PART
I
ITEM
1. BUSINESS
Introduction
Overview
Since
it’s founding in 1950, Blonder Tongue has been an innovative designer and
manufacturer of products for the cable television industry, primarily focused on
the development of technology for niche cable television
applications. This focus has given the Company a leading position in
the private cable market. During the past several years the
differentiation between the franchised and private cable markets has blurred due
to the consumer’s increased expectations for cutting edge services such as
high-speed data, telephony and digital video offerings. In response,
the Company has expanded its strategic thrust to accommodate both the franchised
and private cable markets and is a provider of integrated network solutions to
all of the cable markets that the Company serves, including the multi-dwelling
unit (“
MDU
”) market, the
lodging/hospitality market and the institutional market which includes
hospitals, prisons and schools.
The cable
market has reacted quickly to consumer demands for additional services by
integrating multiple technologies into their existing networks to provide
consumers high-speed data and telephony in addition to video
offerings. Telephone companies have also entered this competitive
arena by upgrading their existing distribution networks, enabling them to be
able to provide video and high-speed data in addition to telephony
offerings. As a result of these market forces, the lodging and
institutional markets are now playing catch up in order to meet consumers’
expectations that these services be available, and are installing new
infrastructure and upgrading existing networks. This is a significant area of
opportunity for the Company to market and sell it’s core product
line.
Most of
the changes in the market segments that the Company serves have recently been
focused on the transition to digital technologies. One of the most
promising areas is Internet Protocol Television (“
IPTV
”), an emerging technology
that allows viewers to access broadcast network channels, subscriber services
and movies-on-demand. This technology is already experiencing full
scale commercialization in international markets such as Hong Kong, Italy and
France. The worldwide market projections are impressive with an estimated 62
million subscribers subscribing to IPTV services by 2010. The Company
has negotiated license agreements that will provide entry into this promising
market, and is currently developing products to meet the needs of customers in
the markets that it serves.
Recent
Developments
During
2007 the Company continued to advance the implementation of its current
strategic plan in an effort to maximize shareholder value. The
Company’s strategic plan consists of the following:
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focusing
on the efficient operation of its core
business,
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realigning
its leadership structure, and
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implementation
of an initiative to have high volume products manufactured in the People’s
Republic of China (
“PRC”
) in order to
substantially reduce the Company’s manufacturing costs, obtain competitive
advantage in the markets served and facilitate a more aggressive marketing
program.
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The
Company’s manufacturing initiative in the PRC entails a combination of contract
manufacturing agreements and purchasing agreements with key Chinese
manufacturers that can most fully meet the Company’s needs. The
Company has entered into a manufacturing agreement with a major contract
manufacturer in the PRC that will govern the terms of its manufacture of certain
of the Company’s high volume and complex products upon a purchase order being
submitted by the Company. The Company is also negotiating with other
PRC-based contract manufacturers with respect to other products. It
is anticipated this transition will relate to products representing a
significant portion of the Company’s net sales and is being implemented in
phases over the next several years, with the first products already transitioned
during the fourth quarter of 2007.
In
December 2007, the Company entered into an agreement to provide manufacturing,
research and development and product support to Buffalo City Center Leasing, LLC
(“
Buffalo City
”) for an
electronic on-board recorder that Buffalo City is producing for Turnpike Global
Technologies, LLC. Although this agreement has not yet contributed
significantly to the Company’s revenues, it is anticipated that this three-year
agreement will provide up to $4 million in revenue for the Company. A
director of the Company is also the managing member and vice president of
Buffalo City and may be deemed to control the entity which owns fifty percent
(50%) of the membership interests of Buffalo City.
On
December 15, 2006, the Company completed the divesture of its wholly-owned
subsidiary, BDR Broadband, LLC (“
BDR
”) through the sale of all
of the issued and outstanding membership interests of BDR to DirecPath Holdings,
LLC, a Delaware limited liability company ("
DirecPath
"), which is a joint
venture between Hicks Holdings LLC and The DIRECTV Group, Inc. The
aggregate sale price was approximately $3.1 million resulting in a gain of
approximately $880,000 on the sale, after certain post-closing
adjustments.
In
addition, in connection with the divestiture transaction, on December 15, 2006,
the Company entered into a Purchase and Supply Agreement with DirecPath, LLC, a
wholly-owned subsidiary of DirecPath ("
DPLLC
"), pursuant to which
DPLLC will purchase $1,630,000 of products from the Company, subject to certain
adjustments, over a period of three years. DPLLC purchased $404,000
of equipment from the Company in 2007. It is also anticipated that
the Company will provide DirecPath with certain systems engineering and
technical services.
BDR
commenced operations in June 2002, when it acquired certain rights-of-entry for
MDU cable television and high-speed data systems (the “
Systems
”) from Verizon Media
Ventures, Inc. and GTE Southwest Incorporated. As a result of BDR
acquiring additional rights-of-entry, at the time of the divesture, BDR owned
Systems for approximately 25 MDU properties in the State of Texas, representing
approximately 3,300 MDU cable television subscribers and 8,400
passings. The Systems were upgraded with approximately $81,000 and
$799,000 of interdiction and other products of the Company during 2006 and 2005,
respectively. During 2004, two Systems located outside of Texas were
sold. While the Company continued to invest in and expand BDR’s
business, in August 2006 the Company determined to seek a buyer for BDR and exit
the business of operating Systems in Texas to allow the Company to pursue
alternative strategic opportunities. In October 2006, several months
prior to the divestiture of BDR, the Company acquired (for nominal
consideration) the 10% minority interest that had been owned by Priority
Systems, LLC.
On
December 14, 2006, the Company’s wholly-owned subsidiary, Blonder Tongue
Investment Company, completed the sale of selected patents, patent applications,
provisional patent applications and related foreign patents and applications
(“
Patents
”) to Moonbeam
L.L.C. for net proceeds of $2,000,000. In connection with the sale,
the Company has retained a non-exclusive, royalty free, non-sublicenseable,
worldwide right and license to use the Patents to continue to develop,
manufacture, use, sell, distribute and otherwise exploit all of the Company’s
products currently protected under the Patents. These products
include some of the Company’s interdiction lines in the Addressable Subscriber
category of equipment.
On June
30, 2006, the Company completed the divesture of its 50% ownership interest in
Blonder Tongue Telephone, LLC (“
BTT
”). Under the
terms of a Share Exchange and Settlement Agreement ("
Share Exchange Agreement
")
with BTT and certain related parties of BTT, the Company transferred to BTT its
49 membership shares of BTT in exchange for BTT transferring back to the Company
the 500,000 shares of the Company's
common
stock that were previously contributed by the Company to the capital of
BTT. Pursuant to the Share Exchange Agreement, the Company granted
BTT a non-transferable equipment purchase credit in the aggregate amount of
$400,000 (subject to certain off-sets), which was exercised in full by September
30, 2006. BTT agreed to change its corporate name within 90 days
after closing and cease using any intellectual property of the Company,
including the names “Blonder,” “Blonder Tongue” or “BT.” As part of
the transaction, certain other non-material agreements among BTT and the Company
were also terminated.
The
Company acquired its 50% ownership interest in BTT as part of a series of
agreements entered into in March 2003 and September 2003. Through its
ownership interest in BTT, the Company was involved in providing a proprietary
telephone system suited to MDU development and was entitled to receive
incremental revenues associated with direct sales of telephony products,
however, revenues derived from sales of such telephony products and services
were not material. In addition to the Company’s interest in BTT, the
Company also acquired a 50% economic interest in NetLinc Communications, LLC
(“
NetLinc
”) as part of
the same series of agreements. The Company continues to hold its
interest in NetLinc, which 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. While NetLinc’s
intellectual property could be further developed and used in the future to
manufacture and sell telephony products, the Company has no present intention to
do so.
On
February 27, 2006 (the “
Effective Date
”), the Company
entered into a series of agreements related to its MegaPort
™
line
of high-speed data communications products. As a result of these
agreements, the Company has expanded its distribution territory, favorably
amended certain pricing and volume provisions and extended by 10 years the term
of the distribution agreement for its MegaPort
™
product
line. These agreements also require the Company to guaranty payment
due by Shenzhen Junao Technology Company Ltd. (“
Shenzhen
”), an affiliate of
Master Gain (as defined below) to Octalica, Ltd. (“
Octalica
”) in connection with
Shenzhen’s purchase of T.M.T.-Third Millennium Technology Limited (“
TMT”
) from
Octalica. In exchange for this guaranty, MegaPort Technology, LLC
(“
MegaPort
”), a
wholly-owned subsidiary of the Company, obtained an assignable option (the
“
Option
”) to acquire
substantially all of the assets and assume certain liabilities of TMT on
substantially the same terms as the acquisition of TMT by Shenzhen from
Octalica. The purchase price for TMT and, therefore, the amount and
payment terms guaranteed by the Company is the sum of $383,150 plus an
earn-out. The earn-out will not exceed 4.5% of the net revenues
derived from the sale of certain products during a period of 36 months
commencing after the sale of certain specified quantities of TMT inventory
following the Effective Date. The cash portion of the purchase price
was payable (i) $22,100 on the 120
th
day
following the Effective Date, (ii) $22,100 on the last day of the twenty-fourth
month following the Effective Date, and (iii) $338,950 commencing upon the later
of (A) the second anniversary of the Effective Date and (B) the date after which
certain volume sales targets for each of the MegaPort
™
products have been met, and then only as and to the extent that revenues
are derived from sales of such products. As of the date of the filing
of this report, none of the volume sales targets for these MegaPort products
have been met and, accordingly, no further purchase price payments have been
made. In February 2007, MegaPort sent notice to TMT and Shenzhen of
its election to exercise the Option to acquire substantially all of the assets
of TMT. Shenzhen has not responded to MegaPort’s notice of exercise
of the Option. MegaPort has engaged legal representation in Israel to
explore its options in connection with enforcement of its contractual rights,
but no decisions with respect thereto have been made. Upon
consummation of the acquisition, MegaPort, or its assignee, will pay Shenzhen,
in the same manner and at the same times, cash payments equal to the purchase
price payments due from Shenzhen to Octalica and will assume certain liabilities
of TMT.
On
November 11, 2005, the Company and its wholly-owned subsidiary, Blonder Tongue
Far East, LLC, a Delaware limited liability company, entered into a joint
venture agreement (“
JV
Agreement
”) with Master Gain International Industrial Limited, a Hong
Kong corporation (“
Master
Gain
”), intending to manufacture products in the PRC. This
joint venture was formed to compete with Far East manufactured products and to
expand market coverage outside North America. On June 9, 2006, the
Company terminated the JV Agreement due to the joint venture's failure to meet
certain quarterly financial milestones as set forth in the JV
Agreement. The inability to meet such financial milestones was caused
by the failure of Master Gain to contribute the $5,850,000 of capital to the
joint venture as required by the JV Agreement and the joint venture's failure to
obtain certain governmental approvals and licenses necessary for the operation
of the joint venture. Following the termination of the JV Agreement,
the Company restructured its strategy for the transition of manufacturing
certain of its products to the PRC, which has resulted in the current contract
manufacturing initiative with certain key Chinese manufacturers as described
above.
The
Company was incorporated under the laws of the State of Delaware in November
1988 and completed its initial public offering in December 1995.
Strategy
It is a
constant challenge for the Company to stay at the forefront of the technological
requirements of the cable markets that the Company serves, including the MDU,
lodging and institutional markets. Changes and developments in the
manner in which information (whether video, voice or data) is transmitted as
well as the use of alternative compression technologies all require the Company
to continue to develop innovative new products. The Company has added
and intends to continue to add new and innovative products to respond to the
migration from analog to digital signal transmission. In order to
provide products and services that allow integrators and operators to deploy
triple play services of voice, high-speed data and video (both analog and
digital), the Company has added new products to the Digital Video Headend,
High-speed Data and Fiber Optic product lines. These key product
lines are more thoroughly discussed under “Business – Products” beginning on
page 7 below. This evolution of the Company’s product lines will
focus on the increased needs created in the digital space by IPTV, Digital Video
and HDTV signals and integrating these signals into the optical networks of the
future.
In
response to the market pressure to compete with Far East manufactured products
and to expand its market coverage outside North America, the Company has already
entered into a manufacturing agreement with a major contract manufacturer in the
PRC for certain of its high volume and complex products and is seeking
additional strategic contract manufacturing relationships in that country and
elsewhere. The Company believes that this initiative will reduce the
manufacturing costs of its products, with resultant improvement in gross profit
margins. The Company commenced production of products in the PRC
during the fourth quarter of 2007.
The
Company’s principal end-use customers are:
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Cable System Operators (both
franchise and private, as well as cable contractors) that
design, package, install and in most instances operate, upgrade and
maintain the systems they build,
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Lodging
/ Hospitality video and high speed data system operators that specialize
in the Lodging/Hospitality Markets,
and
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Institutional
System Operators that operate, upgrade and maintain the systems that are
in their facilities, or Contractors that install, upgrade and
maintain these systems.
