,347 2,145 5,196 1,552 Stockholders' equity .......................... 31,795 25,576 19,740 3,509 4,204
- ------------------ (1) 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. (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(k) of notes to the Company's consolidated financial statements. -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, ---------------------------------------- 1997 1996 1995 ------ ------ ------ Net sales.............................. 100.0% 100.0% 100.0% Costs of goods sold.................... 63.9 62.7 62.6 Gross profit........................... 36.1 37.3 37.4 Selling expenses....................... 8.0 9.8 9.3 General and administrative expenses.... 8.0 8.9 9.5 Research and development expenses...... 3.2 4.0 3.9 Earnings from operations............... 16.9 14.6 14.7 Other (income) expense, net............ (.3) 1.3 2.4 Earnings before income taxes........... 17.2 13.3 12.3 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. -16- 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 Salary 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. 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%. 1996 Compared with 1995 Net Sales. Net sales decreased $3,120,000, or 6.0%, to $48,862,000 in 1996 from $51,982,000 in 1995. International sales accounted for $2,655,000 (5.4% of total sales) for 1996 compared to $4,809,000 (9.3% of total sales) for 1995. Net sales included approximately $2,939,000 of VideoMask(TM) interdiction equipment. Net sales also included $2,192,000 under the Company's agreement to supply interdiction equipment to Pacific Bell. Sales in the lodging market remained strong during 1996 but MDU sales were impacted by the uncertainty surrounding the installation of private cable systems in properties under contract to Interactive Cable Systems, Inc. ("ICS"), one of the Company's largest customers in 1995. Net sales to ICS were approximately $684,000 in 1996 compared to approximately $9,266,000 in 1995. Approximately $655,000 of accounts receivable outstanding at December 31, 1996 was due from ICS for more than 60 days, compared with approximately $933,000 outstanding for more than 60 days at December 31, 1995. Longer than anticipated accelerated life testing of the Company's, new VideoMask(TM) interdiction product delayed production until early March, 1996. Thereafter, volume interdiction sales were further delayed due to the inability of ICS to complete the installation of private cable systems in properties under contract to them and the shift in demand to other users of interdiction whose requirements were for product configurations not yet in production. Cost of Goods Sold. Cost of goods sold decreased to $30,613,000 in 1996 from $32,528,000 in 1995 but increased as a percentage of sales to 62.7% from 62.6%. 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. Reconfiguration costs and low volume production of VideoMask(TM) during 1996 affected gross margins of the product. As VideoMask(TM) volume increases, margins on such products should improve, although there can be no assurance that additional delays will not occur or that volume will increase. -17- Selling Expenses. Selling expenses decreased to $4,780,000 in 1996 from $4,824,000 in 1995, primarily due to decreased costs incurred for commissions as a result of the termination of certain sales representatives offset by increased expenditures for marketing materials, royalties related to certain license agreements and increased operational costs of the BTI sales office along with additional costs incurred in connection with the closure of such office. General and Administrative Expenses. General and administrative expenses decreased to $4,355,000 in 1996 from $4,967,000 for 1995 and also decreased as a percentage of sales to 8.9% in 1996 from 9.5% in 1995. The $612,000 decrease can be attributed to a reduction in rent expense, net of increased depreciation, as a result of the Company's purchase of the Old Bridge Facility and a decline in salaries due to a reduction in personnel, offset by an increase in expenditures for professional services and insurance. Research and Development Expenses. Research and development expenses decreased 1.9% to $1,972,000 in 1996 from $2,011,000 in 1995, primarily due to a decrease in consulting services incurred, which were primarily attributable to the development of the VideoMask(TM) interdiction product line during 1995 and the first half of 1996, offset by an increase in purchased materials for research and development. Research and development expenses increased as a percentage of sales to 4.0% from 3.9%. Operating Income. Operating income decreased 6.7% to $7,142,000 in 1996 from $7,652,000 in 1995. Operating income as a percentage of sales decreased to 14.6% in 1996 from 14.7% in 1995. Interest and Other Expenses. Other expenses, net, decreased to $658,000 in 1996 from $1,236,000 in 1995. These expenses in 1996 consisted of interest expense in the amount of $658,000. Other expenses in 1995 consisted of interest expense of $1,296,000, offset by $60,000 of other income. The reduction in interest expense is primarily attributed to reduced borrowings under the Company's credit line. Income Taxes. The Company, with the consent of its stockholders, elected to be taxed as an S Corporation for federal income tax purposes from its inception until its initial public offering of common stock. As a consequence, the taxable net earnings of the Company were taxed as income to the Company's stockholders in proportion to their individual stockholdings, and the payment of federal income taxes on such proportionate share of the Company's taxable earnings was the personal obligation of each stockholder. The Company's status as an S Corporation terminated on December 11, 1995, and as a result the Company is now a C Corporation for income tax purposes. As a C Corporation, the Company is currently taxed at a combined effective rate of approximately 40% based upon current federal and state income tax regulations. Had the Company been taxable as a C Corporation for the entire year of 1995, pro forma income taxes and pro forma net earnings after taxes for the year ended December 31, 1995 would have been $2,566,000 and $3,850,000, respectively, compared with a provision for income taxes and net earnings after taxes for the year ended December 31, 1996 of $2,601,000 and $3,883,000, respectively. Inflation and Seasonality Inflation and seasonality have not had a material impact on the results of operations of the Company. Fourth quarter sales in 1997 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 Historically, computer programs have been written using two digits rather than four to define the applicable year. Such programs were written without considering the impact of the upcoming change in the century and may experience problems handling dates beyond December 31, 1999. This could cause computer applications to fail or to create erroneous results unless corrective measures are taken. Incomplete or untimely -18- resolution of the Year 2000 issue could have a material adverse impact on the Company's business, operations or financial condition in the future. The Company has been assessing the impact that the Year 2000 issue will have on its computer systems, including both hardware and software utilized by the Company, since 1994. In response to these assessments, which are ongoing, the Company has developed and is implementing a plan to develop solutions to those systems found to have date-related deficiencies. Project plans call for the completion of the solution implementation phase and testing of such solutions prior to any anticipated impact on the Company's systems. The Company is also surveying its bank and critical suppliers and customers to determine the status of their Year 2000 compliance programs. Based on the current status of the Company's Year 2000 compliance program, and assuming that project plans, which continue to evolve, can be implemented as planned, the Company believes future costs relating to the Year 2000 issue will not have a material adverse impact on the Company's business, operations or financial condition. Liquidity and Capital Resources As of December 31, 1997 and 1996, the Company's working capital was $26,055,000 and $23,015,000, respectively. The increase in working capital is attributable primarily to the Company's net earnings offset by a $1,278,000 reclassification of certain promissory notes to shareholders as a current liability due to their maturity dates being within one year and capital expenditures of $1,424,000. 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, 1997 was $2,290,000 as a result of the Company's net earnings offset by $1,847,000 to fund the increase in inventory and $4,470,000 related to the increase in accounts receivable, compared to cash used in operating activities for the period ended December 31, 1996 of $534,000. Cash used in investing activities was $1,587,000. $163,000 was utilized for fees associated with the acquisition of certain license agreements, and $1,424,000 is attributable to capital expenditures for new equipment. The Company purchased several high speed robotic insertion machines which are used primarily in the manufacture of circuit boards for the Company's new VideoMask(TM) product line and the balance was used for the purchase of other automated assembly and test equipment. The Company does not have any present plans or commitments for material capital expenditures for fiscal year 1998, other than in connection with the acquisition of Scientific's Interdiction Business. Cash used in financing activities was $1,488,000 for the period ended December 31, 1997, comprised primarily of $1,176,000 of payments on the Company's line of credit, prepayments of $313,000 on notes to shareholders and repurchase of $498,000 of the Company's common stock under the Company's stock repurchase program, offset by $303,000 in proceeds relating to the exercise of stock options. 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 (7.7% at December 31, 1997). As of December 31, 1997, the Company had no balance 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 -19- 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, 1997, there was no balance outstanding under the acquisition loan commitment and as of March 26, 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. On May 24, 1996, the Company borrowed $2.8 million for a ten year term secured by a mortgage against the 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. 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 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," were issued. SFAS 130 addresses standards for reporting and display of comprehensive income and its components and SFAS 131 requires disclosure of reportable operating segments. In February 1998, SFAS 132, "Employer's Disclosures About Pensions and Other Postretirement Plans" was issued. SFAS 132 standardizes pension disclosures. These statements are effective in 1998. The Company will be reviewing these pronouncements to determine their 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. -20- 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. 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 7, 1998, 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, 1997 and 1996......................................................27 Consolidated Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995.............................28 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995...................29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.............................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, 1997. (c) Exhibits:
Exhibit # Description Location 3.1 Restated Certificate of Incorporation of Blonder Incorporated by reference from Exhibit Tongue Laboratories, Inc. 3.1 to Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 3.2 Restated Bylaws of Blonder Tongue Laboratories, Incorporated by reference from Exhibit Inc. 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 January 1, 1995, Incorporated by reference from Exhibit between Blonder Tongue Laboratories, Inc. and 10.3 to Registrant's S-1 Registration James H. Williams. 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 1996 Director Option Plan. Incorporated by reference from Exhibit 10.7 to Registrant's S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.5 Employment Agreement, dated August 1, 1995, Incorporated by reference from Exhibit between Blonder Tongue Laboratories, Inc. and 10.9 to Registrant's S-1 Registration Daniel J. Altiere. Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.6 Form of Indemnification Agreement entered into Incorporated by reference from Exhibit by Blonder Tongue Laboratories, Inc. in favor of 10.10 to Registrant's S-1 Registration each of its Directors and Officers. Statement No. 33-98070 originally filed October 12, 1995, as amended. -22- 10.7 VideoCipher(R)IICM Commercial Descrambler Incorporated by reference from Exhibit Module Master Purchase and License Agreement, 10.11 to Registrant's S-1 Registration dated August 23, 1990, between Blonder Tongue Statement No. 33-98070 originally filed Laboratories, Inc. and Cable/Home October 12, 1995, as amended. Communication Corp. + 10.8 Patent License Agreement, dated August 21, Incorporated by reference from Exhibit 1995, between Blonder Tongue Laboratories, Inc. 10.12 to Registrant's S-1 Registration and Philips Electronics North America Statement No. 33-98070 originally filed Corporation. October 12, 1995, as amended. + 10.9 Interdiction Technology License Agreement, dated Incorporated by reference from Exhibit August 21, 1995, between Blonder Tongue 10.13 to Registrant's S-1 Registration Laboratories, Inc. and Philips Broadband Statement No. 33-98070 originally filed Networks, Inc. October 12, 1995, as amended. 10.10 401(k) Savings & Investment Retirement Plan. Incorporated by reference 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, and Security Incorporated by reference from Exhibit Agreement dated May 23, 1996 by Blonder 10.2 to Registrant's Quarterly Report on Tongue Laboratories, Inc. in favor of CoreStates Form 10-Q for the period ended June 30, Bank, N.A., successor to Meridian Bank. 1996, filed August 14, 1996. 10.13 Real Estate Loan Note dated May 23, 1996 from Incorporated by reference from Exhibit Blonder Tongue Laboratories, Inc. in favor of 10.3 to Registrant's Quarterly Report on CoreStates Bank, N.A., successor to Meridian Form 10-Q for the period ended June 30, Bank. 1996, filed August 14, 1996. 10.14 Allonge to Real Estate Loan Note, dated Incorporated by reference from Exhibit September 26, 1996 from Blonder Tongue 10.3 to Registrant's Quarterly Report on Laboratories, Inc., in favor of CoreStates Bank, Form 10-Q for the period ended N.A., successor to Meridian Bank. September 30, 1996, filed November 14, 1996. + 10.15 License Agreement dated November 12, 1996 Incorporated by reference from Exhibit between Blonder Tongue Laboratories, Inc. and 10.31 to Registrant's Annual Report on Houston Tracker Systems, Inc. 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 First Amendment to 1995 Long Term Incentive Incorporated by reference from Exhibit Plan 10.5(a) to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997. -23- 10.18 Third Amended and Restated Loan Agreement Filed herewith. dated October 29, 1997 between Blonder Tongue Laboratories, Inc. and CoreStates Bank, N.A. 10.19 Third Amended and Restated Line of Credit Note Filed herewith. dated October 29, 1997 by Blonder Tongue Laboratories, Inc. in favor of CoreStates Bank, N.A. 21 Subsidiaries of Blonder Tongue Laboratories, Inc. Filed herewith. 23 Consent of BDO Seidman, LLP Filed herewith. 27 Financial Data Schedule Electronic filing only. 27.1 Amended and Restated Financial Data Schedule Electronic filing only. relative to Form 10-K for fiscal year ended December 31, 1996.
