10-Q 1 blonder10q033104.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004, 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 (I.R.S. Employer Identification No.) of incorporation or organization) One Jake Brown Road, Old Bridge, New Jersey 08857 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 679-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- Number of shares of common stock, par value $.001, outstanding as of May 14, 2004: 8,002,406 The Exhibit Index appears on page 16. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
(unaudited) ----------- March 31 December 31 2004 2003 -------- -------- Assets (Note 5) Current assets: Cash ................................................................ $ 113 $ 195 Accounts receivable, net of allowance for doubtful accounts of $1,257 and $1,192 respectively .......................... 5,592 5,682 Inventories, net (Note 4) ........................................... 21,465 20,588 Notes receivable (Note 7) ........................................... 454 627 Income tax receivable ............................................... 307 679 Prepaid benefit costs ............................................... 631 631 Prepaid and other current assets .................................... 1,000 695 Deferred income taxes ............................................... 2,279 2,279 -------- -------- Total current assets ............................................ 31,841 31,376 Notes receivable (Note 7) ................................................ -- 216 Property, plant and equipment, net of accumulated depreciation and amortization ........................................ 6,485 6,652 Patents, net ............................................................. 2,533 2,649 Rights-of-Entry, net (Note 6) ............................................ 1,230 1,300 Other assets, net ........................................................ 807 851 Investment in Blonder Tongue Telephone LLC (Note 6) ...................... 2,043 2,043 Deferred income taxes .................................................... 2,903 2,903 -------- -------- $ 47,842 $ 47,990 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt (Note 5) .......................... $ 3,213 $ 3,201 Accounts payable .................................................... 2,116 1,676 Accrued compensation ................................................ 1,098 560 Other accrued expenses (Note 8) ..................................... 1,351 868 -------- -------- Total current liabilities ....................................... 7,778 6,305 -------- -------- Long-term debt (Note 5) .................................................. 8,501 9,745 Stockholders' equity: Preferred stock, $.001 par value; authorized 5,000 shares; no shares outstanding ............................................... -- -- Common stock, $.001 par value; authorized 25,000 shares, 8,445 shares Issued .............................................................. 8 8 Paid-in capital ..................................................... 24,165 24,145 Retained earnings ................................................... 12,845 13,242 Treasury stock, at cost, 449 shares ................................. (5,455) (5,455) -------- -------- Total stockholders' equity ...................................... 31,563 31,940 -------- -------- $ 47,842 $ 47,990 ======== ========
See accompanying notes to consolidated financial statements. 2 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited) Three Months Ended March 31, ------------------ 2004 2003 ------- ------- Net sales ........................................... $ 8,529 $ 8,602 Cost of goods sold .................................. 5,588 6,443 ------- ------- Gross profit .................................... 2,941 2,159 ------- ------- Operating expenses: Selling ......................................... 1,045 998 General and administrative ...................... 1,607 1,564 Research and development ........................ 411 548 ------- ------- 3,063 3,110 ------- ------- Loss from operations ................................ (122) (951) ------- ------- Interest expense ................................ (275) (273) ------- ------- Loss before income taxes ............................ (397) (1,224) Benefit for income taxes ............................ -- (466) ------- ------- Net loss ............................................ $ (397) $ (758) ======= ======= Basic and diluted loss per share .................... $ (0.05) $ (0.10) ======= ======= Basic and diluted weighted average shares outstanding 7,997 7,539 ======= ======= See accompanying notes to consolidated financial statements. 3 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Three Months Ended March 31, ------------------ 2004 2003 ------- ------- Cash Flows From Operating Activities: Net loss ...................................................... $ (397) $ (758) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation ................................................ 264 285 Amortization ................................................ 186 191 Allowance for doubtful accounts ............................. 90 90 Deferred income taxes ....................................... -- 10 Changes in operating assets and liabilities: Accounts receivable ....................................... -- (417) Inventories ............................................... (877) 1,126 Other current assets ...................................... (305) 36 Other assets .............................................. 