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A key
component of the Company’s strategy is to leverage its reputation across a broad
product line, offering one-stop shop convenience to the cable market customers
it serves and delivering products having a high performance-to-cost
ratio. The Company has historically enjoyed, and continues to enjoy,
a leading market position in the private cable industry, while progressively
making inroads into the franchise cable market. The Company provides
integrated network solutions for the MDU market, the lodging/hospitality market
and the institutional market. As the Company has expanded its market
coverage, however, the distinctions between private cable and franchise cable
have become blurred. For example, the most efficient, highest
revenue-producing private cable systems and small franchise cable systems are
built with the same electronic building blocks. Most of the
electronics required for these systems are available from Blonder
Tongue.
The
Company’s product lines (headend and distribution) must continue to evolve to
maintain the ability to provide all of the electronic equipment necessary to
build small cable systems and much of the equipment needed in larger systems for
the most efficient operation and highest profitability in high density
applications.
Markets
Overview
The
broadband signal distribution industry (involving the high-speed transmission of
television, telephony and internet signals) has been dominated by franchise
cable television and multiple system cable operators (“
MSOs
”). The
penetration of wireless, direct-broadcast satellite (“
DBS
”), such as DIRECTV™ and
DISH Network™, in the TV market continues to grow with a combined subscriber
count in excess of 29 million. The Regional Bell Operating Companies
(i.e. Verizon and AT&T) (“
RBOC’s
”) also compete with the
MSO’s for high-speed data services and are building fiber optic networks, on a
national level, capable of delivering triple play services direct to the home or
to the curb utilizing packet-based, Internet Protocol technology (“
IP
”). The MSO’s
are
deploying IP for their Video on Demand (“
VOD
”) services and continue to
expand the reach of fiber optic networks in order to maintain their dominant
position.
The long
term result of these activities will be increased competition for the provision
of all three services and a trend toward delivery of these services through
fiber using IP technology. This major market transition has resulted in
increased consumer expectations, placing the lodging and institutional
markets under pressure to install new infrastructure and upgrade existing
networks. It is not known how long this transition will take but to
remain competitive, the Company must continue to increase its product offerings
for fiber transmission, digital television, IP encoding and decoding and digital
applications.
Cable
Television
Most
cable television operators, both large and small, have built fiber optic
networks with various combinations of fiber optic and coaxial cable to deliver
television signal programming, data and phone services on one drop
cable. Cable television deployment of fiber optic trunk has been
completed in most existing systems. The system architecture being
employed to accomplish the provision of analog video, digital video, HDTV,
high-speed data, VOD and telephone service is a hybrid fiber coaxial (“
HFC
”) network. In
an HFC network, fiber optic trunk lines connect to nodes which typically feed 50
to 250 subscribers, using coaxial cable.
The
Company believes that most major metropolitan areas will eventually have complex
networks of two or more independent operators interconnecting homes and
multi-dwelling complexes. All of these networks are potential users
of Blonder Tongue’s Analog Video Headend, Digital Video Headend, Fiber Optic and
Addressable products.
Lodging
Competition
among cable operators serving the lodging market to provide more channels, VOD
and enhanced interactivity, has resulted in increased demand for analog, digital
and high definition television system electronics. These systems have
been and continue to be well received in the market, as property owners have
sought additional revenue streams and guests have demanded increased in-room
technology services. The leading system integrators in this market
rely upon outside suppliers for their system electronics and most are Blonder
Tongue customers. These companies and others offer lodging
establishments systems that provide VOD movies with a large selection of
titles. 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 guests with more free channels, VOD for a broad selection of movie
titles, and interactive services.
Most of
the systems with VOD service were initially in large 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 are being provided with
video-on-demand as enhanced technology results in reduced headend costs, keeping
the market growth reasonably steady. A current trend in lodging is to
furnish “plug-and-play” high-speed data service to customers and Blonder
Tongue’s MegaPort™ high-speed data product provides the solution for hotel/motel
high-speed data deployment.
Institutional
The
Company identifies the Institutional market as: education campus environments,
correctional facilities and short or long term health service
environments. What all of these seemingly unrelated facilities have
in common is that they all contain private networks that are dependant on either
locally generated or externally sourced video and/or data content. As the
advanced technologies of VOD, HDTV and IPTV permeate the market, these
facilities are embracing these technologies to achieve site specific
goals. The Company has traditionally benefited from a very strong
share of this market with its Analog Video Headend and Distribution
Products. We anticipate that this trend will continue and evolve into
firm adoption of our Digital Video Headend Products, which include HDTV and
Digital Video solutions and our upcoming IPTV platforms.
International
Cable
television service for much of the world is expanding as technological
advancement reduces the cost to consumers. In addition, economic
development in Latin America, Asia and Eastern Europe has allowed
construction
of integrated delivery systems that 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 anticipated that more equipment will be placed in
the field. The Company utilizes several distributors in Florida and
within Latin America to serve the Latin American market, although during the
last several years international sales have not materially contributed to the
Company’s revenue base. The Company’s initiative to manufacture
products in the PRC will expand the Company’s capability to manufacture core
products at a more competitive cost and also could lead to the development of
new markets for product sales in the Far East. In connection with any
expansion, however, there are inherent risks of international operations in
general, and operating in the PRC in particular. These risks are
described in more detail under “Risk Factors” below.
Additional
Considerations
The
technological revolution with respect to video, data and voice services
continues at a rapid pace. Cable TV’s QAM video is competing with
DIRECTV™ and EchoStar’s DBS service and cable modems compete with DSL offered by
the RBOC’s. RBOC’s are building national fiber networks and are now
delivering video, data and voice services directly to the home over fiber optic
cable, and voice over IP (“
VOIP
”) is being offered by
cable companies and others in competition with traditional phone
companies. The Company is also beginning to see the convergence of
data and video communications, wherein computer and television systems
merge. While it is not possible to predict with certainty which
technology will be dominant at any particular point in time, the Company
believes that delivery of services using IP technology will eventually dominate
the delivery systems of the future and the tremendous bandwidth available
through the use of fiber optic cable will eventually be the dominant carrier of
video, voice and data communications signals.
Since the
installed base of United States television sets are for the most part analog
(not digital), direct satellite television, digitally compressed programming and
IP delivery requires headend products or set-top decoding receivers or
converters to convert the transmitted signals back to analog. The
replacement of all television sets with digital sets will be costly and take
many years to complete. The Company believes that for many years to
come, program providers will 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.
Products
Blonder
Tongue’s products can be separated, according to function, into the several
categories described below:
•
Analog Video 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, integrated receiver/decoders,
demodulators, modulators, antennas and antenna mounts, amplifiers, equalizers
and processors. The headend is the “brain” of a television signal
distribution system. It is the central location where the
multi-channel signal is initially received, converted and allocated to specific
channels for analog distribution. In some cases, where the signal is
transmitted in encrypted form or digitized and compressed, a receiver will also
be required to decode the signal. Blonder Tongue is a licensee of Motorola,
Inc.’s (“
Motorola
”)
VideoCipher® and DigiCipher® encryption technologies and integrates their
decoders into integrated receiver/decoder products, where
required. The Company estimates that Analog Video Headend Products
accounted for approximately 49% of the Company’s revenues in each of the three
years 2007, 2006 and 2005.
•
Digital Video Headend Products
used by a system operator for acquisition, processing and manipulation of
digital video signals. Blonder Tongue is constantly expanding its
Digital Products offering, which currently includes the QTM line of Transcoders,
Digital QAM Up-converters for data-over-cable applications, Digital High
Definition Television Processors for delivery of HDTV programming and QAM
Modulators. The QTM line is used for economically deploying or adding a
satellite based digital programming tier of standard digital or HDTV digital
programming. The unit transcodes a satellite signal’s modulation from
Quadrature Phase Shift Key (“
QPSK
”) to Quadrature Amplitude
Modulation (“
QAM
”) or
from 8PSK (HDTV Format) to QAM for signals received from a satellite
transponder. Since QPSK and 8PSK are optimum for satellite transmission and QAM
is optimum for fiber/coaxial distribution, precious system bandwidth is saved
while the signal maintains its digital form. Building upon the
innovative design
work that
brought about the QTM Transcoders, QAM Up-converters and HDTV Processors, the
Company launched the AQD Series of Agile QAM Demodulators. The AQD
Series allows for the reception and demodulation of QAM digital, Off-air
Standard Digital or Off-air HDTV signals. This enables system
operators in all of the Company’s primary market to benefit from digital
transmission, while preserving their analog distribution networks and viewing
sites long after the FCC mandatory transition in 2009. Digital Video Headend
Products continue to expand in all of the Company’s primary markets, bringing
more advanced technology to consumers and operators, and it is expected that
this area will evolve into a major element of the Company’s business in the
future. The Company estimates that Digital Video Headend Products
accounted for approximately 18% of the Company’s revenues in 2007, 16% in 2006
and 13% in 2005.
•
Fiber Products
used to
transmit the output of a cable system headend to multiple locations using fiber
optic cable. Among the products offered are optical transmitters,
receivers, couplers and splitters. These products convert RF
frequencies to light (or infrared) frequencies and launch them on optical
fiber. At each receiver site, an optical receiver is used to convert
the signals back to normal VHF frequencies for distribution to
subscribers. While sales of products in this category have not
historically contributed significantly to the Company’s revenues, they are
expected to increase due to new product innovations that the Company will be
bringing to market in 2008.
•
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 cable
television 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. The Company estimates that distribution products
accounted for approximately 20% of the Company’s revenues in 2007, 19% in 2006
and 20% in 2005.
•
Addressable Products
used to
control access to programming at the subscriber’s location. The
products offered in this category are Interdiction and Addressable Multi-Tap
(AMT) products. Interdiction products limit the availability of
programs to subscribers through jamming of particular channels. In
2006, the Company introduced a consumer version of this product, the TV Channel
Blocker Parental Control, which provides local (at the consumer level) control
of the full analog block of channels. AMT products remotely control all access
to programming for a particular subscriber. Sales of these products
have not contributed significantly to the Company’s revenues.
•
High-speed
Data Products
used to provide
Internet access and transfer data over a hybrid fiber/coaxial cable
system. Products in this category include standard DOCSIS cable
modems, DOCSIS/Euro DOCSIS cable modem termination system (“
CMTS
”), and the MegaPort™
solution for providing broadband Internet access to hospitality environments
& MDUs. The MegaPort™ solution consists of two main components, the Gateway
and the Intelligent Outlets. The Gateway is a broadband Ethernet router or
bridge that establishes a network within a building or community over the
existing coaxial cable system. The Intelligent Outlet serves as the modem, but
is permanently installed in the location to eliminate loss of equipment
associated with churn. Each Gateway can accommodate 64 enabled Outlets and with
a software upgrade, up to 250 outlets. On February 13, 2007, the
Company entered in to a non-exclusive distribution agreement with Motorola, Inc.
for the sales and distribution of Motorola's Connected Home Solutions voice and
data products to the private cable, lodging and institutional markets in the
United States. Products feature the industry leading Motorola SurfBoard® 5101
cable modem and the BSR2000 (Broadband Services Router) compact CMTS featuring
DOCSIS® 2.0 qualification. The BSR2000 is a compact, high-performance CMTS with
1 downstream and 4 upstream channels that is ideal for small or medium sized
distribution systems. The unit offers advanced functionality,
allowing smaller cable operators to efficiently migrate to DOCSIS or EuroDOCSIS
2.0 while simultaneously increasing the performance of their existing base of
DOCSIS 1.0 and 1.1 cable modems. This is a relatively new category of
products for the Company and has not as yet contributed significantly to the
Company’s revenues.
•
Telephony Products
used to
provide expanded telephone service to MDU subscribers. These products are
designed to offer carrier class telephone service to residences using existing
twisted pair wires. Service will be fully transparent to subscribers with
advanced calling features such as 911, Caller ID, Call Waiting Plus, and
Three-way Calling available and bundled at a flat rate to subscribers. The
existing twisted-pair telephone wiring infrastructure is utilized to provide
dial tone at a resident’s premises using any standard telephone. The Company
does not have a significant history of sales of telephony products, having only
acquired the distribution rights in 2003 in connection with its past venture
efforts in BTT. Sales volume has been lower than originally
anticipated and the recent divesture by the Company of its interest in BTT is
likely to further diminish the Company’s sales prospects for these
products. It is not presently anticipated that sales of telephony
products will become a significant source of revenue for the
Company.
•
Microwave Products
used to
transmit voice, analog video, digital video and data signals to multiple
locations using point-to-point communication links in the 18 GHz range of
frequencies. The company offers the full line of products required to
construct and maintain these point-to-point, 18 GHz communication
links. While microwave products will continue to be sold to maintain
existing systems, the Company does not anticipate that these products will
contribute significantly to the Company’s revenues.
•
Test Products
used for
measuring signals in the Headend and Distribution. Among the products
offered by the Company in this category are Analog and Digital QPSK Analyzers,
Palm Tops Analog and Digital Analyzers and Signal Level Meters. While
the Company expects to continue selling test products to meet the needs of
customers, the Company does not anticipate that these products will contribute
significantly to the Company’s revenues.