- ------------------------------ + 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 48 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, 1997 and 1996 ................27 Consolidated Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995.........................................................28 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 ...........................................29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ........................................................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, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. BDO Seidman, LLP Woodbridge, New Jersey February 20, 1998, except for Note 16 for which the date is March 25, 1998 -26- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) December 31, ------------------------- 1997 1996 ------ ----- Assets (Note 4) Current assets: Cash................................................. $ 555 $ 1,340 Accounts receivable, net of allowance for doubtful accounts of $607 and $280, respectively..... 13,130 8,987 Inventories (Note 2)................................. 17,875 16,028 Other current assets ................................ 318 403 Deferred income taxes (Note 13)...................... 1,054 534 ------- ----------- Total current assets..................... 32,932 27,292 Property, plant and equipment, net of accumulated depreciation and amortization (Note 3)............. 7,721 7,161 Other assets........................................... 1,619 1,712 --------- ----------- $42,272 $36,165 ========= =========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt, including related party debt of $1,278 in 1997 (Note 4).......................................... $ 1,866 $ 445 Accounts payable........................................ 2,305 1,627 Accrued compensation.................................... 1,606 993 Other accrued expenses.................................. 929 589 Income taxes (Note 13).................................. 171 623 ---------- -------- Total current liabilities................... 6,877 4,277 ---------- -------- Deferred income taxes (Note 13)........................... 412 410 Revolving line of credit (Note 4)......................... - 1,176 Long-term debt, including related party debt of $1,591 in 1996 (Note 4).......................................... 3,188 4,726 Commitments and contingencies (Notes 5 and 6)............. - - Stockholders' equity (Notes 9, 10, 11 and 12): Preferred stock, $.001 par value; authorized 5,000,000 shares; no shares outstanding................ - - Common stock, $.001 par value; authorized 25,000,000 shares, 8,272,758 shares issued at December 31, 1997 and 8,193,509 shares issued and outstanding at December 31, 1996....................... 8 8 Paid-in capital.......................................... 21,802 21,499 Retained earnings........................................ 10,483 4,069 Treasury stock at cost, 40,200 shares at December 31, 1997 and no shares at December 31, 1996 (Note 9)........ (498) - ---------- -------- Total stockholders' equity.................. 31,795 25,576 ---------- -------- $42,272 $36,165 ========== ======== 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 ------------------------------------------ 1997 1996 1995 ------------- ------------ ------------ Net sales........................... $62,057 $48,862 $51,982 Cost of goods sold.................. 39,656 30,613 32,528 ------------ ------------ ------------- Gross profit.................... 22,401 18,249 19,454 ------------ ------------ ------------- Operating expenses: Selling expenses................ 4,964 4,780 4,824 General and administrative...... 4,974 4,355 4,967 Research and development........ 1,954 1,972 2,011 ------------ ------------ ------------- 11,892 11,107 11,802 ------------ ------------ ------------- Earnings from operations............ 10,509 7,142 7,652 ------------ ------------ ------------- Other income (expense): Interest expense................ (414) (658) (1,296) Other income.................... 595 -- 60 ------------ ------------ ------------- 181 (658) (1,236) ------------ ------------ ------------- Earnings before income taxes........ 10,690 6,484 6,416 Provision for income taxes (Note 13).......................... 4,276 2,601 884 ------------ ------------ ------------- Net earnings.................... $ 6,414 $ 3,883 $ 5,532 ============ ============ ============= Basic earnings per share (Note 10).. $ 0.78 $ 0.48 ============ ============ Basic weighted average shares outstanding (Note 10)............. 8,227 8,144 ============ ============ Diluted earnings per share (Note 10)........................... $ 0.77 $ 0.47 ============ ============ Diluted weighted average shares outstanding (Note 10).............. 8,375 8,300 ============ ============ Pro forma data (Note 1): Historical earnings before income taxes................... $ 6,416 Pro forma provision for income taxes (Note 13)................ 2,566 ------------- Net earnings ............... $ 3,850 ============= Pro forma basic net earnings per share (Note 10)................ $ 0.66 ============= Basic weighted average shares outstanding (Note 10).............. 5,823 ============= Pro forma diluted earnings per share (Note 10).................... $ 0.64 ============= Diluted weighted average shares outstanding (Note 10).............. 6,054 ============= 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)
Note Receivable From Sale Common Stock of Common ----------------- Paid-in Retained Stock Treasury Shares Amount Capital Earnings Stock Total ------ -------- -------- -------- --------- -------- -------- Balance at January 1, 1995 5,653 $ 6 $ 1,449 $ 2,662 $ (608) $ -- $ 3,509 Collection of note receivable -- -- -- -- 608 -- 608 S Corporation net earnings -- -- -- 5,346 -- -- 5,346 Distributions to stockholders -- -- -- (7,896) -- -- (7,896) Issuance and simultaneous purchase and retirement of treasury stock pursuant to acquisition (Note 11) 66 -- (347) -- -- -- (347) Reclassification of S Corporation retained earnings -- -- 112 (112) -- -- -- Proceeds from sale of stock 2,200 2 19,285 -- -- -- 19,287 Costs of initial public offering -- -- (953) -- -- -- (953) C Corporation net earnings -- -- -- 186 -- -- 186 ------ -------- -------- -------- --------- -------- -------- Balance at December 31, 1995 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 ===== ======== ======== ======== ========= ======== ========
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, ------------------------------------- 1997 1996 1995 ---------- --------- ---------- Cash Flows From Operating Activities: Net earnings.................................................... $ 6,414 $ 3,883 $ 5,532 Adjustments to reconcile net earnings to cash provided by (used in) operating activities: Depreciation and amortization............................... 1,130 1,099 431 Provision for doubtful accounts............................. 327 135 58 Deferred income taxes....................................... (518) (469) 345 Non cash compensation expense............................... - - 304 Changes in operating assets and liabilities: Accounts receivable....................................... (4,470) 33 (4,727) Inventories............................................... (1,847) (2,638) (5,129) Other current assets...................................... 85 503 (384) Other assets.............................................. (10) (184) (7) Income taxes.............................................. (452) 97 526 Accounts payable and accrued expenses..................... 1,631 (2,993) 3,546 --------- ---------- ---------- Net cash provided by (used in) operating activities...... 2,290 (534) 495 Cash Flows From Investing Activities: --------- ---------- ---------- Capital expenditures............................................ (1,424) (1,471) (5,502) Acquisitions of licenses........................................ (163) (492) (600) --------- ---------- ---------- Net cash used in investing activities.................... (1,587) (1,963) (6,102) --------- ---------- ---------- Cash Flows From Financing Activities: Net borrowings (repayments) under revolving line of credit...... (1,176) (1,533) (532) Borrowings from stockholders.................................... - - 1,591 Repayments of borrowings from stockholders...................... (313) - - Proceeds from long-term debt.................................... 683 3,422 5,000 Repayments of long-term debt.................................... (487) (396) (9,642) Proceeds from sale of common stock.............................. - 1,606 18,334 Proceeds from exercise of stock options......................... 303 261 - Purchase and retirement of treasury stock....................... - - (347) Acquisition of treasury stock................................... (498) - - Collection of note receivable from sale of common stock......... - - 304 Distributions paid to stockholders.............................. - - (9,126) --------- ---------- ---------- Net cash (used in) provided by financing activities...... (1,488) 3,360 5,582 --------- ---------- ---------- Net (Decrease) Increase In Cash................................... (785) 863 (25) Cash, beginning of period......................................... 1,340 477 502 --------- ---------- ---------- Cash, end of period............................................... $ 555 $ 1,340 $ 477 ========= ========== ========== Supplemental Cash Flow Information: Cash paid for interest.......................................... $ 397 $ 650 $ 1,329 Cash paid for income taxes...................................... 5,251 2,681 29 ========= ========== ========== Non-cash transactions: 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) Reorganization and Recapitalization On October 3, 1995, the Board of Directors and stockholders approved the following actions in connection with the Company's initial public offering, which actions were implemented on December 11, 1995: Authorized capital consisting of 25 million shares of $.001 par value common stock and 5 million shares of $.001 par value preferred stock. The preferred stock may be issued in one or more series with such rights, preferences and limitations as the Board of Directors of the Company may determine. Declared a 2,011 for 1 stock split for the common stock. The consolidated financial statements reflect the impact of the stock split for all periods presented. On December 11, 1995, the Company acquired Blonder Tongue International, Inc. ("BTI"). BTI was an S Corporation formed in 1994 by the stockholders of the Company. The acquisition was consummated by contribution of BTI's shares to the Company. The acquisition was accounted for at historical cost similar to a pooling of interests, due to the common control exercised over the entities by related parties. As a result of the acquisition of BTI, the S Corporation elections for both BTI and the Company automatically terminated on December 11, 1995. See Note 13. In September 1996, BTI closed its sales office located in Barcelona, Spain. The closure did not have a material impact on the Company's operating results. (c) Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out ("FIFO") method, or market. (d) Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company provides for depreciation generally on the straight-line method based upon estimated useful lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and fixtures, 6 to 10 years for machinery and equipment, 10 to 15 years for building improvements and 40 years for the manufacturing and administrative office facility. (e) Income Taxes Prior to December 11, 1995, the Company was treated as an S Corporation under provisions of the Internal Revenue Code. Under these provisions, all earnings and losses of the Company were reported on the federal income tax returns of the stockholders. Accordingly, no provisions had been made for federal income taxes. In January, 1994, the Company elected to be taxed as a small business corporation in the state of New Jersey. The 1995 consolidated financial statements reflect a state income tax provision only. -31- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for temporary differences in the recognition of certain income and expenses for financial and tax reporting purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. (f) Intangible Assets Intangible assets totaling $1,617 and $1,706 as of December 31, 1997 and 1996, 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. Amortization expense was $206, $303 and $52 for 1997, 1996 and 1995, respectively. (g) Long-Lived Assets 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"), was adopted as of January 1, 1996. 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. The adoption of SFAS 121 was not material to the results of operations or financial position. (h) Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with a maturity of less than three months at purchase to be cash equivalents. The Company did not have any cash equivalents at December 31, 1997, 1996 and 1995. (i) Research and Development Research and development expenditures for the Company's projects are expensed as incurred. (j) Revenue Recognition The Company records revenues when products are shipped. Customers do not have a right to return products shipped. (k) 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 ending after December 15, 1997, requires 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. -32- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (l) Treasury Stock Treasury Stock is recorded at cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. (m) Pro Forma Presentations The pro forma income tax provision has been calculated as if the Company were taxable as a C Corporation under the Internal Revenue Code for all periods presented. (n) Significant Risks and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Approximately 68% of the Company's employees are covered by a three year collective bargaining agreement, which expires in February, 1999. The Company estimates that Headend products accounted for approximately 80% of the Company's revenues in 1997, 84% in 1996 and 90% in 1995. 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). 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. (o) New Accounting Pronouncements In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," were issued. SFAS 130 addresses standards for reporting and display of comprehensive income and its components and SFAS 131 requires disclosure of reportable operating segments. In February 1998, SFAS 132, "Employer's Disclosures About Pensions and Other Postretirement Plans" was issued. SFAS 132 standardizes pension disclosures. These statements are effective in 1998. The Company will be reviewing these pronouncements to determine their applicability to the Company, if any. -33- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 2 - Inventories Inventories are summarized as follows: December 31, --------------------------------- 1997 1996 ------------ ----------- Raw materials....................... $ 8,740 $ 7,746 Work in process..................... 2,907 2,451 Finished goods...................... 6,228 5,831 ------------ ----------- $17,875 $16,028 ============ =========== Note 3 - Property, Plant and Equipment Property, plant and equipment are summarized as follows: December 31, ---------------------------- 1997 1996 ----------- ---------- Land............................................... $ 1,000 $ 1,000 Building........................................... 3,361 3,361 Machinery and equipment............................ 4,623 3,457 Furniture and fixtures............................. 391 292 Office equipment................................... 729 596 Building improvements.............................. 415 389 ----------- ---------- 10,519 9,095 Less: Accumulated depreciation and amortization... (2,798) (1,934) ----------- ---------- $ 7,721 $ 7,161 =========== ========== Note 4 - Debt 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 (7.7% at December 31, 1998). As of December 31, 1997, the Company had no balance 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 (See Note 16). 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, 1997, there was no balance outstanding under the acquisition loan commitment and as of March 26, 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 average amount outstanding on the line of credit during 1997 was $859 at a weighted average interest rate of 8.20%. The maximum outstanding under this facility was $1,255 in 1997. -34- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) On May 24, 1996, the Company borrowed $2.8 million 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, ------------------- 1997 1996 --------- -------- Term loan with a bank bearing interest at prime rate less 2%, payable in quarterly installments through June, 1998...................................... $ 143 $ 285 Term loan with a bank bearing interest at 7.25%, payable in monthly installments......................... 2,505 2,691 Term loans with stockholders bearing interest at prime, due December 19, 1998(a)...................... 1,278 1,591 Capital leases (Note 5)................................. 1,128 604 ----------- -------- 5,054 5,171 Less: Current portion.................................. (1,866) (445) ---------- -------- $ 3,188 $ 4,726 ========== ======== (a) $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 $313 on these notes. In January, 1998, the Company prepaid the balance due plus accrued interest in full satisfaction of these notes. The fair value of the debt approximates the recorded value based on the borrowing rates currently available for loans with similar terms and maturities. Annual maturities of long-term debt at December 31, 1997 are: 1998............$ 1,866 1999................443 2000................463 2001................435 2002................289 Thereafter....... 1,558 ----- $ 5,054 ===== Note 5 - Commitments and Contingencies Leases The Company leases certain factory and automotive equipment under noncancellable operating leases expiring at various dates through October 2001. The Company also leased its facility and was generally obligated under the facility leases to pay additional amounts based on real estate taxes, utilities, insurance and common area maintenance charges. The Company leased its primary manufacturing and administrative office facility from a partnership whose only operations consisted of leasing this facility to the Company. The Company had a 49% -35- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) interest in the partnership and the remaining 51% interest in the partnership was held by an unrelated third party. The Company accounted for its interest in the partnership using the equity method. Lease payments to this partnership were approximately $605 in 1995. In 1995, the Company entered into an agreement to purchase the remaining 51% interest of the partnership and thereby acquired the manufacturing and administrative office facility for $633 in cash plus the payment of two mortgages in the amount of $3,728. The Company made these payments from the proceeds of its initial public offering and accounted for the purchase of the partnership interest as an acquisition of the building since it owns the building outright upon purchase of the remaining partnership interest. Future minimum rental payments, required for all noncancellable leases are as follows: Capital Operating 1998............................................. $ 327 $ 177 1999............................................. 319 118 2000............................................. 318 39 2001............................................. 267 13 2002............................................. 106 -- ------- -------- Total future minimum lease payments.............. 1,337 $ 347 ====== Less: amounts representing interest............. (209) -------- Present value of minimum lease payments.......... $ 1,128 ======= Property, plant and equipment included capitalized leases of $1,331, less accumulated amortization of $183, at December 31, 1997, and $648, less accumulated amortization of $32, at December 31, 1996. Rent expense, net of sublease income was $31, $77 and $709 for the years ended December 31, 1997, 1996 and 1995 respectively. Rent expense was $43, $79 and $725 for the years ended December 31, 1997, 1996 and 1995, respectively. Litigation On October 18, 1996, the Company was served with a complaint in a lawsuit filed by Scientific-Atlanta, Inc. ("Scientific") in the United States District Court for the Northern District of Georgia alleging patent infringement by the Company's VideoMask(TM) interdiction product. The complaint requested an unspecified amount of damages and injunctive relief. Following the Company's acquisition of the assets and technology rights of Scientific's interdiction business, Scientific's lawsuit against the Company was dismissed with prejudice (See Note 16). 