43 3 Income taxes .............................................. 372 (191) Accounts payable, accrued compensation and accrued expenses 1,462 484 ------- ------- Net cash provided by operating activities ................. 838 859 ------- ------- Cash Flows From Investing Activities: Capital expenditures .......................................... (97) (323) Collection of note receivable ................................. 389 162 Investment in Blonder Tongue Telephone, LLC ................... -- (200) Acquisition of rights-of-entry ................................ -- (150) ------- ------- Net cash provided by (used in) investing activities ........... 292 (511) ------- ------- Cash Flows From Financing Activities: Borrowings of long-term debt .................................. 2,945 2,430 Repayments of long-term debt .................................. (4,177) (2,935) Proceeds from exercise of stock options ....................... 20 -- Acquisition of treasury stock ................................. -- (69) ------- ------- Net cash used in financing activities ................... (1,212) (574) ------- ------- Net decrease in cash ............................................... (82) (226) Cash, beginning of period .......................................... 195 258 ------- ------- Cash, end of period ................................................ $ 113 $ 32 ======= ======= Supplemental Cash Flow Information: Cash paid for interest ........................................ $ 278 $ 187 Cash paid for income taxes .................................... -- -- ======= =======
See accompanying notes to consolidated financial statements. 4 BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (unaudited) Note 1 - Company and Basis of Presentation Blonder Tongue Laboratories, Inc. (the "Company") is a designer, manufacturer and supplier of electronics and systems equipment for the cable television industry, primarily throughout the United States. The consolidated financial statements include the accounts of Blonder Tongue Laboratories, Inc. and subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the first quarter of 2004 are not necessarily indicative of the results to be expected for the full fiscal year and have not been audited. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting primarily of normal recurring accruals, necessary for a fair statement of the results of operations for the period presented and the consolidated balance sheet at March 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company's latest annual report on Form 10-K for the year ended December 31, 2003. Note 2 - New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 addresses the consolidation by business enterprises of variable interest entities, as defined in the Interpretation. FIN 46 expands existing accounting guidance regarding when a company should include in its financial statements the assets, liabilities, and activities of another entity. Many variable interest entities have commonly been referred to as special-purpose entities or off-balance sheet structures. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after March 15, 2004. The Company believes that the adoption of FIN 46 will not have a material impact on the Company's financial position, results of operations or cash flows. In July 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 requires the shares that are mandatorily redeemable for cash or other assets at a specified or determinable date or upon an event certain to occur to be classified as liabilities, not as part of shareholders' equity. This pronouncement does not currently impact the Company's financial position, results of operations or cash flows. Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The EITF addresses the accounting for revenue generating arrangements involving multiple deliverables. This EITF does not currently apply to the Company. Note 3 - Stock Options The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income (loss) and net (loss) income per common share as if compensation cost for stock options granted under the plans, if applicable, had been determined in accordance with the fair value based method prescribed in FAS 123. The Company does not plan to adopt the fair value based method prescribed by FAS 123. The Company estimates the fair value of each stock option grant by using the Black-Scholes option-pricing model. No options were granted during either of the three months ended March 31, 2004 or 2003. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (unaudited) Under accounting provisions of FAS 123, the Company's net loss to common shareholders and net loss per common share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data): Three Months Ended March 31 ---------------- 2004 2003 ------ ------ Net loss as reported ................................. $ (397) $(758) Adjustment for fair value of stock options, net of tax ......................................... 41 78 ------ ------ Pro forma ....................................... $ (438) ($836) ====== ====== Net loss per share basic and diluted: As reported ..................................... $(0.05) $(0.10) ====== ====== Pro forma ....................................... $(0.06) $(0.11) ====== ====== Note 4 - Inventories Inventories net of reserves are summarized as follows: March 31, Dec. 31, 2004 2003 -------- -------- Raw Materials ................... $ 11,451 $ 11,379 Work in process ................. 