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 a 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 ongoing 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, and (iv) acquire products incorporating
technology that could not otherwise be developed quickly enough using internal
resources. Research and development projects are often initially
undertaken at the request of and in an effort to address the particular needs of
the Company’s customers and customer prospects with the expectation or promise
of substantial future orders from such customers or customer
prospects. In the new product development process, the vast
experience of the Company’s Technical Services Group is leveraged to ensure the
highest level of suitability and widest acceptance in the
marketplace. Products tend to be developed in a functional building
block approach that allows for different combinations of blocks to generate new
relevant products as changes in the market demand. Additional research and
development efforts are also continuously underway for the purpose of enhancing
product quality and engineering lower production costs. For the
acquisition of new technologies, the Company may rely upon technology licenses
from third parties. The Company will also license technology if it can obtain
technology quicker, or more cost-effectively from third parties than it could
otherwise develop on its own, or if the desired technology is proprietary to a
third party. There were 16 employees in the research and development
department of the Company at December 31, 2007. The Company spent
$1,797,000, $1,634,000 and $1,552,000 on research and development expenses for
the years ended December 31, 2007, 2006 and 2005, respectively.
Marketing
and Sales
Blonder
Tongue markets and sells its products worldwide primarily to the following
markets: the MDU market, the lodging market and the institutional
market. Sales are made directly to customers by the Company’s
internal sales force, as well as through a few domestic stocking distributors
(which accounted for approximately 54% of the Company’s revenues for fiscal
2007). These distributors serve multiple markets. Direct
sales to cable operators and system integrators accounted for approximately 22%
of the Company’s revenues for fiscal 2007.
The
Company’s sales and marketing function is predominantly performed by its
internal sales force. Should it be deemed necessary, the Company may
retain independent sales representatives in particular geographic areas or
targeted to specific customer prospects or target market
opportunities. The Company’s internal sales force consists of 22
employees, which currently includes 10 salespersons in Old Bridge, New Jersey,
one salesperson in each of North Myrtle Beach, South Carolina, Cudahy,
Wisconsin, and Austin, TX and 9 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, when circumstances warrant, such as a
commitment to a large blanket purchase order, the Company will extend 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.
Customers
Blonder
Tongue has a broad customer base, which in 2007 consisted of approximately 467
active accounts. Approximately 58%, 50%, and 48% of the Company’s
revenues in fiscal years 2007, 2006, and 2005, respectively, were derived from
sales of products to the Company’s five largest customers. In 2007,
2006 and 2005, sales to Toner Cable Equipment, Inc. accounted for approximately
23%, 20% and 17% respectively of the Company’s revenues. 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 or to provide
the Company with binding forecasts of product purchases for any future
period.
The
complement of leading customers tends to vary over time 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 Canada and to a more limited extent,
in underdeveloped countries. Television service is less developed in
many international markets, particularly Latin America, Eastern Europe and Asia,
creating opportunity for those participants who offer quality products at a
competitive price. Sales to customers outside of the United States
represented approximately 2%, 6% and 6% of the Company’s revenues in fiscal
years 2007, 2006 and 2005 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. In connection with the Company’s initiatives
in the PRC, the Company may have foreign currency transactions and may be
subject to various currency exchange control programs related to its PRC
operations. See Risk Factors below for more detail on the risk of
foreign operations.
Manufacturing
and Suppliers
Blonder
Tongue’s manufacturing operations are presently 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 improvements 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. The Company has also entered into a manufacturing agreement
with a major contract manufacturer in the PRC that governs the terms of its
manufacture of certain of the Company’s high volume and complex products upon a
purchase order being submitted by the Company. The Company is also
negotiating with other PRC-based contract manufacturers with respect to other
products. The Company commenced production of certain products in the
PRC during the fourth quarter of 2007. If successful, the Company may
shift a material portion of its manufacturing operations to the PRC in order to
maximize manufacturing and operational efficiencies.
Outside
contractors supply standard components, etch-printed circuit boards and
electronic subassemblies 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. On an as-needed basis, the Company purchases several
products from sole suppliers for which alternative sources are not available,
such as the DigiCipher® encryption systems manufactured by Motorola, which are
standard encryption methodologies employed on U.S. C-Band and Ku-Band
transponders, EchoStar digital receivers for delivery of DISH Network™
programming, and Hughes digital satellite receivers for delivery of DIRECTV™
programming. An inability to timely obtain sufficient quantities of certain of
these components would have a material adverse effect on the Company’s operating
results. The Company does not have an agreement with any sole source
supplier requiring the supplier to sell a specified volume of components to the
Company.
Blonder
Tongue maintains a quality assurance program which tests samples of component
parts purchased, as well as its finished products, on an ongoing
basis. The Company also tests component and sub-assembly boards
throughout the manufacturing process using commercially available and in-house
built testing systems that incorporate proprietary procedures. The
highest level of quality assurance is maintained through out all aspects of the
design and manufacturing process because of the in-house calibration
program. This program ensures that all test and measurement equipment
that is used in the manufacturing process is calibrated to the same in-house
reference standard on a consistent basis. When all test and
measurement devices are calibrated in this manner, discrepancies are eliminated
between the engineering, manufacturing and quality control departments, thus
increasing operational efficiency and ensuring a high level of product
quality. Blonder Tongue performs final product tests 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 franchise 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, quality, price, terms, service,
technical support and administrative support. The Company believes it
differentiates itself from competitors by continuously offering innovative
products, providing excellent technical service support and delivering a high
performance-to-cost ratio.
Intellectual
Property
The
Company currently holds 11 United States patents and 4 foreign patents none of
which are considered material to the Company’s present operations because they
do not relate to high volume applications. In December 2006, the
Company’s wholly-owned subsidiary, Blonder Tongue Investment Company, completed
the sale to Moonbeam L.L.C. of a portfolio of selected patents, patent
applications, provisional patent applications and related foreign patents and
applications (“
Patents
”)
originally acquired in the Company’s acquisition of Scientific-Atlanta, Inc.’s
interdiction business in 1998. Blonder Tongue retained a
non-exclusive, royalty free, non-sublicenseable, worldwide right and license to
use the Patents to continue to develop, manufacture, use, sell, distribute and
otherwise exploit all of the Company’s products currently protected under the
Patents. Because of the rapidly evolving nature of the cable television
industry, the Company believes that its market position as a supplier to cable
integrators 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 has a registered trademark on “Blonder Tongue®” and also on a “BT®”
logo. In connection with the transactions pursuant to which the
Company acquired an ownership interest in NetLinc and BTT, the Company granted
BTT a non-exclusive, revocable and royalty-free license to use these trademarks
and certain variations of such names. This license was terminated as
part of the 2006 transaction in which the Company divested its interest in
BTT.
The
Company is a licensee of Philips Electronics North America Corporation and its
affiliate, Philips Broadband Networks, Inc., Motorola, 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 Motorola relating to Motorola’s VideoCipher® encryption
technology and is also a party to a private label agreement with Motorola
relating to its DigiCipher® technology. Under the VideoCipher®
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® commercial descrambler module. The
VideoCipher® 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® license agreement also provides for the
payment by the Company of royalties based upon unit sales of licensed
products. Under the DigiCipher® private label agreement, the Company
is granted the non-exclusive right to sell DigiCipher® II integrated receiver
decoders bearing the Blonder Tongue name for use in the commercial
market. The DigiCipher® 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.
During
1996, the Company 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™ remote interdiction control
system, which is used for remote operation of VideoMask™ 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.
The
Company relies on a combination of contractual rights and trade secret laws to
protect its proprietary technologies and know-how. There can be no
assurance that the Company will be able to protect its technologies and know-how
or that third parties will not be able to develop similar technologies 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
competitive position.
Regulation
Private
cable, while in some cases subject to certain FCC licensing requirements, is not
presently burdened with extensive government regulations. Franchise
cable operators 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 deregulated many
aspects of franchise cable system operation and opened the door to competition
among cable operators and telephone companies in each of their respective
industries.
In June,
2000, the FCC adopted and issued a Final Rule and Order relating to the
re-designation of portions of the 18GHz-frequency band among the various
currently allocated services. The Final Rules regarding this issue provided for
the grandfathering, for a period of ten years, of certain pre-existing
(installed) terrestrial fixed service operators (“
TFSOs
”) and TFSOs that had
made application for a license prior to a certain date. In November
2002, the FCC issued a Second Order on Reconsideration (the “
Second Order
”), which
redefined the use of the 18 GHz microwave band. As a result of the
Second Order, the Company’s existing microwave inventory would have to be
modified to function within the new frequency band. In addition, on
April 19, 2004, the FCC International Bureau released a Notice of Proposed
Rulemaking (“
NPRM
”),
Docket 04-143, which among other things, proposes channelization changes for the
18GHz band to further reduce the usable band. The uncertainty
associated with these regulatory issues, coupled with the expanding use of fiber
optic cable due to its inherently superior bandwidth, have resulted in a
significant shift away from microwave products. These products are
not anticipated to be a material portion of the Company’s future
sales.
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 2007 and does not anticipate
incurring in 2008 material capital expenditures for compliance with Federal,
state and local environmental laws and regulations. There can be no
assurance, however, that changes in environmental regulations will not result in
the need for additional capital expenditures or otherwise impose additional
financial burdens on the Company. Further, such regulations could
restrict the Company’s ability to expand its operations. Any failure
by the Company to obtain required permits for, control the use of, or adequately
restrict the discharge of, hazardous substances under present or future
regulations could subject the Company to substantial liability or could cause
its manufacturing operations to be suspended.
The
Company 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 May 31, 2012.
Employees
As of January 10, 2008, the Company
employed approximately 232 people, including 162 in manufacturing, 16 in
research and development, 11 in quality assurance, 22 in sales and marketing,
and 21 in a general and administrative capacity. 109 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, 2009. The Company considers its relations with
its employees to be good.
The
Company’s business operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company’s control. The
following “Risk Factors” highlights some of these risks. Additional
risks not currently known to the Company or that the Company now deems
immaterial may also affect the Company and the value of its common
stock. The risks described below, together with all of the other
information included in this report, should be carefully considered in
evaluating our business and prospects. The occurrence of any of the
following risks could harm the Company’s business, financial condition or
results of operations. Solely for purposes
of the
risk factors in this Item 1A, the terms “we”, “our” and “us” refer to Blonder
Tongue Laboratories, Inc. and its subsidiaries.
Any
substantial decrease in sales to our largest customer may adversely affect our
results of operations or financial condition.
In 2007,
2006 and 2005, sales to Toner Cable Equipment, Inc. accounted for approximately
23%, 20% and 17%, respectively, of our revenues. There can be no
assurance that any sales to this customer will reach or exceed historical levels
in any future period. However, we anticipate that this customer will
continue to account for a significant portion of our revenues in future periods,
although it is not obligated to purchase any specified amount of products
(beyond outstanding purchase orders) or to provide us with binding forecasts of
product purchases for any future period.
The
complement of leading customers tends to vary over time as the most efficient
and better-financed integrators grow more rapidly than others. We
believe that many integrators will grow rapidly, and, as such, our success will
depend in part on:
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the
viability of those customers;
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•
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our
ability to identify those customers with the greatest growth and growth
prospects; and
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•
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our
ability to maintain our position in the overall marketplace by shifting
our emphasis to such customers.
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Any
substantial decrease or delay in sales to one or more of our leading customers,
the financial failure of any of these entities, or our inability to develop
solid relationships with the integrators which may replace the present leading
customers, could have a material adverse effect on our results of operations and
financial condition.
An
inability to reduce expenses or increase revenues may cause continued net
losses.
We have
had net losses from continuing operations each year since 2002. While
management believes its plans to reduce expenses and increase revenues will
return us to profitability, there can be no assurance that these actions will be
successful. Failure to reduce expenses or increase revenues could
have a material adverse effect on our results of operations and financial
condition.
A
significant increase to inventory reserves due to inadequate reserves in a prior
period or to an increase in excess or obsolete inventories may adversely affect
our results of operations and financial condition.
We
continually analyze our slow-moving, excess and obsolete
inventories. Based on historical and projected sales volumes and
anticipated selling prices, we establish reserves. If we do not meet
our sales expectations, these reserves are increased. Products that
are determined to be obsolete are written down to net realizable
value. We recorded an increase to our reserve of $314,000, $114,000
and $4,372,000 during 2007, 2006 and 2005, respectively. Although we
believe reserves are adequate and inventories are reflected at net realizable
value, there can be no assurance that we will not have to record additional
inventory reserves in the future. Significant increases to inventory
reserves could have a material adverse effect on our results of operations and
financial condition.
An
inability to develop, or acquire the rights to, technology, products or
applications in response to changes in industry standards or customer needs may
reduce our sales and profitability.