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 $59, $54 and $46 for the years ended December 31, 1997, 1996 and 1995, respectively. -36- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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 pension expense for this plan includes the following components: December 31, ---------------------------------------- 1997 1996 1995 --------- ---------- -------- Service cost..................... $ 81 $78 $54 Interest cost.................... 56 49 42 Actual return on plan assets..... (90) (63) (78) Net amortization and deferral.... 42 29 51 --------- ---------- -------- Net pension expense.............. $ 89 $93 $69 ========= ========== ======== The funded status of the plan and the amounts recorded in the Company's consolidated balance sheets are as follows: December 31, ----------------------- 1997 1996 -------- -------- Actuarial present value of benefit obligations: Vested benefit obligation.......................... $ 543 $553 ======== ======== Accumulated benefit obligation..................... $ 679 $644 ======== ======== Projected benefit obligation.......................... 757 716 Plan assets at fair value............................. 762 681 -------- -------- Projected benefit obligation in excess of plan assets. (5) (35) Unrecognized net gain................................. 195 201 Unrecognized net transition liability................. (89) (99) -------- -------- Prepaid pension costs................................. $ 101 $67 ======== ======== Key economic assumptions used in these determinations were: December 31, --------------------- 1997 1996 -------- ------ Discount rate......................................... 7.5% 7.5% Expected long-term rate of return..................... 7.0% 7.0% Note 7 - Related Party Transactions On July 22, 1993, the Company issued a $912 note to a stockholder, who is also the Company's President, Chief Executive Officer and Chairman of the Board, pertaining to the purchase of 2,040 shares of common stock. Principal payments on this note are due annually through July, 1996 with interest at 3.62%. Upon completion of the offering, the final payment of this note was prepaid. In addition, the Company had a special bonus agreement whereby the stockholder was paid net after-tax bonuses of $291, $281 and $272 over a three year period due annually, through July, 1996. 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 -37- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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 64% and 61% of the Company's outstanding trade accounts receivable at December 31, 1997 and 1996, 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, 1997, the Company's largest customer accounted for approximately 16% of the Company's sales. At December 31, 1997, this customer accounted for approximately 16% of the Company's outstanding trade accounts receivable. Management believes these amounts to be collectible. A different customer accounted for approximately 17% of the Company's sales in 1996 while a third customer accounted for approximately 18% of the Company's sales in 1995. 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. 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, 1997, the Company had repurchased 40 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, 1997, 1996 and 1995 are calculated as follows: -38- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Net Income Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------- 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 ======================================= For the year ended December 31, 1995 (pro forma): Basic earnings per share $ 3,850 5,823 $ 0.66 Effect of assumed conversion of employee stock options - 231 --------------------- Diluted earnings per share $ 3,850 6,054 $ 0.64 ======================================= Note 11 - Acquisition In 1993, the Company acquired the assets of MAR Associates, a company engaged in research, development, manufacturing, and sales of electronic components used in low power television transmission and microwave- link signal transmission. The purchase price of $360 was paid in cash and the assumption of certain liabilities. Additionally, the Company agreed to grant the former owners options to purchase 132 shares of the Company's stock, for a nominal amount, contingent upon the acquired company's meeting certain performance targets. In October, 1994, the acquired company met the performance requirements, and the Company granted the stock options and recorded goodwill of $342 as additional consideration. The options were valued at the estimated fair market value at date of grant. In March 1995, the former owners notified the Company of their intention to exercise the options by tendering the cash required under the purchase agreement. However, the former stockholders did not execute the stockholders agreement required by the purchase agreement until October 10, 1995. Upon execution of the agreement, the Company issued 132 shares of common stock and simultaneously therewith repurchased and retired 66 shares of the common stock for an aggregate purchase price of $347 ($5.31 per share). -39- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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. Also, in 1994, the Company granted non-qualified options for 6 shares to an employee of BTI. These options expired during 1996 as a result of the termination of the employee. 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 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 500 shares of common stock for issuance under the 1995 Plan, as amended to date. In September, 1997, the Board of Directors approved an increase in the number of shares available for issuance under the 1995 Plan from 500 to 750, subject to stockholder approval at the 1998 Annual Meeting of Stockholders. 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 -40- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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 is exercisable at $10.25 and expires in 2006. -41- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
Weighted- Weighted- Weighted- Average Average Average 1994 Exercise 1995 Exercise 1996 Exercise Plan (#) Price ($) Plan (#) Price ($) Plan (#) Price ($) ---------------------------------------------------------------------------- Shares under option: Outstanding at January 1, 1995 170,607 2.57 -- -- -- -- Granted 98,169 4.33 -- -- -- -- Exercised -- -- -- -- -- -- Canceled -- -- -- -- -- -- Outstanding at December 31, 1995 268,776 3.21 -- -- -- -- Granted 34,000 10.38 226,500 9.72 1,500 8.50 Exercised (84,156) 3.10 -- -- -- -- Canceled (6,033) 4.33 (1,500) 9.63 -- -- Outstanding at December 31, 1996 212,587 4.36 225,000 9.72 1,500 8.50 Granted -- -- 253,500(a) 9.27 -(b) -- Exercised (66,915) 2.77 (12,334) 9.63 -- -- Canceled (5,228) 4.33 (28,000) 9.31 -- -- Outstanding at December 31, 1997 140,444 5.13 438,166 9.49 1,500 8.50 Options exercisable at December 31, 1997 86,810 4.04 67,520 10.08 1,500 8.50 Weighted-average fair value of options granted during 1995 $ 1.37 -- -- Weighted-average fair value of options granted during 1996 $ 6.36 $ 6.27 $ 5.53 Weighted-average fair value of options granted -- $ 5.81 -- during 1997
- ------------ (a) Does not include options to purchase an aggregate of 30,000 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 4,000 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 (excluding conditionally granted stock options subject to stockholder approval) outstanding at December 31, 1997:
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------------------------------- Number of Weighted- Options Average Weighted- Number Range of Exercise Outstanding at Remaining Average Exercise Exercisable at Weighted-Average Prices ($) 12/31/97 Contractual Life Price ($) 12/31/97 Exercise Price ($) - ---------------------------------------------------------------------------------------------------------------------- 1994 Plan: 2.57 52,808 6.6 years 2.57 52,808 2.57 4.33 53,636 7.3 4.33 22,668 4.33 9.38 to 10.59 34,000 4.5 10.38 11,334 10.38 ------ ------ 2.57 to 10.59 140,444 6.3 5.13 86,810 4.04 ======= ====== 1995 Plan: 8.63 to 9.63 377,666 9.1 9.09 52,836 9.63 10.59 20,500 3.6 10.59 6,834 10.59 12.69 40,000 9.7 12.69 7,850 12.69 ------ ----- 8.63 to 12.69 438,166 8.9 9.49 67,520 10.08 ======= ====== 1996 Plan: 8.50 1,500 5.0 8.50 1,500 8.50 ===== =====
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: December 31, ------------ 1997 1996 1995(a) ------ ------ ------- Net earnings - as reported $6,414 $3,883 $3,850 Net earnings - pro forma 5,957 3,686 3,827 Basic earnings per share - as reported 0.78 0.48 0.66 Basic earnings per share - pro forma 0.72 0.45 0.66 Diluted earnings per share - as reported 0.77 0.47 0.64 Diluted earnings per share - pro forma 0.71 0.44 0.63 (a) 1995 net earnings are presented on a pro forma basis (See Note 1). 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: 1997 1996 1995 ---- ---- ---- Expected volatility 60% 65% 65% Risk-free interest rate 6.0% 6.45% 6.45% Expected lives 6 6 6 Dividend yield none none none -43- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 13 - Income Taxes Prior to December 11, 1995, with the consent of its stockholders, the Company elected to be treated as an S Corporation under the provisions of the Internal Revenue Code. Under these provisions, all earnings and losses of the Company were reported on the federal income tax returns of the stockholders. Accordingly, no provision for federal income taxes had been made. In January 1994, the Company elected to be taxed as a small business corporation in the State of New Jersey. The consolidated financial statements for the fiscal year ended December 31, 1995 reflect state income tax provisions only. The provision for income taxes for the period January 1 through December 10, 1995 was $177 as the Company was still treated as an S Corporation. On December 11, 1995, the Company's S election was terminated and, accordingly, the Company was subject to federal income taxes. Upon termination of the S election, the Company recorded a $587 charge related to net deferred tax liabilities. The pro forma income taxes represent the taxes that would have been reported as Federal, State and local income taxes had the Company accounted for its income taxes under Statement of Financial Accounting Standards No. 109 as a C Corporation. The effective rate utilized for all periods presented was 40%. The following summarizes the provision for income taxes: Year Ended December 31, ------------------------------------------------ (pro forma) 1997 1996 1995 1995 ---------- ---------- ------- ------------- Current: Federal................... $3,707 $2,372 $279 $2,082 State and local........... 1,087 698 260 613 ---------- ---------- ------- ------------- 4,794 3,070 539 2,695 Deferred: Federal................... (399) (361) 179 (99) State and local........... (119) (108) 166 (30) ---------- ---------- ------- ------------- (518) (469) 345 (129) ---------- ---------- ------- ------------- Provision for income taxes... $4,276 $2,601 $884 $2,566 ========== ========== ======= ============= 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, ------------------------------------------------- (pro forma) 1997 1996 1995 1995 ---------- ---------- ------- ------------- Provision for Federal income taxes at the statutory rate....... $3,630 $2,205 $2,181 $2,181 State and local income taxes, net of Federal benefit........... 641 391 191 385 S Corporation earnings not subject to Federal income taxes..... - - (2,075) - Recording of net deferred taxes for conversion to C - Corporation.................................................... - - 587 - Research and development credits............................... (28) (28) (2) (26) Other, net..................................................... 33 33 2 26 ---------- ---------- ------- -------------- Provision for income taxes..................................... $4,276 $2,601 $ 884 $2,566 ========== ========== ======= =============
-44- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Upon the completion of the offering, the Company declared a distribution equal to the 1995 taxable S Corporation income which was paid from the proceeds of the offering. At the date of the termination, the Company had approximately $1,760 of previously untaxed income as a result of change in tax accounting methods. The Company recorded a tax liability for the taxes due (which is payable over 6 years) resulting from this change. The estimated tax liability was approximately $704 (using an effective rate of 40%). Significant components of the Company's deferred tax assets and liabilities are as follows: December 31, -------------------------- 1997 1996 -------- -------- Deferred tax assets: Allowance for doubtful accounts $ 243 $ 112 Inventory 658 384 Accrued Vacation 179 99 Other 123 125 -------- -------- Total deferred tax assets 1,203 720 -------- -------- Deferred tax liabilities: Tax accounting method (165) (247) Depreciation (396) (349) -------- -------- Total deferred tax liabilities (561) (596) -------- -------- $ 642 $ 124 ======== ======== 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 3% in 1997, 5% in 1996, and 9% in 1995. The Company's export sales were concentrated to customers in North and South America for all periods presented. Note 15 - Quarterly Financial Information - Unaudited
1997 Quarters 1996 Quarters ------------------- ---------------- First Second Third Fourth First Second Third Fourth ------------------------------------------------------------------------------- Net sales $14,041 $15,575 $16,965 $15,476 $11,572 $11,693 $13,154 $12,443 Gross profit 4,745 5,284 6,181 6,191 3,957 4,540 5,020 4,732 Net earnings 1,130 1,510 2,098 1,676 590 807 1,253 1,233 Basic earnings per share 0.14 0.18 0.26 0.20 0.07 0.10 0.16 0.15 Diluted earnings per share 0.14 0.18 0.25 0.20 0.07 0.10 0.15 0.15
Note 16 - Subsequent Event 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 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, -45- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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. Scientific will provide certain manufacturing, consulting and other transition services to the Company pursuant to agreements executed by the parties during a limited period following the acquisition in order to permit the Company to fulfill sales orders of the Interdiction Business for the transition period following the closing. In addition, under the terms of the purchase agreement with Scientific, the Company is obligated to file a registration statement with the Securities and Exchange Commission to register the shares of common stock issued to Scientific and underlying the warrant held by Scientific as part of the purchase price for the Interdiction Business within 90 days after the closing of the acquisition. -46- 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 20, 1998 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 20, 1998 -47- BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES for the years ended December 31, 1997, 1996 and 1995 (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, 1997: $280 $366 - ($39) $607 Year ended December 31, 1996: $205 $135 - ($60) $280 Year ended December 31, 1995: $147 $75 - ($17) $205
-48- 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, 1998 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 March 30, 1998 - ------------------------- Chief Executive Officer James A. Luksch (Principal Executive Officer) /s/ Peter Pugielli Senior Vice President, March 30, 1998 - ------------------------- Chief Financial Officer, Peter Pugielli Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) /s/ Robert J. Palle, Jr. Director, Executive Vice March 30, 1998 - ------------------------- President, Chief Operating Robert J. Palle, Jr. Officer and Secretary /s/ John E. Dwight Senior Vice President March 30, 1998 - ------------------------- John E. Dwight /s/ James H. Williams Director March 30, 1998 - ------------------------- James H. Williams /s/ James F. Williams Director March 30, 1998 - ------------------------- James F. Williams /s/ Robert B. Mayer Director March 30, 1998 - ------------------------- Robert B. Mayer /s/ Gary P. Scharmett Director March 30, 1998 - ------------------------- Gary P. Scharmett /s/ Robert E. Heaton Director March 30, 1998 - ------------------------- Robert E. Heaton -49- EX-10.18 2 LOAN AGREEMENT THIRD AMENDED AND RESTATED LOAN AGREEMENT between CORESTATES BANK, N.A. (successor to Meridian Bank) and BLONDER TONGUE LABORATORIES, INC. Dated as of October 29, 1997 (i) THIRD AMENDED AND RESTATED LOAN AGREEMENT BETWEEN CORESTATES BANK, N.A. (successor to Meridian Bank) and BLONDER TONGUE LABORATORIES, INC. TABLE OF CONTENTS
Article Page - ------- ---- I. Definitions............................................................................................1 II. Credit Accommodations.................................................................................10 2.1. The Line of Credit.........................................................................10 2.2 Real Estate Loan...........................................................................12 2.3 Acquisition Facility.......................................................................12 2.4 Requirements of Law........................................................................19 2.5 Determinations.............................................................................19 2.6 Payments and Computations..................................................................20 2.7 Borrowing..................................................................................20 2.8 Prepayment and Repayment...................................................................20 III. Security..............................................................................................21 3.1 Security Documents.........................................................................21 IV. Representations and Warranties of the Borrower........................................................21 4.1 Good Standing of the Borrower; Authorization...............................................21 4.2 Compliance with Laws and Other Agreements..................................................21 4.3 No Conflict; Governmental Approvals........................................................22 4.4 Financial and Other Information Regarding Borrower...................................................................................22 4.5 Taxes......................................................................................22 4.6 Encumbrances and Guaranties................................................................22 4.7 Material Adverse Changes...................................................................23 4.8 Margin Securities..........................................................................23 4.9 ERISA......................................................................................23 4.10 Pending Litigation.........................................................................23 4.11 Valid, Binding and Enforceable.............................................................24 4.12 Priority of Security Interests.............................................................24 4.13 Environmental Matters .....................................................................24 4.14 No Untrue Statements.......................................................................24 4.15 Patents and Trademarks.....................................................................25 V. Conditions Precedent to the Bank's Obligations........................................................25 5.1 Documents to be Delivered by the Borrower at Closing.......................................25 5.2 Conditions Precedent to Making Line of Credit Loans or Acquisition Loans...................26 VI. Affirmative Covenants of the Borrower.................................................................26 6.1 Use of Proceeds............................................................................26 6.2 Financial Statements.......................................................................26 6.3 Ordinary Course of Business; Records.......................................................27 6.4 Information for the Bank...................................................................27 6.5 Insurance..................................................................................27 6.6 Maintenance................................................................................28 (ii) Article Page - ------- ---- 6.7 Taxes......................................................................................29 6.8 Leases.....................................................................................29 6.9 Corporate Existence; Certain Rights; Laws..................................................29 6.10 Notice of Litigation or Other Proceedings..................................................29 6.11 Indebtedness...............................................................................29 