1,327 1,746 Finished Goods .................. 12,159 10,935 -------- -------- ................................. 24,937 24,060 Less Reserve for excess inventory ..................... (3,472) (3,472) -------- -------- $ 21,465 $ 20,588 ======== ======== Note 5 - Debt On March 20, 2002 the Company entered into a credit agreement with Commerce Bank, N.A. for a $19,500 credit facility, comprised of (i) a $7,000 revolving line of credit under which funds may be borrowed at LIBOR, plus a margin ranging from 1.75% to 2.50%, in each case depending on the calculation of certain financial covenants, with a floor of 5% through March 19, 2003, (ii) a $9,000 term loan which bore interest at a rate of 6.75% through September 30, 2002, and thereafter at a fixed rate ranging from 6.50% to 7.25% to reset quarterly depending on the calculation of certain financial covenants and (iii) a $3,500 mortgage loan bearing interest at 7.5%. Borrowings under the revolving line of credit are limited to certain percentages of eligible accounts receivable and inventory, as defined in the credit agreement. The credit facility is collateralized by a security interest in all of the Company's assets. The agreement also contains restrictions that require the Company to maintain certain financial ratios as well as restrictions on the payment of cash dividends. The initial maturity date of the line of credit with Commerce Bank was March 20, 2004. The term loan required equal monthly principal payments of $187 and matures on April 1, 2006. The mortgage loan requires equal monthly principal payments of $19 and matures on April 1, 2017. The mortgage loan is callable after five years at the lender's option. In November 2003, the Company's credit agreement with Commerce Bank was amended to modify the interest rate and amortization schedule for certain of the loans thereunder, as well as to modify one of the financial covenants. Beginning November 1, 2003, the revolving line of credit began to accrue interest at the prime rate plus 1.5%, with a floor of 5.5% (5.5% at March 31, 2004), and the term loan began to accrue interest at a fixed rate of 7.5%. Beginning December 1, 2003, the term loan requires equal monthly principal payments of $193 plus interest with a final payment on April 1, 2006 of all remaining unpaid principal and interest. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (unaudited) At March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, the Company was unable to meet one of its financial covenants required under its credit agreement with Commerce Bank, which non-compliance was waived by the Bank effective as of each such date. In March 2004, the Company's credit agreement with Commerce Bank was amended to (i) extend the maturity date of the line of credit until April 1, 2005, (ii) reduce the maximum amount that may be borrowed under the line of credit to $6,000, (iii) suspend the applicability of the cash flow coverage ratio covenant until March 31, 2005, (iv) impose a new financial covenant requiring the Company to achieve certain levels of consolidated pre-tax income on a quarterly basis commencing with the fiscal quarter ended March 31, 2004, and (v) require that the Company make a prepayment against its outstanding term loan to the Bank equal to 100% of the amount of any prepayment received by the Company on its outstanding note receivable from a customer, up to a maximum amount of $500. Note 6 - Acquisition (Subscribers and passings in whole numbers) During June, 2002, the Company formed a venture with Priority Systems, LLC and Paradigm Capital Investments, LLC for the purpose of acquiring the rights-of-entry for certain multiple dwelling unit ("MDU") cable television systems (the "Systems") owned by affiliates of Verizon Communications, Inc. The venture entity, BDR Broadband, LLC ("BDR Broadband"), 90% of the outstanding capital stock of which is owned by the Company, acquired the Systems, which are comprised of approximately 3,070 existing MDU cable television subscribers and approximately 7,520 passings. BDR Broadband paid approximately $1,880 for the Systems, subject to adjustment, which constitutes a purchase price of $.575 per subscriber. The final closing date for the transaction was on October 1, 2002. The Systems were cash flow positive beginning in the first year. To date, the Systems have been upgraded with approximately $890 of interdiction and other products of the Company. It is planned that the Systems will be upgraded with approximately $500 of additional interdiction and other products of the Company over the course of operation. During July 2003, the Company purchased the 10% interest in BDR Broadband that had been originally owned by Paradigm Capital Investments, LLC, for an aggregate purchase price of $35, resulting in an increase in the Company's stake in BDR Broadband from 80% to 90%. The purchase price was allocated $1,524 to rights-of-entry and $391 to fixed assets. The rights-of-entry are being amortized over a five year period. In consideration for its majority interest in BDR Broadband, the Company advanced to BDR Broadband $250, which was paid to the sellers as a down payment against the final purchase price for the Systems. The Company also agreed to guaranty payment of the aggregate purchase price for the Systems by BDR Broadband. The approximately $1,630 balance of the purchase price was paid by the Company on behalf of BDR Broadband on November 