Both the
private cable and franchised cable industries are characterized by the
continuing advancement of technology, evolving industry standards and changing
customer needs. To be successful, we must anticipate the evolution of
industry standards and changes in customer needs, through the timely development
and introduction of new products, enhancement of existing products and licensing
of new technology from third parties. Although we depend primarily on
our own research and development efforts to develop new products and
enhancements to our existing products, we have and may continue to seek licenses
for new technology from third parties when we believe that we can obtain such
technology more quickly and/or cost-effectively from such third parties than we
could otherwise develop on our own, or when the desired technology has already
been patented by a third party. There can, however, be no assurance
that new technology or such licenses will be available on terms acceptable to
us. There can be no assurance that:
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we
will be able to anticipate the evolution of industry standards in the
cable television or the communications industry
generally;
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we
will be able to anticipate changes in the market and customer
needs;
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technologies
and applications under development by us will be successfully developed;
or
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successfully
developed technologies and applications will achieve market
acceptance.
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If we are
unable for technological or other reasons to develop and introduce products and
applications or to obtain licenses for new technologies from third parties in a
timely manner in response to changing market conditions or customer
requirements, our results of operations and financial condition would be
materially adversely affected.
Anticipated
increases in direct and indirect competition with us may have an adverse effect
on our results of operations and financial condition.
All
aspects of our business are highly competitive. We compete with
national, regional and local manufacturers and distributors, including companies
larger than us, which have substantially greater resources. Various
manufacturers who are suppliers to us sell directly as well as through
distributors into the cable television marketplace. 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 us. Many of these potential competitors have
significantly greater financial, technical, manufacturing, marketing, sales and
other resources than we have. We expect that direct and indirect
competition will increase in the future. Additional competition could
have a material adverse effect on our results of operations and financial
condition through:
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delays
in the timing of customer orders;
and
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an
inability to increase our penetration into the cable television
market.
|
Our
sales and profitability may suffer due to any substantial decrease or delay in
capital spending by the cable infrastructure operators that we serve in the MDU,
lodging and institutional cable markets.
The vast
majority of our revenues in fiscal years 2007, 2006 and 2005 came from sales of
our products for use by cable infrastructure operators. Demand for
our products depends to a large extent upon capital spending on private cable
systems and specifically by private cable operators for constructing,
rebuilding, maintaining or upgrading their systems. Capital spending
by private cable operators and, therefore, our sales and profitability, are
dependent on a variety of factors, including
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access
by private cable operators to financing for capital
expenditures;
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demand
for their cable services;
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availability
of alternative video delivery technologies;
and
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general
economic conditions.
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In
addition, our sales and profitability may in the future be more dependent on
capital spending by traditional franchise cable system operators as well as by
new entrants to this market planning to over-build existing cable system
infrastructures, or constructing, rebuilding, maintaining and upgrading their
systems. There can be no assurance that system operators in private
cable or franchise cable will continue capital spending for constructing,
rebuilding, maintaining, or upgrading their systems. Any substantial
decrease or delay in capital spending by private cable or franchise cable
operators would have a material adverse effect on our results of operations and
financial condition.
Any
significant casualty to our facility in Old Bridge, New Jersey may cause a
lengthy interruption to our business operations.
We
operate out of one manufacturing facility in Old Bridge, New Jersey (the “
Old Bridge
Facility
”). While we maintain a limited amount of business
interruption insurance, a casualty that results in a lengthy
interruption
of the ability to manufacture at, or otherwise use, that facility would have a
material adverse effect on our results of operations and financial
condition.
Our
dependence on certain third party suppliers could create an inability for us to
obtain component products not otherwise available or to do so only at increased
prices.
We
purchase several products from sole suppliers for which alternative sources are
not available, such as certain components of EchoStar’s digital satellite
receiver decoders, which are specifically designed to work with the DISH
Network™, and certain components of Hughes Network Systems digital satellite
receivers which are specifically designed to work with DIRECTV®
programming. Our results of operations and financial condition could
be materially adversely affected by:
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•
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an
inability to obtain sufficient quantities of these
components;
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our
receipt of a significant number of defective
components;
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an
increase in component prices; or
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our
inability to obtain lower component prices in response to competitive
pressures on the pricing of our
products.
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Our
existing and proposed international sales and operations subject us to the risks
of changes in foreign currency exchange rates, changes in foreign
telecommunications standards, and unfavorable political, regulatory, labor and
tax conditions in other countries.
Sales to
customers outside of the United States represented approximately 2%, 6% and 6%
of our revenues in fiscal years 2007, 2006 and 2005,
respectively. Such sales are subject to certain risks such
as:
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changes
in foreign government regulations and telecommunications
standards;
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export
license requirements;
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capital
and exchange control programs;
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fluctuations
in foreign currency exchange rates;
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difficulties
in staffing and managing foreign operations;
and
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political
and economic instability.
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Fluctuations
in currency exchange rates could cause our products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. There can be no assurance that
sales to customers outside the United States will reach or exceed historical
levels in the future, or that international markets will continue to develop or
that we will receive additional contracts to supply our products for use in
systems and equipment in international markets. Our results of
operations and financial condition could be materially adversely affected if
international markets do not continue to develop, we do not continue to receive
additional contracts to supply our products for use in systems and equipment in
international markets or our international sales are affected by the other risks
of international operations.
Our
contract manufacturing in the PRC may subject us to the risks of unfavorable
political, regulatory, legal and labor conditions in the PRC.
During
the fourth quarter of 2007, we began manufacturing and assembling some of our
products in the People’s Republic of China, or PRC, under a contract
manufacturing arrangement with a certain key Chinese manufacturer. In
addition, we may increase the amount of revenues we derive from sales to
customers outside the United States, including sales in the PRC. Our
future operations and earnings may be adversely affected by the risks related
to, or any other problems arising from, having our products manufactured in the
PRC, including those risks described in the preceding risk
factor. Although the PRC has a large and growing economy, its
potential economic, political, legal and labor developments entail uncertainties
and risks. In the event of any changes that adversely
affect
our ability to manufacture in the PRC after products have been successfully
transitioned out of the United States, our business will suffer.
Shifting
our operations between regions may entail considerable expense.
Over time
we may shift a material portion of our manufacturing operations to the PRC in
order to maximize manufacturing and operational efficiency. This
could result in reducing our domestic operations in the future, which in turn
could entail significant one-time earnings charges to account for severance,
equipment write-offs or write downs and moving expenses.
Competitors
may develop products that are similar to, and compete with, our products due to
our limited proprietary protection.
We
possess limited patent or registered intellectual property rights with respect
to our technology. We rely on a combination of contractual rights and
trade secret laws to protect our proprietary technology and
know-how. There can be no assurance that we will be able to protect
our technology and know-how or that third parties will not be able to develop
similar technology independently. Therefore, existing and potential
competitors may be able to develop similar products which compete with our
products. Such competition could adversely affect the prices for our
products or our market share and could have a material adverse effect upon our
results of operations and financial condition.
Patent
infringement claims against us or our customers, whether or not successful, may
cause us to incur significant costs.
While we
do not believe that our products (including products and technologies licensed
from others) infringe the proprietary rights of any third parties, there can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted against
us or our customers. Damages for violation of third party proprietary
rights could be substantial, in some instances damages are trebled, and could
have a material adverse effect on the Company’s financial condition and results
of operation. Regardless of the validity or the successful assertion
of any such claims, we would incur significant costs and diversion of resources
with respect to the defense thereof which could have a material adverse effect
on our financial condition and results of operations. If we are
unsuccessful in defending any claims or actions that are asserted against us or
our customers, we may seek to obtain a license under a third party’s
intellectual property rights. There can be no assurance, however,
that under such circumstances, a license would be available under reasonable
terms or at all. The failure to obtain a license to a third party’s
intellectual property rights on commercially reasonable terms could have a
material adverse effect on our results of operations and financial
condition.
Any
increase in governmental regulation of the cable markets that we serve,
including the MDU, lodging and institutional markets, may have an adverse effect
on our results of operations and financial condition.
The MDU,
lodging and institutional markets within the cable industry, which represents
the vast majority of our business, while in some cases subject to certain FCC
licensing requirements, is not presently burdened with extensive government
regulations. It is possible, however, that regulations could be
adopted in the future which impose burdensome restrictions on these cable
markets resulting in, among other things, barriers to the entry of new
competitors or limitations on capital expenditures. Any such
regulations, if adopted, could have a material adverse effect on our results of
operations and financial condition.
Private
cable system operation is not presently burdened with significant government
regulation, other than, in some cases, certain FCC licensing
requirements. The Telecommunications Act of 1996 deregulated many
aspects of franchise cable system operation and opened the door to competition
among cable operators and telephone companies in each of their respective
industries. It is possible, however, that regulations could be
adopted which would re-impose burdensome restrictions on franchise cable
operators resulting in, among other things, the grant of exclusive rights or
franchises within certain geographical areas. In addition, certain
rules adopted by the FCC in June, 2000 (as further revised in 2002 and 2004)
provide for the re-designation of portions of the 18GHz-frequency band among the
various currently allocated services, which rules have shifted demand away from
our microwave products. Any increased regulation of franchise cable
could have a material adverse effect on our results of operations and financial
condition.
Any
increase in governmental environmental regulations or our inability or failure
to comply with existing environmental regulations may cause an adverse effect on
our results of operations or financial condition.
We are
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 our manufacturing processes. We
do not anticipate material capital expenditures during the fiscal year ending
2008 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
us. Further, such regulations could restrict our ability to expand
our operations. Any failure by us to obtain required permits for,
control the use of, or adequately restrict the discharge of, hazardous
substances under present or future regulations could subject us to substantial
liability or could cause our manufacturing operations to be
suspended. Such liability or suspension of manufacturing operations
could have a material adverse effect on our results of operations and financial
condition.
Losing
the services of our executive officers or our other highly qualified and
experienced employees, or our inability to continue to attract and retain highly
qualified and experienced employees, could adversely affect our
business.
Our
future success depends in large part on the continued service of our key
executives and technical and management personnel, including James A. Luksch,
Chief Executive Officer, and Robert J. Pallé, President and Chief Operating
Officer. Our future success also depends on our ability to continue
to attract and retain highly skilled engineering, manufacturing, marketing and
managerial personnel. The competition for such personnel is intense,
and the loss of key employees, in particular the principal members of our
management and technical staff, could have a material adverse effect on our
results of operations and financial condition.
Our
organizational documents and Delaware state law contain provisions that could
discourage or prevent a potential takeover or change in control of our company
or prevent our stockholders from receiving a premium for their shares of our
Common Stock.
Our board
of directors has the authority to issue up to 5,000,000 shares of undesignated
Preferred Stock, to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
unissued series of undesignated Preferred Stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by our stockholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to the
rights of the Common Stock. Furthermore, such Preferred Stock may
have other rights, including economic rights, senior to the Common Stock, and as
a result, the issuance of such stock could have a material adverse effect on the
market value of the Common Stock. In addition, our Restated
Certificate of Incorporation:
|
•
|
eliminates
the right of our stockholders to act without a
meeting;
|
|
•
|
does
not provide cumulative voting for the election of
directors;
|
|
•
|
does
not provide our stockholders with the right to call special
meetings;
|
|
•
|
provides
for a classified board of directors;
and
|
|
•
|
imposes
various procedural requirements which could make it difficult for our
stockholders to affect certain corporate
actions.
|
These
provisions and the Board’s ability to issue Preferred Stock may have the effect
of deterring hostile takeovers or offers from third parties to acquire our
company, preventing our stockholders from receiving a premium for their shares
of our Common Stock, or delaying or preventing changes in control or management
of our company. We are also afforded the protection of Section 203 of
the Delaware General Corporation Law, which could:
|
•
|
delay
or prevent a change in control of our
company;
|
|
•
|
impede
a merger, consolidation or other business combination involving us;
or
|
|
•
|
discourage
a potential acquirer from making a tender offer or otherwise attempting to
obtain control of our company.
|
Any of
these provisions which may have the effect of delaying or preventing a change in
control of our company or could have a material adverse effect on the market
value of our Common Stock.
It
is unlikely that we will pay dividends on our Common Stock.
We intend
to retain all earnings to finance the growth of our business and therefore do
not intend to pay dividends on our Common Stock in the foreseeable
future. Moreover, our loan agreement with National City Business
Credit prohibits the payment of cash dividends by us on our Common
Stock.
Potential
fluctuations in the stock price for our Common Stock may adversely affect the
market price for our Common Stock.
Factors
such as:
|
•
|
announcements
of technological innovations or new products by us, our competitors or
third parties;
|
|
•
|
quarterly
variations in our actual or anticipated results of
operations;
|
|
•
|
failure
of revenues or earnings in any quarter to meet the investment community’s
expectations; and
|
|
•
|
market
conditions for cable industry stocks in
general;
|
may cause
the market price of our Common Stock to fluctuate significantly. The
stock price may also be affected by broader market trends unrelated to our
performance. These fluctuations may adversely affect the market price
of our Common Stock.
Delays
or difficulties in negotiating a labor agreement may cause an adverse effect on
our manufacturing and business operations.
All of
our direct labor employees are members of the International Brotherhood of
Electrical Workers Union, Local 2066, under a collective bargaining agreement,
which expires in February 2009. Delays or difficulties in negotiating
and executing a new agreement, which may result in work stoppages, could have a
material adverse effect on our results of operations and financial
condition.