6.12 Notice of Events of Default................................................................29 6.13 ERISA......................................................................................29 6.14 Deposit Accounts...........................................................................30 6.15 Management.................................................................................30 6.16 Financial Covenants........................................................................30 6.17 Compliance with Environmental Laws.........................................................30 6.18 Further Actions............................................................................31 6.19 Material Adverse Change....................................................................31 6.20 Meeting Regarding Projections..............................................................31 6.21 Subordination of Debt......................................................................31 VII. Negative Covenants....................................................................................31 7.1 Fundamental Corporate Changes..............................................................31 7.2 Indebtedness...............................................................................32 7.3 Encumbrances...............................................................................32 7.4 Guaranties.................................................................................33 7.5 Sales and Lease-Backs......................................................................33 7.6 Loans, Investments.........................................................................33 7.7 Change in Business.........................................................................33 7.8 Sale or Discount of Receivables............................................................33 7.9 Prepayment of Indebtedness.................................................................33 7.10 ERISA......................................................................................33 7.11 Compliance with Federal Reserve Board Regulations..........................................33 7.12 Blonder International......................................................................34 VIII. Events of Default.....................................................................................34 8.1 Borrower's Failure to Pay..................................................................34 8.2 Breach of Covenants or Conditions..........................................................34 8.3 Defaults in Other Agreements...............................................................34 8.4 Agreements Invalid.........................................................................35 8.5 False Warranties; Breach of Representations................................................35 8.6 Judgments..................................................................................35 8.7 Bankruptcy or Insolvency of the Borrower or Other Loan Parties.............................35 IX. Remedies..............................................................................................36 9.1 Further Advances; Acceleration; Setoff.....................................................36 9.2 Further Remedies...........................................................................37 X. Miscellaneous.........................................................................................37 10.1 Remedies Cumulative; No Waiver.............................................................37 10.2 Notices....................................................................................37 10.3 Costs, Expenses and Attorneys' Fees........................................................38 10.4 Survival of Covenants......................................................................38 10.5 Counterparts; Effectiveness................................................................39 10.6 Headings...................................................................................39 (iii) Article Page - ------- ---- 10.7 Payment Due On A Day Other Than a Business Day.............................................39 10.8 Judicial Proceedings.......................................................................39 10.9 Governing Law..............................................................................39 10.10 Integration................................................................................39 10.11 Amendment and Waiver.......................................................................39 10.12 Successors and Assigns.....................................................................40 10.13 Severability of Provisions.................................................................40 10.14 Consent to Jurisdiction and Service of Process.............................................40 10.15 Indemnification............................................................................41
(iv) THIRD AMENDED AND RESTATED LOAN AGREEMENT This THIRD AMENDED AND RESTATED LOAN AGREEMENT ("Agreement"), dated as of October 29, 1997, is between CORESTATES BANK, N.A. (successor to Meridian Bank), a national banking association (the "Bank"), and BLONDER TONGUE LABORATORIES, INC., a Delaware corporation (the "Borrower"). BACKGROUND A. The Bank and the Borrower are parties to a Second Amended and Restated Loan Agreement dated September 26, 1996 (as amended, modified and/or extended, the "Existing Loan Agreement"). B. In accordance with the terms of the Existing Loan Agreement, the Bank has extended to the Borrower (i) a line of credit in the maximum principal amount of Fifteen Million Dollars ($15,000,000) (the "Existing Line of Credit") pursuant to which there is no outstanding principal balance on the date hereof, which line of credit is further evidenced by a certain Amended and Restated Line of Credit Note dated September 26, 1996 made by the Borrower in favor of the Bank (the "Existing Line of Credit Note"); (ii) a real estate loan in the original principal amount of Two Million Eight Hundred Thousand Dollars ($2,800,000) (the "Existing Real Estate Loan") pursuant to which there is an outstanding principal balance on the date hereof of $2,535,555.48 (the "Existing Real Estate Loan Indebtedness"); and an acquisition loan commitment in the maximum principal amount of $10,000,000 (the "Existing Acquisition Loan") pursuant to which there is no outstanding principal balance on the date hereof. C. The Bank and the Borrower now desire to amend and restate in their entirety the terms and conditions of the Existing Loan Agreement pursuant to the terms hereof and set forth the terms and conditions upon which the Bank will continue to make available to the Borrower certain credit facilities to be used for the purposes specified in this Agreement. Accordingly, the Bank and the Borrower, each intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS Terms used herein without definition that are defined in the Uniform Commercial Code shall have the meanings ascribed to them therein, unless the context requires otherwise. The following terms shall have the following meanings in this Agreement: "Account" shall have the meaning given to that term in the Uniform Commercial Code and, in addition, shall include any right to payment for goods sold or leased or services rendered which is evidenced by an instrument or chattel paper. - 1 - "Acquisition Facility" shall mean the credit facility extended by the Bank to the Borrower pursuant to Section 2.3 hereof. "Acquisition Loan" and "Acquisition Loans" shall have the meaning given such terms in Section 2.3(a) hereof. "Acquisition Loan Adjusted Overnight Base Rate" shall mean the interest rate equal to the sum of the Overnight Base Rate plus (i) 1.25%, if the ratio of Senior Debt to Capital Funds is less than .75:1.00 at the end of the previous fiscal quarter, (ii) 1.75%, if the ratio of Senior Debt to Capital Funds is equal to or greater than .75:1.00, but less than 1.00:1.00 at the end of the previous fiscal quarter, (iii) 2.25%, if the ratio of Senior Debt to Capital Funds is equal to or greater than 1.00:1.00, but less than 1.25:1.00 at the end of the previous fiscal quarter, and (iv) 2.75%, if the ratio of Senior Debt to Capital Funds is equal to or greater than 1.25:1.00, at the end of the previous fiscal quarter. "Acquisition Loan Commitment" shall have the meaning given such term in Section 2.3 hereof. "Acquisition Loan Note(s)" shall have the meaning given such term in Section 2.3(e) hereof. "Affiliate" shall mean any Subsidiary of the Borrower and any Person or entity that, now or hereafter, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common ownership or control with the Borrower. For purposes of this definition, the terms "control," "controls" and "controlled" shall refer to the power to determine the management or policies of a Person, whether resulting from an official position or capacity with such Person, direct or indirect beneficial ownership of at least twenty percent (20%) of the voting securities or other equity interests of such Person, or otherwise. "Agreement" shall mean this agreement, together with all exhibits, amendments, modifications and supplements hereto as may be in effect from time to time. "Allonge to Existing Real Estate Loan Note" shall mean the allonge to Existing Real Estate Loan Note, dated September 26, 1996. "Applicable Law" shall mean all applicable provisions of (i) constitutions, statutes, rules, regulations and orders of governmental authorities of any kind having jurisdiction over the Bank or the Borrower, (ii) authorizations, consents, approvals, and licenses of such governmental authorities, (iii) Judgments, and (iv) common law and equity. - 2 - "Bank" shall have the meaning specified in the initial paragraph of this Agreement, together with its successors and assigns. "Blonder International" shall mean Blonder Tongue International, Inc., a Delaware corporation, together with its successors and assigns. "Borrower" shall have the meaning specified in the initial paragraph of this Agreement, together with its successors and assigns. "Business Day" shall mean any day upon which the Bank is open for business at its office in Reading, Pennsylvania. "Capital Lease" shall mean any lease of property which, in accordance with GAAP, should be capitalized on the lessee's balance sheet. "Capital Lease Obligation" shall mean the amount of the liability which, according to GAAP, should be capitalized or disclosed with respect to a Capital Lease. "Closing" shall mean the execution and delivery to the Bank of all of the documents and instruments required by the terms of this Agreement and the closing of the transactions contemplated by this Agreement. "Closing Date" shall mean the date on which the Closing takes place. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Collateral" shall have the meaning set forth in the Security Agreement. "Default Rate" shall mean the rate of interest applicable to any Loan, plus two percent (2.0%). "Encumbrance" shall mean, as to any Person, any mortgage, lien, pledge, adverse claim, charge, security interest or other encumbrance in or on, or any interest or title of any vendor, lessor, lender to, or other secured party of the Person under any conditional sale or other title retention agreement or Capital Lease with respect to, any property or asset of the Person. "Environmental Laws" shall mean all provisions of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss.9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat. 1613 (October 17, 1986), the Resource Conservation and Recovery Act, 42 U.S.C. ss.6901 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. ss.1801 et seq., the Clean Water - 3 - Act, 33 U.S.C. ss.1251 et seq., the Clean Air Act, 42 U.S.C. ss.7401 et seq., the Storage Tank and Spill Prevention Act, 35 P.S. ss.6021.101 et seq., the Solid Waste Management Act, 35 P.S. ss.6018.101 et seq., the Clean Streams Law, 35 P.S. ss.691.1 et seq., the Hazardous Sites Cleanup Act, 35 P.S. ss.6021.101 et seq., and all other federal, state and local legal requirements pertaining to the environment or regulating or restricting the use, transfer, storage or disposal of Hazardous Materials and applicable to the Borrower or its business, operations or assets. "ERISA" shall mean the federal Employee Retirement Income Security Act of 1974, as amended. "Event of Default" shall have the meaning set forth in Article VIII of this Agreement. "Existing Line of Credit Note" shall have the meaning given such term in paragraph B of the Background Section of this Agreement. "Existing Real Estate Loan" shall have the meaning given such term in paragraph B of the Background Section of this Agreement. "Existing Real Estate Loan Indebtedness" shall have the meaning given such term in paragraph B of the Background Section of this Agreement. "Existing Real Estate Loan Note" shall mean the Real Estate Loan Note, dated May 23, 1996 made by the Borrower in favor of the Bank, evidencing the Existing Real Estate Loan Indebtedness, as amended by the Allonge to Existing Real Estate Note. "Federal Reserve Board" shall mean the Board of Governors of the United States Federal Reserve System. "Financial Statements" shall have the meaning set forth in Section 4.4(a) of this Agreement. "GAAP" shall mean generally accepted accounting principles, as in effect at the time of application to the provisions hereof, and consistently applied. "Guarantor" shall mean any Person who guarantees the payment and performance of all or any part of the Obligations. "Guaranty" shall mean any guaranty or agreement to be a surety or other contingent liability (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligation of another Person. "Hazardous Materials" shall mean all materials of any kind which are flammable, explosive, toxic, radioactive or - 4 - otherwise hazardous to animal or plant life or the environment, including, without limitation, "hazardous wastes," "hazardous substances" and "contaminants," as such terms are defined by Environmental Laws. "Indebtedness" shall mean any obligation for borrowed money, including, without limitation: (a) any obligation owed for all or any part of the purchase price of property or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business; (b) any Capital Lease Obligation; and (c) any reimbursement obligations and other obligations under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management devise, or any forward sale or purchase agreement for foreign currencies. "Judgment" shall have the meaning set forth in Section 8.6 of this Agreement. "Line of Credit" shall mean the line of credit from the Bank to the Borrower established pursuant to Section 2.1 of this Agreement. "Line of Credit Adjusted Overnight Base Rate" shall mean the interest rate equal to the sum of the Overnight Base Rate plus (i) .95%, if the ratio of Senior Debt to Capital Funds is less than .75:1.00 at the end of the previous fiscal quarter, (ii) 1.45%, if the ratio of Senior Debt to Capital Funds is equal to or greater than .75:1.00, but less than 1.00:1.00, at the end of the previous fiscal quarter, (iii) 1.95%, if the ratio of Senior Debt to Capital Funds is equal to or greater than 1.00:1.00, but less than 1.25:1.00, at the end of the previous fiscal quarter, and (iv) 2.45%, if the ratio of Senior Debt to Capital Funds is equal to or greater than 1.25:1.00, at the end of the previous fiscal quarter. "Line of Credit Commitment" shall have the meaning set forth in Section 2.1 of this Agreement. "Line of Credit Loans" shall mean the loans made by the Bank to the Borrower pursuant to the Line of Credit. "Line of Credit Note" shall have the meaning set forth in Section 2.1 of this Agreement, together with all replacements, amendments and renewals thereof. "Loan Documents" shall mean this Agreement, the Security Agreement, the Notes, the Mortgage, the Patent - 5 - Assignment, the Trademark Assignment, the Life Insurance Assignments and all agreements, amendments, certificates, financing statements, schedules, reports, notices, and exhibits now or hereafter executed or delivered in connection with any of the foregoing, as may be in effect from time to time. "Loans" shall mean the Line of Credit Loans, the Existing Real Estate Loan and the Acquisition Loan(s). "Mortgage" shall mean the Mortgage, Assignment of Leases, and Security Agreement dated as of May 23, 1996 from the Borrower to the Bank, and encumbering real and personal property located generally at Middlesex County, New Jersey, and any amendments and supplements thereto. "Notes" shall mean the Line of Credit Note, the Existing Real Estate Loan Note, the Acquisition Note(s) and all replacements, amendments, extensions and renewals thereof. "Obligations" shall mean the obligations of the Borrower: (a) To pay the principal, interest, commitment fees and any other liabilities of the Borrower to the Bank under this Agreement and the other Loan Documents in accordance with the terms thereof; (b) To satisfy all of the other direct or indirect liabilities of the Borrower to the Bank, whether hereunder or otherwise, whether now existing or hereafter incurred, whether or not evidenced by any note or other instrument, matured or unmatured, direct, absolute or contingent, joint or several, including any extensions, modifications, renewals thereof and substitutions therefor; (c) To repay the Bank all amounts advanced by the Bank hereunder or otherwise on behalf of the Borrower, including, but without limitation, advances for principal or interest payments to prior secured parties, mortgagors or lienors, or for taxes, levies, insurance, rent, wages, repairs to or maintenance or storage of any Collateral; and (d) To reimburse the Bank, on demand, for all of the Bank's expenses and costs, including the reasonable fees and expenses of its counsel, in connection with the negotiation, preparation, administration, amendment, modification, or enforcement of this Agreement and the documents required hereunder, including all amounts payable under Section 10.3 hereof. "Other Loan Parties" shall mean any Guarantor, together with their successors or assigns. "Overnight Base Rate" shall mean a per annum rate of interest determined by the Bank at its discretion on each banking - 6 - day on the basis of the Bank's assessment of interest rate conditions, and published internally by the Bank for use as the Overnight Base Rate on that date and on any immediately succeeding nonbanking days. Said per annum rate of interest shall change automatically and simultaneously each time the Overnight Base Rate changes effective on and as of the date of the change and the Bank's determination and designation from time to time of such a reference rate shall not in any way preclude the Bank from making loans to other borrowers at rates which are higher or lower or different from such referenced rate. "Patent Assignment" shall mean the Patent Collateral Assignment made by the Borrower to the Bank, dated March 30, 1989, as amended and reaffirmed pursuant to the Reaffirmation and Amendment of Patent Assignment, together with all amendments, modifications, exhibits and schedules thereto as may be in effect from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, court or governmental or political subdivision or agency thereof. "Reaffirmation and Amendment of Patent Assignment" shall mean that certain reaffirmation and amendment by the Borrower of the Patent Assignment dated the same date as this Agreement. "Reaffirmation and Amendment of Security Agreement" shall mean that certain reaffirmation and amendment by the Borrower of the Security Agreement dated the same date as this Agreement. "Reaffirmation and Amendment of Trademark Assignment" shall mean that certain reaffirmation and amendment by the Borrower of the Trademark Assignment dated the same date as this Agreement. "Reaffirmations" shall mean the Reaffirmation and Amendment of Security Agreement, the Reaffirmation and Amendment of Patent Assignment, and the Reaffirmation and Amendment of Trademark Assignment. "Regulatory Change" means (a) the enactment or effectuation after the date of this Agreement of any new, or change in any existing, Applicable Law, (b) the adoption after such date of any new, or the adoption or other effectuation after such date of any change in any existing, interpretation, directive or request (whether or not having the force of law), or (c) any change after such date in the administration or enforcement of any Applicable Law to which the Bank is subject. As used in this definition, the "effectuation" of a change shall - 7 - include, without limitation, that consisting of or resulting from a determination of a court or regulatory authority. "Security Agreement" shall mean the Amended and Restated Security Agreement between the Borrower as debtor and the Bank as secured party dated October 2, 1995 by which the Borrower granted security interests in certain of its assets to the Bank, as