30, 2002 pursuant to the terms and in satisfaction of certain promissory notes executed by BDR Broadband in favor of the sellers. In March, 2003, the Company entered into a series of agreements, pursuant to which the Company acquired a 20% minority interest in NetLinc Communications, LLC ("NetLinc") and a 35% minority interest in Blonder Tongue Telephone, LLC ("BTT") (to which the Company has licensed its name). The aggregate purchase price consisted of (i) up to $3,500 payable over a minimum of two years, plus (ii) 500 shares of the Company's common stock. NetLinc owns patents, proprietary technology and know-how for certain telephony products that allow Competitive Local Exchange Carriers ("CLECs") to competitively provide voice service to MDUs. Certain distributorship agreements were also concurrently entered into among NetLinc, BTT and the Company pursuant to which the Company ultimately acquired the right to distribute NetLinc's telephony products to private and franchise cable operators as well as to all buyers for use in MDU applications. BTT partners with CLECs to offer primary voice service to MDUs, receiving a portion of the line charges due from the CLECs' telephone customers, and the Company offers for sale a line of telephony equipment to complement the voice service. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (unaudited) As a result of NetLinc's inability to retain a contract manufacturer to manufacture and supply the products in a timely and consistent manner in accordance with the requisite specifications, in September, 2003 the parties agreed to restructure the terms of their business arrangement entered into in March, 2003. The restructured business arrangement was accomplished by amending certain of the agreements previously entered into and entering into certain new agreements. Some of the principal terms of the restructured arrangement include increasing the Company's economic ownership in NetLinc from 20% to 50% and in BTT from 35% to 50%, all at no additional cost to the Company. The cash portion of the purchase price in the venture was decreased from $3,500 to $1,167 and the then outstanding balance of $342 was paid in installments of $50 per week until it was paid in full in October, 2003. BTT has an obligation to redeem the $1,167 cash component of the purchase price to the Company via preferential distributions of cash flow under BTT's limited liability company operating agreement. In addition, of the 500 shares of common stock issued to BTT as the non-cash component of the purchase price (fair valued at $1,030), one-half (250 shares) have been pledged to the Company as collateral. Under the restructured arrangement, the Company can purchase similar telephony products directly from third party suppliers other than NetLinc and, in connection therewith, the Company would pay certain future royalties to NetLinc and BTT from the sale of these products by the Company. While the distributorship agreements among NetLinc, BTT and the Company have not been terminated, the Company does not anticipate purchasing products from NetLinc in the near term. NetLinc, however, continues to own intellectual property, which may be further developed and used in the future to manufacture and sell telephony products under the distributorship agreements. Note 7 - Notes Receivable During September 2002, the Company sold inventory at a cost of approximately $1,447 to a private cable operator for approximately $1,929 in exchange for which the Company received notes receivable in the principal amount of approximately $1,929. The notes are payable by the customer in 48 monthly principal and interest (at 11.5%) installments of approximately $51 commencing January 1, 2003. The customer's payment obligations under the notes are collateralized by purchase money liens on the inventory sold and blanket second liens on all other assets of the customer. The Company has recorded the notes receivable at the inventory cost and will not recognize any revenue or gross profit on the transaction until a substantial amount of the cost has been recovered, and collectibility is assured. The Company collected $389 during the first quarter of 2004 and recorded the receipts as a reduction in the note receivable balance. The balance of the notes are expected to be collected during 2004 and approximately $482 of gross margin and $268 of interest income is expected to be recognized. Note 8 - Related Party Transactions The President of the Company lent the Company 100% of the purchase price of certain used-equipment inventory purchased by the Company in October through November of 2003. The inventory was purchased at a substantial discount to market price. While the aggregate cost to purchase all of the inventory was approximately $950, the maximum amount of indebtedness outstanding to the President at any one time during the first quarter of 2004 was $675. At March 31, 2004, the remaining outstanding balance due to the President was $518 and was included in other accrued expenses. The President made the loan to the Company on a non-recourse basis, secured solely by a security interest in the inventory purchased by the Company and the proceeds resulting from the sale of the inventory. In consideration for the extension of credit on a non-recourse basis, the President will receive from the Company interest on the outstanding balance at the margin interest rate he incurs for borrowing the funds from his lenders (approximately 