The
Company’s principal manufacturing, engineering, sales and administrative
facilities consist of one building totaling approximately 130,000 square feet
located on approximately 20 acres of land in Old Bridge, New Jersey (the “
Old Bridge Facility
”) which is
owned by the Company. The Old Bridge Facility is encumbered by a
mortgage held by National City Business Credit, Inc. in the principal amount of
$1,534,000 as of December 31, 2007. Management believes that the Old
Bridge Facility is adequate to support the Company’s anticipated needs in
2008.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
The
Company is a party to certain proceedings incidental to the ordinary course of
its business, none of which, in the current opinion of management, is likely to
have a material adverse effect on the Company’s business, financial condition,
results of operations or cash flows.
|
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, 2007, through the solicitation of proxies or
otherwise.
Note
1 - Summary of Significant Accounting Policies
(a) 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 (including BDR Broadband, LLC “
BDR
”). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
The
Company’s investment in Blonder Tongue Telephone, LLC (“
BTT
”) and NetLinc
Communications, LLC (“
NetLinc
”) were accounted for
on the equity method since the Company did not have control over these entities.
On June 30, 2006, the Company sold its ownership interest in BTT. See Note
13.
The
Company does not have substantive participating rights in the day-to-day
operations of NetLinc. NetLinc is managed by a Board of Mangers
consisting of two Managers, one of whom is a controlling member of the sole
other member of NetLinc and the other is an officer of the
Company. However, the Managers have delegated general and active
management of NetLinc to a President, who is also in a control position with
respect to such other member. Although the Company owns a 50% equity
and voting interest in NetLinc, all decisions of the members, including the
election of Managers, require a vote of at least 51% of the voting
interests. In addition, each action of the Board of Managers,
including the election and removal of the President, requires a majority vote of
the Managers. The Company, therefore, does not control the election
of the Managers or the President of NetLinc, and does not have the power to
remove the President. Accordingly, the other member of NetLinc
possesses substantive participating rights through its common affiliation with
the President. The Company does possess certain protective rights in
connection with certain actions by NetLinc which require the unanimous approval
of all members, including the creation of a new class of membership interest,
approving a change of control, and approving a change in the nature of its
business.
On
November 11, 2005, the Company and its wholly-owned subsidiary, Blonder Tongue
Far East, LLC, a Delaware limited liability company, entered into a joint
venture agreement with Master Gain International Industrial Limited, a Hong Kong
corporation, to manufacture products in the People’s Republic of
China. This joint venture was formed to compete with Far East
manufactured products and to expand market coverage outside North
America. On June 9, 2006, the Company terminated the JV Agreement due
to the joint venture's failure to meet certain quarterly financial milestones as
set forth in the JV Agreement. The inability to meet such financial
milestones was caused, in part, by the failure of Master Gain to contribute the
$5,850 of capital to the joint venture as required by the JV Agreement and the
joint venture's failure to obtain certain governmental approvals and licenses
necessary for the operation of the joint venture.
(b) Accounts
Receivable and Allowance for Doubtful accounts
Accounts
receivable are customer obligations due under normal trade terms. The
Company sells its products primarily to distributors and private cable
operators. The Company performs continuing credit evaluations of its
customers’ financial condition and although the Company generally does not
require collateral, letters of credit may be required from its customers in
certain circumstances.
Senior
management reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The Company includes
any accounts receivable balances that are determined to be uncollectible, along
with a general reserve based on historical experience, in its overall allowance
for doubtful accounts. After all attempts to collect a receivable
have failed, the receivable is written off against the
allowance. Based on the information available, the Company believes
its allowance for doubtful accounts as of December 31, 2007 is adequate;
however, actual write-offs might exceed the recorded allowance.
(c) Inventories
Inventories
are stated at the lower of cost, determined by the first-in, first-out (“
FIFO
”) method, or
market.
The
Company periodically analyzes anticipated product sales based on historical
results, current backlog and marketing plans. Based on these
analyses, the Company anticipates that certain products will not be sold during
the next
twelve
months. Inventories that are not anticipated to be sold in the next
twelve months, have been classified as non-current.
The
Company continually analyzes its slow-moving, excess and obsolete
inventories. Based on historical and projected sales volumes and
anticipated selling prices, the Company establishes reserves. If the
Company does not meet its sales expectations, these reserves are
increased. Products that are determined to be obsolete are written
down to net realizable value. During 2005, the Company reserved 100%
of all items for which there was no usage over the previous twelve months and
100% of the value of closeout products. The Company recorded an
increase to its reserve of $314, $114 and $4,372 during 2007, 2006 and 2005,
respectively. The Company believes reserves are adequate and
inventories are reflected at net realizable value.
(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, 5
to 7 years for cable systems, and 40 years for the manufacturing and
administrative office facility.
(e) Income
Taxes
The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” and FASB
Interpretation No 48 “Accounting for Uncertainty In Income Taxes- An
Interpretation of FASB Statement No. 109” (“
FIN 48
”). 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.
Effective
January 1, 2007, the Company adopted FIN 48, which prescribes a single,
comprehensive model for how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions that the Company
has taken or expects to take on its tax returns. Upon adoption of FIN
48, the Company recognized a decrease of approximately $401 in the liability for
unrecognized tax benefits, which was accounted for as an increase to retained
earnings of $401 as of January 1, 2007.
As of
January 1, 2007, after the implementation of FIN 48, the Company’s amount of
unrecognized tax benefits is $55. The amount of unrecognized tax
benefits, if recognized, would not have a material impact on the Company’s
effective tax rate. The Company files income tax returns in the
United States (federal) and in the state of New Jersey and various state
jurisdictions. The Company is no longer subject to federal and state
income tax examinations by tax authorities for years prior to 2003.
Under FIN
48, the impact of an uncertain income tax position(s) on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be
sustained upon an audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained.
The
Company will classify as income tax expense any interest and penalties
recognized in accordance with FIN 48.
(f) Intangible
Assets
Intangible
assets consist of acquired patents and rights-of-entry, 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, 12
years for acquired patents and 5 years for rights-of-entry. The
Company sold its rights-of-entry during the year ended December 31, 2006 (See
Note 13).
The
components of intangible assets consisting entirely of acquired patents at
December 31, 2007 and December 31, 2006 are as follows:
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
Acquired
patents
|
|
$
|
1,390
|
|
|
$
|
1,390
|
|
|
Accumulated
amortization
|
|
$
|
1,316
|
|
|
$
|
1,283
|
|
|
|
|
$
|
74
|
|
|
$
|
107
|
|
The
Company continues to amortize its patents over their estimated useful lives with
no significant residual value. Amortization expense for intangible
assets, including rights-of-entry, was $33, $629 and $636 for the years ending
December 31, 2007, 2006 and 2005, respectively. Intangible asset
amortization is projected to be approximately $33 per year for the years ending
December 31, 2008 and 2009 and $8 for the year ending December 31,
2010.
(g) Long-Lived
Assets
The
Company follows Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“
FAS 144
”). FAS 144
standardized the accounting practices for the recognition and measurement of
impairment losses on certain long-lived assets based on non-discounted cash
flows. No impairment losses have been recorded through December 31,
2007.
(h) Cash
and Cash Equivalents
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, 2007, 2006 and 2005.
(i) Research
and Development
Research
and development expenditures for the Company’s projects are expensed as
incurred.
(j)
R
evenue
Recognition
The
Company records revenues when products are shipped and the amount of revenue is
determinable and collection is reasonably assured. Customers do not
have a right of return. The Company provides a three year warranty on
most products. Warranty expense was not deemed material in the three
year period ended December 31, 2007.
(k) Earnings
(loss) Per Share
Earnings
(loss) per share are calculated in accordance with FAS 128, which provides for
the calculation of “basic” and “diluted” earnings (loss) per
share. Basic earnings (loss) 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 (loss) per share
reflect, in periods in which they have a dilutive effect, the effect of common
shares issuable upon exercise of stock options. The diluted share
base excludes incremental shares of 1,902, 1,527 and 1,282 related to stock
options for December 31, 2007, 2006 and 2005 respectively. These
shares were excluded due to their antidilutive effect.
(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) Derivative
Financial Instruments
The
Company utilizes interest rate swaps at times to manage interest rate
exposures. The Company specifically designates interest rate swaps as
hedges of debt instruments and recognizes interest differentials as adjustments
to interest expense in the period they occur. The Company does not
hold or issue financial instruments for trading purposes. Although
the Company held an interest rate swap at December 31, 2007 and 2006, the effect
on the balance sheet was not deemed material.
(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
47% of the Company’s employees are covered by a three year collective bargaining
agreement, which expires in February 2009.
The
Company estimates that analog headend products accounted for approximately
49% of the Company’s revenues in each of the three year period ending December
31, 2007. Any substantial decrease in sales of headend products could
have a material adverse effect on the Company’s results of operations, financial
condition and cash flows.
(o) Stock
Options
The
Company implemented SFAS No. 123(R), “Accounting for Share-Based Payment,” in
the first quarter of 2006. The statement requires companies to
expense the value of employee stock options and similar awards. Under
FAS 123(R) share-based payment awards result in a cost that will be measured at
fair value on the awards’ grant date based on the estimated number of awards
that are expected to vest. Compensation cost for awards that vest
will not be reversed if the awards expire without being
exercised. Stock compensation expense under FAS 123(R) was $433 and
$252 for the years ended December 31, 2007 and 2006, respectively.
The
Company estimates the fair value of each stock option grant by using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: expected lives of 6.5, 6.3 and 9.5 years; no
dividend yield; volatility at 70%, 72% and 73%; and risk free interest rate of
4.93%, 4.65% and 3.2% for 2007, 2006 and 2005, respectively.
Under
accounting provisions of FAS 123, the Company’s net income (loss) to common
shareholders and net income (loss) per common share would have been adjusted to
the pro forma amounts indicated below (in thousands, except per share
data):
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
|
Net
loss as
reported
|
|
$
|
(5,500
|
)
|
|
Adjustment
for fair value of stock options
|
|
|
647
|
|
|
Pro
forma
|
|
|
(6,147
|
)
|
|
Net
loss per share basic and diluted:
|
|
|
|
|
|
As
reported
|
|
$
|
(0.69
|
)
|
|
Pro
forma
|
|
$
|
(0.77
|
)
|
(p)
New
Accounting
Pronouncements
requires
that a retained noncontrolling interest upon the deconsolidation of a subsidiary
be initially measured at its fair value. Upon adoption of SFAS No.
160, the Company would be required to report any noncontrolling interests as a
separate component of consolidated stockholders’ equity. The Company
would also be required to present any net income allocable to noncontrolling
interests and net income attributable to the stockholders of the Company
separately in its consolidated statements of operations. SFAS No. 160
is effective for fiscal years, and interim period within those fiscal years,
beginning on or after January 1, 2009. SFAS No. 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS No. 160
shall be applied prospectively. SFAS No. 160 would have an impact on
the presentation and disclosure of the noncontrolling interests of any non
wholly-owned business acquired in the future.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
("
SFAS
") No. 141R,
"Business Combinations" ("
SFAS
141R
"), which replaces SFAS 141, "Business Combinations." SFAS
141R establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R would have
an impact on accounting for any businesses acquired after the effective date of
this pronouncement.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“
SFAS 159
”). SFAS
159 provides companies with an option to report selected financial assets and
liabilities at fair value. The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earning caused by measuring related assets and liabilities
differently. Generally accepted accounting principles have required
different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. The FASB has indicated it
believes that SFAS 159 helps to mitigate this type of accounting-induced
volatility be enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. Management is in the process of evaluating this
pronouncement.
In
September 2006, the SEC staff issued Staff Accounting Bulleting (“
SAB
”) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (“
SAB
108
”). SAB 108 was issued in order to reduce the diversity in
practice in how public companies quantify misstatements of financial statements,
including misstatement that were not material to prior years’ financial
statements. SAB 108 is effective for fiscal year 2007. The
adoption of this pronouncement did not have an impact on the Company’s financial
position, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans.” Among other items, SFAS No. 158
requires recognition of the overfunded or underfunded status of an entity’s
defined benefit postretirement plan as an asset or liability in the financial
statements, requires the measurement of defined benefit postretirement plan
assets and obligations as of the end of the employer’s fiscal year, and requires
recognition of the funded status of defined benefit postretirement plans in
other comprehensive income. SFAS No. 158 is effective for fiscal years
ending after December 15, 2006. The Company adopted SFAS 158 in the fourth
quarter of 2006 on a prospective basis and the adoption did not have a material
impact on its consolidated results of operation or financial
position.
In
September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value
Measurements.” SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective
for the Company for financial statements issued subsequent to November 15,
2007. The adoption of SFAS No. 157 did not have a material impact on
the Company’s consolidated financial position, results of operations or cash
flows.
In May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3"
which, among other things,
changes
the accounting and reporting requirements for a change in accounting principle
and provides guidance on error corrections. SFAS No. 154 requires
retrospective application to prior period financial statements of a voluntary
change in accounting principle unless impracticable to determine the
period-specific effects or cumulative effect of the change, and restatement with
respect to the reporting of error corrections. SFAS No. 154 applies
to all voluntary changes in accounting principles, and to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. SFAS No. 154 also requires
that a change in method of depreciation or amortization for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Adoption of SFAS No. 154 has not had a
significant impact on the Company's financial statements or results of
operations.