amended and reaffirmed pursuant to the Reaffirmation and Amendment of Security Agreement, together with all amendments, modifications, exhibits, and schedules thereto as may be in effect from time to time. "Subsidiary" shall mean, as to any designated corporation, any corporation, the outstanding shares of which having sufficient voting power (not depending on the happening of a contingency) to elect at least a majority of the members of its board of directors, are at the time owned by the designated corporation. "Tax" means any federal, state or foreign tax, assessment or other governmental levy or duty or other charge (including any withholding tax) upon a person or entity or upon its assets, revenues, income or profits, other than income and franchise taxes imposed upon the Bank by the jurisdictions (or any political subdivision thereof) in which the Bank or any office of the Bank is located. "Termination Date" shall have the meaning set forth in Section 2.1 of this Agreement. "Trademark Assignment" shall mean the Trademark Collateral Assignment made by the Borrower to the Bank, dated March 30, 1989, as amended and reaffirmed pursuant to the Reaffirmation and Amendment of Trademark Assignment, together with all amendments, modifications, exhibits and schedules thereto as may be in effect from time to time. "Uniform Commercial Code" shall mean the Uniform Commercial Code of Pennsylvania as codified at 13 Pa. C.S.A. ss.ss.101 et seq., as in effect on the date of this Agreement. "Usage Fee" shall have the meaning given such term in Section 2.3(f) hereof. ARTICLE II CREDIT ACCOMMODATIONS 2.1 The Line of Credit. The Bank shall make available to the Borrower, commencing on the Closing Date, a Line of Credit in the maximum principal amount of $15,000,000 (the "Line of Credit Commitment"), upon the terms and conditions set forth herein. - 8 - (a) Generally. At any time and from time to time during the period commencing on the Closing Date and ending on June 30, 1999 (the "Termination Date"), upon the request of the Borrower, the Bank shall provide to the Borrower a loan or loans in multiples of One Thousand Dollars ($1,000), which shall be used by the Borrower for working capital. The indebtedness, if any, outstanding under the Existing Line of Credit Note shall not be repaid or discharged, but shall be deemed outstanding under the Line of Credit on and as of the Closing Date and shall be evidenced by the Line of Credit Note. The Borrower may use the Line of Credit during the period referred to in the preceding sentence by borrowing, repaying and reborrowing in accordance with the terms of this Agreement. The aggregate outstanding principal under the Line of Credit at any time shall not exceed the Line of Credit Commitment. If, at any time, the aggregate outstanding principal under the Line of Credit exceeds the Line of Credit Commitment, then, without any requirement of demand or notice from the Bank, the Borrower shall immediately pay to the Bank the amount of such excess. Upon the Termination Date, unless the Bank has agreed in writing to extend the Termination Date through June 30, 2000 based upon the Borrower's financial statements for the year ended December 31, 1998 and such other information requested by the Bank, the Bank's commitment to make Line of Credit Loans shall terminate, all Line of Credit Loans shall immediately mature and all Obligations under the Line of Credit Loans shall be immediately due and payable in full. (b) Letters of Credit. (1) Generally. In addition to making loans to the Borrower under the Line of Credit as provided in Section 2.1(a) hereof, the Bank shall, upon the request of the Borrower and subject to the terms of this Agreement, also issue one or more letters of credit ("Letters of Credit") for the account of the Borrower up to an aggregate amount not to exceed $1,000,000 (the "Letter of Credit Sublimit"). All amounts drawn under Letters of Credit shall be deemed to be loans made under the Line of Credit and evidenced by the Line of Credit Note, and the amount available to be borrowed under the Line of Credit shall be reduced by the aggregate amounts drawn and available to be drawn at any time under all outstanding Letters of Credit. In no event shall the aggregate amount available to be drawn on all outstanding Letters of Credit plus the outstanding principal balance of Line of Credit Loans exceed the Line of Credit Commitment. The duration of any Letters of Credit shall not extend beyond the Termination Date without the written consent of the Bank. (2) Issuance of Letters of Credit. Subject to the provisions of Section 2.1(b)(1), the Bank shall issue Letters of Credit for the account of the Borrower, provided that the Borrower (i) provides a written request for each such Letter of Credit specifying the terms thereof, including, without limitation, the amount and the name and address of the beneficiary of such Letter of Credit; (ii) executes and delivers - 9 - to the Bank an application for each such Letter of Credit pursuant to the form provided for such purpose by the Bank; and (iii) executes and delivers to the Bank such other documents and instruments which the Bank, in its sole and absolute discretion, deems reasonable and necessary. The Borrower shall pay to the Bank all transactional and customary fees required by the Bank in connection with the issuance of each Letter of Credit hereunder, including, without limitation, the Bank's standard remittance, transfer and issuance fees, which fees may be deducted by the Bank from the Borrower's account as such fees are incurred. (c) Interest. Interest shall accrue on all loans outstanding under the Line of Credit at an annual rate equal at all times to the Line of Credit Adjusted Overnight Base Rate, which rate shall change simultaneously and automatically upon each change in the Bank's Overnight Base Rate. Interest on the aggregate outstanding principal under the Line of Credit shall be payable monthly on first day of each calendar month commencing with the first full month following the execution of this Agreement. (d) Line of Credit Note. The obligations of the Borrower to repay the aggregate outstanding principal under the Line of Credit and to pay accrued interest thereon shall be evidenced by a Third Amended and Restated Line of Credit Note, in form and substance satisfactory to the Bank, to be executed and delivered to the Bank concurrently with the execution and delivery of this Agreement (the "Line of Credit Note"). (e) Administrative Fee. In addition to the interest and other fees payable by the Borrower, the Borrower shall pay to the Bank a quarterly administrative fee of $1,500, payable on January 1, 1998 and on the first day after the end of each calendar quarter thereafter. The Bank is authorized to automatically deduct the foregoing fee from any account of the Borrower maintained at the Bank on the date such fee is due and owing. (f) Existing Line of Credit Note. The Bank agrees to return to the Borrower the Existing Line of Credit Note marked "cancelled." - 10 - 2.2 Real Estate Loan. (a) Generally. The Bank has made available to the Borrower the Existing Real Estate Loan in the initial principal amount of $2,800,000, the proceeds of which have been used refinance certain land and the buildings and other improvements thereon owned by the Borrower and located at One Jake Brown Road, Old Bridge, New Jersey (the "Property"). The Borrower shall repay the Existing Real Estate Loan Indebtedness in one hundred nineteen (119) equal, consecutive, monthly installments in the amount of $15,555.56 on the first day of each month, which payments commenced on June 1, 1996, together with a final installment, consisting of the entire remaining principal balance of the Existing Real Estate Loan, together with all accrued interest thereon, which shall be due and payable May 1, 2006. (b) Interest. Interest shall accrue on the outstanding principal of the Existing Real Estate Loan at an annual rate equal to seven and one quarter of one percent (7.25%) for the period commencing on the date of disbursement thereof, and ending on June 1, 1999. Thereafter, interest shall accrue at an annual rate equal at all times to the Prime Rate, which rate shall change simultaneously and automatically upon each change in the Bank's Prime Rate, or another fixed rate agreed upon between the Bank and the Borrower. Interest shall continue to be paid monthly on the first day of each month beginning October 1, 1996. (c) Real Estate Loan Note. The obligations of the Borrower to repay the aggregate outstanding principal under the Existing Real Estate Loan are evidenced by the Existing Real Estate Loan Note, and the Borrower agrees to repay the Existing Real Estate Loan Indebtedness in accordance with the terms of this Agreement and the Existing Real Estate Loan Note. 2.3 Acquisition Facility. The Bank shall make available to the Borrower, commencing on the Closing Date, an Acquisition Facility in the maximum principal amount of $15,000,000 (the "Acquisition Loan Commitment"), upon the terms and conditions set forth herein. (a) Advances. Subject to the terms and conditions of this Agreement, at any time or times on or before the Termination Date, the Bank shall provide to the Borrower a loan or loans (each an "Acquisition Loan" and, collectively, the "Acquisition Loans") to be used by the Borrower to finance acquisitions. Amounts borrowed under the Acquisition Facility and repaid may not be reborrowed under the Acquisition Facility. The aggregate amount of all Acquisition Loans made under the Acquisition Facility shall not exceed the Acquisition Loan Commitment. If, at any time, the aggregate amount of all Acquisition Loans made under the Acquisition Facility exceeds the Acquisition Loan Commitment, then, without any requirement of - 11 - demand or notice from the Bank, the Borrower shall immediately pay to the Bank the amount of such excess. Upon the Termination Date, the Bank's commitment to make Acquisition Loans under the Acquisition Facility shall terminate. The aggregate principal balance of each Acquisition Loan, together with accrued interest thereon, shall be repaid in either (i) thirty-six (36) equal consecutive monthly installments, (ii) forty-eight (48) equal consecutive monthly installments, or (iii) sixty (60) equal consecutive monthly installments, as selected by the Borrower on the date of funding of such Acquisition Loan. (b) Requirements for Acquisition Loans. The Bank shall not be obligated to make any Acquisition Loan unless the Borrower has delivered to the Bank the following documents in form and substance satisfactory to the Bank: (1) an Acquisition Loan Note, duly executed by the Borrower evidencing such Acquisition Loan; (2) such security agreements, guaranty agreements, financing statements and other documents as may be necessary or desirable in order to insure that the Bank has a first priority perfected security interest in the assets to be acquired by the Borrower, including, without limitation, the assets owned by any corporation whose stock is being acquired by the Borrower in connection with such Acquisition Loan; and (3) the Usage Fee payable to the Bank in connection with such Acquisition Loan, as provided in Section 2.3(f). (c) Additional Deliveries. The Borrower shall deliver to the Bank within thirty (30) days after the funding of any Acquisition Loan the following documents: (1) copies of any purchase agreement or other agreement of sale entered into by the Borrower in connection with the acquisition to be financed with the proceeds of such Acquisition Loan, together with copies of all other documents executed or delivered in connection therewith; and (2) evidence satisfactory to the Bank of the transfer of the assets or stock acquired by the Borrower, free and clear of all liens and encumbrances. (d) Interest. Interest shall accrue on all loans outstanding under the Acquisition Loan at one of the following rates which shall be elected by the Borrower at the time the Borrower requests an Acquisition Loan: (i) an annual rate equal at all times to the Acquisition Loan Adjusted Overnight Base Rate, which rate shall change simultaneously and automatically upon each change in the Bank's Overnight Base Rate; or (ii) a fixed annual rate of interest being offered by the Bank at the time of such Acquisition Loan for either a three-year or five-year term. Interest on the outstanding principal under each - 12 - Acquisition Loan shall be payable monthly on the first day of each calendar month commencing with the first full calendar month after such Acquisition Loan is made by the Bank. (e) Acquisition Loan Notes. The obligations of the Borrower to repay the outstanding principal of each Acquisition Loan and to pay accrued interest thereon shall be evidenced by a promissory note, in the form attached hereto as Exhibit "A", to be executed and delivered to the Bank on or prior to the date of funding such Acquisition Loan (each, an "Acquisition Loan Note" and, collectively, the "Acquisition Loan Notes"). (f) Usage Fee. On or prior to the disbursement of any Acquisition Loan, in addition to the interest and other fees payable in respect of the Acquisition Facility, the Borrower shall pay to the Bank a usage fee ("Usage Fee"), in an amount equal to .25% of the amount of such Acquisition Loan. 2.4 Requirements of Law. In the event that after the date hereof, any change in any law, regulation or treaty or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority, agency or instrumentality: (a) subjects or shall subject the Bank to any tax of any kind whatsoever with respect to this Agreement, the loans made hereunder or the issuance or maintenance of the Letters of Credit hereunder, or changes the basis of taxation of payments to the Bank of principal, commitment fees, interest or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of the Bank); (b) imposes, modifies or holds or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of the Bank, which reserve, special deposit, compulsory loan or similar requirement is not otherwise included in determination of the interest rate hereunder; (c) imposes or shall impose on the Bank any other condition; and the result of any of the foregoing is to, directly or indirectly, increase the cost to the Bank of making, renewing or maintaining advances or extensions of credit or issuing or maintaining Letters of Credit or to reduce any amount receivable thereunder then, in any such case, the Borrower shall promptly pay the Bank, upon its demand, any additional amounts necessary to compensate the Bank for such additional cost or reduced amount - 13 - receivable. If the Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower of the event by reason of which it has become so entitled. The good faith determination as to any additional amounts payable pursuant to the foregoing sentence by the Bank shall be conclusive in the absence of manifest error. 2.5 Determinations. In making the determinations contemplated by Section 2.4 hereof the Bank may make such estimates, assumptions, allocations and the like that it, in good faith, determines to be appropriate. All such determinations shall be final, binding and conclusive upon the Borrower, except to the extent of any manifest error in computation or transmission, however, the Bank will permit the Borrower to rebut such determinations if it does so in writing, with appropriate evidence thereof, within ten (10) Business Days from the date of notification thereof by the Bank. The Bank shall furnish to the Borrower a certificate outlining in reasonable detail the computation of any amounts claimed by it under Section 2.4 and the assumptions underlying such computations, provided that the failure to deliver a certificate shall not affect the Bank's right to such amounts, but shall extend the time for the Borrower to respond thereto as required above. 2.6 Payments and Computations. All amounts payable by the Borrower to the Bank under this Agreement or the Notes shall be paid directly to the Bank in immediately available funds at the address of the Bank set forth in Section 10.2 hereof or at such other address of which the Bank shall give notice to the Borrower pursuant to Section 10.2 hereof. The Bank is authorized to charge any account of the Borrower at the Bank for any payment due by the Borrower under this Agreement or any of the Notes. All computations of interest hereunder shall be made by the Bank on the basis of a year of 360 days for the actual number of days elapsed. All payments under each of the Notes shall be applied first to the payment of interest due and payable thereunder and then to the reduction of the outstanding principal balance thereof. 2.7 Borrowing. The Borrower shall notify the Bank of each proposed borrowing under the Line of Credit not later than 2:30 p.m., Philadelphia, Pennsylvania time on the day of the proposed borrowing. 2.8 Prepayment and Repayment. The Borrower shall pay a prepayment premium with respect to voluntary or involuntary prepayments of Loans bearing interest at a fixed rate equal to the difference between (x) the aggregate amount of interest which would otherwise have been payable on such prepaid amount from the date of prepayment to the date when such prepaid amount was due (but, with respect to the Existing Real Estate Loan, in no event beyond the date on which interest on the Existing Real Estate Loan converts from a fixed rate to a floating rate as prescribed in Section 2.2(b) above, unless the interest rate is thereafter fixed in accordance with such Section), unless the parties have - 14 - agreed to a new fixed rate of interest to be applicable after such date and (y) the aggregate amount of interest which the Bank would earn if such prepaid amount were invested at the Treasury Rate Security Yield from the date of prepayment to the date when such prepaid amount was due (but, with respect to the Existing Real Estate Loan, in no event beyond the date on which interest on the Existing Real Estate Loan converts from a fixed rate to a floating rate as prescribed in Section 2.2(b) above, unless the interest rate is thereafter fixed in accordance with such Section), unless the parties have agreed to a new fixed rate of interest to be applicable after such date, which difference in interest earnings shall be discounted to present value at the Treasury Rate Security Yield. The term, "Treasury Rate Security Yield", means the bond equivalent yield to maturity available on the secondary market on a Treasury Security with a maturity as close as possible to the scheduled maturity of the prepaid amount and a coupon as close as possible to the bond equivalent yield. The Bank's determination of the amount of any prepayment premium will be conclusive and binding absent manifest error, however, the Bank will permit the Borrower to rebut such amounts if it does so in writing, with appropriate evidence thereof, within ten (10) Business Days from the date of notification by the Bank. All prepayments of outstanding principal shall be applied to installments of principal due thereunder in the inverse order of maturity. ARTICLE III SECURITY 3.1 Security Documents. As security for the prompt payment, performance, satisfaction and discharge when due of all the Obligations, the Borrower shall execute and deliver or shall cause to be executed and delivered to the Bank, concurrently with the execution of this Agreement, the Reaffirmations. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BORROWER In order to induce the Bank to execute and deliver this Agreement and to make the Loans available to the Borrower, the Borrower represents and warrants to the Bank that, as of the date hereof: 4.1 Good Standing of the Borrower; Authorization. The Borrower is duly incorporated, organized and existing and in good standing in the State of Delaware and is duly qualified as a foreign corporation and authorized to do business in all other jurisdictions wherein the nature of its business or property makes such qualification necessary, and has the corporate power to own its properties and to carry on its business as now conducted. The execution, delivery and performance of this Agreement, and the Loan Documents have been duly authorized by all necessary corporate proceedings on the part of the Borrower. - 15 - 4.2 Compliance with Laws and Other Agreements. The Borrower is in compliance with all laws, rules, regulations, judgments, decrees, orders, agreements and requirements which affect in any material way the Borrower, its assets or the operation of its business and has not received, and has no knowledge of, any order or notice of any governmental investigation or of any violation or claim of violation of any law, regulation, judgment, decree, order, agreement, or other governmental requirement. 