3.97% as of March 31, 2004) plus 25% of the gross profit derived from the Company's resale of such inventory, which amounts will not be paid to the President until the outstanding balance of the indebtedness has been paid in full. Through March 31, 2004, accrued interest on the loan payable to the President was $10, and the share of gross profit payable to the President was $88. In March, 2003, the Company entered into a series of agreements, pursuant to which the Company acquired a 20% minority interest in NetLinc Communications, LLC ("NetLinc") and a 35% minority interest in Blonder Tongue Telephone, LLC ("BTT"). During September, 2003, the parties restructured the terms of their business arrangement which included increasing Blonder Tongue's economic ownership in NetLinc from 20% to 50% and in 8 BTT from 35% to 50%, all at no additional cost to Blonder Tongue. The cash portion of the purchase price in the venture was decreased from $3,500 to $1,167, and was paid in full by the Company to BTT in October, 2003. As the non-cash component of the purchase price, the Company issued 500 shares of Common Stock to BTT, resulting in BTT becoming the owner of greater than 5% of the outstanding Common Stock of the Company. The Company will receive preferential distributions equal to the $1,167 cash component of the purchase price from the cash flows of BTT. One-half of such Common Stock (250 shares) has been pledged to the Company as collateral to secure BTT's obligation. Under the restructured arrangement, the Company pays certain future royalties to NetLinc and BTT upon the sale of telephony products. During 2003, the total accrued royalties to NetLinc and BTT were $14 and $22, respectively, which will be paid to them by the Company in 2004. In addition, during 2003 the Company paid certain expenses of BTT totaling approximately $95. Through this telephony venture, BTT offers primary voice service to MDUs and the Company offers for sale a line of telephony equipment to complement the voice service. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements In addition to historical information, this Quarterly Report contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company's business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The words "believe", "expect", "anticipate", "project" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (See Item 1 - Business; Item 3 - Legal Proceedings; and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations). General During June, 2002, the Company formed a venture with Priority Systems, LLC and Paradigm Capital Investments, LLC for the purpose of acquiring the rights-of-entry for certain multiple dwelling unit cable television systems (the "Systems") owned by affiliates of Verizon Communications, Inc. The venture entity, BDR Broadband, 90% of the outstanding capital stock of which is owned by the Company, acquired the Systems, which are comprised of approximately 3,070 existing MDU cable television subscribers and approximately 7,520 passings. BDR Broadband paid approximately $1,880,000 for the Systems, subject to adjustment, which constitutes a purchase price of $575 per subscriber. The final closing date for the transaction was on October 1, 2002. The Systems were cash flow positive beginning in the first year. To date, the Systems have been upgraded with approximately $890,000 of interdiction and other products of the Company. It is planned that the Systems will be upgraded with approximately $500,000 of additional interdiction and other products of the Company over the course of operation. During July, 2003, the Company purchased the 10% interest in BDR Broadband that had been originally owned by Paradigm Capital Investments, LLC, for an aggregate purchase price of $35,000, resulting in an increase in the Company's stake in BDR Broadband from 80% to 90%. In consideration for its majority interest in BDR Broadband, the Company advanced to BDR Broadband $250,000, which was paid to the sellers as a down payment against the final purchase price for the Systems. The Company also agreed to guaranty payment of the aggregate purchase price for the Systems by BDR Broadband. The approximately $1,630,000 balance of the purchase price was paid by the Company on behalf of BDR 9 Broadband on November 30, 2002, pursuant to the terms and in satisfaction of certain promissory notes (the "Seller Notes") executed by BDR Broadband in favor of the sellers. The Company believes that similar opportunities currently exist to acquire additional rights-of-entry for multiple dwelling unit cable television systems at historically low prices. The Company also believes that the model it devised for acquiring and operating the Systems will be successful and can be replicated for other transactions with the same or new venture partners. While the Company is not actively seeking opportunities to acquire additional rights-of-entry at the present time, if such opportunities arise, the Company would evaluate and consider them. Given that financing may not be available on acceptable terms or at all, even if attractive opportunities arise, the Company may be unable to pursue these opportunities. In March, 2003, the Company entered into a series of agreements, pursuant to which the Company acquired a 20% minority interest in NetLinc Communications, LLC ("NetLinc") and a 35% minority interest in Blonder Tongue Telephone, LLC ("BTT") (to which the Company has licensed its name). The aggregate purchase