In March
2005, the FASB issued FASB Interpretation (“
FIN
”) No. 47, “Accounting for
Conditional Asset Retirement Obligations - An Interpretation of FASB Statement
No. 143” (“
FIN 47
”),
which will result in (a) more consistent recognition of liabilities relating to
asset retirement obligations, (b) more information about expected future cash
outflows associated with those obligations, and (c) more information about
investment in long-lived assets because additional asset retirement costs will
be recognized as part of the carrying amounts of the assets. FIN 47
clarifies that the term conditional asset retirement obligation as used in SFAS
No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal
obligation to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and/or method of settlement. Uncertainty about the timing
and/or method of settlement of a conditional asset retirement obligation should
be factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The Company adopted FIN 47 at the end
of its 2005 fiscal year and the adoption has not had a significant impact on its
consolidated results of operations or financial position.
The FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting
pronouncements and regulations as of December 31, 2007 that will become
effective in subsequent periods; however, management of the Company does not
believe that any of those pronouncements would have significantly affected the
Company’s financial accounting measures or disclosures had they been in effect
during 2007, 2006 or 2005, and it does not believe that any of those
pronouncements will have a significant impact on the Company’s consolidated
financial statements at the time they become effective.
(r) Royalty
and License Expense
The Company records royalty expense, as
applicable, when the related products are sold. Royalty expense is
recorded as a component of selling expenses. The Company amortizes
license fees over the life of the relevant contract.
(s) Foreign
Exchange
The
Company uses the United States dollar as its functional and reporting currency
since the majority of the Company’s revenues, expenses, assets and liabilities
are in the United States and the focus of the Company’s operations is in that
country. Assets and liabilities in foreign currencies are translated using the
exchange rate at the balance sheet date. Revenues and expenses are translated at
average rates of exchange during the year. Gains and losses from foreign
currency transactions and translation for the years ended December 31, 2007,
2006 and 2005 and cumulative translation gains and losses as of December 31,
2007, 2006 and 2005 were not material.
Note
2 – Inventories
Inventories,
net of reserves, are summarized as follows:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw
materials
|
|
$
|
9,169
|
|
|
$
|
8,564
|
|
|
Work
in
process
|
|
|
1,592
|
|
|
|
1,864
|
|
|
Finished
goods
|
|
|
10,823
|
|
|
|
11,162
|
|
|
|
|
|
21,584
|
|
|
|
21,590
|
|
|
Less
current
inventory
|
|
|
(8,572
|
)
|
|
|
(9,708
|
)
|
|
|
|
|
13,012
|
|
|
|
11,882
|
|
|
Less
reserve for slow moving and obsolete inventory
|
|
|
(7,144
|
)
|
|
|
(6,830
|
)
|
|
|
|
$
|
5,868
|
|
|
$
|
5,052
|
|
The
Company recorded a $314, $114 and $4,372 provision for slow moving and obsolete
inventory during the years ended December 31, 2007, 2006 and 2005,
respectively. In 2006, the Company wrote off fully reserved
inventories of approximately $2,000.
Note
3 - Property, Plant and Equipment
Property,
plant and equipment are summarized as follows:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
Building
|
|
|
3,361
|
|
|
|
3,361
|
|
|
Machinery
and
equipment
|
|
|
8,355
|
|
|
|
8,078
|
|
|
Cable
systems (See Note 13)
|
|
|
452
|
|
|
|
546
|
|
|
Furniture
and
fixtures
|
|
|
404
|
|
|
|
403
|
|
|
Office
equipment
|
|
|
2,038
|
|
|
|
2,017
|
|
|
Building
improvements
|
|
|
967
|
|
|
|
717
|
|
|
|
|
|
16,577
|
|
|
|
16,122
|
|
|
Less: Accumulated
depreciation and
amortization
|
|
|
(12,047
|
)
|
|
|
(11,585
|
)
|
|
|
|
$
|
4,530
|
|
|
$
|
4,537
|
|
Depreciation
expense amounted to approximately $462, $986 and $1,021 during the years ended
December 31, 2007, 2006 and 2005, respectively.
Note
4 – Debt
On
December 29, 2005 the Company entered into a Credit and Security Agreement
(“
Credit
Agreement
”) with National City
Business Credit, Inc. (“
NCBC
”) and National City Bank
(the “
Bank
”). The Credit
Agreement initially provided for (i) a $10,000 asset based revolving credit
facility (“
Revolving
Loan
”) and (ii) a $3,500 term loan facility (“
Term Loan
”), both of which
have a three year term. The amounts which may be borrowed under the
Revolving Loan are based on certain percentages of Eligible Receivables and
Eligible Inventory, as such terms are defined in the Credit
Agreement. The obligations of the Company under the Credit Agreement
are secured by substantially all of the assets of the Company.
In March
2006, the Credit Agreement was amended to (i) modify certain financial covenants
as defined under the Credit Agreement, (ii) increase the applicable interest
rates for the Revolving Loan and Term Loan thereunder by 25 basis points until
such time as the Company had met certain financial covenants for two consecutive
fiscal quarters and (iii) impose an availability block of $500 under the
Company’s borrowing base until such time as the Company had met certain
financial covenants for two consecutive fiscal quarters. The increase
in interest rates and availability block were released as of November 14,
2006.
On
December 15, 2006, the Company and BDR, as Borrowers, and Blonder Tongue
Investment Company, a wholly-owned subsidiary of the Company, as Guarantor,
entered into a Second Amendment to Credit and Security Agreement (the “
Amendment
”) with NCBC and the
Bank. Incident to the Company’s divestiture of BDR, the Amendment
removed BDR as a “Borrower” under the Credit Agreement as amended and included
other modifications and amendments to the Credit Agreement and related ancillary
agreements necessitated by the removal of BDR as a Borrower. These
other modifications and amendments included a reduction of approximately $1,400
to the maximum
amount of
advances that NCBC will make to the Company under the Revolving Loan, due to the
release from collateral of the rights-of-entry owned by BDR.
As of the
end of each fiscal quarter during 2007, the Company was in violation of a
certain financial covenant, compliance with which was waived by the Bank
effective as of each such date.
On August
8, 2007, the Credit Agreement was amended to (i) reduce the maximum revolving
advance amount by $2,500 to $7,500; (ii) increase by one percent (1.0%), the
applicable interest rate margin for the Revolving Loan and Term Loan thereunder
priced against the lender’s “prime” or “base” rate; (iii) eliminate the
Company’s option to pay interest on its loans based upon the LIBOR rate plus an
applicable margin; (iv) add a covenant requiring the Company to meet certain
levels of EBITDA for the calendar months of July through September 2007; and (v)
add a covenant requiring the Company to maintain certain minimum levels of
undrawn availability under the Revolving Loan.
On
November 7, 2007, the Credit Agreement was amended to (i) increase by 0.25% the
applicable interest rate margin for the Revolving Loan and Term Loan thereunder
priced against the lender’s “prime” or “base” rate; and (ii) add a covenant
requiring the Company to meet certain levels of EBITDA for the calendar months
of October through December 2007.
On March
28, 2008, the Credit Agreement was amended to (i) increase by 0.25% the
applicable interest rate margin for the Revolving Loan and Term Loan thereunder
priced against the lender’s “prime” or “base” rate; and (ii) add a covenant
requiring the Company to meet certain levels of EBITDA for the calendar months
of January through March 2008.
Under the
Credit Agreement, as amended, the Revolving Loan bears interest at a rate per
annum equal to the “Alternate Base Rate,” being the higher of (i) the prime
lending rate announced from time to time by the Bank plus 1.50% or (ii) the
Federal Funds Effective Rate (as defined in the Credit Agreement), plus
1.50%. The Term Loan bears interest at a rate per annum equal to the
Alternate Base Rate plus 1.50%. In connection with the Term Loan, the
Company entered into an interest rate swap agreement (“
Swap Agreement
”) with the Bank
which exchanges the variable interest rate of the Term Loan for a fixed interest
rate of 5.13% per annum effective January 10, 2006 through the maturity of the
Term Loan. The impact of the Swap Agreement on the 2007 and 2006
consolidated financial statements was not material.
The
Revolving Loan terminates on December 28, 2008, at which time all outstanding
borrowings under the Revolving Loan are due. The Term Loan matures on
December 28, 2008 and requires equal monthly principal payments of $19 each,
plus interest, with the remaining balance due at maturity.
The
Credit Agreement contains customary representations and warranties as well as
affirmative and negative covenants, including certain financial
covenants. The Credit Agreement contains customary events of default,
including, among others, non-payment of principal, interest or other amounts
when due.
The fair
value of the debt approximates the recorded value based on the borrowing rates
currently available to the Company for loans with similar terms and
maturities.
Long-term
debt consists of the following:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revolving
loan
|
|
$
|
1,014
|
|
|
$
|
2,199
|
|
|
Term
loan
|
|
|
1,534
|
|
|
|
1,767
|
|
|
Capital
leases (Note
5)
|
|
|
26
|
|
|
|
62
|
|
|
|
|
|
2,574
|
|
|
|
4,028
|
|
|
Less: Current
portion
|
|
|
(2,560
|
)
|
|
|
(2,469
|
)
|
|
|
|
$
|
14
|
|
|
$
|
1,559
|
|
Annual
maturities of long term debt at December 31, 2007 are $2,560 in 2008 and $14 in
2009.
The
average amount outstanding on the Company’s lines of credit during 2007 and 2006
was $2,062 and $3,522, respectively. The maximum amount outstanding
on the lines of credit during 2007 and 2006 was $3,319 and $4,558,
respectively. The weighted average interest rate at December 31,
2007, 2006 and 2005 was 10.8%, 8.9% and 8.4%, respectively.
Note
5 – Commitments and Contingencies
Leases
The
Company leases certain factory, office and automotive equipment under
noncancellable operating leases and equipment under capital leases expiring at
various dates through December, 2012.
Future
minimum rental payments, required for all noncancellable leases are as
follows:
|
|
|
Capital
|
|
|
Operating
|
|
|
2008
|
|
|
16
|
|
|
$
|
148
|
|
|
2009
|
|
|
15
|
|
|
|
110
|
|
|
2010
|
|
|
-
|
|
|
|
53
|
|
|
2011
|
|
|
-
|
|
|
|
16
|
|
|
2012
|
|
|
-
|
|
|
|
3
|
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
Total
future minimum lease payments
|
|
|
31
|
|
|
$
|
330
|
|
|
Less: amounts
representing interest
|
|
|
5
|
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
$
|
26
|
|
|
|
|
|
Property,
plant and equipment included capitalized leases of $2,724 at December 31, 2007
and 2006, less accumulated amortization of $2,703 and $2,644 at December 31,
2007 and 2006, respectively.
Rent
expense was $190, $137 and $164 for the years ended December 31, 2007, 2006 and
2005, respectively.
Litigation
The
Company is a party to certain proceedings incidental to the ordinary course of
its business, none of which, in the current opinion of management, is likely to
have a material adverse effect on the Company’s business, financial condition,
results of operations or cash flows.
Note
6 – Benefit Plans
Defined
Contribution Plan
The
Company has a defined contribution plan covering all full time 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 $240, $189 and $180, for the years
ended December 31, 2007, 2006 and 2005, respectively.
Defined
Benefit Pension Plan
Substantially
all union employees who meet certain requirements of age, length of service and
hours worked per year were 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. On August 1, 2006, the plan
was frozen.