4.3 No Conflict; Governmental Approvals. The execution, delivery, and performance of this Agreement and each of the Loan Documents will not (i) conflict with, violate, constitute a default under, or result in a breach of any provision of any applicable law, rule, regulation, judgment, decree, order, instrument or other agreement, or (ii) conflict with or result in a breach of any provision of the certificate of incorporation or by-laws of the Borrower. No authorization, permit, consent or approval of or other action by, and no filing, registration or declaration with, any governmental authority or regulatory body is required to be obtained or made by the Borrower for the due execution, delivery and performance of this Agreement or any of the Loan Documents, except such as have been duly obtained or made prior to the Closing Date and are in full force and effect as of the Closing Date (copies of which have been delivered to the Bank on or before the Closing Date). 4.4 Financial and Other Information Regarding Borrower. (a) The Borrower has delivered to the Bank true, correct and complete copies of the balance sheets of the Borrower as of December 31, 1996, and related statements of income for the period then ended, together with notes thereto and the unqualified opinion thereon, dated March 3, 1997, of BDO Seidman, LLP. Those financial statements ("Financial Statements") present fairly the financial position of the Borrower and the results of the operations of the Borrower as of the dates and for the periods indicated, in conformity with GAAP. (b) Except as set forth on Schedule 4.4(b) hereto, the Borrower has no Indebtedness other than as shown in the most recent Financial Statements, and any subsequent interim financial statements which have been delivered to the Bank. (c) Except as set forth on Schedule 4.4(c) hereto, the Borrower has no "investment" (as such term is defined under GAAP), whether by stock purchase, capital contribution, loan, advance, purchase of property or otherwise, in any Person, other than as shown in the most recent Financial Statements, and any subsequent interim financial statements which have been delivered to the Bank. 4.5 Taxes. The Borrower is not delinquent in payment of any income, property or other tax, except for any delinquency - 16 - in the payment of a tax which is contested in good faith by the Borrower and for which appropriate reserves have been established in accordance with GAAP. 4.6 Encumbrances and Guaranties. (a) All properties and assets of the Borrower are owned by the Borrower free and clear of all Encumbrances except (i) those for taxes or other government charges either not yet delinquent or the nonpayment of which is permitted by Section 4.5 of this Agreement; (ii) those arising in connection with Indebtedness that do not materially impair the use or value of the properties or assets of the Borrower in the conduct of its businesses; (iii) Encumbrances whose release and termination is evidenced by the Borrower's delivery to the Bank of appropriate documents on the Closing Date; (iv) Encumbrances otherwise permitted under the Loan Documents, the Security Agreement and the Mortgage; and (v) Encumbrances disclosed in the most recent Financial Statements. (b) The Borrower is not obligated under any Guaranty. 4.7 Material Adverse Changes. Since December 31, 1996, there has not been any material adverse change in the business, operations, properties or financial position of the Borrower. The Borrower does not know of any fact (other than matters of a general economic or political nature) which materially adversely affects, or, so far as the Borrower can now reasonably foresee, will materially adversely affect, the business, operations, properties or financial position of the Borrower or the performance by the Borrower of its obligations under this Agreement and the other Loan Documents. 4.8 Margin Securities. The assets of the Borrower do not include any "margin securities" within the meaning of Regulations G or U of the Board of Governors of the Federal Reserve System (12 C.F.R. 207, 221), and the Borrower does not have any present intention of acquiring any margin security. 4.9 ERISA. The provisions of each employee benefit plan as defined in Section 3(3) of ERISA ("Plan") maintained by the Borrower complies with all applicable requirements of ERISA and of the Code, and with all applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No reportable event, as defined in Section 4043 of ERISA, has occurred with respect to any Plan; no Plan to which Section 4021 of ERISA applies has been terminated; no Plan has incurred any liability to PBGC as provided in Section 4062, 4063 and 4064 of ERISA; no Plan has been involved in any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code; and there are no unfunded liabilities with respect to any Plan which are not disclosed in the Financial Statements. - 17 - 4.10 Pending Litigation. Except as disclosed in the Borrower's periodic reports filed with the Securities and Exchange Commission and provided to the Bank, there are no actions, suits, proceedings or investigations pending, or, to the knowledge of the Borrower, threatened against or affecting the Borrower, before any court, arbitrator or administrative or governmental body which, in the aggregate, might adversely affect any action taken or to be taken by the Borrower under this Agreement and the other Loan Documents or which, in the aggregate, might materially adversely affect the business, operations, properties or financial position of the Borrower, or the ability of the Borrower to perform its obligations under this Agreement and the other Loan Documents. 4.11 Valid, Binding and Enforceable. This Agreement and the Loan Documents to which the Borrower is a party have been duly and validly executed and delivered by the Borrower and constitute the valid and legally binding obligations of such parties enforceable in accordance with their respective terms, except as enforcement of this Agreement and the other Loan Documents may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights and except as enforcement is subject to general equitable principles. 4.12 Priority of Security Interests. The Security Agreement, together with the financing statements which have been filed in connection therewith have created valid first perfected security interests in the personal property of the Borrower described therein as collateral for all the Obligations subject to no prior Encumbrances. 4.13 Environmental Matters. (a) The Borrower has performed all of its obligations under, has obtained all necessary approvals, permits, authorizations and other consents required by, and is not in material violation of, any Environmental Laws. (b) The Borrower has not received any notice, citation, summons, directive, order or other communication, written or oral, from, and the Borrower has no knowledge of the filing or giving of any such notice, citation, summons, directive, order or other communication by, any governmental or quasi-governmental authority or agency or any other Person concerning the presence, generation, treatment, storage, transportation, transfer, disposal, release or other handling of any Hazardous Materials within, on, from, related to, or affecting any real property owned or occupied by the Borrower. (c) To the best of the Borrower's knowledge, after reasonable inquiry, no real property owned or occupied by the Borrower has ever been used, either by the Borrower or any of its predecessors in interest, to generate, treat, store, transport, transfer, dispose of, release or otherwise handle any - 18 - Hazardous Material in violation of any applicable Environmental Laws. (d) To the best of the Borrower's knowledge, after due inspection, there are no Hazardous Materials within, on or under any real property owned or occupied by the Borrower in violation of any applicable Environmental Laws. 4.14 No Untrue Statements. Neither this Agreement, the Loan Documents nor any other document, certificate or statement furnished or to be furnished by the Borrower or by any other party to the Bank in connection herewith contains, or at the time of delivery will contain, any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein and therein not misleading. 4.15 Patents and Trademarks. Since March 30, 1989, the Borrower has not held any patents or trademarks which have been registered with the United States Patent and Trademark Office. ARTICLE V CONDITIONS PRECEDENT TO THE BANK'S OBLIGATIONS The Bank's obligations hereunder are conditioned upon the satisfaction by the Borrower of the following conditions precedent: 5.1 Documents to be Delivered by the Borrower at Closing. The Borrower shall deliver or cause to be delivered to the Bank at the Closing the following: (a) This Agreement duly executed by the Borrower; (b) The Line of Credit Note duly executed by the Borrower; (c) The Reaffirmations duly executed by the parties thereto; (d) Evidence of the Borrower's having complied with those covenants regarding insurance as are contained in this Agreement and the other Loan Documents; (e) A certificate of the Secretary or an Assistant Secretary of the Borrower dated the Closing Date including (i) resolutions duly adopted by the Borrower authorizing the transactions under the Loan Documents; (ii) evidence of the incumbency and signature of the officers executing on the Borrower's behalf any of the Loan Documents and any other document to be delivered pursuant to any such documents, together with evidence of the incumbency of such officers; (iii) a certification that the by-laws and the articles of incorporation of the Borrower have not been amended since - 19 - December 11, 1995; and (iv) certificates of authority or good standing for the Borrower from its jurisdiction of incorporation and any other jurisdiction where the Borrower is qualified to do business; (f) A copy of each and every authorization, permit, consent, and approval of and other action by, and notice to and filing with, every governmental authority and regulatory body which is required to be obtained or made by the Borrower for the due execution, delivery and performance of this Agreement and the other Loan Documents; and (g) The opinion of Stradley, Ronon, Stevens & Young dated as of Closing Date, in form and substance reasonably satisfactory to the Bank and its counsel. 5.2 Conditions Precedent to Making Line of Credit Loans or Acquisition Loans. The Bank shall not be obligated to make any Line of Credit Loans or any Acquisition Loan hereunder unless: (a) As of the date of the proposed advance, no Event of Default has occurred and is continuing and no event has occurred and is continuing which, with the giving of notice or lapse of time, or both, would constitute an Event of Default; (b) The representations and warranties contained in Article IV are true and correct on the date of the proposed advance, except that the representations and warranties in Section 4.4 shall refer to the financial statements most recently supplied to the Bank pursuant to Section 6.2 of this Agreement; and (c) No material adverse change has occurred in the business, property, operations or condition (financial or otherwise) of the Borrower since the date hereof; and (d) The Borrower has delivered to the Bank, upon the Bank's request, a certificate executed by the chief executive officer of the Borrower confirming the statements made in paragraphs (a), (b), and (c) above. ARTICLE VI AFFIRMATIVE COVENANTS OF THE BORROWER The Borrower hereby covenants and agrees that from the date hereof and until satisfaction in full of the Obligations, unless the Bank shall otherwise consent in writing, the Borrower shall do the following: 6.1 Use of Proceeds. Use the proceeds of the borrowings hereunder only for the purposes specified in Sections 2.1, 2.2 and 2.3 of this Agreement. - 20 - 6.2 Financial Statements. Furnish to the Bank the following financial statements which shall be prepared in accordance with GAAP and signed by the chief financial officer of the Borrower: (a) within one hundred twenty (120) days after the end of each fiscal year, the financial statements of the Borrower, including a balance sheet, statement of income and statement of cash flows, as reported on the Form 10K of the Borrower as filed with the United States Securities and Exchange Commission, and such other financial statements of the Borrower in such detail as the Bank may reasonably request. Such financial statements shall present fairly the financial condition of the Borrower as of the close of such year and the results of its operations and its cash flows during such year, in accordance with GAAP, and shall be audited and accompanied by the opinion, satisfactory in form and substance to the Bank, of BDO Seidman, LLP or another independent public accountant acceptable to the Bank; (b) within sixty (60) days after the end of each fiscal quarter, the financial statements of the Borrower, including a balance sheet, statement of income and statement of cash flows, as reported on the Form 10Q of the Borrower as filed with the United States Securities and Exchange Commission, and such other financial statements of the Borrower in such detail as the Bank may reasonably request. Such financial statements shall present fairly the financial condition of the Borrower as of the close of such quarter and the results of its operations and its cash flows during such quarter, in accordance with GAAP, certified by the chief financial officer of the Borrower; (c) within one hundred eighty (180) days after the end of each fiscal year of the Borrower, a copy of the Management Letter of the Borrower prepared by BDO Seidman, LLP or another independent public accountant acceptable to the Bank; and (d) such other information in the Borrower's possession as the Bank may reasonably request. 6.3 Ordinary Course of Business; Records. Conduct its business only in the ordinary course and keep accurate and complete books and records of its assets, liabilities and operations consistent with sound business practices and in accordance with GAAP. 6.4 Information for the Bank. Make available during normal business hours for inspection by the Bank or its designated representatives any of its books and records when reasonably requested by the Bank to do so, and furnish the Bank any information reasonably requested regarding its operations, business affairs and financial condition within a reasonable time after the Bank gives notice of its request therefor. In particular, and without limiting the foregoing, the Borrower shall permit, during normal business hours, representatives of - 21 - the Bank's Audit Department to make such periodic inspections of the Borrower's books, records and assets as such representatives deem necessary and proper. 6.5 Insurance. Carry at all times in financially sound and reputable insurers: (a) all workers' compensation or similar insurance as may be required under the laws of any jurisdiction; (b) public liability insurance against claims for personal injury, death or property damage suffered upon, in or about any premises occupied by it or occurring as a result of the ownership, maintenance or operation by it of any automobile, truck or other vehicle or as a result of the use of products manufactured, constructed or sold by it, or services rendered by it; (c) business interruption insurance covering risk of loss as a result of the cessation for all or any part of one year of any substantial part of the business conducted by it; (d) hazard insurance against such other hazards as are usually insured against by business entities of established reputation engaged in like businesses and similarly situated, including, without limitation, fire (flood, if applicable) and extended coverage; and (e) such other insurance as the Bank may from time to time reasonably require, and pay all premiums on the policies for all such insurance when and as they become due and take all other actions necessary to maintain such policies in full force and effect at all times. The insurance specified in Subsections (b), (c) and (d) shall be maintained in such amounts (and with co-insurance and deductibles) as such insurance is usually carried by business entities of established reputation engaged in the same or similar business and similarly situated, provided that the amount of such coverage shall not be in an amount less than 80% of the insurable value of the Borrower's assets or 100% of the amount of the Loans. The Borrower shall from time to time, upon request by the Bank, promptly furnish or cause to be furnished to the Bank evidence, in form and substance satisfactory to the Bank, of the maintenance of all insurance required to be maintained hereby, including, without limitation, such originals or copies as the Bank may request of policies, certificates of insurance, riders and endorsements relating to such insurance and proof of premium payments. The Borrower shall cause each hazard insurance policy to provide, and the insurer issuing each such policy to certify to the Bank, that (a) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer will promptly notify the Bank and such cancellation or change shall not be effective for 30 days after receipt by the Bank of such notice, unless the effect of such change is to extend or increase coverage under the policy; (b) the Bank shall be named as lender loss payee with respect to personal property and mortgagee with respect to real property; and (c) the Bank will have the right, at its election, to remedy any default in the payment of premiums within 30 days of notice from the insurer of such default. The foregoing covenants regarding insurance are in addition to, and not intended to supersede, those covenants regarding insurance set forth in the Security Agreement. In the event and to the extent of any conflict between the provisions of this Agreement and the - 22 - provisions of the Security Agreement regarding the insuring of Collateral, the provisions of the Security Agreement with respect thereto shall govern. 6.6 Maintenance. Maintain its equipment, real property and other properties in good condition and repair (normal wear and tear excepted) and pay and discharge the cost of repairs thereto or maintenance thereof. 6.7 Taxes. Pay all taxes, assessments, charges and levies imposed upon it or on any of its property, or which it is required to withhold and pay over, and provide evidence of payment thereto to the Bank if the Bank so requests, except where contested in good faith by lawful and appropriate proceedings and where adequate reserves therefor have been set aside on its books; provided, however, that the Borrower shall pay all such taxes, assessments, charges and levies forthwith whenever foreclosure on any lien which attaches or security therefor appears imminent. 6.8 Leases. Pay all rent or other sums required by every lease to which the Borrower is a party as the same becomes due and payable, perform all its obligations as tenant or lessee thereunder except where contested in good faith by lawful and appropriate proceedings and where adequate reserves therefor have been set aside; and keep all such leases at all times in full force and effect during the terms thereof. 6.9 Corporate Existence; Certain Rights; Laws. Do all things necessary to preserve and keep in full force and effect in each jurisdiction in which it conducts business the business existence, licenses, permits, rights, patents, trademarks, trade names and franchises of the Borrower and comply with all present and future laws, ordinances, rules, regulations judgments, orders and decrees which affect in any material way the Borrower, its assets or the operation of its business. 6.10 Notice of Litigation or Other Proceedings. Give immediate notice to the Bank of (i) the existence of any dispute, (ii) the institution of any litigation, administrative proceeding or governmental investigation involving the Borrower or (iii) the entry of any judgment, decree or order against or involving the Borrower, any of which might materially and adversely affect the operation, financial condition, property or business of the Borrower or affect the enforceability of this Agreement or any of the other Loan Documents. 6.11 Indebtedness. Pay or cause to be paid when due (or within applicable grace periods) all Indebtedness of the Borrower. 6.12 Notice of Events of Default. Give immediate notice to the Bank if the Borrower becomes aware of the occurrence of any Event of Default, or of any fact, condition or event which with the giving of notice or lapse of time, or both, - 23 - would be an Event of Default, or of the failure of the Borrower to observe or perform any of the conditions or covenants to be observed or performed by it under this Agreement or any of the other Loan Documents. 