price consisted of (i) up to $3,500,000 payable over a minimum of two years, plus (ii) 500,000 shares of the Company's common stock. NetLinc owns patents, proprietary technology and know-how for certain telephony products that allow Competitive Local Exchange Carriers ("CLECs") to competitively provide voice service to MDUs. Certain distributorship agreements were also concurrently entered into among NetLinc, BTT and the Company pursuant to which the Company ultimately acquired the right to distribute NetLinc's telephony products to private and franchise cable operators as well as to all buyers for use in MDU applications. BTT partners with CLECs to offer primary voice service to MDUs, receiving a portion of the line charges due from the CLECs' telephone customers, and the Company offers for sale a line of telephony equipment to complement the voice service. As a result of NetLinc's inability to retain a contract manufacturer to manufacture and supply the products in a timely and consistent manner in accordance with the requisite specifications, in September, 2003 the parties agreed to restructure the terms of their business arrangement entered into in March, 2003. The restructured business arrangement was accomplished by amending certain of the agreements previously entered into and entering into certain new agreements. Some of the principal terms of the restructured arrangement include increasing the Company's economic ownership in NetLinc from 20% to 50% and in BTT from 35% to 50%, all at no additional cost to the Company. The cash portion of the purchase price in the venture was decreased from $3,500,000 to $1,166,667 and the then outstanding balance of $342,000 was paid in installments of $50,000 per week until it was paid in full in October, 2003. In addition, of the 500,000 shares of common stock issued to BTT as the non-cash component of the purchase price (fair valued at $1,030,000), one-half (250,000 shares) have been pledged to the Company as collateral to secure BTT's obligation to repay the $1,167,667 cash component of the purchase price to the Company via preferential distributions of cash flow under BTT's limited liability company operating agreement. Under the restructured arrangement, the Company can purchase similar telephony products directly from third party suppliers other than NetLinc and, in connection therewith, the Company would pay certain future royalties to NetLinc and BTT from the sale of these products by the Company. While the distributorship agreements among NetLinc, BTT and the Company have not been terminated, the Company does not anticipate purchasing products from NetLinc in the near term. NetLinc, however, continues to own intellectual property, which may be further developed and used in the future to manufacture and sell telephony products under the distributorship agreements. In addition to receiving incremental revenues associated with its direct sales of the telephony products, the Company also anticipates receiving a portion of BTT's net income derived from voice-service revenues through its 50% stake in BTT. While the events related to the restructuring resulted in a delay in the Company's anticipated 2003 revenue stream from the sale of telephony products, the Company believes that these revised terms are beneficial and will result in the Company enjoying higher gross margins on telephony equipment unit sales as well as an incrementally higher proportion of telephony service revenues. Material incremental revenues associated with the sale of telephony products are not presently anticipated to be received until at least the third quarter of 2004. First three months of 2004 Compared with first three months of 2003 Net Sales. Net sales decreased $73,000 or 0.9% to $8,529,000 in the first three months of 2004 from $8,602,000 in the first three months of 2003. The decrease in sales is primarily attributed to a decrease in capital spending by cable system operators and weak overall economic conditions. As a result, the Company experienced 10 lower interdiction and digital product sales. Net sales included approximately $677,000 and $1,190,000 of interdiction and digital equipment for the first three months of 2004 compared to approximately $775,000 and $1,336,000 for the first three months of 2003. Included in net sales are revenues from BDR Broadband of $346,000 and $202,000 for the first three months of 2004 and 2003, respectively. Cost of Goods Sold. Cost of goods sold decreased to $5,588,000 for the first three months of 2004 from $6,443,000 for the first three months of 2003, primarily due to decreased volume, and decreased as a percentage of sales to 65.5% from 74.9%. The decrease as a percentage of sales was caused primarily by a higher portion of sales during the period being comprised of higher margin product. Selling Expenses. Selling expenses increased to $1,045,000 for the first three months of 2004 from $998,000 in the first three months of 2003 and increased as a percentage of sales to 12.3% for the first three months of 2004 from 11.6% for the first three months of 2003. This $47,000 increase is primarily attributable to a increase in wages and fringe benefits of $64,000 due to an increase in headcount, offset by a reduction in freight of $24,000 and commissions of $17,000 due to reduced sales levels. General and Administrative Expenses. General and administrative expenses increased to $1,607,000 for the first three months of 2004 from $1,564,000 for the