The
following table sets forth the change in projected benefit obligation, change in
plan assets and funded status of the defined benefit pension plan:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
2,757
|
|
|
$
|
2,633
|
|
|
$
|
2,616
|
|
|
Service
cost
|
|
|
0
|
|
|
|
64
|
|
|
|
103
|
|
|
Interest
cost
|
|
|
160
|
|
|
|
163
|
|
|
|
150
|
|
|
Plan
participants’ contributions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Amendments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Actuarial
loss (gain)
|
|
|
(180
|
)
|
|
|
121
|
|
|
|
(92
|
)
|
|
Business
combinations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Divestitures
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Curtailments
|
|
|
0
|
|
|
|
(34
|
)
|
|
|
0
|
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Special
termination benefits
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Benefits
paid
|
|
|
(207
|
)
|
|
|
(189
|
)
|
|
|
(144
|
)
|
|
Currency
translation adjustment
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Benefit
obligation at end of year
|
|
$
|
2,530
|
|
|
$
|
2,757
|
|
|
$
|
2,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
2,654
|
|
|
$
|
2,408
|
|
|
$
|
2,240
|
|
|
Actual
return on plan assets
|
|
|
124
|
|
|
|
235
|
|
|
|
114
|
|
|
Employer
contribution
|
|
|
150
|
|
|
|
200
|
|
|
|
200
|
|
|
Business
combinations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Divestitures
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Plan
participants’ contributions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Benefits
paid
|
|
|
(207
|
)
|
|
|
(189
|
)
|
|
|
(144
|
)
|
|
Administrative
Expenses Paid
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Currency
Translation Adjustment
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Fair
value of plan assets at end of year
|
|
$
|
2,721
|
|
|
$
|
2,654
|
|
|
$
|
2,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$
|
191
|
|
|
$
|
(103
|
)
|
|
$
|
(224
|
)
|
|
Unrecognized
actuarial loss (gain)
|
|
|
|
|
|
|
|
|
|
|
871
|
|
|
Unrecognized
prior service cost
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
Unrecognized
net initial obligation
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
Net
amount recognized
|
|
|
|
|
|
|
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in the Statement of Financial Position consists
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
Adoption of FAS 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Accrued
benefit liability
|
|
|
|
|
|
|
(103
|
)
|
|
|
(185
|
)
|
|
Intangible
asset
|
|
|
|
|
|
|
0
|
|
|
|
33
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
826
|
|
|
|
821
|
|
|
Net
amount recognized
|
|
|
|
|
|
$
|
723
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
adoption of FAS 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
$
|
191
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Current
liabilities
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Noncurrent
liabilities
|
|
|
|
|
|
|
(103
|
)
|
|
|
0
|
|
|
Net
amount recognized
|
|
$
|
191
|
|
|
$
|
(103
|
)
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Accumulated Other Comprehensive Income Due to Adoption of FAS 158
(before tax effects)
|
|
|
-
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in Accumulated Other Comprehensive Income consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss (gain)
|
|
$
|
654
|
|
|
$
|
826
|
|
|
|
|
|
|
Prior
service cost (credit)
|
|
|
-
|
|
|
|
0
|
|
|
|
|
|
|
Unrecognized
net initial obligation (asset)
|
|
|
-
|
|
|
|
0
|
|
|
|
|
|
|
Total
(before tax effects)
|
|
$
|
654
|
|
|
$
|
826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit Obligation End of Year
|
|
$
|
2,530
|
|
|
$
|
2,757
|
|
|
$
|
2,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information
for Pension Plans with an Accumulated Benefit Obligation in excess of Plan
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit of obligation
|
|
|
-
|
|
|
$
|
2,757
|
|
|
$
|
2,633
|
|
|
Accumulated
benefit obligation
|
|
|
-
|
|
|
$
|
2,757
|
|
|
$
|
2,593
|
|
|
Fair
value of plan assets
|
|
|
-
|
|
|
$
|
2,654
|
|
|
$
|
2,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Assumptions Used to Determine Benefit Obligation in Excess of Plan
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
Rate
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
Salary
Scale
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Net Periodic Benefit Cost and Other Amounts Recognized in Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0
|
|
|
$
|
64
|
|
|
$
|
103
|
|
|
Interest
cost
|
|
|
160
|
|
|
|
163
|
|
|
|
150
|
|
|
Expected
return on plan assets
|
|
|
(186
|
)
|
|
|
(170
|
)
|
|
|
(160
|
)
|
|
Recognized
prior service cost (credit)
|
|
|
0
|
|
|
|
2
|
|
|
|
4
|
|
|
Recognized
actuarial (gain) loss
|
|
|
55
|
|
|
|
66
|
|
|
|
63
|
|
|
Recognized
net initial obligation (asset)
|
|
|
0
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
Recognized
actuarial (gain) loss due to curtailments
|
|
|
0
|
|
|
|
31
|
|
|
|
0
|
|
|
Recognized
actuarial (gain) loss due to settlements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Recognized
actuarial (gain) loss due to special termination benefits
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Net
periodic benefit cost
|
|
$
|
28
|
|
|
$
|
147
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss (gain)
|
|
$
|
(117
|
)
|
|
$
|
21
|
|
|
|
|
|
|
Recognized
actuarial loss (gain)
|
|
|
(55
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
Prior
service cost (credit)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
Recognized
prior service cost (credit)
|
|
|
0
|
|
|
|
(33
|
)
|
|
|
|
|
|
Total
net obligation
|
|
|
0
|
|
|
|
10
|
|
|
|
|
|
|
Total
recognized in other comprehensive income (before tax
effects)
|
|
$
|
(172
|
)
|
|
$
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic benefit cost and other comprehensive income
(before tax effects)
|
|
$
|
(144
|
)
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Amounts
Expected to be Recognized in Net Periodic Cost in the Coming
Year
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)/loss
recognition
|
|
|
$
|
38
|
|
|
$
|
54
|
|
|
|
|
|
Prior
service cost recognition
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
Net
initial obligations/(asset) recognition
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Assumptions Used to Determine Net Periodic Cost for Fiscal Periods Ending
as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
Expected
asset return
|
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
Salary
Scale
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Category
|
|
Expected
Long-Term Return
|
|
|
Target
Allocation
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Equity
securities
|
|
|
8.50
|
%
|
|
|
55
|
%
|
|
|
58
|
%
|
|
|
54
|
%
|
|
|
55
|
%
|
|
Debt
securities
|
|
|
5.50
|
%
|
|
|
45
|
%
|
|
|
42
|
%
|
|
|
46
|
%
|
|
|
45
|
%
|
|
Total
|
|
|
7.00
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Future Benefit Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
company contributions in the following fiscal year
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
Expected
Benefit Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
the first year following the disclosure date
|
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
In
the second year following the disclosure date
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
In
the third year following the disclosure date
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
In
the fourth year following the disclosure date
|
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
In
the fifth year following the disclosure date
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
In
the sixth year following the disclosure date
|
|
|
$
|
794
|
|
|
|
|
|
|
|
|
|
Note
7 - Related Party Transactions
On
January 1, 1995, the Company entered into a consulting and non-competition
agreement with James H. Williams who was a director of the Company until May 24,
2006 and who was also the largest stockholder until November 14,
2006. Under the agreement, Mr. Williams provides consulting services
on various operational and financial issues and is currently paid at an annual
rate of $186 but in no event is such annual rate permitted to exceed
$200. Mr. Williams also agreed to keep all Company information
confidential and not to compete directly or indirectly with the Company for the
term of the agreement and for a period of two years thereafter. The
initial term of this agreement expired on December 31, 2004 and automatically
renews thereafter for successive one-year terms (subject to termination at the
end of the initial term or any renewal term on at least 90 days’
notice). This agreement automatically renewed for a one-year
extension until December 31, 2008. On November 14, 2006, the Company
repurchased 1,293 shares of its common stock from Mr. Williams in a private
off-market block transaction for $0.75 per share, for an aggregate purchase
price of $970.
As of
December 31, 2007 the Chief Executive Officer was indebted to the Company in the
amount of $153, for which no interest has been charged. This
indebtedness arose from a series of cash advances, the latest of which was
advanced in February 2002 and is included in other assets at December 31, 2007
and 2006.
In
December 2007, the Company entered into an agreement to
provide manufacturing, research and development and product support
to Buffalo City Center Leasing, LLC (“
Buffalo City
”) for an
electronic on-board recorder that Buffalo City is producing for Turnpike Global
Technologies, LLC. Although not yet significant, the three-year
agreement is anticipated to provide up to $4,000 in revenue to the
Company. A director of the Company is also the
managing
member and a vice president of Buffalo City and may be deemed to control the
entity which owns fifty percent (50%) of the membership interests of Buffalo
City.
As
described in Note 13, the Company entered into a series of agreements in 2003
pursuant to which it acquired a 50% economic ownership interest in NetLinc
Communications, LLC (
“NetLinc”
) and Blonder Tongue
Telephone, LLC (
“BTT”
). As the
non-cash component of the purchase price, the Company issued 500 shares of its
common stock to BTT, resulting in BTT becoming the owner of greater than 5% of
the outstanding common stock of the Company. As further described in
Note 13, on June 30, 2006 the Company entered into the Share Exchange Agreement
with BTT and certain related parties pursuant to which, among other things, the
Company received back these 500 shares in exchange for the Company's membership
interest in BTT and the grant to BTT of an equipment purchase credit of $400,
which was exercised in 2006. The Company will continue to pay future
royalties to NetLinc upon the sale of certain telephony products.
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 of which, at times, may exceed insurance limits and expose the
Company to credit risk. 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 was concentrated with one of the
Company’s customers in 2007 and two customers in 2006. These customers accounted
for approximately 30% and 40% of the Company’s outstanding trade accounts
receivable at December 31, 2007 and 2006, respectively. These
customers are distributors of telecommunications and private cable television
components, and providers of franchise and 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. 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’s largest customer accounted for approximately 23%, 20% and 17% of the
Company’s sales in each of the years ended December 31, 2007, 2006 and 2005,
respectively. This customer accounted for approximately 30% and 24%
of the Company’s outstanding trade accounts receivable at December 31, 2007 and
2006, respectively. A second customer accounted for approximately 11%
of the Company’s sales for the year ended December 31, 2007. A third
customer accounted for 14% of the Company’s trade accounts receivable at
December 31, 2006. The Company had sales outside the United States in
each of the years ended December 31, 2007, 2006 and 2005 of 2%, 6% and 6%,
respectively.
Note
9 – Stock Repurchase Program
On July
24, 2002, the Company commenced a stock repurchase program to acquire up to $300
of its outstanding common stock. The stock repurchase was funded by a
combination of the Company’s cash on hand and borrowings against its revolving
line of credit. The Company repurchased 70 shares during
2003. On June 30, 2006, the Company reacquired 500 shares of stock at
a basis of $886 in connection with its sale of its ownership interest in BTT
(see Note 13). On November 14, 2006, the Company repurchased 1,293
shares of its common stock for $970 from a former director in a private off
market block transaction.
Note
10 – Preferred Stock
The
Company is authorized to issue 5,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors. At December 31, 2007 and 2006, there
were no outstanding preferred shares.
Note
11 – Stock Option Plans
In 1994,
the Company established the 1994 Incentive Stock Option Plan (the “
1994 Plan
”). The 1994 Plan
provided 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 became
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. The 1994 Plan expired by its terms on March 13,
2004.
In
October, 1995, the Company’s Board of Directors and stockholders approved the
1995 Long Term Incentive Plan (the “
1995 Plan
”). The
1995 Plan provided 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.
Stockholders
have previously approved a total of 1,150 shares of common stock for issuance
under the 1995 Plan, as amended to date. The 1995 Plan expired by its
terms on November 30, 2005.
In May,
1998, the stockholders of the Company approved the Amended and Restated 1996
Director Option Plan (the “
Amended 1996
Plan
”). Under the 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 in its discretion; 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 200 shares of Common Stock are subject to issuance under the Amended
1996 Plan, as amended. The plan is administered by the Board of
Directors. The Amended 1996 Plan expired by its terms on January 2,
2006.
In 1996,
the Board of Directors granted a non-plan, non-qualified option for 10 shares to
an individual, who was not an employee or director of the Company at the time of
the grant. The option was originally exercisable at $10.25 per share
and expired in 2006. This option was repriced to $6.88 per share on
September 17, 1998.
In May
2005, the stockholders of the Company approved the 2005 Employee Equity
Incentive Plan (the “
Employee
Plan
”). The Employee Plan authorizes the Compensation
Committee of the Board of Directors (the “
Committee
”) to grant a maximum
of 500 shares of equity based and other performance based awards to executive
officers and other key employees of the Company. The Committee
determines the optionees and the terms of the awards granted under the Employee
Plan, including the type of awards, exercise price, number of shares subject to
the award and the exercisability thereof. In May 2007, the
stockholders of the Company approved an amendment to the Employee Plan to
increase the maximum number of equity based and other performance awards to
1,100.
In May
2005, the stockholders of the Company approved the 2005 Director Equity
Incentive Plan (the “
Director
Plan
”). The Director Plan authorizes the Board of Directors
(the “
Board
”) to grant a
maximum of 200 shares of equity based and other performance based awards to non
employee directors of the Company. The Board determines the optionees
and the terms of the awards granted under the Director Plan, including the type
of awards, exercise price, number of shares subject to the award and the
exercisability thereof.