6.13 ERISA. Maintain each Plan in compliance with all applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code. As promptly as practicable (but in any event not later than ten days) after the Borrower receives from the PBGC a notice of intent to terminate any Plan or to appoint a trustee to administer any Plan, after the Borrower has notified the PBGC that any reportable event, as defined in Section 4043 of ERISA, with respect to any Plan has occurred, or after the Borrower has provided a notice of intent to terminate to each affected party, as defined for purposes of Section 4041(a)(2) of ERISA, with respect to any Plan, a certificate of the chief executive officer of the Borrower shall be furnished to the Bank setting forth the details with respect to the events resulting in such reportable event, as the case may be, and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of intent to terminate or to appoint a trustee from the PBGC, of the notice of such reportable event or of the Borrower's notice of intent to terminate, as the case may be. 6.14 Deposit Accounts. Use the Bank as its primary depository institution to the extent reasonably feasible unless otherwise agreed in writing by the Bank; and notify the Bank, in writing and on a continuing basis, of all deposit accounts and certificates of deposit (including the numbers thereof) maintained with or purchased from other banks and other financial institutions. Notwithstanding the foregoing, Borrower may use a bank other than the Bank for its payroll account, and working capital accounts (which accounts may not, at any time, contain an average daily balance calculated on a monthly basis, in excess of $250,000 in the aggregate) to be used for incidental expenses of Borrower, including, travel expenses of its employees, and provided no Events of Default exist, Borrower may, at Borrower's discretion, in lieu of the Lock Box Agreement, use a New Jersey bank, satisfactory to the Bank, as a depository transfer institution, pursuant to an agreement in form and substance satisfactory to the Bank, establishing a depository transfer arrangement between the Bank, the depository bank and the Borrower. 6.15 Management. Furnish to Bank within five (5) days of any election or appointment of officers or directors, written notice of any change in the persons who from time to time become officers and directors of Borrower and retain executive management personnel at all times satisfactory to the Bank, it being understood that management, which consists of James A. Luksch as President and CEO, and Robert J. Palle as Executive Vice President, of the Borrower as of the date hereof, is satisfactory. - 24 - 6.16 Financial Covenants. Observe the financial covenants set forth on Schedule 6.16 attached hereto and made a part hereof, provided that such financial covenants may be revised if the Line of Credit Commitment is extended beyond the Termination Date. 6.17 Compliance with Environmental Laws. Comply fully with all Environmental Laws and not use any property which it owns or occupies to generate, treat, store, transport, transfer, dispose of, release or otherwise handle any Hazardous Material, except in compliance with all Environmental Laws. 6.18 Further Actions. Cooperate and join with the Bank, at its own expense, in taking all such further actions as the Bank, in its sole judgment, shall deem necessary to effectuate the provisions of the Loan Documents and to perfect or continue the perfected status of all Encumbrances granted to the Bank pursuant to the Loan Documents, including, without limitation, the execution, delivery and filing of financing statements, amendments thereto and continuation statements, the delivery of chattel paper, documents or instruments to the Bank, and the notation of Encumbrances in favor of the Bank on certificates of title. 6.19 Material Adverse Change. Notify the Bank in writing upon any material adverse change in the business, operations, properties or condition (financial or otherwise) of the Borrower. 6.20 Meeting Regarding Projections. On or prior to June 1, 1998 the Borrower shall participate in a meeting with the Bank at which time the Borrower shall discuss with the Bank the Borrower's financial statement projections for the 1998 fiscal year, including without limitation, the Borrower's projected balance sheet, statement of income and statement of cash flows for such fiscal year. 6.21 Subordination of Debt. Deliver to the Bank a subordination agreement in form and substance satisfactory to the Bank with respect to any Indebtedness of the Borrower (except Indebtedness permitted pursuant to Section 7.2 hereof) incurred after the date hereof. ARTICLE VII NEGATIVE COVENANTS The Borrower hereby covenants and agrees that from the Closing Date until satisfaction in full of the Obligations, it will not do any one or more of the following without first obtaining the written consent of the Bank: - 25 - 7.1 Fundamental Corporate Changes. (a) Change its name, enter into or effect any merger (except any merger where the Borrower is the surviving corporation), consolidation, share exchange involving in excess of 25% of the Borrower's capital stock, or dissolve. (b) Sell, transfer, lease or otherwise dispose of all or (except in the ordinary course of business) any material part of its assets or any significant product line or process; (c) Have any Subsidiary, except Blonder International and Vu-Tech Communications, Inc. 7.2 Indebtedness. Incur, create, assume or have any Indebtedness except: (a) The Loans; and (b) Indebtedness constituting either Capital Lease Obligations or Indebtedness under agreements for the installment purchase of equipment, provided that such Indebtedness does not exceed 100% of the installment purchase price of such equipment; and (c) Obligations to The Business Bank pursuant to a promissory note dated July 22, 1993 in the original principal amount of $950,000. 7.3 Encumbrances. Create or allow any Encumbrances to be on or otherwise affect any of its property or assets except: (a) Encumbrances in favor of the Bank; (b) Encumbrances for taxes, assessments and other governmental charges incurred in the ordinary course of business which are not yet due and payable or which are being properly contested in good faith by lawful and appropriate proceedings; (c) Pledges or deposits made in the ordinary course of business to secure payment of workmen's compensation or to participate in any fund in connection with workmen's compensation, unemployment insurance or other social security obligations; (d) Good faith pledges or deposits made in the ordinary course of business to secure performance of tenders, contracts (other than for the repayment of Indebtedness) or leases or to secure statutory obligations or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (e) Liens of mechanics, materialmen, warehousemen, carriers or other similar liens, securing obligations incurred in the ordinary course of business that are - 26 - not yet due and payable or are being contested in good faith by appropriate and lawful proceedings; (f) Encumbrances securing Indebtedness permitted under Section 7.2 (b), provided that (i) no other covenants of this Agreement are thereby violated and (ii) no equipment other than the equipment so acquired secures such Indebtedness; (g) Encumbrances, if any, otherwise expressly permitted by the Security Agreement or the Mortgage; and (h) Encumbrances disclosed in the Financial Statements, and any subsequent interim financial statements which have been delivered to the Bank prior to the Closing Date, or as set forth on Schedule 7.3 attached hereto. 7.4 Guaranties. Directly or indirectly make any Guaranty, other than for the benefit of Blonder International. 7.5 Sales and Lease-Backs. Sell, transfer or otherwise dispose of any property, real or personal, now owned or hereafter acquired, with the intention of directly or indirectly taking back a lease on such property. 7.6 Loans, Investments. Except as set forth on Schedule 4.4(c), purchase, invest in, or make any loan in the nature of an investment in the stocks, bonds, notes or other securities or evidence of Indebtedness of any person, or make any loan or advance to or for the benefit of any Person except for (i) short-term obligations of the Treasury of the United States of America; (ii) certificates of deposit issued by banks with shareholders' equity of at least $100,000,000; (iii) repurchase agreements not exceeding 29 days in duration issued by banks with shareholders' equity of at least $100,000,000; (iv) notes and other instruments generally known as "commercial paper" which arise out of current transactions, which have maturities at the time of issuance thereof not exceeding nine months and which have, at the time of such purchase, investment or other acquisition, the highest credit rating of Standard & Poor's Corporation or Moody's Investors Service, Inc.; (v) investments in the capital stock or indebtedness of any person or persons where the aggregate of such investment(s) does not exceed $5,000,000, provided that at the time of, and after giving effect to such investment(s), no Event of Default and no event which with the giving of notice, the passage of time or both, would constitute an Event of Default has occurred or would occur as a result thereof; and (vi) purchases by the Borrower of the common stock of the Borrower, pursuant to a share repurchase program duly adopted by the Borrower's Board of Directors and conducted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. 7.7 Change in Business. Discontinue any substantial part, or change the nature of, the business of the Borrower, or - 27 - enter into any new business unrelated to the present business conducted by the Borrower. 7.8 Sale or Discount of Receivables. Sell any notes receivable or accounts receivable, with or without recourse. 7.9 Prepayment of Indebtedness. Make any voluntary prepayments of Indebtedness other than the Loans. 7.10 ERISA. (a) Terminate any Plan maintained by the Borrower to which Section 4021 of ERISA applies; (b) Allow the value of the benefits guaranteed under Title IV of ERISA to exceed the value of assets allocable to such benefits; (c) Incur a withdrawal liability within the meaning of Section 4201 of ERISA. 7.11 Compliance with Federal Reserve Board Regulations. (i) Use any of the proceeds of the Loans, directly or indirectly, for the purposes of purchasing or carrying any "margin security" within the meaning of Regulations G or U of the Board of Governors of the Federal Reserve System (12 C.F.R. 207, 221), (ii) use any of the proceeds of the Loans, directly or indirectly, for the purpose of purchasing, carrying or trading in any securities under such circumstances as to involve the Borrower in a violation of Regulation X of such Board (12 C.F.R. 224), or (iii) take or permit to be taken any other action which would result in the Loans or the consummation of any of the other transactions contemplated hereby being violative of such regulations or any other regulation of such Board. 7.12 Blonder International. From and after the Closing Date, and until satisfaction in full of all Obligations of the Borrower to the Bank, unless the Bank shall otherwise consent in writing, the Borrower shall not transfer assets having a value in excess of $200,000 in the aggregate to Blonder International, and shall not permit Blonder International to have assets having an aggregate book value in excess of $200,000. ARTICLE VIII EVENTS OF DEFAULT An event of default ("Event of Default") under this Agreement shall be deemed to exist if any one or more of the following events occurs and is continuing, whatever the reason therefor: 8.1 Borrower's Failure to Pay. The Borrower fails to pay any amount of principal interest, fees or other sums as and when due under this Agreement or any of the Loan Documents, or - 28 - any other Obligations, whether upon stated maturity, acceleration, or otherwise and has not remedied and fully cured such failure to pay within ten (10) Business Days after the date such payment is so due. 8.2 Breach of Covenants or Conditions. The Borrower or any of the Other Loan Parties fails to perform or observe any term, covenant, agreement or condition in this Agreement or any of the other Loan Documents or is in violation of or non-compliance with any provision of this Agreement or any of the Loan Documents, and has not remedied and fully cured such non-performance, non-observance, violation of or non-compliance within thirty (30) days after the Bank has given written notice thereof to the Borrower, or such Other Loan Party; provided, however, that during such thirty (30) day period the Bank's obligations to make further Loans to the Borrower shall be suspended. 8.3 Defaults in Other Agreements. The Borrower or any of the Other Loan Parties fails to perform or observe any term, covenant, agreement or condition contained in, or there shall occur any default under or as defined in, any other agreement applicable to the Borrower or any of the Other Loan Parties or by which any of them is bound involving a material liability of the Borrower or any of the Other Loan Parties which shall not be remedied within the period of time (if any) within which such other agreement permits such default to be remedied, unless such default is waived by the other party thereto or excused as a matter of law. 8.4 Agreements Invalid. The validity, binding nature of, or enforceability of any material term or provision of any of the Loan Documents is disputed by, on behalf of, or in the right or name of the Borrower or any of the Other Loan Parties or any material term or provision of any such Loan Document is found or declared to be invalid, avoidable, or non-enforceable by any court of competent jurisdiction. 8.5 False Warranties; Breach of Representations. Any warranty or representation made by the Borrower or any of the Other Loan Parties in this Agreement or any other Loan Document or in any certificate or other writing delivered under or pursuant to this Agreement or any other Loan Document, or in connection with any provision of this Agreement or related to the transactions contemplated hereby shall prove to have been false or incorrect or breached in any material respect on the date as of which made. 8.6 Judgments. A final judgment or judgments is entered, or an order or orders of any judicial authority or governmental entity is issued against the Borrower or any of the Other Loan Parties (such judgment(s) and order(s) hereinafter collectively referred to as "Judgment") (i) for payment of money, which Judgment, in the aggregate, exceeds Two Hundred Thousand Dollars ($250,000.00) outstanding at any one time which is not - 29 - covered by insurance; or (ii) for injunctive or declaratory relief which would have a material adverse effect on the ability of the Borrower or any of the Other Loan Parties to conduct its business, and such Judgment is not discharged or execution thereon or enforcement thereof stayed pending appeal, within thirty days after entry or issuance thereof, or, in the event of such a stay, such Judgment is not discharged within thirty days after such stay expires. 8.7 Bankruptcy or Insolvency of the Borrower or Other Loan Parties. (a) The Borrower or any of the Other Loan Parties becomes insolvent, or generally fails to pay, or is generally unable to pay, or admits in writing its inability to pay, its debts as they become due or applies for, consents to, or acquiesces in, the appointment of a trustee, receiver or other custodian for the Borrower or any of the Other Loan Parties, as the case may be, or a substantial part of its property, or makes a general assignment for the benefit of creditors. (b) The Borrower or any of the Other Loan Parties commences any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any state or federal bankruptcy or insolvency law, or any dissolution or liquidation proceeding. (c) Any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any state or federal bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is involuntarily commenced against or in respect of the Borrower or any of the Other Loan Parties, or an order for relief is entered in any such proceeding which is not terminated upon the earlier of (i) the entry of an order to relief in any such proceeding or (ii) within ninety (90) days after such case or proceeding is involuntarily commenced. (d) A trustee, receiver, or other custodian is appointed for the Borrower or any of the Other Loan Parties or a substantial part of such Person's property and such appointment is not terminated within ninety (90) days thereafter. ARTICLE IX REMEDIES 9.1 Further Advances; Acceleration; Setoff. (a) Upon the occurrence of any one or more Events of Default, the Bank may, in its sole discretion, refuse to make any further advances or Loans to the Borrower; (b) Automatically upon the occurrence of any Event of Default described in Section 8.7 of this Agreement, and in the sole discretion of the Bank upon the occurrence of any other Event of Default, the unpaid principal balance of all - 30 - Loans, all interest and fees accrued and unpaid thereon, and all other amounts and Obligations payable by the Borrower under this Agreement and the other Loan Documents shall immediately become due and payable in full, all without protest, presentment, demand, or further notice of any kind to the Borrower, all of which are expressly waived by the Borrower; (c) If any of the Obligations shall be due and payable or any one or more Events of Default shall have occurred, the Bank shall have the right, in addition to all other rights and remedies available to it, without notice to the Borrower, to apply toward and set-off against and apply to the then unpaid balance of the Notes and the other Obligations any items or funds held by the Bank, any and all deposits (whether general or special, time or demand, matured or unmatured, fixed or contingent, liquidated or unliquidated) now or hereafter maintained by the Borrower for its own account with the Bank, and any other indebtedness at any time held or owing by the Bank to or for the credit or the account of the Borrower. For such purpose the Bank shall have, and the Borrower hereby grants to the Bank, a first lien on all such deposits. The Bank is hereby authorized to charge any such account or indebtedness for any amounts due to the Bank. Such right of set-off shall exist whether or not the Bank shall have made any demand under this Agreement, the Notes or any other Loan Document and whether or not the Notes and the other Obligations are matured or unmatured. The Borrower hereby confirms the Bank's lien on such accounts and right of set-off, and nothing in this Agreement shall be deemed any waiver or prohibition of such lien and right of set-off. 9.2 Further Remedies. Upon the occurrence of any one or more Events of Default, the Bank may proceed to protect and enforce its rights under this Agreement and the other Loan Documents by exercising such remedies as are available to the Bank in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any provision contained in this Agreement or any of the other Loan Documents or in aid of the exercise of any power granted in this Agreement or any of the other Loan Documents. ARTICLE X MISCELLANEOUS 10.1 Remedies Cumulative; No Waiver. The rights, powers and remedies of the Bank provided in this Agreement and the other Loan Documents are cumulative and not exclusive of any right, power or remedy provided by law or equity, and no failure or delay on the part of the Bank in the exercise of any right, power, or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. - 31 - 10.2 Notices. Every notice and communication under this Agreement or any of the other Loan Documents shall be in writing and shall be given by either (i) hand-delivery, (ii) first class mail (postage prepaid), (iii) reliable overnight commercial courier (charges prepaid), or (iv) telecopy or other means of electronic transmission, if confirmed promptly by any of the methods specified in clauses (i), (ii) and (iii) of this sentence, to the following addresses: If to the Borrower: Blonder Tongue Laboratories, Inc. One Jake Brown Road Old Bridge, NJ 08857 Attn: Mr. James A. Luksch, President Fax: (732) 679-4353 With a copy to: Stradley, Ronon, Stevens & Young 2600 One Commerce Square Philadelphia, PA 19103-7098 Attn: Gary P. Scharmett, Esquire Fax: (215) 564-8120 If to the Bank: CoreStates Bank, N.A. 600 Penn Street Reading, Pennsylvania 19603 Attn: Ms. Lynn B. Eagleson, Vice President Fax: (610) 655-1514 With a copy to: Duane, Morris & Heckscher One Liberty Place Philadelphia, PA 19103 Attn: James M. Keating, Jr. Esquire Fax: (215) 979-1020 Notice given by telecopy or other means of electronic transmission shall be deemed to have been given and received when sent. Notice by overnight courier shall be deemed to have been given and received on the date scheduled for delivery. Notice by mail shall be deemed to have been given and received three (3) calendar days after the date first deposited in the United States Mail. Notice by hand delivery shall be deemed to have been given and received upon delivery. A party may change its address by giving written notice to the other party as specified herein. 