first three months of 2003 and increased as a percentage of sales to 18.8% for the first three months of 2004 from 18.2% for the first three months of 2003. The $43,000 increase can be primarily attributed to an increase in operating expenses of $31,000, related to BDR Broadband. Research and Development Expenses. Research and development expenses decreased to $411,000 in the first three months of 2004 from $548,000 in the first three months of 2003. This $137,000 decrease was primarily due to a decrease in wages and fringe benefits of $103,000 due to a reduction in headcount. Research and development expenses, as a percentage of sales, decreased to 4.8% in the first three months of 2004 from 6.4% in the first three months of 2003. Operating Loss. Operating loss was $122,000 for the first three months of 2004 compared to $951,000 for the first three months of 2003. Interest Expense. Interest expense increased to $275,000 in the first three months of 2004 from $273,000 in the first three months of 2003. The increase is the result of higher average borrowing and higher effective interest rates. Income Taxes. The benefit for income taxes for the first three months of 2004 was zero compared to a benefit of $466,000 for the first three months of 2003 as a result of a decrease in taxable loss. The benefit for the current year loss has been subject to a valuation allowance of $151,000 since the realization of the deferred tax benefit is not considered more likely than not. Liquidity and Capital Resources As of March 31, 2004 and December 31, 2003, the Company's working capital was $24,063,000 and $25,071,000, respectively. The decrease in working capital is attributable primarily to a decrease in long term debt of $1,232,000. The Company's net cash provided by operating activities for the three-month period ended March 31, 2004 was $838,000, compared to net cash provided by operating activities for the three-month period ended March 31, 2003, which was $859,000. Cash provided by investing activities was $292,000, which was attributable to capital expenditures for new equipment and upgrades to the BDR Broadband Systems of $97,000 and a $389,000 collection of a note receivable. Cash used in financing activities was $1,212,000 for the first three months of 2004 primarily comprised of $2,945,000 of borrowings offset by $4,177,000 of repayments of long term debt. 11 On March 20, 2002 the Company entered into a credit agreement with Commerce Bank, N.A. for a $19,500,000 credit facility, comprised of (i) a $7,000,000 revolving line of credit under which funds may be borrowed at LIBOR, plus a margin ranging from 1.75% to 2.50%, in each case depending on the calculation of certain financial covenants, with a floor of 5% through March 19, 2003, (ii) a $9,000,000 term loan which bore interest at a rate of 6.75% through September 30, 2002, and thereafter at a fixed rate ranging from 6.50% to 7.25% to reset quarterly depending on the calculation of certain financial covenants and (iii) a $3,500,000 mortgage loan bearing interest at 7.5%. Borrowings under the revolving line of credit are limited to certain percentages of eligible accounts receivable and inventory, as defined in the credit agreement. The credit facility is collateralized by a security interest in all of the Company's assets. The agreement also contains restrictions that require the Company to maintain certain financial ratios as well as restrictions on the payment of cash dividends. The initial maturity date of the line of credit with Commerce Bank was March 20, 2004. The term loan required equal monthly principal payments of $187,000 and matures on April 1, 2006. The mortgage loan requires equal monthly principal payments of $19,000 and matures on April 1, 2017. The mortgage loan is callable after five years at the lender's option. In November 2003, the Company's credit agreement with Commerce Bank was amended to modify the interest rate and amortization schedule for certain of the loans thereunder, as well as to modify one of the financial covenants. Beginning November 1, 2003, the revolving line of credit began to accrue interest at the prime rate plus 1.5%, with a floor of 5.5% (5.5% at March 31, 2004), and the term loan began to accrue interest at a fixed rate of 7.5%. Beginning December 1, 2003, the term loan requires equal monthly principal payments of $193,000 plus interest with a final payment on April 1, 2006 of all remaining unpaid principal and interest. At March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, the Company was unable to meet one of its financial covenants required under its credit agreement with Commerce Bank, which non-compliance was waived by the Bank effective as of each such date. In March 2004, the Company's credit agreement with Commerce Bank was amended to (i) extend the maturity date of the line of credit until April 1, 2005, (ii) reduce the maximum amount that may be borrowed under the line of credit to $6,000,000, (iii) suspend the applicability of the cash flow coverage ratio covenant until March 31, 2005, (iv) impose a new financial covenant requiring the Company to achieve certain levels of consolidated pre-tax income on a quarterly basis commencing with the fiscal quarter ended March 31, 2004, and (v) require that the Company make a prepayment against its outstanding term loan to the Bank equal to 100% of the amount of any prepayment received by the Company on its outstanding note receivable from a customer, up to a