The following tables summarize
information about stock options outstanding for each of the three years ended
December 31, 2005, 2006 and 2007:
|
|
|
1994
Plan
(#)
|
|
|
Weighted-
Average
Exercise
Price
($)
|
|
|
1995
Plan
(#)
|
|
|
Weighted-Average
Exercise
Price
($)
|
|
|
1996
Plan
(#)
|
|
|
Weighted-Average
Exercise Price ($)
|
|
|
2005
Employee Plan (#)
|
|
|
Weighted-Average
Exercise Price ($)
|
|
|
2005
Director Plan (#)
|
|
|
Weighted-Average
Exercise Price ($)
|
|
|
Shares
under option:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at January 1, 2005
|
|
|
54
|
|
|
|
3.85
|
|
|
|
989
|
|
|
|
5.35
|
|
|
|
128
|
|
|
|
4.37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
3.84
|
|
|
|
25
|
|
|
|
3.85
|
|
|
|
80
|
|
|
|
3.76
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(31
|
)
|
|
|
4.33
|
|
|
|
(39
|
)
|
|
|
5.43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Options
outstanding at December 31, 2005
|
|
|
23
|
|
|
|
3.40
|
|
|
|
1,026
|
|
|
|
5.24
|
|
|
|
153
|
|
|
|
4.28
|
|
|
|
80
|
|
|
|
3.76
|
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327
|
|
|
|
1.99
|
|
|
|
50
|
|
|
|
1.91
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(6
|
)
|
|
|
6.88
|
|
|
|
(107
|
)
|
|
|
6.88
|
|
|
|
(5
|
)
|
|
|
4.30
|
|
|
|
(4
|
)
|
|
|
3.76
|
|
|
|
(10
|
)
|
|
|
1.91
|
|
|
Options
outstanding at December 31, 2006
|
|
|
17
|
|
|
|
2.88
|
|
|
|
919
|
|
|
|
5.08
|
|
|
|
148
|
|
|
|
4.30
|
|
|
|
403
|
|
|
|
2.32
|
|
|
|
40
|
|
|
|
1.91
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
354
|
|
|
|
1.98
|
|
|
|
40
|
|
|
|
1.98
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(312
|
)
|
|
|
6.88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
3.76
|
|
|
|
-
|
|
|
|
-
|
|
|
Options
outstanding at December 31, 2007
|
|
|
17
|
|
|
|
2.88
|
|
|
|
607
|
|
|
|
4.21
|
|
|
|
148
|
|
|
|
4.30
|
|
|
|
748
|
|
|
|
2.15
|
|
|
|
80
|
|
|
|
1.94
|
|
|
Options
exercisable at December 31, 2007
|
|
|
17
|
|
|
|
2.88
|
|
|
|
607
|
|
|
|
4.21
|
|
|
|
148
|
|
|
|
4.30
|
|
|
|
179
|
|
|
|
1.99
|
|
|
|
40
|
|
|
|
1.91
|
|
|
Weighted-average
fair value of options granted during:
2005
|
|
|
-
|
|
|
|
|
|
|
$
|
3.84
|
|
|
|
|
|
|
$
|
3.85
|
|
|
|
|
|
|
$
|
3.76
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
2006
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
1.99
|
|
|
|
|
|
|
$
|
1.91
|
|
|
|
|
|
|
2007
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
1.36
|
|
|
|
|
|
|
$
|
1.36
|
|
|
|
|
|
Total
options available for grant were 465 and 257 at December 31, 2007 and December
31, 2006, respectively.
|
|
|
Options
Outstanding
|
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
Range
of Exercise Prices ($)
|
|
Number
of Options Outstanding at 12/31/07
|
|
Weighted-Average
Remaining Contractual Life
|
|
Weighted-Average
Exercise Price ($)
|
|
Number
Exercisable at 12/31/07
|
|
Weighted-Average
Exercise Price ($)
|
|
|
|
|
|
|
|
|
1994
Plan: 2.88
|
17
|
3.1
|
2.88
|
17
|
2.88
|
|
|
|
|
|
|
|
|
1995
Plan: 2.88 to 7.38
|
607
|
4.1
|
4.21
|
607
|
4.21
|
|
|
|
|
|
|
|
|
1996
Plan: 2.05 to 7.03
|
148
|
4.1
|
4.30
|
148
|
4.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Employee Plan: 1.91 to 3.84
|
|
748
|
|
8.6
|
|
2.15
|
|
179
|
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Director Plan:
1.91
to 2.98
|
|
80
|
|
8.8
|
|
1.94
|
|
40
|
|
1.91
|
The
exercisable options under each of the Plans at December 31, 2007 had an
intrinsic value of $0.
Note
12 - Income Taxes
The
following summarizes the provision (benefit) for income taxes:
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
Federal
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
State and local
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(252
|
)
|
|
|
(427
|
)
|
|
|
(1,606
|
)
|
|
State and local
|
|
|
(45
|
)
|
|
|
(75
|
)
|
|
|
(353
|
)
|
|
|
|
|
(297
|
)
|
|
|
(502
|
)
|
|
|
(1,959
|
)
|
|
Valuation
allowance
|
|
|
297
|
|
|
|
502
|
|
|
|
1,959
|
|
|
Provision
(benefit) for income
taxes
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
The
provision (benefit) for income taxes differs from the amounts computed by
applying the applicable Federal statutory rates due to the
following:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Provision
(benefit) for Federal income taxes at the statutory rate
|
|
$
|
(170
|
)
|
|
$
|
130
|
|
|
$
|
(1,824
|
)
|
|
State
and local income taxes, net of Federal benefit
|
|
|
(20
|
)
|
|
|
18
|
|
|
|
(248
|
)
|
|
Other,
net
|
|
|
(107
|
)
|
|
|
(650
|
)
|
|
|
113
|
|
|
Change
in valuation allowance
|
|
|
297
|
|
|
|
502
|
|
|
$
|
1,959
|
|
|
Provision
(benefit) for income taxes
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred
tax assets:
Allowance for doubtful
accounts
|
|
$
|
133
|
|
|
$
|
248
|
|
|
Inventories
|
|
|
3,036
|
|
|
|
2,916
|
|
|
Goodwill
|
|
|
1,892
|
|
|
|
2,258
|
|
|
Net operating loss carry
forward
|
|
|
3,346
|
|
|
|
3,275
|
|
|
Total deferred tax
assets
|
|
|
8,407
|
|
|
|
8,697
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
Total deferred tax
liabilities
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
|
|
8,397
|
|
|
|
8,694
|
|
|
Valuation
allowance
|
|
|
(6,041
|
)
|
|
|
(6,338
|
)
|
|
Net
|
|
$
|
2,356
|
|
|
$
|
2,356
|
|
The
Company has recorded $453 and $1,903 of short term and long term deferred tax
assets, respectively, as of December 31, 2007, since it projects recovering
these benefits over the next three to five years. The Company also
considered various tax strategies in arriving at the carrying amount of deferred
tax assets. A valuation allowance has been recorded against the
balance of the long-term deferred tax benefits since management does not believe
the realization of these benefits is more likely than not. As of
December 31, 2007, the Company had federal net operating loss carry forwards and
state net operating loss carry forwards of approximately $8,447 and $6,590,
which will begin to expire in the year 2023 and 2013, respectively.
Note
13 – Discontinued Operations and Sale of BTT (Subscribers and passings in whole
numbers)
In June
2002 the Company acquired its initial ownership interest in BDR Broadband, LLC
and in October 2006 acquired the 10% minority interest that had been owned by
Priority Systems, LLC for nominal consideration. In June 2002, BDR
acquired certain rights-of-entry for multiple dwelling unit cable television and
high-speed data systems (the
“Systems”
). As a
result of BDR acquiring additional rights-of-entry, at the time of divesture in
December 2006, BDR owned Systems for approximately 25 MDU properties in the
State of Texas, representing approximately 3,300 MDU cable television
subscribers and 8,400 passings. The Systems were upgraded with
approximately $81 and $799 of interdiction and other products of the Company
during 2006 and 2005, respectively. During 2004, two Systems located
outside of Texas were sold.
On
December 15, 2006, the Company and BDR entered into a Membership Interest
Purchase Agreement ("
Purchase
Agreement
") with DirecPath Holdings, LLC, a Delaware limited liability
company ("
DirecPath
")
pursuant
to which
and on such date, the Company sold all of the issued and outstanding membership
interests of BDR to DirecPath.
Pursuant
to the Purchase Agreement, DirecPath paid the Company an aggregate purchase
price of $3,130 in cash, resulting in a gain of approximately $880 on
the sale, after certain post-closing adjustments, including an adjustment for
cash, an adjustment for working capital and adjustments related to
the number
of subscribers for certain types of
services, all as of the closing date and as set forth in the Purchase Agreement.
A portion of the purchase price, $465, is being held in an escrow account, and
is included as part of the prepaid and other current assets, pursuant to an
Escrow Agreement dated December 15, 2006, among the Company, DirecPath and U.S.
Bank National Association, to secure the Company’s indemnification obligations
under the Purchase Agreement.
In
addition, in connection with the divestiture transaction, on December 15, 2006,
the Company entered into a Purchase and Supply Agreement with DirecPath, LLC, a
wholly-owned subsidiary of DirecPath ("
DPLLC
"), pursuant to which
DPLLC will purchase $1,630 of products from the Company, subject to certain
adjustments, over a period of three (3) years. DPLLC purchased $404
of equipment from the Company in 2007.
The
period in which DPLLC is required to satisfy the purchase commitment may be
extended upon the occurrence of certain events, including if the Company is
unable to deliver the products required by DPLLC. The Purchase
Agreement includes customary representations and warranties and post-closing
covenants, including indemnification obligations, subject to certain
limitations, on behalf of the parties with respect to their representations,
warranties and agreements made pursuant to the Purchase Agreement. In
addition, except for certain activities by Hybrid Networks, LLC, a wholly-owned
subsidiary of the Company, the Company agreed, for a period of two (2) years,
not to engage in any business that competes with BDR.
In
connection with the Purchase Agreement, the Company also entered into a
Transition Services Agreement with DirecPath, pursuant to which the Company will
provide certain administrative and other services to DirecPath
during a ninety-day transition period, which was extended and
completed in April, 2007.
As a
result of the above, the Company reflected the sale of BDR as a discontinued
operation. Components of the loss from discontinued operations are as
follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Net
Sales
|
|
$
|
1,846
|
|
|
$
|
1,738
|
|
|
Cost
of goods sold
|
|
|
624
|
|
|
|
765
|
|
|
Gross profit
|
|
|
1,222
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,722
|
|
|
|
1,520
|
|
|
Other
income
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(500
|
)
|
|
$
|
(544
|
)
|
During
2003, the Company entered into a series of agreements pursuant to which the
Company ultimately acquired a 50% economic ownership interest in NetLinc
Communications, LLC (“
NetLinc
”) and Blonder Tongue
Telephone, LLC (“
BTT
”)
(to which the Company had licensed its name). The aggregate purchase
price consisted of (i) the cash portion of $1,167, plus (ii) 500 shares of the
Company’s common stock. BTT had 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) were pledged to the Company as collateral.
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 multiple dwelling units (“
MDUs
”). BTT
partnered 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
offered for sale a line of telephony equipment to complement the voice service.
Certain distributorship agreements were entered into among NetLinc, BTT
and the Company pursuant to which the Company acquired the right to distribute
NetLinc's telephony products in certain markets. The Company
also purchased similar telephony products from third party suppliers other than
NetLinc and, in connection with the sales of such third-party products, incurred
royalty obligations to NetLinc and BTT. While the distributorship
agreements among NetLinc, BTT and the Company have not been terminated, the
Company does not presently anticipate purchasing products from
NetLinc. NetLinc, however, continues to own intellectual property,
which could be further developed and used in the future to manufacture and sell
telephony products under the distributorship agreements, although the Company
has no present intention to do so. The Company accounts for its
investments in NetLinc and BTT using the equity method.
On June
30, 2006, the Company entered into a Share Exchange and Settlement Agreement
("
Share Exchange
Agreement
") with BTT and certain related parties of
BTT. Pursuant to the Share Exchange Agreement, in exchange for all of
the membership shares of BTT owned by the Company (the "
BTT Shares
"), BTT transferred
back to the Company the 500 shares of the Company's common stock that were
previously contributed by the Company to the capital of BTT (the "
Company Common Stock
"). Under
the terms of the Share Exchange Agreement, the parties also agreed to the
following:
|
·
|
the
Company granted BTT a non-transferable equipment purchase credit in the
aggregate amount of $400 (subject to certain off-sets as set forth in the
Share Exchange Agreement); two-thirds (2/3rds) of which ($270) had to be
used solely for the purchase of telephony equipment and the remaining
one-third (1/3rd) of which ($130) could be used for either video/data
equipment or telephony equipment;
|
|
·
|
the
equipment credit would have expired automatically on December 31, 2006,
but it was exercised in full by September 30,
2006;
|
|
·
|
certain
non-material agreements were terminated, including the Amended and
Restated Operating Agreement of BTT among the Company, BTT and remaining
member of BTT, the Joint Venture Agreement among the Company, BTT, and
certain related parties, the Royalty Agreement between the Company and
BTT, and the Stock Pledge Agreement between the Company and BTT, each
dated September 11, 2003 (collectively, the "
Prior
Agreements
");
|
|
·
|
BTT
agreed, within ninety (90) days, to change its corporate name and cease
using any intellectual property of the Company, including, without
limitation, the names "Blonder", "Blonder Tongue" or "BT";
and
|
|
·
|
the
mutual release among the parties of all claims related to (i) the
ownership, purchase, sale or transfer of the BTT Shares or the Company
Common Stock, (ii) the Joint Venture (as defined in the Joint Venture
Agreement) and (iii) the Prior
Agreements.
|
Note
14 – Other Income
During
September 2006, the Company’s wholly owned subsidiary, Blonder Tongue investment
Company, signed an agreement to sell selected patents to Moonbeam, LLC, for net
proceeds of approximately $2,000. In connection with the sale, the Company
retained a non-exclusive, royalty free, worldwide license to continue to
develop, manufacture, use, sell, distribute and otherwise exploit all of the
Company’s products currently protected under there patents. The
Company recognized a $386 gain in connection with the sale which
is included in other income for the year ended December 31,
2006.