10.3 Costs, Expenses and Attorneys' Fees. Whether or not the transactions contemplated by this Agreement and the other Loan Documents are fully consummated, the Borrower shall promptly pay (or reimburse, as the Bank may elect) all costs and expenses - 32 - which the Bank has incurred or may hereafter incur in connection with the negotiation, preparation, reproduction, interpretation and enforcement of this Agreement and the other Loan Documents, the collection of all amounts due hereunder and thereunder, and any amendment, modification, consent or waiver which may be hereafter requested by the Borrower or otherwise required. Such costs and expenses shall include, without limitation, the fees and disbursements of counsel to the Bank, the costs of appraisal fees, searches of public records, costs of filing and recording documents with public offices, and similar costs and expenses incurred by the Bank. Upon the occurrence of an Event of Default, such costs shall also include the fees of any accountants, consultants or other professionals retained by the Bank. The Borrower's reimbursement obligations under this Section shall survive any termination of this Agreement. 10.4 Survival of Covenants. This Agreement and all covenants, agreements, representations and warranties made herein and in any certificates delivered pursuant hereto shall survive the making of the Loans and the execution and delivery of the Notes and, subject to the provisions of 10.15 hereof, shall continue in full force and effect until all of the Obligations have been fully paid, performed, satisfied and discharged. 10.5 Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. This Agreement shall be deemed to have been executed and delivered when the Bank has received counterparts hereof executed by all parties listed on the signature page(s) hereto. 10.6 Headings. The headings of sections have been included herein for convenience only and shall not be considered in interpreting this Agreement. 10.7 Payment Due On A Day Other Than A Business Day. If any payment due or action to be taken under this Agreement or any Loan Document falls due or is required to be taken on a day which is not a Business Day, such payment or action shall be made or taken on the next succeeding Business Day and such extended time shall be included in the computation of interest. 10.8 Judicial Proceedings. Each party to this Agreement agrees that any suit, action or proceeding, whether claim or counterclaim, brought or instituted by any party hereto or any successor or assign of any party, on or with respect to this Agreement or any of the other Loan Documents or the dealings of the parties with respect hereto, or thereto, shall be tried only by a court and not by a jury. EACH PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. Further, each party waives any right it may have to claim or recover, in any such suit, action or proceeding, any special, exemplary, punitive or - 33 - consequential damages or any damages other than, or in addition to, actual damages. THE BORROWER ACKNOWLEDGES AND AGREES THAT THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND THAT THE BANK WOULD NOT EXTEND CREDIT TO THE BORROWER IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS AGREEMENT. 10.9 Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Pennsylvania. 10.10 Integration. This Agreement and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter hereof and thereof and supersede all oral negotiations and prior writings with respect to the subject matter hereof and thereof. 10.11 Amendment and Waiver. No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. 10.12 Successors and Assigns. (a) Generally. This Agreement (i) shall be binding upon the Borrower and the Bank and their respective successors and assigns, and (ii) shall inure to the benefit of the Borrower and the Bank and its respective successors and assigns, provided, however, that the Borrower may not assign its rights hereunder or any interest herein without the prior written consent of the Bank, and any such assignment or attempted assignment by the Borrower shall be void and of no effect with respect to the Bank. (b) Participations. The Bank may from time to time sell or otherwise grant participations in the Loans and the Notes, and the holder of any such participation, if the participation agreement so provides, (i) shall, with respect to its participation, be entitled to all of the rights of the Bank and (ii) may exercise any and all rights of setoff or banker's lien with respect thereto, in each case as fully as though the Borrower were directly indebted to the holder of such participation in the amount of such participation. The Bank may disclose to prospective participants such information regarding the Borrower's affairs as the Bank possesses. The Bank shall give notice to the Borrower of the grant of such participations; however, the failure to give such notice shall not affect any of the Bank's rights hereunder. 10.13 Severability of Provisions. Any provision in this Agreement that is held to be inoperative, unenforceable, voidable, or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions, and to this end the provisions of this Agreement are declared to be severable. - 34 - 10.14 Consent to Jurisdiction and Service of Process. The Borrower irrevocably appoints each and every officer of the Borrower as its attorneys upon whom may be served, by regular or certified mail at the address set forth in Section 10.2 hereof, any notice, process or pleading in any action or proceeding against it arising out of or in connection with this Agreement or any of the other Loan Documents; and the Borrower hereby (i) consents that any action or proceeding against it be commenced and maintained in any court within the Commonwealth of Pennsylvania or in the United States District Court for the Eastern District of Pennsylvania by service of process on any such officer; (ii) agrees that the courts of the Commonwealth of Pennsylvania and the United States District Court for the Eastern District of Pennsylvania shall have jurisdiction with respect to the subject matter hereof and the person of the Borrower and the Collateral, and (iii) waives any objection that such Borrower may now or hereafter have as to the venue of any such suit, action or proceeding brought in such a court or that such court is an inconvenient forum. Notwithstanding the foregoing, the Bank, in its absolute discretion may also initiate proceedings in the courts of any other jurisdiction in which the Borrower may be found or in which any of its properties or the Collateral may be located. 10.15 Indemnification (a) If, after receipt of any payment of all or any part of the Obligations, the Bank is compelled to surrender such payment to any Person or entity for any reason (including, without limitation, a determination that such payment is void or voidable as a preference or fraudulent conveyance, an impermissible setoff, or a diversion of trust funds), then this Agreement and the other Loan Documents shall continue in full force and effect, and the Borrower shall be liable for, and shall indemnify, defend and hold harmless the Bank with respect to the full amount so surrendered. (b) The Borrower shall indemnify, defend and hold harmless the Bank with respect to any and all claims, expenses, demands, losses, costs, fines or liabilities of any kind, including reasonable attorneys' fees and costs, arising from or in any way related to (i) acts or conduct of the Borrower or any of the Other Loan Parties under, pursuant to or related to this Agreement and the other Loan Documents, (ii) Borrower's or any Other Loan Party's breach or violation of any representation, warranty, covenant or undertaking contained in this Agreement or the other Loan Documents, and (iii) Borrower's or any other Loan Party's failure to comply with any or all laws, statutes, ordinances, governmental rules, regulations or standards, whether federal, state, or local, or court or administrative orders or decrees, including without limitation those resulting from any Hazardous Materials or dangerous environmental condition within, on, from, related to or affecting any real property owned or occupied by the Borrower, unless resulting from the acts or - 35 - conduct of the Bank constituting gross negligence or willful misconduct. (c) The provisions of this section shall survive the termination of this Agreement and the other Loan Documents and shall be and remain effective notwithstanding the payment of the Obligations, the cancellation of any of the Notes, the release of any Encumbrance securing the Obligations or any other action which the Bank may have taken in reliance upon its receipt of such payment. Any cancellation of any of the Notes, release of any Encumbrance or other such action shall be deemed to have been conditioned upon any payment of the Obligations having become final and irrevocable. - 36 - IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their duly authorized officers on the date first above written. BLONDER TONGUE LABORATORIES, INC. By: /s/ James A. Luksch ----------------------- James A. Luksch, President CORESTATES BANK, N.A. (successor to Meridian Bank) By: /s/ Lynn B. Eagleson -------------------------- Lynn B. Eagleson, Vice President - 37 - STATE OF NEW JERSEY : : SS COUNTY OF MIDDLESEX : I CERTIFY that on October 29, 1997, James A. Luksch, the President of BLONDER TONGUE LABORATORIES, INC., a Delaware corporation, personally appeared before me, who I am satisfied to be the person who signed the foregoing instrument, and acknowledged that he was authorized to execute the same as the act of said corporation. /s/ Candace R. Tice ----------------------------------- Name: Candace R. Tice Title: Notary Public of New Jersey --------------------------- My Commission expires June 4, 2000 - 38 - Schedule 4.4(b) Lease commitments between Borrower and CoreStates Leasing, Inc. for the aggregate amount of $230,834, as follows: Locator Machine $ 25,000* System Manager $ 42,685 Amads Punch Press $135,000 Liquid Dispense Machine $ 28,149 *Note: Lease commenced in September 1997. - 39 - Schedule 4.4(c) Investment in Enhances Telecommunications, Inc. ("ETI") pursuant to Share Exchange Agreement dated July 20, 1996 pursuant to which Borrower issued 8,333 shares of its common stock in exchange for 11,211 shares of ETI's common stock. - 40 - Schedule 6.16 FINANCIAL COVENANTS This Schedule is a part of the Third Amended and Restated Loan Agreement dated October 29, 1997 between CoreStates Bank, N.A. (successor to Meridian Bank) and Blonder Tongue Laboratories, Inc. A. Debt Coverage Ratio--The Borrower shall have a Debt Coverage Ratio at the end of the fiscal year ending December 31, 1997 of not less than 2:00:1.00, and for each fiscal year thereafter. B. Net Working Capital--The Borrower shall have Net Working Capital of not less than $12,000,000 for the fiscal year ending December 31, 1997, and for each fiscal quarter thereafter. C. Ratio of Senior Debt to Capital Funds--The Borrower shall have a ratio of Senior Debt to Capital Funds of not more than 1.50:1.00 for the fiscal year ending December 31, 1997, and for each fiscal quarter thereafter. For purposes of this Schedule, all capitalized terms used herein and not otherwise defined shall have the meanings given to them, respectively, in the Loan Agreement, and the following terms shall have the following meanings: "Capital Funds" shall mean, at any time, the sum of Subordinated Indebtedness plus Tangible Net Worth. "Current Assets" shall mean, at any time, all assets which, in accordance with GAAP, should be classified as current assets of the Borrower. "Current Liabilities" shall mean, at any time, all Liabilities which, in accordance with GAAP, should be classified as current liabilities of the Borrower. "Debt Coverage Ratio" shall mean for each Fiscal Year the ratio of (A) the Net Income for such Fiscal Year increased by the sum of (i) interest expense for such Fiscal Year, plus (ii) income tax expense for such Fiscal Year, plus (iii) the depreciation and amortization expense included in the income statement for such Fiscal Year, to (B) interest expense for such Fiscal Year, plus the prior Fiscal Year's current maturities of long term debt, all as determined in accordance with GAAP. "Liabilities" shall mean, at any time, all liabilities which, in accordance with GAAP, shall be classified as liabilities of the Borrower. "Net Income" shall mean, for any period, the net income of the Borrower, determined in accordance with GAAP, excluding: - 41 - (a) the proceeds of any insurance policy; (b) any gain or loss arising from: (1) the sale or other disposition of any assets (other than Current Assets); (2) any write-up of assets; or (3) the acquisition of outstanding securities representing Indebtedness of the Borrower; (c) any amount representing any interest in the undistributed earnings of any Person; (d) any earnings, prior to the date of acquisition, of any Person acquired in any manner; (e) any earnings of a successor to or transferee of the assets of the Borrower prior to becoming such successor or transferee; (f) any deferred credit (or amortization of a deferred credit) arising from the acquisition of any Person; and (g) any other item constituting an extraordinary gain or loss under GAAP. "Net Working Capital" shall mean, at any time, the amount by which Current Assets exceed Current Liabilities, less any amount due from any Affiliate to the extent that such amount is included in Current Assets. "Senior Debt" shall mean, at any time, all Liabilities less all Subordinated Indebtedness. "Subordinated Indebtedness" shall mean, at any time, all Indebtedness subordinated to the Obligations on terms satisfactory to the Bank. "Stockholders' Equity" shall mean, at any time, stockholders' equity as determined in accordance with GAAP. "Tangible Net Worth" shall mean, at any time, the aggregate Stockholders' Equity, less all intangible assets of the Borrower, including, without limitation, organization costs, securities issuance costs, unamortized debt discount and expense, goodwill, excess of purchase costs over net assets acquired, patents, trademarks, trade names, copyrights, trade secrets, knowhow, licenses, franchises, capitalized research and development expenses, amounts owing from officers and/or Affiliates and any amount reflected as treasury stock. - 42 - Schedule 7.3 Liens securing indebtedness disclosed on Schedule 4.4(b). - 43 - Exhibit "A" ACQUISITION LOAN NOTE $_____________ Reading, Pennsylvania ___________, 199_ FOR VALUE RECEIVED, BLONDER TONGUE LABORATORIES, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of CORESTATES BANK, N.A. (successor to Meridian Bank) (the "Bank") the principal amount of ____________________ ($__________) in _____________ consecutive monthly payments of $_________, payable on the first day of the month, commencing __________ __, 199_, and a final installment, consisting of the entire remaining principal balance, payable on ______________, 199_. This Acquisition Loan Note is issued under the Third Amended and Restated Loan Agreement dated , 1997 by and between the Borrower and the Bank, as amended, modified or restated from time to time (the "Loan Agreement"). Terms capitalized but not defined herein shall have the meanings given to them respectively in the Loan Agreement. Reference is made to the Loan Agreement for a statement of the terms and conditions under which the loan evidenced hereby has been made, is secured, and may be prepaid or accelerated. Until maturity (whether by acceleration or otherwise) interest shall accrue on the outstanding principal balance hereof at [an annual rate equal at all times to the Acquisition Loan Adjusted Overnight Base Rate, which rate shall change automatically and simultaneously upon each change in the Bank's Overnight Base Rate] or [insert fixed rate]. Interest shall be calculated on the basis of a 360-day year, counting the actual number of days elapsed. Subsequent to maturity or the occurrence of any Event of Default, and continuing after the entry of any judgment against the Borrower with respect to the obligations evidenced by this Note, interest shall accrue at an annual rate which shall be two percent (2%) above the rate of interest otherwise payable hereunder. Accrued interest shall be payable monthly on the first day of each month commencing with the month immediately following the date hereof and if not paid when due, shall be added to the principal. All amounts payable by the Borrower to the Bank hereunder shall be paid directly to the Bank at 600 Penn Street, Reading, Pennsylvania 19602 (or at such other address of which the Bank shall give notice to the Borrower in accordance with the Loan Agreement) in immediately available funds. The Borrower hereby waives the requirements of demand, presentment, protest, notice of protest and dishonor and all other demands or notices of any kind in connection with the delivery, acceptance, performance, default, dishonor or enforcement of this Note. - 44 - The construction, interpretation and enforcement of this Note shall be governed by the internal laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower has caused this Note to be executed by its duly authorized officer as of the day and year first above written. Attest: BLONDER TONGUE LABORATORIES, INC. By:_________________________ By: _________________________ Title:______________________ Title:_______________________ - 45 - EX-10.19 3 CREDIT NOTE THIRD AMENDED AND RESTATED LINE OF CREDIT NOTE $15,000,000 Philadelphia, Pennsylvania October 29, 1997 FOR VALUE RECEIVED, BLONDER TONGUE LABORATORIES, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of CORESTATES BANK, N.A. (successor to Meridian Bank) (the "Bank") on the Termination Date the principal amount of FIFTEEN MILLION DOLLARS (15,000,000) or, if less, the aggregate outstanding principal under the Line of Credit extended under the Third Amended and Restated Loan Agreement dated the date hereof by and between the Borrower and the Bank as may be amended, modified or restated from time to time (the "Loan Agreement"). Terms capitalized but not defined herein shall have the meanings given to them respectively in the Loan Agreement. Reference is made to the Loan Agreement for a statement of the terms and conditions under which the loans evidenced hereby have been made, are secured, and may be prepaid or accelerated. This Note amends and restates and replaces (but does not discharge) the obligations of the Borrower under the Second Amended and Restated Line of Credit Note dated September 26, 1996, as such note has been amended, modified and/or extended. Until maturity (whether by acceleration or otherwise) interest shall accrue on the outstanding principal balance hereof at the rate or rates set forth in the Loan Agreement. Interest shall be calculated on the basis of a 360-day year, counting the actual number of days elapsed. Subsequent to maturity or the occurrence of any Event of Default, and continuing after entry of any judgment against the Borrower with respect to the obligations evidenced by this Note, interest shall accrue at an annual rate which shall be two percent (2%) above the rate of interest otherwise payable hereunder. Accrued interest shall be payable monthly on the first day of each month commencing with the month immediately following date hereof and if not paid when due, shall be added to the principal. All amounts payable by the Borrower to the Bank hereunder shall be paid directly to the Bank at 600 Penn Street, Reading, Pennsylvania 19602 (or at such other address of which the Bank shall give notice to the Borrower in accordance with the Loan Agreement) in immediately available funds. The Borrower hereby waives the requirements of demand, presentment, protest, notice of protest and dishonor and all other demands or notices of any kind in connection with the delivery, acceptance, performance, default, dishonor or enforcement of this Note. The construction, interpretation and enforcement of this Note shall be governed by the internal laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrower has caused this Note to be executed by its duly authorized officer as of the day and year first above written. BLONDER TONGUE LABORATORIES, INC. By: /s/ James A. Luksch James A. Luksch President /s/ Candace R. Tice Notary Public of New Jersey My Commission expires June 4, 2000 EX-21 4 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 5 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 20, 1998, 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, 1997. BDO Seidman, LLP Woodbridge, New Jersey March 30, 1998 EX-27 6 ART. 5 FDS FOR 10-K
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, 1997 AND BALANCE SHEET AS AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 555 0 13,737 607 17,875 32,932 10,519 2,798 42,272 6,877 0 0 0 8 31,787 42,272 62,057 62,057 39,656 39,656 11,526 366 414 10,690 4,276 10,509 0 0 0 6,414 .78 .77
EX-27.1 7 ART. 5 FDS FOR 10-K
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, 1996 AND BALANCE SHEET AS AT DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 1,340 0 9,267 280 16,028 27,292 9,095 1,934 36,165 4,277 0 0 0 8 25,568 36,165 48,862 48,862 30,613 30,613 10,972 135 658 6,484 2,601 7,142 0 0 0 3,883 .48 .47
-----END PRIVACY-ENHANCED MESSAGE-----