maximum amount of $500,000. At March 31, 2004, there was $3,531,000, $4,668,000 and $3,033,000 outstanding under the revolving line of credit, term loan and mortgage loan, respectively. The Company has from time to time experienced short-term cash requirement issues. In 2002, the Company paid approximately $1,880,000 in connection with acquiring its majority interest in BDR Broadband and paying off the Seller Notes for BDR Broadband. In addition, the Company will incur additional obligations related to royalties, if any, in connection with its $1,167,000 cash investments during 2003, in NetLinc and BTT. While the Company's existing lender agreed to allow the Company to fund both the BDR Broadband obligations and the NetLinc/BTT obligations using its line of credit, such lender did not agree to increase the maximum amount available under such line of credit. These expenditures, coupled with the March 2004 amendment to the Company's credit agreement with Commerce Bank described above, and certain near-term funding requirements relating to the purchase of a large quantity of high-speed data products, will reduce the Company's working capital. The Company is exploring various alternatives to enhance its working capital, including inventory-related pricing and product reengineering efforts, as well as restructuring its long-term debt with Commerce Bank or seeking alternative financing. During 2003, BDR Broadband had positive cash flow, which is expected to continue in 2004. As such, BDR Broadband is not presently anticipated to adversely impact the Company's working capital. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 addresses the consolidation by business enterprises of variable interest entities, as defined in the Interpretation. FIN 46 expands existing accounting guidance regarding 12 when a company should include in its financial statements the assets, liabilities, and activities of another entity. Many variable interest entities have commonly been referred to as special-purpose entities or off-balance sheet structures. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after March 15, 2004. The Company believes that the adoption of FIN 46 will not have a material impact on the Company's financial position, results of operations or cash flows. In July 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 requires the shares that are mandatorily redeemable for cash or other assets at a specified or determinable date or upon an event certain to occur to be classified as liabilities, not as part of shareholders' equity. This pronouncement does not currently impact the Company's financial position, results of operations or cash flows. Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The EITF addresses the accounting for revenue generating arrangements involving multiple deliverables. This EITF does not currently apply to the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates. At March 31, 2004 and 2003 the principal amount of the Company's aggregate outstanding variable rate indebtedness was $3,531,000 and $5,595,000, respectively. A hypothetical 100 basis point increase in interest rates would have had an annualized unfavorable impact of approximately $35,000 and $56,000, respectively, on the Company's earnings and cash flows based upon these quarter-end debt levels. At March 31, 2004, the Company did not have any derivative financial instruments. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote; however, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at a reasonable assurance level. In addition, the Company reviewed its internal control over financial reporting and there have been no changes during the fiscal quarter covered by this report in the Company's internal control over financial reporting, to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company's business, financial condition, or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits are listed in the Exhibit Index appearing at page 16 herein. (b) Reports on Form 8-K On March 31, 2004, the Company filed a Form 8-K relating to Item 12 of such Form. The information under Item 12 related to the Company's March 31, 2004 press release announcing its financial results for the fourth quarter and year ended December 31, 2003. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLONDER TONGUE LABORATORIES, INC. Date: May 17, 2004 By: /s/ James A. Luksch ------------------------------------- James A. Luksch Chief Executive Officer By: /s/ Eric Skolnik ------------------------------------- Eric Skolnik Senior Vice President and Chief Financial Officer (Principal Financial Officer) 15 EXHIBIT INDEX ------------- Exhibit # Description Location --------- ----------- -------- 3.1 Restated Certificate of Incorporated by reference Incorporation of Blonder from Exhibit 3.1 to S-1 Tongue Laboratories, Inc. Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 3.2 Restated Bylaws of Blonder Incorporated by reference Tongue Laboratories, Inc. from Exhibit 3.2 to S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended. 10.1 Second Amendment and Waiver to Filed herewith. Loan and Security Agreement between Blonder Tongue Laboratories, Inc and Commerce Bank, N.A., dated March 29, 2004. 31.1 Certification of James A. Filed herewith. Luksch pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Eric Skolnik Filed herewith. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to Filed herewith. Section 906 of Sarbanes-Oxley Act of 2002. 16